Intel Corp. (NASDAQ: INTC) is accelerating the reorganization of operations to focus on faster-growing high-tech markets and, like many of its peer, the world’s biggest semiconductor manufacturer is putting connectivity, or, the internet-of-things (IoT), at the heart of its business evolution. Its latest quarterly results indicate the company is hitting speed bumps and confirm analysts’ forecast that the transition would be tough.
Reports indicate Intel plans to reduce its workforce by about 5 percent over the next year even as it keeps capital expenditure, R&D and other operating expenses flat from the 2013 period. Company executives said the slate of new products being lined up for the health, tablet, smartphone and home connectivity markets would help Intel resume growth, reversing the current trend that has seen revenue drop in the last two years. (See: Intel to reduce global workforce by five percent in 2014).
The turnaround won’t be immediate, though. Intel forecasts 2014 revenue will be unchanged from the $52.7 billion it reported for 2013 when sales fell slightly from the $53.3 billion posted in 2012. Intel’s 2013 net income fell 13 percent, to $9.6 billion, or $1.89 per share, from $11 billion, or $2.13 per share, in 2012. The company’s gross profit margin for 2013 also declined, to 59.8 percent from 62.1 percent, according to CFO Stacy Smith. The 2014 outlook isn’t exactly positive although the company sees flat performance as an improvement on declining sales and profitability.
“We are planning for revenues to be approximately flat [in 2014]” said Smith while discussing Intel’s fourth quarter results with analysts. “We expect the Data Center Group revenue to be up in the low double-digits and PC Client Group revenue to be down in the mid-single-digits.”
Here are other takeaways from Intel’s fourth quarter results. The comments in italics are from the fourth quarter earnings conference call.
- 2014 Capital & Spending Will be Flat Year-Over-Year: Intel is keeping capital equipment expenditure and R&D spending unchanged in 2014, perhaps in an effort to ensure success as it forges ahead with plans to be viable in markets outside the PC segment. “We are forecasting spending for the year at $18.6 billion and expect capital spending of $11 billion both of which are approximately flat to 2013,” said Smith. “Within the flat spending, we are advancing the strategy of the company by shifting investments towards the data center, tablets and low-power SoCs. We are forecasting the midpoint of our gross margin range at 60 percent flat to 2013. We expect startup cost to decline partially offset by the impact of tablets as we ramp our volume and provide contra revenue support to our customers”.
- Sales in 2014 will be Unchanged from 2013: Intel is forecasting 2014 sales will be unchanged from 2013, an improvement in performance from the prior two years when sales fell sequentially. Aside from the low to zero-growth, it’s probably more important to watch the company’s revenue shift from PC to mobile platforms and other devices, according to analysts.
- Investment shift & Payroll Cut Ahead: – Intel is expected to increase investment in non-PC products due to slowing growth in the personal computer market. The company has been pouring money into mobile platforms and it is forecast to increase this in 2014. It has also reportedly confirmed a reduction of about 5 percent in payroll. “Q1 will be the high point in terms of quarterly spending,” said Intel CEO Brian Krzanich. “It will come down quarter by quarter. We will be bringing employment down over the course of the year. And beyond that, as we talked about at the investor meeting, we are going to be making some significant new investments and things like the data center tablets, low power SoCs those kinds of things. So even beyond the headline number, there was going to be kind of a significant shift in investments over the course of the year.”
- Slower-than-Expected Recovery in Corporate/Enterprise PC Market: Intel overestimated sales into the enterprise market for 2013. Demand from the segment lagged forecast due to cuts at governments and reluctance of enterprises to hire and boost capital expenses. “Enterprise fell short of our expectations for the fourth quarter as we overestimated the rate of recovery among corporate buyers,” said Krzanich. “We are showing a kind of long-term growth rate in enterprise that’s less than what it was three years ago. There was some impact associated with the virtualization curve having played out, but that doesn’t stop the fact that we think that there is growth in the enterprise segment. We have just changed our view for 2014. We think the recovery just plays out a bit slower than we would have thought a quarter ago.”
- Intel Faces a Vastly Different Landscape: The market Intel plays in has changed dramatically from what it was even a mere two years ago. PCs no longer dominate semiconductor demand and it’s become obvious the company hasn’t quite mastered the new environment, either because customers are wary about another Intel monopoly or because the new landscape is more diffused with numerous players. What’s clear is that Intel is facing the greatest challenge in its history. Unfortunately, the story Intel is telling the market isn’t nearly as gripping as its previous narrative. Intel executives, of course, see it differently. They believe 2014 will be different but the sales forecast doesn’t support that assumption.