If “Only the Paranoid Survive” as former Intel Corp. CEO Andrew Grove once said, the current executives of the chipmaker must have found its most recent quarterly performance indicative of the need to double their efforts to break into segments of the high-tech industry that are growing faster than the PC sector.
Whatever their resolve, the famed ability of Intel to reinvent itself and respond with agility to changing market conditions is in doubt following numerous failed attempts over the last decade by the world’s biggest semiconductor vendor to establish a dominant position in faster-growing market segments even as its core PC business continued to decline.
In the first quarter, Intel’s revenue were flat from the year-ago quarter, reflecting continuing problems in the PC market, which analysts believe will decline in the high single-digit in 2015 with a recovery pushed out at least another year. In this environment, Intel executives believe the company is better off focusing on growth opportunities rather than waiting for a resurgence in demand for PCs, whether from the business or consumer markets.
“Following a reset to our outlook in March, the first quarter finished roughly as expected. Our PC business was impacted by slowing desktop sales, particularly in small and medium business,” said Brian Krzanich, during a conference call to discuss the company’s results. “At the same time, challenging macroeconomic conditions and an appreciating U.S. dollar weighed on our business in important geographic markets. Despite this, revenue was flat year-over-year as our Data Center, Internet of Things, and NAND business all delivered double-digit growth.”
Krzanich, in a statement announcing the company’s latest financial results, noted what investors and the company’s shareholders as well as customers should expect. “These results reinforce the importance of continuing to execute our growth strategy,” he said.
That growth strategy is looking increasingly lopsided and even doubtful. Intel now forecasts 2015 revenue will be approximately flat or unchanged from the $55.9 billion reported in 2014 and has slashed capital expenditure in response, a reversal of its regular practice of jacking up capex even in the midst of the industry’s often brutal downturns. However, as Intel continues to struggle to increase PC sales, it is bouncing strongly ahead in data center, memory and internet of things, (IoT), all areas the company is betting will in future account for a greater portion of its revenue.
In the latest quarter, the client computing business accounted for approximately 58 percent of total sales, or $7.4 billion out of $12.8 billion, while the faster growing data center group represented 29 percent of sales. The three other reporting groups were each less than 5 percent of sales. Those numbers mask some positive news for the company, however. Despite accounting for less than one-third of revenue, Intel’s data center group contributed the largest share of the company’s operating income ($1.7 billion out of $2.6 billion) and exceeded the larger client computing group’s contribution by nearly $300 million.
The reported first quarter results demonstrates the entrenchment of a new and increasingly uncertain future for Intel despite recent actions by the semiconductor vendor to better align operations to avoid sales fluctuations and protect profit margins. While first quarter results were disappointing, the bright stars in Intel’s operations tell a rather optimistic story about the company’s future.
In the three months ended March 28, Intel reported double-digit sales increases for its data center, IoT and memory divisions. Revenue for the client computing group tumbled 8 percent, year-over-year, and 16 percent sequentially, pointing to persistent pressure in the PC market, analysts said. Sales for the data center and IoT groups rose sequentially 19 percent and 11 percent, respectively.
“As usual, the problem was the PC market but in this instance it was not the consumer but the small and mid-size businesses that bought fewer PCs than expected,” said Richard Windsor, an analyst with Edison Investment Research, in a report. “The good news is the data centre, where demand has been stronger than expected allowing Intel to guide better than feared. Intel also moved to account for weaker expectations overall for the PC market in 2015 [estimate] by reducing its full year revenue forecast from mid-single digit revenue growth to approximately flat, putting an end to any hopes of revenue growth.”
A better future for Intel obviously depends on strong performance outside the PC market but making this transition is proving more difficult than the company had anticipated due to its still heavy exposure to the computing sector. Since PC microprocessors account for more than half of the company’s business, Intel cannot just abandon the segment, despite the heavy pressure it continues to face from the margin-sensitive business.
What it is doing, instead, is slowly managing through the decline of the PC market while pouring money into higher-growth markets. To defend its semiconductor market share Intel has invested billions of dollars in the communications market and even recently reportedly opened discussions to buy FPGA chip vendor Altera Inc. in what would have been a market-changing move. The discussions were eventually terminated, according to news reports.
What should Intel do next? Many analysts want it to make a big acquisition that would help it immediately achieve its goal while others believe the company should continue its current strategy of adding on bite-size deals to its current portfolio while beefing up investments in growth businesses. Despite repeated demand by analysts Intel executives declined to speculate on the company’s likely acquisition moves during the recent conference call.
The analysts should have known better; Intel executives were highly unlikely to reveal anything about the company’s acquisition plans until a deal has been finalized. Intel’s management may be paranoid but they certainly aren’t foolish.