Intel Grows PC, Data Center Businesses, but Mobile Falls

Intel executives expect the momentum in the PC market to continue through at least the rest of the year.

Intel CEO Krzanich

Intel's financial fortunes continue to be boosted by a rejuvenated PC market and an increasingly strong data center business, as the chip maker lays out its plans to bolster lineups for servers, desktops and notebooks.

After three years of contracting sales in the wake of Apple's initial release of the iPad, recent PC shipment and revenue numbers from analysts and vendors have indicated a stabilization in the market, welcome relief to companies like Intel, which have been battered by the declining worldwide PC sales.

Intel officials in April said they were seeing a slowdown in falling PC sales in the first quarter, and last month indicated that demand for systems was better than expected. On July 15, Intel executives announced second-quarter financial numbers that included 8 percent growth in revenues over the same period in 2013 and a 40 percent jump in net income.

Leading the way were the PC Client Group, which saw a 6 percent increase in revenues, and the Data Center Group, with a 19 percent jump. Revenues for the company's nascent Internet of Things Group increased 24 percent. Such numbers help give cover to Intel's struggling mobile business, which saw revenues fall 83 percent over the same time last year, as the chip maker continues to struggle to gain traction against low-power chip designer ARM and its range of partners, including Qualcomm, Samsung and Texas Instruments.

During a conference call with analysts and journalists to discuss the second-quarter numbers, CEO Brian Krzanich said there are a number of factors contributing to the revitalization of the PC market, from Microsoft's ending of support for Windows XP operating system in April to businesses refreshing their aged fleet of systems to consumers—who at one time gravitated to tablets at the expense of PCs—showing interest in new, low-cost form factors, including 2-in-1 systems. Krzanich estimated that there are about 600 million PCs in the world that are at least four years old.

"We are seeing clear signs of a refresh in the enterprise and small and medium businesses," he said.

Krzanich said he expected PC sales to remain strong through at least the rest of the year. Intel is forecasting revenue growth for 2014 to be around 5 percent, higher than previous expectations.

Jack Gold, principal analyst with J. Gold Associates, backed up the CEO's contention in a research note, saying Intel's revenue growth in both notebooks (9 percent) and desktops (8 percent) was not surprising, given the expected refresh of older systems among enterprises and business users.

"We expect the PC market to continue to grow for at least the next 3 quarters as more machines are upgrades/replaced, and the investment in new tablets continues to taper off with increasing saturation," Gold wrote.

During the conference call, Krzanich and CFO Stacy Smith talked about upcoming chip releases that they expect will continue to push Intel's efforts in PCs, servers and the mobile space. New Xeon E5 server chips codenamed "Grantley" and based on the "Haswell" architecture will start appearing in systems this quarter, they said. In addition, PCs powered by the delayed 14-nanometer "Broadwell" processors will hit the market by the holiday season, they reiterated.

Other upcoming chips for the year include "Cherry Trail" for tablets, which will ship by the end of the year, and "Broxton," the next-generation low-power Atom chip. Next year, Intel will release Skylake, for PCs and tablets, in 2015, though neither Krzanich nor Smith were clear on exactly when it would launch. The CEO indicated that much of the decision will be determined by how ready system makers are for the chip.

Krzanich and Smith said that despite the disappointing revenues for the mobile business, they are encouraged by what is coming. A key will be the upcoming SoFIA systems-on-a-chip (SoCs), which will be the first for Intel to include an integrated wireless modem. Currently, Intel sells chips with discrete modems, but integrating modems onto the chip will help device makers create smaller and cheaper tablets and smartphones.

Integrating the modems onto the chip will be a significant step for Intel as it looks to stake its claim in the mobile space, the CEO said.

"Clearly we don't go into businesses looking to lose money and over time we believe we can make this a profitable business," Krzanich said.

Gold wrote in his analyst note that Intel is seeing some design wins, but that it will take another nine to 12 months for the company to turn around the mobile business.

"They will not be able to compete in any major way with the ARM-based suppliers until they have a fully 4G/LTE SoC late this year and into next year," he wrote. "Intel’s numbers will likely continue to decline until they achieve volumes with the next generation of SoCs targeting primarily the tablet space first, and then later next year the phone space."