For all the work Intel has done to build out its data center business, expand into mobile devices and embrace growth areas like the Internet of Things, the company’s first-quarter financials indicate that much of the giant chip maker’s fortunes are still tied to the struggling PC market.
The April 14 financial report shows strong revenue growth in the data center and IoT businesses. Still, first-quarter revenue of $12.8 billion was flat over the same period last year in large part because of softening PC demand. Net income jumped 3 percent, to $2 billion.
Intel’s Client Computing Group still accounts for well over half of the company’s sales. Revenue for the unit came in at $7.4 billion, an 8 percent drop over the first quarter of 2014. However, executives expect that as the year progresses, gains in the data center, IoT and memory businesses will offset PC losses.
“Our PC business was impacted by slowing desktop sales, particularly in small and medium businesses,” CEO Brian Krzanich said during a conference call with analysts and journalists. He noted that the company also was hurt by a strengthening dollar that made its products more expensive.
It’s no surprise the PC market is struggling. Sales globally have been on the decline since 2011, when tablets like Apple’s iPad came on the scene. The fall slowed last year, thanks in large part to Microsoft’s ending support for the aged Windows XP operating system in April. But the XP refresh has run its course, and there appears to be a stall in new PC purchases while buyers await the release of Windows 10 later this year.
Intel officials in March warned of the problem, cutting the company’s first-quarter outlook by $900 million due to weaker-than-expected demand in the business PC market. Gartner analysts earlier this month said worldwide first-quarter PC shipments fell 5.2 percent year-to-year, while IDC analysts put the decline at 6.7 percent.
Krzanich and CFO Stacy Smith said they expect the decline in the global PC market to shrink by single-digit percentages this year. However, there are some reasons for optimism, according to the CEO.
“Data is continuing to grow and our estimates are that there’s something approximating 600 million PCs out there … that are greater than four years old,” Krzanich said. “You can look at this as a great opportunity, and we still believe that at some point those systems will flip over.”
Also, later this year, Intel will release its next generation of 14-nanometer processors, dubbed “Skylake.” The new processors will offer improved performance, battery life and power efficiency, which when paired with Windows 10 could convince the owners of some of those 600 million aging PCs to make the switch to a new system.
“We are enthusiastic about the release of Windows 10 this summer, especially when combined with Skylake,” Krzanich said.
While the PC business struggled, Intel saw strength in several of its other business units. Revenue for the Data Center Group grew by 19 percent year-over-year, to $3.7 billion. IoT revenue was up 11 percent, to $533 million.
“Intel is capitalizing on growth in the x86 server market, as enterprise, mid-market and [small and midsize business] customers increasingly adopt x86 solutions for a growing variety of use cases,” Stephen Belanger, analyst with Technology Business Research (TBR), said in a research note. “While these customers will remain a critical revenue stream for Intel’s DCG, the vendor is enhancing its data center portfolio to better accommodate cloud, telecommunication service providers and web hosting companies.”
Intel PC Business Falls, But Data Center, IoT Sales Climb
Krzanich said that the Xeon E5 v3 server processor, introduced last year, now accounts for more than half of the chips Intel sells into two-socket systems. In addition, Intel last month launched Xeon D, the first Xeon-based system-on-a-chip (SoC) aimed at systems like micro-servers, storage appliances, networking gear and IoT devices.
Xeon D will be an important part for Intel, TBR’s Belanger said.
“By extending the Xeon processor into a 64-bit SoC, Intel will offer a dense, low-power processor,” he wrote. “Intel is already gaining traction among several large-scale customers. For example, Facebook is one of the first users of the SoC on an Open Compute Project (OCP)-based server design. TBR believes the product line launch will complement Intel’s strong footprint and brand recognition in the global data center market, and will help the vendor drive DCG revenue as cloud and telecommunication service provider customers scale their infrastructure.”
Intel continues to push in a mobile market dominated by Qualcomm and other ARM-based SoC makers. Intel was slow to respond to the growth of smartphones and tablets, and its mobile business has sustained significant losses in recent years. Intel’s Smith said that in the quarter, more than 7 million tablets powered by Intel chips shipped—a 45 percent increase over the same period last year. The company is on track to improve profitability in the mobile business by $800 million, though most of that will be seen in the second half of the year, he added.
Krzanich indicated he is optimistic about strides the company is making, pointing to the release in March of the new Atom x5 and x7 chips, as well as the Atom x3. Formerly code-named SoFIA, the x3 Socks are aimed at entry-level devices, including smartphones, phablets and tablets. They also will expand into the IoT space and include integrated wireless modems.
Belanger said the x3 helped narrow the technological gap between Intel and Qualcomm.
“It is unlikely that Intel will be able to dominate the mobile and IoT markets as it has in the PC market,” he wrote. “However, the vendor’s core data center and PC businesses give Intel flexibility to take its time and carefully develop technology that aligns with customer demand. Intel will incrementally enhance its mobile and IoT offerings and become a viable alternative to ARM-based processors that are dominant in the mobile device market.”