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Intel Earnings Send Mixed Messages

By Chad Fraser on July 19, 2012

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Intel (NasdaqGS: INTC) makes chips that power 80% of the world’s personal computers. For that reason, investors look to the company as a barometer of the tech sector’s prospects.

On Tuesday night, Intel delivered an earnings report that was largely positive, but the company lowered its full-year sales forecast—and left many other questions unanswered, too.

Strong Server Demand Helped Increase Sales at Intel

In the company’s fiscal 2012 second quarter, which ended June 30, 2012, its revenue rose 3.6%, to $13.5 billion from $13.0 billion a year ago. Earnings dipped 4.3%, to $2.83 billion, or $0.54 a share, from $2.95 billion, or $0.54 a share. Revenue fell just short of the $13.54 billion that analysts were expecting, but earnings beat the consensus forecast by $0.02.

Intel saw sales rise 4.4% from a year ago at its main PC business, but the server division was the strongest performer, with a 15.1% sales gain.

Despite the gains, Intel said it now expects sales to rise 3% to 5% for all of fiscal 2012, down from its previous forecast of a “high single-digit” increase. The guidance cut, according to president and CEO Paul Otellini, was “due to a more challenging macroeconomic environment.”

That didn’t stop many investors from breathing a sigh of relief. “Simply stated, guidance could have been worse. A lot worse.” Needham analyst N. Quinn Bolton wrote in a note quoted by MarketWatch. “Though we maintain our hold rating, we are warming up to Intel shares, especially should the shares fall below $25.”

Slumping PC Market Is an Ongoing Challenge for Intel

The company remains heavily reliant on PC chips, which accounted for 64% of its overall sales in the latest quarter, and that market has taken a beating of late. Last year, flooding in Thailand caused parts shortages that slowed PC production. That, in turn, lowered demand for Intel chips.

In addition, the weak global economy continues to hold back PC sales. According to market research firm Gartner, overall PC sales slipped 0.1% in the second quarter from the same period a year ago.

The more worrying long-term trend for Intel is the ever-bigger bite that mobile devices are taking out of PC sales. Intel was late to the mobile party, and it’s still well behind the market leader, U.K.-based ARM Holdings (NasdaqGS: ARMH), which designs the chips that run 95% of the world’s mobile devices, including the Apple (NasdaqGS: AAPL) iPad.

The key to ARM’s success? Its chips are designed to be highly energy-efficient, something that’s crucial to extending mobile device battery life. Intel, which has traditionally been more focused on processing speed, has had difficulty adapting to the mobile environment.

Still, the company continues to invest heavily in mobile chip development, and it has had some recent successes. For example, the high-end version of the new Microsoft Surface tablet computer will use an Intel chip. As well, Hewlett-Packard (NYSE: HPQ) is reportedly working on a tablet that will feature a new version of Intel’s Atom processor.

Mobile Chip Powerhouse Is Set to Take on Intel’s Server Dominance

In addition, ARM Holdings is now expanding beyond mobile devices and into servers. ARM’s expertise in low-power chips could give it an edge over Intel here, too, as most servers must run 24 hours a day, so any power savings could be significant over a period of years. That could have major appeal to cost-conscious businesses.

ARM’s move into servers ups the pressure on Intel to respond with a serious mobile-chip push, according to Zacks.com: “… while [ARM’s] server impact could take a couple of years and Intel could have something to counter this threat by then, Intel really needs to buck up its mobile strategy. Failing to do this will see its revenues dwindling as tablets continue to cannibalize its core computing market.”

Aggressive Ultrabook Forecast Seems Unrealistic

The company has also invested heavily in the launch of the Ultrabook, a thin, lightweight notebook computer that Intel feels will account for 40% of all PC sales by the end of 2012.

So far, according to Gartner analyst Mikako Kitagawa, Ultrabooks aren’t making much of an impact: “Despite the high expectations for the thin and light notebook segment, Ultrabooks, shipment volume was small and (had) little impact on overall shipment growth [in the second quarter],” she said in a statement quoted on Forbes.com. “This segment is still in an early adopter’s stage.”

In addition, when the device launched last year, it was priced at $999, well above the iPad and about the same as the MacBook Air, which Intel sees as the device’s main competitor. The price is expected to drop to around $699, which, along with the launch of the new Windows 8 operating system this fall, could boost Ultrabook sales.

But even with those advantages, the Ultrabook still faces long odds going up against Apple, according to Rob Enderle, principal analyst with the Enderle Group:

“There is an exclusivity that comes with Apple,” he said. “Everything from the out of box experience to your treatment in stores is different from the rest of the market. So Apple has the equivalent of a Lexus dealership while the other guys are selling Toyotas.”

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