Intel beats expectations on strong second-quarter PC sales

Above: Intel CEO Brian Kraznich at Intel analyst day.

Image Credit: Intel

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Intel reported that its second quarter earnings were above expectations on strong PC sales.

Intel’s results are a bellwether for the PC industry, as it is the world’s largest chip maker. But as mobile becomes a bigger piece and Intel isn’t participating in that as much as it would like, it isn’t as much of a bellwether for the entire electronics industry anymore.

For the second quarter, analysts expected Intel to post revenue of $13.69 billion and earnings per share to be 52 cents

Intel reported earnings per share of 55 cents on revenue of $13.8 billion. In afterhours trading, Intel’s stock is up 4.3 percent to $33.01 a share.

“Our second-quarter results showed the strength of our strategy to extend the reach of Intel technology from the data center to PCs to the Internet of Things,” said Intel CEO Brian Krzanich in a statement. “With the ramp of our Baytrail system-on-chip family, we have expanded into new segments such as Chrome-based systems, and we are on track to meet our 40 million unit tablet goal. In addition, we hit an important qualification milestone for our upcoming 14nm Broadwell product, and expect the first systems to be on shelves during the holidays.”

Intel had said on June 12 that it was raising its expectations because of strong demand for business PCs. The PC Client Group’s revenue was $8.7 billion, up 6 percent from a year ago and up 9 percent sequentially. Data Center Group revenue was $3.5 billion, up 19 percent from a year ago.

Krzanich, who replaced CEO Paul Otellini in the middle of 2013, has laid out a vision for wearable technology and gadgets based on the “Internet of Things,” or smarter devices that connect dumb things to the Internet. Internet of things sales were $539 million, up 12 percent from the previous quarter and up 24 percent from a year ago.

For the third quarter, Intel forecast revenue of $14.4 billion, plus or minus $500 million. It expects gross profit margin of 66 percent,and  R&D and MG&A spending of $4.9 billion. Revenue for the full year is expected to be higher than previously thought, up 5 percent. Capital spending will be about $11 billion, unchanged.

While the PC market isn’t what it once was, Intel is still one of the most profitable companies on Earth. It generated $5.5 billion in cash from operations during the second quarter.

Intel is still strong in data center chips, with 95 percent market share, but it has a small presence in chips for tablets and smartphones, where Apple and Qualcomm are the incumbents.

Intel’s mobile chip revenues remained fairly weak at $51 million in the quarter, down 83 percent from a year ago.

Intel president Renee James recently acknowledged that the company was slow to catch on to the mobile wave.

"We were very successful, but success can breed complacency and fear," said James in a conversation with Fortune's Michal Lev-Ram at the Brainstorm Tech 2014 event. "We didn't appreciate that the iPhone was the advent of mobile and ultra mobile computing."

So the company is playing catchup. It has said that it wants its mobile chips to be the brains of 40 million new tablets shipping this year. But it will be hard to deal with competition from Qualcomm and the many partners of ARM.

"We have had not had the best technology in mobile – we think we do now," James said.

Jack Gold, analyst at Jack Gold Associates, said the PC growth is “not surprising as we've been predicting the renewal of many older machines, particularly in enterprises and for 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 said that the Data Center revenues were boosted by the ongoing push to cloud computing, and he expects Intel to pick up a significant share of the low-end server market as ARM-based systems begin to compete in that segment.

As for mobile, he said, “This is is one area where Intel is doing quite badly. But this was expected, as 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. 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. Design wins are showing momentum, but they are not yet competitive with others in this space.”

He expects that to change in the next year.

Gold added, “Overall, this has been a very good quarter for Intel and shows that despite what some believed, Intel in not down and out in a changed market. They are reinventing themselves to the needs of the new market realities, and will remain a major force in defining the next generations of mobile and internet of things markets.”

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