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Intel Corporation Earnings: Stabilization, but More Is Needed

First-quarter results from Intel (NASDAQ: INTC  ) are out, and for the most part, they're unimpressive. Intel managed to meet analyst expectations on earnings, but its underlying business shrank compared to the same quarter a year ago. The stock shot up in after-hours trading after the results were released, but came back down once the market opened the next day. That seems to imply that Intel's "so-so" quarter showed some progress, but significant uncertainties still linger.

By now, it's universally known that Intel still clings to the personal computer. This has proved to be a cumbersome shackle on the company's efforts to branch out into new product categories. Intel's chief executive officer has promised the company's huge investments in mobile devices will pay off this year, but the first quarter was yet another in which that goal proved elusive.

Take the good with the bad
It's important to note that Intel stemmed the decline seen over the past several quarters. It finally hit expectations on profits and showed stability on margins, which had eroded in recent periods. In all, Intel generated $12.7 billion in revenue, representing a 1.5% decline year-over-year. Diluted earnings per share clocked in at $0.38, a 5% decline versus the first quarter of 2013.

Among Intel's business segments, certain units performed better than others. For example, Intel is doing very well in data centers, which grew revenue by 11%. Unfortunately, the anchor weighing down Intel continues to be its PC client group, where revenue fell 1% year-over-year. This was a manageable decline, but the PC client group still represents 62% of Intel's revenue, which makes it difficult to move the needle, even if its other businesses perform well.

Continued erosion in personal computers is holding back a slew of companies still reliant on the PC. Hewlett-Packard (NYSE: HPQ  ) delivered 17% growth in GAAP earnings per share in the first quarter, mostly thanks to significantly reduced costs. Revenue declined by 1%, because HP still has a large printers business, which is not doing well; revenue in that segment fell by 2% year-over-year.

Technology companies still reliant on the PC, like Intel and HP, are getting credit for producing satisfactory profits. But, that's mostly due to harsh cost cuts, not revenue growth, which can only go so far. It seems that a lot of optimism over Intel's first quarter involves margins. This metric is heavily scrutinized by analysts when it comes to technology stocks.

Fortunately for Intel, its 59.7% gross margin in the first quarter wasn't a shock. And, it expects a 63% margin in the current quarter. Going forward, Intel sees gross margin coming in at 61% for the full year. That's a full percentage point higher than its prior expectations.

The hunt for 40 million tablets
Intel CEO, Brian Krzanich, has long vowed to get his company's chips into 40 million tablet processors by the end of 2014. Intel managed to ship 5 million tablet processors in the first quarter, and management is confident it will reach its goal. Intel was very late to the smartphone device market, and has spent a lot of money over the past couple of years trying to catch up. Intel's percentage of R&D and marketing, general, and administrative costs rose to 35.5% last year, up from 29.5% in 2010.

The key takeaway from Intel's quarter is that, while the company realized stabilization in the personal computer space and is showing growth in data centers and other businesses, a lot of progress still needs to be made. The future of computing is clearly in the smartphone category. Intel is still held back by a large and underperforming PC business, and that needs to change soon if Intel is to grow once again.

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Comments from our Foolish Readers

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  • Report this Comment On April 18, 2014, at 1:09 PM, techy46 wrote:

    Intel's management delivered on the results that they set at the end of 2013 for 2014. Those expectations are to invest in mobile chips including offering ODM's $3 billion to used 40 million Atom Bay Trail processors, really design for mid-high end tablets, in low end devices while nurturing the enterprise PC and server markets as the PC refresh stabilizes and cloud data centers continue to expand We all know we can buy Qualcomm at $81 PS with a PE of 22 to bet on the current winner in mobile chips and I'm sure some of my mutual funds have done so. However, INTC LEAPs seem like a good opportunity for a 50% upside between now and 2016.

  • Report this Comment On April 19, 2014, at 9:42 AM, will1946 wrote:

    I don't know why you would say that the future of computing is in smartphones. That doesn't seem to make any sense. The future of computing is probably in several types of device; however, the big money seems to also be in smartphones: don't do as most analysts are doing these days and sell the pc industry short. It is a very big deal.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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