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Has Intel Given Up on the PC?

By Ashraf Eassa – Aug 6, 2018 at 6:10PM

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Increased focus on data doesn't mean ignoring client computing.

A slide from Intel's (INTC -6.41%) 50th anniversary celebration began making the rounds on the internet, as you can see here (via HardOCP):

A slide showing "data centric" trending up and "PC centric" going down.

Image source: HardOCP.

This image might lead some to believe that Intel has given up on personal computers -- an area that has traditionally been and still is the company's largest source of revenue and profit -- but I don't think that's necessarily the message that Intel was trying to convey in that slide.

Let's take a closer look at what's going on.

The PC is becoming less important to Intel

For years, the personal computer market was in a state of decline. To illustrate, market research company Gartner (IT 0.82%) said that industry wide personal computer shipments topped 365 million in 2011 . By 2017, Gartner's numbers pegged industry wide personal computer shipments at just 262.5 million units -- a roughly 28% decline from 2011 levels.

It's little wonder that, in light of such a significant reduction in personal computer shipments over the years, Intel has been looking to push into other markets.

The personal computer market has recently shown signs of stabilization, however. In fact, during the second quarter of 2018, industry wide personal computer shipments were reportedly up a bit.

On its most recent earnings call, Intel even said that it now expects personal computer shipments to "modest growth for the first time since 2011." 

Intel's Core i-series logos.

Image source: Intel.

With that in mind, although the personal computer market seems to be doing well in 2018, Intel's client computing group business unit -- which consists primarily of personal computer processor and related component sales -- was still its slowest-growing one last quarter.

For some perspective, here's a table that shows the total amount of revenue that each of Intel's business units generated and the year-over-year revenue growth rates that they saw last quarter:

Business Unit Revenue Growth YOY
Client computing group $8.7B 6%
Data center group $5.5B 27%
Nonvolatile memory solutions group $1.1B 23%
Internet of Things group $880M 22%
Programmable solutions group (formerly Altera) $517M 18%

Source: Intel earnings release .

Indeed, Intel's client computing group is still an important part of Intel's overall financial performance (it's still the company's largest business unit by revenue), but its importance has been diminishing over time as its other businesses have, collectively, grown faster than the client computing group has.

"Just five years ago, roughly a third of our revenue was data-centric," Swan said . "Today, nearly half our revenue is data-centric and growing at a double-digit rate."

The slide that I showed at the beginning of this column is simply a visual representation of the phenomenon that Swan described.

The importance of the PC

Although Intel clearly expects its PC-centric business to become less important over time, I don't think that the company would be wise to neglect it. 

On the company's most recent earnings call, Interim CEO Bob Swan said that its client computing group business "continues to be an extremely important source of [intellectual property], scale, and cash flow for our company."

Let's break that down. First, Swan mentioned intellectual property. Back in 2014, then-CFO Stacy Smith showed how Intel developed a core set of intellectual properties for personal computers, like CPU cores, and then leveraged those technologies in other products such as data center processors and Internet of Things chips. You can see some of that in this slide:

Intel slide showing how intellectual properties designed for the PC are leveraged in other products.

Image source: Intel.

What Smith talked about in 2014 is likely what Swan referred to on the company's second-quarter earnings call.

Swan then mentioned "scale." In this case, it seems like he's talking about chip manufacturing scale.

Keep in mind that Intel is one of the few companies that manufactures its own chips (most companies design chips that are then manufactured by third parties). It costs a lot of money to build and equip chip manufacturing factories, and very few companies generate enough revenue selling chips to be able to support owning and operating such factories.

Remember that Gartner claims that the industry shipped 262.5 million personal computers in 2017 and, based on Intel's commentary, it's reasonable to expect that Gartner will report an even larger shipment figure for 2018. Even though personal computers shipments are down a lot from the peak, unit shipments in absolute terms are still quite large.

Since Intel likely ships north of 200 million personal computer processors each year, and since many of those processors require a separate platform controller hub chip either on the motherboard or on the same package as the processor itself, it's not hard to see that Intel needs to build a lot of chips for the personal computer market.

Finally, Swan mentioned that the PC market provides a lot of cash flow for the company -- and he's absolutely right.

Last quarter, Intel's client computing group generated $8.7 billion in revenue and $3.2 billion in operating profit. The business was the single biggest contributor to the company's operating profit in the second quarter of 2018 (although the company's data center group was close behind, raking in $2.7 billion in operating profit).

Given how important the personal computer market is likely to be for the company in the years ahead, shareholders should hope that the company continues to invest appropriately in it.

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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