How's that for foreshadowing?
When market researchers Gartner and IDC released their preliminary estimates of PC shipments in the second quarter last week, showing a flat market, it was a pretty clear indication that Intel (Nasdaq: INTC) probably didn't have a whopping earnings beat in store for investors and might very well miss relative to the Street's best guesses. Turns out those premonitions were spot-on.
Figures first
Total revenue in the second quarter tallied up to $13.5 billion, just barely missing the consensus estimate by a hair. On the other hand, it was able to squeeze out a beat on the bottom line by pocketing net income of $2.8 billion, or $0.54 per share. You win one, you lose one. Either way, the results weren't really anything to write home about.
Breaking down the segments further, the PC client group expectedly sat mostly unchanged, increasing a modest 4% to $8.7 billion, the majority of sales. Data-center sales continue to be strong, jumping 15% to $2.8 billion. The relatively broad "other architecture" group actually shrank to $1.1 billion. Looking at each of those three primary segments, you can't help noticing the effect of the precipitous migration to smartphones and tablets.
PC sales are overall uninspiring, so no one's shocked by the PC segment's similarly humble performance. Beefing up the cloud to handle all those devices is turning into meaningful gains in data center sales, but that segment's importance takes a back seat to the core PC business. The other architecture segment is what I'm most intrigued with, because it includes netbooks, smartphones, tablets, and other mobile components.
Mobile moves
Despite Intel's unrivaled dominance in PCs, the chipmaker has largely missed out on mobile. Data-center wins are nice, but they don't have nearly the same volumes that direct design wins in smartphones and tablets would.
The company's Medfield Atom chip just recently launched in a handful of smartphones, but none are from top-tier manufacturers. Instead, we're talking about Lenovo, Lava, and Orange, none of which are key players in the smartphone market.
Netbook sales are getting eaten alive by tablets, and Intel currently has no tablet seats whatsoever. Intel showed off a Lenovo tablet earlier this year at the Consumer Electronics Show, sporting Google (Nasdaq: GOOG) Android and a Medfield Atom chip, which was due out by the second quarter. Well, it's July, and that means the second quarter has come and gone and this tablet is nowhere to be seen. Lenovo's tablet offerings continue to be powered by ARM Holdings (Nasdaq: ARMH)-based chips.
That means as smartphones and tablets continue their current trajectory, Intel is only enjoying a minuscule sliver of just the smartphone market. Its real tablet foray is riding almost entirely on Microsoft (Nasdaq: MSFT) Windows 8, which is due out later this year. These tablets will run on Clover Field Atom chips, the successor to Medfield. That will entail transitioning from Medfield's 32-nanometer manufacturing process to 22-nanometer, the same as its newest Ivy Bridge PC processors.
On the conference call, CEO Paul Otellini said the company is looking at more than 20 Windows 8 tablet wins with Clover Field. At least one of these includes Microsoft's own Surface tablet that was unveiled in June.
Is it still the year of the Ultrabook?
Otellini also said that Ultrabooks "continued to build momentum" and had achieved Intel's volume goals for the first half of 2012. That's especially interesting, as Gartner and IDC both expressed disappointment in Ultrabook sales. Gartner had said Ultrabook "shipment volume was small and little impact on overall shipment growth," and IDC echoed this sentiment by saying "Ultrabooks have not yet produced a significant rise in volumes."
Maybe Intel's volume goals were just very low? Then again, Intel does enjoy the seat in Apple's (Nasdaq: AAPL) MacBook Air lineup, which Ultrabooks are modeled after. MacBook Airs are seeing robust sales and were also recently upgraded with Ivy Bridge chips. This is why Ultrabooks are less about competing directly with Apple and all about competing with tablets.
Intel expects Ultrabooks to soon reach a $700 price point, giving them a price advantage over MacBook Airs, and Chip King Kong is sticking to its prediction that Ultrabooks will reach a 40% penetration level within consumer notebooks by year's end.
The bigger picture
Overall, it was a fairly ho-hum quarter. The longer-term picture for Intel continues to ride on two key related themes: Windows 8 and mobile devices. Both Microsoft and Intel are banking on having Windows 8 reinvigorate sales, but they could be sorely disappointed if the OS doesn't deliver, which some analysts think is a distinct possibility. For example, IDC expects "effectively no upgrade activity" from Windows 7 to Windows 8 in traditional PCs.
If Windows 8 tablets running Intel chips flop, the chip giant doesn't have any other fallbacks in the tablet segment. The iPad continues to run amok, Google just launched its own Nexus 7, and third-party Android OEMs have no Intel inside. Meanwhile, its current smartphone spots are negligible and borderline meaningless.
Smartphones and tablets are only going to continue eating into PC sales, so Intel needs to gain traction there. It can't rely solely on data-center growth to substitute the slowing PC market at the hands of mobile devices.
Intel certainly can wage this war for ages, and its biggest advantage is its vertical integration. While ARM chipmakers face 28-nanometer bottlenecks at main flame Taiwan Semiconductor Manufacturing, Intel points and laughs at their misfortune. If third-party chip manufacturers fail to keep up with Intel's manufacturing prowess over the long run, the rest of the ARM players will suffer for it, and Intel will eventually win.
For now, Chipzilla's mobile future is up in the air.
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