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Key Takeaways From Intel's Earnings Report

By Bob Ciura - Jan 21, 2014 at 8:00PM

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Intel displayed familiar struggles afflicting most companies still reliant on the personal computer for profits.

As many analysts suspected, it was a lackluster fourth quarter and fiscal 2013 for semiconductor giant Intel (INTC 1.17%). The personal computers industry, which Intel dominates, is in what appears to be a structural decline. Intel's earnings report confirmed that, even though it's still a leader in its core business, the fact that the broader industry is in such a pronounced decline means there's nowhere to hide.

At this point, it seems that a great deal of patience and trust in management are necessary to keep holding Intel. While there may be light at the end of its tunnel, Intel faces a long and uphill battle against the death of the PC.

Don't bet on a near-term recovery
The mammoth shift in usage from personal computers to mobile devices has caught many companies off guard. Those that rely on the personal computer for business suffered a rough 2013. A wide range of industry observers back this up with credible findings that certainly make it seem like the PC industry has an axe hanging over its head.

For example, market research firm Gartner found that, during the fourth quarter, worldwide PC shipments fell nearly 7%. This marked the seventh consecutive quarter of declining PC shipments. Even more disturbing, Gartner stated that 2013 resulted in the biggest decline ever for the global PC market.

Likewise, fellow industry researcher IDC generated similar findings in its own review; in all of 2013, worldwide PC shipments fell a projected 10% versus 2012. The personal computer industry can't count on international growth to save itself. IDC also found that PC shipments in Europe, the Middle East, and Africa fell 6.4% in the fourth quarter of 2013, down from the same quarter the year prior. This represented the sixth consecutive quarterly decline in the region.

Will 2013 represent a bottom?
That's the key question facing companies still reliant on the PC, such as Intel, Hewlett-Packard (HPQ 2.68%), and Microsoft (MSFT -0.40%).

Put bluntly, all of Intel's key metrics deteriorated in 2013. Revenue, gross margin, net income, and earnings per share each declined versus the prior year. Revenue stayed relatively afloat, posting just a 1% decline. However, earnings per share dropped 11%, indicating Intel's spending on getting its chips into mobile devices hasn't been rewarded. In response, Intel announced cost-savings initiatives designed to boost profits over the near term, such as cutting its global workforce by 5%.

Of course, the key question remains whether Intel can get its chips into mobile devices. Intel was unfashionably late to that party, meaning it's facing an uphill climb on the smartphone front. In the earnings release, management pointed to progress on this over the past six months. Unfortunately, Intel still isn't too confident in this regard. Its 2014 outlook calls for flat revenue and another 2 percentage-point drop in gross margin.

For its part, HP struggled across all of its business segments last year. The company suffered revenue declines in each of its seven segments. Not surprisingly, those segments tied to the personal computer saw the steepest drops. For instance, revenue fell 10% in HP's combined personal systems and printing groups.

To its credit, Microsoft seems to be bucking the trend of broad PC industry woes, as it managed 16% revenue growth and 17% diluted earnings-per-share growth in its fiscal 2014 first quarter. Microsoft's results show a clear divergence between its consumer-oriented Widows and Office products, and its commercial products such as servers, Commercial Windows, and Microsoft Office for business.

Microsoft's devices and consumer segment, which includes consumer-based products, saw gross margin fall 9% in the first quarter. By contrast, the commercial segment increased gross margin by 10%.

Old tech faces a new challenge
Companies that rose to power during the PC boom, such as Intel, HP, and Microsoft, are the ones facing the biggest challenges now that the sun has set on the PC. Growth going forward is clearly in mobile devices. Earnings are staying afloat due to aggressive cost cuts and share repurchases, but in order for revenue growth to resume, mobile-market penetration is key. So far, only Microsoft appears to be generating strong revenue growth in the post-PC era.


Bob Ciura owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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