The massive futility of Intel's (NASDAQ:INTC) efforts to secure its presence in the mobile chip market became apparent when the company announced first-quarter results in line with its revised financial reporting structure. With Intel's newly formed mobile and communications group posting a jaw-dropping operating loss of $929 million, the company's aim of catching up with mobile chip market leader Qualcomm (NASDAQ:QCOM) seems nothing short of a pipe dream.
And when you combine that with Intel's near-80% dependence on the steadily declining PC industry for its revenue, this seems like a time when Intel needs to transition to the mobile world. It's time to take stock and look for any possible bright spots for Intel.
A good opening performance
For starters, Intel's PC chip division recorded a rise in operating profits to $2.8 billion, prompted by a 1% year-over-year increase in chip unit shipments. Although that signifies that the chipmaker has managed to gain market share in the PC business, it obviously had to pay a heavy price to do so, as evidenced by the 3% fall in average selling prices of its chips. That may have been one of the contributing factors behind the company's overall 4.8% fall in net income during the quarter, even though overall revenue edged up slightly by 1.5%.
Microsoft's decision to end support for Windows XP probably played a big part behind the uptick in Intel's PC chip business, as it has led to a lot of companies upgrading their systems. The trend is likely to continue for some time, considering the sheer number of PCs running the Windows XP OS around the world. That may have prompted Intel to raise its gross margin guidance for the current quarter.
Still, with research firm IDC expecting the global PC market to shrink by a further 6.1% during the current year, Intel's core business has little hope of a strong recovery.
The company's server chip business did a pretty good job, with revenue up 11% on a year-over-year basis. While it's true that server chips are certainly more profitable than the ones made for PCs -- another possible reason for Intel's current healthy gross margins -- they are certainly no match for the latter in terms of volume sales. And even here, the increased adoption of cloud services by the enterprise segment will continue as a threat to Intel's future sales of server chips.
New horizons to explore
After failing to capitalize on the recent boom in mobile devices, Intel seems to have pinned its hopes on the Internet of Things. The company has reported a 32% year-over-year increase in revenue for this segment, but then a lot of it has probably come from the sale of chips for embedded applications in car infotainment systems and medical devices, rather than new-age wearable devices such as smartwatches.
The mobile segment debacle
However, the biggest drag on Intel's future profitability continues to be its dismal performance in the sale of chips for mobile devices -- an area where it is generations behind the current leader Qualcomm. While Qualcomm has recently launched its fourth-generation LTE-enabled smartphone chips, Intel is still in the process of developing its first-generation products in this category, highlighting the wide gap between the two.
Less room to maneuver
One possible means of survival for Intel is to utilize its highly developed chip manufacturing capabilities to produce chips for rivals like Qualcomm -- an idea which management also seems to agree with. But then, the company has hardly found any takers for its products.
A large part of the reason can be attributed to its failure to woo customers from Taiwan Semiconductor Manufacturing (NYSE:TSM) or TSMC, the world's biggest contract chip maker, with around 50% market share. With TSMC planning to make massive investments in the development of newer chip manufacturing technologies, it is likely to emerge as an even more formidable competitor to Intel in the future.
Some Foolish final thoughts
Given the fading prospects of the worldwide PC industry, the basic problem with Intel still lies in its inability to create a newer and more solid revenue stream to counter this scenario. With the company having seriously fallen behind in the race to manufacture chips for mobile devices, Intel's hopes of making it big in new-age areas such as wearable devices and the Internet of Things may be a bit premature.
And with rivals such as Qualcomm light years ahead in the realm of LTE network technology, Intel is again losing out on the huge potential in emerging markets such as China. Given this situation, it would be a big mistake to view the company's higher-than-expected gross-margin guidance for the current quarter as a sign of good times ahead.
Investors should keep a close watch on this stock until the end of this year and . If things don't improve much by then, it might be time to make a drastic decision about Intel.
Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. 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.