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Intel posts a 25 percent drop in profits as falling PC sales bite

Server chips fail to take up the slack
Wed Apr 17 2013, 10:01
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CHIPMAKER Intel reported a 25 percent drop in profits for the first quarter of 2013 as the decline of the PC industry hit what is arguably its largest supplier hard.

Intel's reliance on the PC industry to sell its chips has been predicted to cause the firm pain as sales of traditional computers fall in favour of tablets and smartphones, markets where Intel has yet to score any major success.

The firm's first quarter 2013 financial results point to the prediction becoming reality, with revenues from its PC division dropping six percent resulting in overall revenues falling marginally to $12.6bn.

While Intel's revenue decline was cushioned by the firm's strong Data Center Group, which includes Xeon server chips, Intel's profits and gross margin took a hammering. The firm reported first quarter profits of $2bn, down 25 percent from the same quarter last year, while the firm's gross margin fell from 64 percent in the first quarter of 2012 to 56.2 percent last quarter.

Intel's problem is that it still cannot point to significant end-user products in the growth markets of smartphones and tablets. Instead the firm's CEO Paul Otellini, who will leave the firm next month, said that PC vendors shouldn't all be grouped into a band of falling giants. Intel needs to "continue to give [system builders] tools to innovate," he said. "I wouldn't paint the entire customer base with the same brush."

Otellini singled out Lenovo and said no-name OEMs and ODMs were doing a good job of innovating. He said, "Lenovo outperformed everyone else and actually had very good year-on-year numbers in a down year. Others continued to - well, a subset of customers in different [market] segments are also doing very well - [such as] those providing products in datacenters. What I see when we look out is tremendous customer innovation particularly at the ODM, Taiwanese OEM side where [there is] the ability to miniaturise and bring extremely thin form factors."

Otellini said Intel's job is to deliver chips such as Haswell and Baytrail that allow those device makers to produce what they want. While Intel will ship chips intended for smartphones and tablets in the next quarter, it remains to be seen which device makers will pick them up and incorporate them into products that consumers buy.

The only encouraging highlight in Intel's first quarter financials came from its datacentre division, which produces chips for servers and network infrastructure, posting revenues of $2.6bn, a 7.5 percent increase from the same quarter last year.

Even Intel's sales of high margin server chips were not enough to stem the erosion of its high gross margin, which the firm tries hard to protect. The firm will now find it harder to justify its significant manufacturing investments to Wall Street if it can't show continuing high returns. µ


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