Who would believe that Intel's chips for consumers--specifically consumer desktops--would be the bright spot in Intel's earnings report?
While there's no reason to believe that Intel's fourth-quarter earnings contradict the conventional wisdom that the PC market is on the wane, optimists might point out that's exactly what happened. Stacy Smith, Intel's chief financial officer, said that Intel saw PC sales for the fourth quarter at higher levels than what the chipmaker tracked a year ago--and disclosed aggressive plans to push into the Android tablet market in 2014.
All told, Intel reported fourth-quarter revenue slightly highly than what Wall Street expected--a 3 percent increase to $13.8 billion over last year's fourth-quarter figure. Profits were just about flat at $2.6 billion, versus $2.5 billion a year ago, missing analyst estimates by a penny a share.
"Given the PC market was in the toilet and the phone and tablet division didn't financially perform well, they did well in 2013," Pat Moorhead, principal with Moor Insights & Strategy, said in an email. "In 2014, Intel will need to turnaround mobility, defend the datacenter from AMD, ARM, and Broadcom, and gracefully enter the growing Internet of Things client market."
So what happened?
Intel's performance in the PC Client Group business actually outperformed its PC customers. For 2013, market-research firm IDC said, total PC shipments declined 10 percent. But for the same period, Intel's PC business declined just 4 percent, to $33 billion. (Rival AMD may have soaked up some of that red ink.) And while sales of Intel's notebook chips suffered--down 4 percent in terms of both prices and unit volume--the prices of Intel's desktop chips actually rose 6 percent throughout the year.
And within the desktop PC space, Intel forged success from a number of different components.
"Some of the contributions of fourth quarter was the XP transition, which is really what you are talking about," Intel chief executive Brian Krzanich told analysts during a Thursday conference call. "We don't think that was the only thing. As I said, it was most--a lot of the growth came from desktop, but the desktop was largely enterprise in the mature markets. That really, we think, has to do with a lot of great form factors that are coming in the all-in-ones, the great innovation that's coming in there. We saw some of the highest units of [Core] i5 and i7 in the enthusiast area. I think those are some great gaming platforms. So we think there is a lot more to the desktop growth. We also introduced the Haswell-based NUC, which is a smallest form factor desktop machine that you can have. So it's those kinds of innovations that are driving this desktop growth as much and more than the software transition."
Notebook PC sales were "pretty much in line with expectation," Krzanich added.
A torrent of tablets?
Krzanich also said that Intel enters 2014 with the goal of selling 40 million Intel-based tablets. Intel's Smith said that Intel saw "strong tablet growth in the back of the year," and that the combined unit growth of tablets and PCs during the fourth quarter was up almost 10 percent versus a year ago.
All told, Krzanich said, Intel exited 2013 with 10 million tablet sales under its belt--and with expectations of more to come. Intel's first "Bay Trail" chips were designed for Windows, he said, but OEMs are readying a new wave of Android tablets. "Most of the Bay Trail Android tablets really start showing up more in Q2 than in Q1," Krzanich said.
The goal, Krzanich said, was to put those value Android tablets in the market before the back-to-school season hits--which, incidentally, would be when the next wave of PCs, using Intel's delayed Broadwell chip, are due to be released. (Broadwell samples should be shipped to Intel's hardware partners this quarter.)
The disappointing data center
Intel can usually depend on its Xeon chips funding most of its business; after all, Intel's making a push to put "Intel Inside" into the cloud. But Intel's data center business only grew 8 percent to $3 billion, not quite the double-digit growth Wall Street was hoping for. In part, Intel executives implied, enterprise spending slowed as a result of the government shutdown and debt concerns.
Intel's share price fell about 4.7 percent in after-hours trading Thursday, as Wall Street digested the narrative shift--PCs might not be so bad after all, and the enterprise could be weaker than expected. As always, Intel usually is a bellwether for the PC market, with AMD's earnings historically providing a more bearish counterpoint.
Still, Intel has yet to break free of the admittedly lucrative desktop/notebook/server hegemony, and crack the mobile space. Until it can do that, Wall Street will be wary. But what is this disturbing new trend of a successful PC? An anomaly, or something more? If nothing else, it will provide an intriguing framework as the rest of the industry prepares its own earnings reports.