Best Ideas and Dividend Growth Newsletter holding Intel (click ticker for report: ) reported lackluster results Tuesday afternoon. For the first quarter, the firm posted a revenue decline of 3% year-over-year, which was slightly worse than consensus expectations. Earnings were a penny shy of consensus estimates, falling 17% year-over-year to $0.40 per share. Gross margins fell 800 basis points year-over-year to 56%, but the firm maintained its full-year outlook for gross margins of 60%.
Ultimately, the market knew not to expect a blowout quarter, as PC sales languish. For the quarter, PC client revenue declined 6% year-over-year to $7.99 billion, but the segment’s operating income decline was steeper, falling 28% year-over-year to $2.5 billion as the firm took large inventory write-downs to deal with excess supply of older generation chips. On the positive side, the firm continues to upgrade to its 14 nanometer transistor technology, and it remains on-track to start production in the back half of 2013.
The issue with Intel isn’t its leadership in PC chip technology—Intel’s ahead of the curve. Intel’s problem is its mobile presence, or lack thereof. Although CFO Stacy Smith noted that the firm is becoming more leveraged to mobile form factors (tablets, ultrabooks, convertibles), Intel trails Samsung, ARM (click ticker for report: ), and Apple (click ticker for report: ) in the smartphone technology. We feel bullish about the potential for Apple and Samsung to dominate the smartphone wars, leaving Intel out of the biggest shift in computing products in a generation.
Nevertheless, we believe the quarter contained a few positives for the firm. Data Center group revenue rose 7% year-over-year to $2.6 billion, as Intel continues to benefit from strong growth in cloud storage. The company recently revealed its next generation of chips that offer superior performance and power optimization, which the firm believes will drive double-digit revenue growth for the full-year. We also think better manufacturing utilization will help improve segment operating margins.
Additionally, management provided further color on the push into the foundry business after the company landed a manufacturing deal with Altera (click ticker for report: ). We believe expanding its foundry business could be a profitable endeavor for the company, and outgoing CEO Paul Otellini agrees, saying:
“The business model that we have for the foundry assumes value based pricing. The people that we are soliciting and people that are attracted to us are those who see the advantages of our technology as it manifests itself in their products and gives them an advantage in the marketplace. So it’s a healthy business for us.”
The company will not sell its services to competitors, so Intel will not be competing with itself on any front. It’s difficult to estimate the exact impact foundry could have on the greater business, but it will certainly help the firm diversify away from the PC.
Overall, the first quarter at Intel wasn’t great, but we also thought there were plenty of positive takeaways. On top of strong data center growth and positive developments in the foundry business, the firm trimmed its capital spending forecast by $1 billion and maintained its gross margin outlook. We continue to believe shares of Intel look attractive, and a yield of 4.2% will pay us to wait for capital appreciation.