Intel (INTC) reduced its revenue guidance March 12, dropping expectations for the first quarter to $12.8 billion from $13.7 billion. The world’s largest semiconductor chip maker pointed to weaker-than-expected PC demand, as well as lower inventory levels in the PC supply chain. As far as Intel is concerned, management cited a lack of Windows XP refreshes from small and medium businesses, along with worsening macroeconomic conditions and currency headwinds as main factors in the decline.
Despite the reduction in revenue guidance, the mid-point gross margin expectations remain at ~60% for the period due to higher average selling prices offsetting any profit deleveraging caused by the lower expected volume of PC sales. The firm’s R&D and MG&A spending and depreciation expectations for the quarter also remained unchanged. All other guidance, however, has been withdrawn and will be updated with the company’s first-quarter earnings report on April 14. This includes the previous guidance of revenue growth in the mid-single digits for the year 2015.
Other notable PC-related companies have also experienced dips in the past week in response to news of falling demand levels. Microsoft (MSFT), NVIDIA (NVDA), HP (HPQ), Seagate (STX), and Western Digital (WDC) all followed Intel down after the announcement of continued weak demand for personal computers. Intel’s primary focus has been the design and manufacturing of semiconductor chips for PCs and servers, but as the industry becomes more mobile-oriented, Intel must continue the transformation it began recently.
Intel continues to make progress in non-PC related endeavors. At the Mobile World Congress on March 2, for example, the firm announced updates and new releases to its mobile processor and modem line-ups, as well as new security software OEM deals and agreements with telecommunications equipment vendors. The most noticeable product, a processor previously code-named SoFIA, is aimed at allowing manufacturers the opportunity to produce low-cost, fully-featured mobile devices, giving Intel access to a growing market segment.
Various versions of Intel’s McAfee Security line will come standard on Samsung’s Galaxy S6, as well as the new LG smart watch and LG smartphones. Other mobile security products have attracted new customers in Europe and Russia, ensuring that Intel will be involved in the European and Russian Android markets. Multiple other mobile communications projects have been launched or updated, and management hopes that these efforts can help a mobile division that looks to improve its profitability and capture demand on the next wave of computing.
Reports from VentureBeat have surfaced in the past week of a deal between Apple (AAPL) and Intel as a supplier of modem chips for the iPhone beginning in 2016. The units produced using Intel’s chips will be aimed at emerging markets in Latin America and Asia, the latter being a primary growth focus of Apple. For the past several years, these modem chips have been produced by Qualcomm (QCOM), but unofficial sources indicate that engineers from Apple have been collaborating with Intel engineers to get its latest LTE modem into the iPhone’s circuit board. Intel’s focus on low-cost smartphone developments has given it an edge to land this prospective agreement for Apple’s emerging markets. Though the deal is not official, it has the potential to give Intel a boost in 2016 and beyond, should the agreement materialize.
Intel’s multiple mobile communications projects have a great deal of upside and the deal with Apple could turn out to be a major win for the chip giant, but weakened demand for PCs will continue to hurt Intel’s revenue, at least in the near term. Unchanged R&D guidance, however, shows that the company is still dedicated to necessary growth and innovation in an ever-changing industry. Intel is not likely to see a major comeback until it begins realizing results from its recent mobile developments and agreements, unless of course, the PC market rebounds quickly and unexpectedly, which we’re not counting on.
All-in, we’re not changing our fair value estimate of Intel as a result of the news, but we note that near-term sentiment has shifted greatly on the PC supply chain. We may use Intel as a source of cash in the newsletter portfolios. Should we make any definitive changes, we will issue a transaction alert email.