By Don Clark And Tess Stynes
Intel Corp. continues to endure the pain of a declining market
for personal computers, but larger machines are helping prop up the
chip maker's bottom line.
The Silicon Valley giant, which said last month that revenue
would suffer in the first quarter due to sagging PC sales, on
Tuesday reported that net income for the period grew just 3% on
overall revenue that was flat with the year-earlier period.
Intel disclosed that operating income for its client computing
group fell 24% in the first quarter, while revenue declined 8.3%.
That newly formed segment rolled up PC chips with those for tablets
and smartphones, a previously separate unit that had recorded heavy
operating losses as Intel used subsidies to build market share.
But Intel's data center group, which includes chips for server
systems, posted a 19% jump in revenue. And Intel projected
improvement in gross profit margins in the current quarter that was
greater than analysts expected.
"Data center continues to pull the company along," said Bill
Kreher, an analyst at Edward Jones.
Intel's shares rose 3% in after-hours trading. The stock had
declined 13% this year through Tuesday's close.
Intel, based in Santa Clara, Calif., gets the largest portion of
its revenues from chips that serve as calculating engines in most
PCs. That business began suffering several years ago as consumer
spending shifted to smartphones and tablets.
Last year, though, Intel benefited from a modest rebound in
sales of PC chips as companies began giving employees new notebook
computers. Moreover, some companies bought PCs so they could
upgrade their operating system, a reaction to Microsoft Corp.'s
decision to phase out support for its aging Windows XP
software.
But new headwinds emerged in March. Intel slashed its
first-quarter outlook and withdrew its financial projection for the
year, citing unexpectedly low demand for desktop computers and
lower inventory levels among computer and parts suppliers.
Intel traced those issues to the fact that small and medium-size
businesses weren't upgrading desktop PCs in connection with the
Windows XP phaseout as quickly as expected. The company also cited
macroeconomic and currency conditions, particularly in Europe,
where the rising value of the dollar has made PCs more expensive in
local currencies.
Brian Krzanich, Intel's chief executive, told analysts Tuesday
that shipments of chips for notebook computers rose for the fifth
consecutive time in the first quarter, even as desktop PC sales
fell.
"We expect the PC market to remain challenging," Mr. Krzanich
said, with overall unit sales expected to decline by a
mid-single-digit percentage.
Beyond the bright outlook for server chips, Intel benefited from
14% revenue growth in a unit that sells chips called NAND flash
memory and 11% growth in its Internet of Things division, which
includes sales of chips for consumer and business equipment other
than computers.
Roger Kay, an analyst at Endpoint Technologies Associates, said
the combination of numbers shows that Intel's effort to decrease
its reliance on PCs is paying off.
Additional factors driving Intel's profit margins include lower
spending on factories and capital equipment than analysts expected,
said Stacy Rasgon, an analyst at Sanford C. Bernstein.
Last week, The Wall Street Journal and other outlets reported
that Intel's plan to acquire Altera Corp., in a deal that would
have been Intel's largest ever, appeared to have stalled. Some
analysts think Intel was considering the purchase of Altera, which
specializes in the chips known as field-programmable network
arrays, to help defend its position in the server market.
Intel executives declined to discuss that potential deal during
its quarterly earnings conference call.
Overall, Intel reported profit of $1.99 billion, or 41 cents a
share, up from $1.93 billion, or 38 cents a share, a year earlier.
Revenue was $12.78 billion, compared with $12.76 billion a year ago
and in line with Intel's reduced guidance. Analysts polled by
Thomson Reuters had expected per-share profit of 41 cents and
revenue of $12.9 billion.
Intel said its gross margin rose to 60.5% from 59.6%. For the
second quarter, Intel projected that figure at 62%, plus or minus a
couple of percentage points. It projected revenue of $13.2 billion,
plus or minus $500 million, compared with analysts' average
estimate of $13.51 billion.
For all 2015, Intel said it expects revenue to be flat from a
year ago, when it reported full-year revenue of $55.9 billion. The
company projected its gross profit margin at around 61%.
Write to Don Clark at don.clark@wsj.com and Tess Stynes at
tess.stynes@wsj.com
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