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Market Update

Weak PC Market Creating Headwinds for Intel

Despite pressure from the slowing global PC market, Intel’s server processors should drive long-term growth, says Morningstar’s Andy Ng.

 Intel (INTC) reported first-quarter results that were within our range of expectations. The firm saw headwinds from continued softness in PC processor demand, as well as first quarter seasonality, but provided an outlook that was somewhat encouraging. We are maintaining our fair value estimate and moat rating.

For the quarter, revenue was $12.6 billion, down 7% sequentially, and a decline from $12.9 billion a year-ago. The first quarter is typically seasonally soft and the sequential decline was roughly in-line with historical norms. In Intel's PC processor segment, sales were $8 billion, down 7% sequentially, and down 6% year-over-year. The unit continued to be pressured by a slowdown in the global PC market, which put some pressure on processor demand from computer manufacturers. The firm's server processor business posted revenue of $2.6 billion, down 7% from the fourth quarter, but up 7% year-over-year. We think the increase from the year-ago quarter is encouraging, as we expect the segment to grow with the build outs of the cloud infrastructure over time.

On the profit front, gross margin came in at 56.2%, versus 58.0% in the fourth quarter. Although some of the decline was due to lower volumes, it was largely driven by the production ramp of the upcoming Haswell processors, which requires the firm to write-off inventory before they are qualified for sale. However, Intel will be able to reverse the write-offs when the new products are actually sold. Operating profit was $2.5 billion, compared with $3.2 billion in the fourth quarter.

For the second quarter, management expects revenue to be $12.4-$13.4 billion, implying 3% growth at the midpoint. Intel expects to see some chip inventory replenishments from the current depressed levels in the PC supply chain as computer makers gear up for the launch of Haswell-based PCs. We believe the weak PC market will likely create headwinds for Intel in the coming quarters. However, we think the firm can still grow in the long-run, driven by the server processor business. Further, it appears Intel's Atom chips are getting more competitive on the power efficiency front with ARM-based solutions in the smartphone and tablet processor space, which could provide Intel another growth channel.

We think it will be important to keep an eye on the upcoming Haswell processors, as it could be a strong product given its power and performance characteristics. As a result, Haswell could potentially drive more interest in the Ultrabook PC form factor and help Intel capture market share in high-end tablets. Nonetheless, we think it is currently difficult to gauge how much of a boost Haswell will give Intel amidst the backdrop of an uncertain global PC market. But the new chip, which promises to provide significantly better battery life than today's PC processors, may help stem the recent declines in Intel's main PC processor business.

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