Here are some key takeaways from the company’s first quarter earnings call.
Power-efficiency
What makes Otellini so optimistic is that we’re entering a new wave of multiple form factor computing. Computers no longer sit on your desk or in your lap, now you hold them in your hand, and in the future you’ll be wearing them on your wrist or even your face.
As a chipmaker, Intel Corporation (NASDAQ:INTC) remains at the forefront of manufacturing, inventing new processes that allow it to deliver on the promise of Moore’s Law. As companies like Apple Inc. (NASDAQ:AAPL), Samsung, and even Microsoft Corporation (NASDAQ:MSFT) design computers made to look like watches, battery life will play a significant role. What good is a watch that only works for 12 hours? Intel’s manufacturing strength lends itself to high-efficiency chips that these devices require.
Ultrabooks
Intel hopes to leverage its strength in making smaller, more efficient chips to improve the impact of Ultrabooks on the market. Last year, sales of Ultrabooks significantly failed to meet expectations, as only about half of the initially forecasted units moved off the shelves.
This year, Intel will release Haswell, a new chipset designed with Ultrabooks in mind. Intel Corporation (NASDAQ:INTC) hopes that the launch of Haswell along with new Ultrabooks designed around Microsoft Corporation (NASDAQ:MSFT)’s Windows 8 will help pick up sales in the second half of the year. As a result, Intel expects Ultrabook pricing to come down to the $599 range, and battery life to extend up to 13 hours.
IHS expects Ultrabook sales to quadruple from last year to 44 million units. The $599 price point, however, may be tough to achieve according to senior analyst Craig Stice. A full-featured Ultrabook with a new Haswell processor and touch screen will make the OEM’s margins unthinkably small. Using older technology might allow for it, but it seems unlikely we’ll see a lot in that price range.
Mobile
Mobile is an area where Intel was slow to adapt. This year, however, the company expects to make a serious impact, significantly increasing its 1% share of the market from last year. In the first quarter, the company increased tablet volume 100% in the first quarter, and expects to double again this quarter.
In the second half, the company expects its Bay Trail and Clover Trail chips to power a new generation of mobile devices and bring price points down to $300 to $400. Otellini said there’s an opportunity to “go into prime selling season with new products, new technologies, new form factors, and new capabilities that, up to now, were unapproachable price points.”
Intel’s refusal to manufacture ARM Holdings plc (ADR) (NASDAQ:ARMH)’ chip designs is an oft contested business move. ARM’s designs are in 90% of smartphones, and the company has a 31% share of the mobile computing market. Intel Corporation (NASDAQ:INTC) is fighting an uphill battle against QUALCOMM, Inc. (NASDAQ:QCOM) (in baseband processors) and NVIDIA (with its Tegra mobile processors), which both use ARM architecture.
Intel management appears to know what it’s doing, as analysts fear ARM’s market share dominance is in jeopardy, particularly in tablets. While its chips are in the most popular tablets like the iPad, Kindle Fire, and Google Inc (NASDAQ:GOOG) Nexus, Intel is making moves in the low-end tablet market. Asustek just released an Android tablet with a Baytrail processor that competes with Google Inc (NASDAQ:GOOG)’s Nexus and similar HP tablets that use ARM chips.
Most growth in tablet sales going forward will likely come from the lower-end as emerging markets see an expanding middle class. Capturing a large part of the low-end from ARM will be a huge coup for Intel.
Intel Corporation (NASDAQ:INTC) CFO Stacey Smith gave few details on how well its phone business was doing saying, “we had a good first quarter in our baseband business.” The company just launched LTE versions this quarter, a segment where Qualcomm controls 86% of the market.
QUALCOMM, Inc. (NASDAQ:QCOM) is looking to further expand its market share of baseband chips through strategic partnerships. It’s LTE chips are found in Samsung’s Galaxy S4, HTC’s One, and Apple Inc. (NASDAQ:AAPL)’s iPhone 5. Already on its 3rd generation of LTE chips, Qualcomm has an expertise advantage over Intel. Capturing market share going forward will likely prove difficult for Intel without strategic partnerships in mobile.
Margin
Gross margin was down 2 points from expectations at 56%. Management expects it to bounce back to 58% this quarter and 60% for the year.
The culprit was increased demand for Haswell chips before the company is able to sell them (which bodes well for Ultrabook sales). As a result, production costs increased while there was no benefit to revenues. It expects to get back the inventory writeoff throughout the rest of the year once Haswell qualifies for sale.
I wouldn’t be surprised by an uptick in margin next quarter, but maintaining a 60% gross margin for the year is quite ambitious. With the precipitous fall in the PC market, and the pricing pressure on Ultrabooks that the company is putting on itself, margins will be hard to maintain.
Capital Expenditures
Intel Corporation (NASDAQ:INTC)’s capital expenditures have more than doubled since 2011 as the company works to catch up with its competitors in mobile. As the PC market declined faster than expected last quarter, the company saw “higher than expected excess capacity charges in older generation process technologies.”
The company took the opportunity to take capacity offline and reuse the equipment for its ramp up in 14 nm processes. The result is a savings in Cap-Ex of $1 billion for the year, bringing the total down to $12 billion. This is still significantly higher than in the past, but it shows a more cost conscious management.
Outlook
Intel Corporation (NASDAQ:INTC)’s outlook is extremely optimistic and quite ambitious in my opinion. While I feel the chipmaker has great long-term prospects, particularly with its next generation of high-efficiency chips, I think it will have problems meeting its short-term forecasts.
Ultrabooks provide a great opportunity for reverse cannibalization of the tablet market, and if wearable computing proves popular, Intel may find itself in more mobile products. The company’s technological capabilities are well ahead of the competitions’. Intel just needs to convince manufacturers to use it.
The article Key Takeaways From Intel’s Earnings Call originally appeared on Fool.com and is written by Adam Levy.
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