When Intel reported quarterly results today, net income was short of Wall Street’s expectations. Sure, the chip giant remains a profit machine. And Intel is kicking around AMD these days. But that’s not good enough for skeptical Intel investors, who want stronger results. Fact is, the chip giant faces at least three major challenges in 2008. Here’s a look.
1. The Windows Vista Hangover: In a word, Microsoft’s much-hyped operating system upgrade was a dud. Instead of driving people to upgrade, Vista drove customers crazy and prompted many businesses to sit tight with their current PC infrastructure. Not exactly good news for Intel. If Microsoft takes 10 simple steps, demand for Vista and new PCs with Intel processors will surely rise.
2. Fearful Consumers: You’re trying to pay your mortgage, your home equity line of credit, car payments and your Visa bill. Opening your wallet for a new PC (especially when your old XP system is still chugging along) isn’t a top priority. Fact is, there are no “killer” applications for Vista, and your cash is tied up elsewhere.
Intel’s best hope is to continue pushing beyond the traditional PC market. Smart phones, mobile Internet devices and WiFi handhelds are the rage. Intel’s relationship with Canonical, focused on mobile Linux offerings, is a key effort that should pay dividends in late 2008 but perhaps not till 2009. (Check out item #44 in this list of 50 things you need to know about Canonical’s Ubuntu Linux.)
3. Virtualization: Intel was smart to embrace and evangelize virtualization. Businesses want to unlock the full power of their servers and desktops by running multiple operating systems and applications. But the virtualization craze has surely hurt Intel sales volumes — a least a tiny bit — because virtualization customers can do “more with less.”
In order to offset sales lost to virtualization, Intel needs to continue scaling its processors higher — pulling even more business away from high-end Unix systems and RISC hardware. Intel also will need to continue pushing its vPro technology as a way for partners to more effectively manage customer systems.
Of course, it’s important to keep Intel’s challenges in perspective. Intel’s per-share earnings were two cents short of analyst expectations, according to CNBC. That’s certainly not a disaster. But Intel shares did fall 13 percent on the news. Ouch.
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I think you missed the point. INTC’s results weren’t a reflection on economic or PC weakness. Rather, they are dealing with weak memory pricing and a few extrenuating circumstances. I’ll elaborate:
First, INTC stated that a variety of small factors, no one of which is particularly significant, conspire to produce a cautious outlook for Q1. Weak PC demand was NOT AMONG THEM:
1. NAND pricing will probably continue to weak.
2. The Marvell supply agreement started winding down during Q4 and will continue to do so in Q1.
3. NOR is now a part of their results and tends to have exacerbated seasonality Q4 to Q1. This is the first year where that will impact Q4 to Q1 seasonality.
Of course, they also mentioned that economic indicators make it prudent to be a “little bit cautious”.
As for the PC business, notebook CPU growth DID slow down, but INTC explained that this was due to lower ASPs (due to strong proliferation of lower-priced notebooks in emerging markets) and the decline in the Marvell supply agreement. When discussing the overall PC environment, Stacy Smith’s introductory statement was garbled, but it sounded like he said that the CPU business was “up-ly seasonal” in terms of unit volume expected in Q1. The rest of his statement was clear and consistent with an “up-ly seasonal” expectation:
“We saw demand grow through the fourth quarter. We didn’t see anything unusual in terms of cancellations and we didn’t see anything unusual in terms of inventory building up. Our inventory is lower than I’d like. The disty channel inventory that we have visibility into is at the low end. So, it all felt pretty healthy through the fourth quarter.”
INTC went on to say that most industry analysts have PC unit volume “growing in the low double-digits in ‘08 over ‘07. That is an assumption, we wouldn’t argue with and that’s one that we’re building our capacity plans around.”
They also saw insignificant evidence of double-ordering in the quarter.
Finally, server demand was “outstanding” in Q4: “The servers are building the infrastructure for the Internet and the enterprises and the notebooks are essentially becoming the clients to view those on. And the combination, we think, is very powerful and is not showing any signs of diminishing.”
Mark G: Those are very solid points across the board. Hard to argue with you. In fact, The VAR Guy can’t. But he stands by the three primary points in his blog entry: Microsoft’s lame upgrade (Vista), cash-strapped consumers and virtualization are three core challenges to Intel’s biz in 2008.