The decline in demand for personal computers has affected the value propositions of suppliers, with customers increasingly switching to smartphones and tablets. Intel Corporation (INTC), which manufactures chipsets and microprocessors, has been adversely affected by this trend as well, but its stock benefited today as the company raised its second-quarter guidance on the back of improved demand for business PCs. Intel had been expecting flat sales for the year, but the improved guidance marks the first annual increase in expected sales since 2011.
Intel now expects revenues to be $13.7 billion (give or take $300 million), higher than its previous guidance of $13 billion (give or take $500 million.) With the increase in expected sales, the microchip maker expects its gross margin to be 1% higher, at 64% for the quarter. Full-year revenues – which the company did not address – are sure to come in higher as well.
The world's largest semiconductor producer has been equipping more than 80% of PCs across the globe with Intel processors. It earns nearly 64% of its total revenues from its PC Client Group segment, which makes platforms for desktops and notebooks. With its reliance on this segment, the company has been facing great headwinds in its attempt to increase revenues and make inroads into the tablet and smartphone markets, in which other companies have established a strong foothold.
The increase in demand for PCs can be explained by several factors. Recently, Microsoft Corporation (MSFT) ended support for Windows XP, causing many businesses to upgrade their systems. Secondly, businesses – unlike consumers – are unlikely to substitute smartphones and tablets for PCs.
According to the International Data Corporation (IDC), PC shipments will decline 6% this year, compared to the 10% decline in 2013. Shipments will continue to fall as consumers shift to mobile devices, but the corporate demand for PCs may remain. The IDC predicted that business PC shipments will decline 4.3%.
In Intel’s earnings for the first quarter of its fiscal 2014, Intel CEO Brian Krzanich indicated that he saw signs of improvement in the PC business. Consumer demand will remain weak, but even the sustainability of business PC demand is in question. The current increase has been triggered by the termination of Windows XP support, and the fact that mobile devices do not provide all the functions of a PC. According to the president and chief analyst of TECHnalysis Research, Bob O'Donnell, powerful hybrid PCs (or 2-in-1 PCs) are also of interest to many businesses as they serve multiple purposes.
As indicated earlier, the sustainability of PC demand is also up in the air. Intel has ramped up the production of chips for mobile devices, wearables, and the Internet of Things, but none have gained enough traction yet. To utilize the over-capacity caused by a decline in PC shipments, the company has now opened up its fabs (fabrication plants) for other chip makers too, whereas previously they were used only for production of Intel’s chips.