Coverage: Intel drops after cutting outlook

Intel is in trouble. Businesses aren’t buying PCs as they wait for new software and the strong U.S. dollar is hurting the exchange rate. The company slashed its outlook for the first quarter, sending the stock down.

Don Clark and Chelsey Dulaney had this story for The Wall Street Journal:

Intel Corp. cut its revenue outlook for the first quarter by nearly a billion dollars, a sign that demand for personal computers is weakening amid sharp currency fluctuations and other factors.

The primary supplier of processor chips for PCs on Thursday said it has seen weaker-than-expected demand for business desktop computers and lower inventory levels across the industry’s component supply chain.

Intel traced the problems to two issues: that small and medium-size businesses have held off PC purchases in anticipation of upgrading from Microsoft Corp.’s outdated Windows XP operating system, plus “increasingly challenging” economic and currency conditions, particularly in Europe.

Analysts said they believed the second set of factors is more important. Intel sells its chips to customers in dollars, but many PC makers that buy those chips sell their products in local currencies. They may also have to convert local currencies to buy components, a process that has grown more costly as the dollar’s value has risen.

The Reuters story by Anya George Tharakan and Sai Sachin R offered these details on the profit shortfall:

Intel said on Thursday that it expected first-quarter revenue of $12.8 billion, plus or minus $300 million – about 7 percent lower than its earlier forecast of $13.7 billion, plus or minus $500 million.

Though dominant in the market for chips used in PCs, Intel has been slower than rivals such as Qualcomm Inc (QCOM.O) to adjust in recent years to the growing popularity of smartphones.

When Microsoft Corp (MSFT.O) wound down support for its Windows XP operating system last April, Intel had expected a bounce in demand from small- and medium-sized businesses. But this has not happened.

Businesses and consumers are taking an “if it ain’t broke, don’t fix it” attitude to their old PCs, Summit Research analyst Srini Sundararajan said.

According to BlueFin Research Partners, 75 million-76 million PCs will be shipped worldwide in the first quarter, a decline of 8-9 percent from the preceding quarter.

Intel, whose historic “Wintel” alliance with Microsoft once delivered breathtakingly high profit margins, has been trying to offset the impact of slower PC upgrades by making chips for devices such as “2-in-1s”, which function as both laptop and tablet.

CNET’s Ben Fox Rubin said that consumers lack of interest in the new operation system could spell trouble for the chip and the software companies:

A lack of interest to move on from Windows XP could spell trouble not only for Intel, the world’s biggest chipmaker, but also Microsoft, as it promotes its newest operating system, Windows 10, which comes out later this year. PC makers, such as Lenovo, Acer and HP, would also suffer from slower refreshes from Windows XP.

For consumers and businesses alike, a lack of interest in leaving that operating system would open them to greater security risks and viruses, Microsoft claims.

On a positive note, Intel said its data center business, which has become a major profit engine, is meeting quarterly expectations. Several other estimates were withdrawn and will be updated with the company’s quarterly earnings report on April 14.

Intel wrapped up 2014 on a strong note. Its data center group experiencing substantial growth, and its PC business rose after previously struggling with consumers’ migration to smartphones and tablets. The PC segment has benefited from the amount of upgrading from Windows XP that has been occurring, as well as more customers going back to buying new laptops and desktops after spending on tablet computers in prior years. However, some analysts expressed concerns that the PC market wasn’t experiencing a long-term revival, and instead was simply enjoying a short-term bump.

Dan Frommer wrote for Quartz that the big question will be if consumers actually upgrade the computers:

We’ll see how those businesses react to Windows 10 when it’s released later this year. Microsoft is even making the update free, if your computer can handle it—a good way to nudge someone to upgrade to a faster PC.

But perhaps the bigger threat is that these customers—which clearly aren’t using bleeding-edge technology—won’t upgrade to new Windows PCs at all, but capable tablets from Apple or one of Google’s many Android manufacturers—a market where neither Microsoft nor Intel is very strong.

Intel is in a tough position. Its business depends on consumers purchasing another company’s product. That worked great when Windows was on top, but now consumers are shopping around for other products. A $1 billion drop in profit is a lot for investors to swallow, but they shouldn’t be surprised. The update has been a long time coming, and many just aren’t willing to make that investment.