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Dominating the PC microprocessor market for the last two decades, Intel’s (NASDAQ:INTC) growth has slowed down recently on account of weakness in the global PC market. The company closed its fiscal 2012 with 1.2% and 15% declines in annual revenue and net income, respectively. However, it generated approximately $18.9 billion in cash from its operations, highlighting that it is managing its business well amid macro weakness.

A continuous decline in revenue from the PC client group, which accounts for over 60% of Intel’s revenue combined with increasing investment in building its technology prowess, has impacted Intel’s revenue growth as well as its bottom line. Nevertheless, 2012 has been an eventful year for the company as it made significant progress in alternate markets, with new product launches and design wins.

Though the robust pipeline of new platforms and products have helped increase Intel’s competitiveness in the market, we believe the same will not have a material impact on the company’s Q1 2013 earnings, slated to be announced on April 16. Though we believe in Intel’s long term growth potential, we think the persistent decline in global PC shipments and a small footprint in the mobile computing market will impact its growth in the short term.

PC Sales Remained Sluggish In Q1 2013; Declining Shipments In 2013

The slowing enterprise market, consumer softness in mature markets (U.S. and Western Europe), slowing demand from emerging markets, operating system transitions and cannibalization by tablets are some of the main factors leading to the current slump in PC shipments. PC sales declined marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well. [1]

On account of the Chinese New Year, new budget cuts by the government and anti-corruption measures, PC demand in Q1 2013 was lower than anticipated. Though IDC estimates a revival in demand in the second half of the year, we keep a conservative estimate for PC shipments in the future. Nevertheless, with improving macro conditions, increasing demand from emerging economies and the introduction of new convertible and hybrid designs, we forecast the rate of decline in global PC demand to drop down in the future.

(In Millions)

2009

2010

2011

2012

2013

2014

2015

2016

Total PC Sales

304.9

347.1

363.9

350.4

344.4

341.5

339.9

339.5

Desktop Sales

136.2

145.9

154.8

148.4

145.4

142.5

139.0

135.5

Notebook & Netbook Sales

168.7

201.2

209.1

202.0

199.0

199.0

201.0

204.0

Source: IDC Press Release & Trefis Estimate

Overhaul Of Ultrabooks Can Help Intel Retain Its Market Share

After a slow response for ultrabooks in 2011, due to their steep price, Intel has taken a number of steps to increase their popularity among users. The company ramped up its Ultrabook designs from 20 to 140+ in the last year and claims that the growth in Ultrabooks helped it achieve its volume goals in the first half of 2012. Additionally, Intel has lowered the ultrabook price to as low as $699, and intends to further reduce the price to $599 by the year end.

In the coming months, Intel plans to introduce more than 140 core-based Ultrabooks, more than 40 of which will be touch-enabled. Aiming to combine the productivity of a PC with the convenience of a tablet, it intends to launch a dozen convertible Ultrabook designs. As the line between PCs and tablets is blurring, Intel intends to focus on developing more convertibles and detachable Ultrabook designs in the future.

Earlier this year, Intel launched a low power 7-watt version of Ivy Bridge line of processors for Ultrabooks. The low power line of processors will enable OEMs to have greater flexibility in designing thinner and lighter touch based Ultrabook convertibles. In addition, it will also introduce its 4th generation core processor family, code-named Haswell, later this year. The processor promises to offer up to 13 hours of battery life, in turn enabling a broad new range of ultrabook convertibles, detachables and tablets.

Despite the expected entry of ARM-technology based players in the market, we believe that a continuous effort to innovate its product portfolio will enable Intel to retain its dominance in the PC microprocessor market.

Expanding Portfolio To Increase Mobile Footprint

Ever since its entry in the mobile space last year, Intel has made significant progress in the market. Intel’s processors have generally consumed more power and so were not initially considered suitable for use in mobile devices. However, the company has worked towards developing more energy efficient chips and its processors now compete with ARM designs on performance, and have equal or better power and battery life. Intel’s R&D expenditure increased by 22% in 2012.

Though it accounts for less than 1% of the global market share in smartphone chips, it currently has fewer than 10 phones and 10 tablets shipping across 20 countries that support the Windows 8 and the Android operating system. [2]

Earlier this year, Intel announced a range of new products which underline its intention to continue increasing its footprint in the mobile computing space. At 2013 Mobile World Conference (MWC), Intel launched its new dual-core Atom system-on-chip (SoC) platform, code named Clover Trail+, for smartphones and Android tablets. In addition, Intel launched its first LTE compatible chips and a new low-power Atom processor based platform for low-end smartphones. It plans to introduce its first quad-core processor and shift to the 22 nm platform later this year. (Read: Intel Expands Its Mobile Push With New Chips & Platforms and Intel’s New Mobile Platform Expands Its Reach In Key Growth Markets)

The Atom processor division accounts for only 2% of Intel’s total revenue, and we do not expect the extended portfolio to make a significant contribution in its Q1 2013 results. However, we believe that with an expanding mobile footprint, the revenue contribution from the mobile space will increase in the future.

We will update our $29.20 price estimate for Intel after the Q1 2013 earnings release.

Disclosure: No positions.

Source: Intel's Earnings Will Show The PC Slowdown Continues