Intel's lingering reliance on PCs keeps sales growth subdued

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(Bloomberg) -- Intel Corp.’s push into new products is helping bolster sales and earnings in the second half of the year, even as the chipmaker’s dependence on the lackluster personal-computer and server markets is keeping growth in check.

Revenue and profit were stronger than analysts estimated in the third quarter, and sales in the current period will be about $16.3 billion, the company said. While that’s ahead of projections, it would still leave revenue little changed from the same period a year earlier, underscoring how difficult it is for the world’s biggest chipmaker to expand total sales while its largest business stagnates.

Chief Executive Officer Brian Krzanich is trying to spread Intel’s bets more widely by adding new products that will make the company’s chips essential in areas such as self-driving cars and artificial intelligence. He’s managing that transition while still relying on a PC market that has shrunk every year since 2011, and a server-chip business that’s dependent on the capital spending plans of a handful of companies to generate a large portion of its profit.

“They are going through a transformation,” said Betsy Van Hees, an analyst at Loop Capital Markets in San Francisco. She recommends buying the stock. “They’re handling it and realigning the organization in the face of a very challenging environment when their core business is on a secular decline.”

Intel shares rose about 2 percent in extended trading following the announcement, after closing at $41.35 in regular New York trading. The stock has lagged behind peers this year with a 14 percent gain, less than half of the 36 percent advance by the Philadelphia Stock Exchange Semiconductor Index.

Gross margin will be about 63 percent in the fourth quarter. That prediction and the sales forecast, which includes a range of plus or minus $500 million, compare with average analysts’ estimates for $16.1 billion in revenue and margin of 62.9 percent, according to data compiled by Bloomberg.

Third-quarter results got a lift from robust growth in Intel’s memory-chip and internet of things units. Net income rose to $4.5 billion, or 94 cents a share, from $3.4 billion, or 69 cents, in the same period a year earlier. Sales climbed 2 percent to $16.1 billion. Excluding certain items, profit was $1.01 a share. On that basis, analysts had projected 80 cents in profit on revenue of $15.7 billion.

Intel’s management said on a conference call they will try to tighten spending and reduce annual operating expenses to 30 percent of revenue by 2020, helping extend gains by the stock. The company reduced costs in the recent quarter to below that level through a change in the way it accounts for marketing subsidies paid to PC makers.

Earlier this month, market researchers said the PC market lost ground again in the third quarter, with shipments falling 3.6 percent. The latest results were hampered because the back-to-school season didn’t provide its traditional boost in demand, Gartner Inc. said. Industry shipments peaked in 2011 at 363.8 million. In 2016 they were more than 100 million units short of that level.

“We’ve seen declining growth but relatively stable. Our unit volume in the quarter was a little bit better than that, ” said Chief Financial Officer Bob Swan. “Consumers are continuing to pay up for high-performance products. Our average selling prices are up.”

Intel’s PC chip unit had sales of $8.9 billion, flat from a year earlier. In PCs, Santa Clara, California-based Intel is facing a revived challenge from longtime rival Advanced Micro Devices Inc. Swan said the market’s competitive dynamics haven’t changed.

The company’s data-center unit, which sells powerful, expensive chips for machines that run the internet and corporate networks, had revenue of $4.9 billion, an increase of 7 percent. Krzanich has said that business can achieve growth of more than 10 percent over the long term. Its performance is increasingly dependent on orders from cloud companies such as Google, Microsoft Corp. and Inc.’s web services unit. Their data centers are expanding at the expense of in-house server farms at corporations that are outsourcing their computing needs to providers of services over the internet.

Within that division, sales from data-center operators were up 24 percent in the quarter, helping making up for a 6 percent decline in revenue from corporations, the company said.

Two of Intel’s newer businesses, memory and internet of things, registered sales growth of 37 percent and 23 percent, respectively. Still, the impact of that growth was limited because those divisions are each only about a 10th the size of the PC-chip business.

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