the results

INTC reported 1Q15 earnings after the close on Tuesday.   Results were flattish year-on-year, matching analysts’ forecasts.  This was unsurprising, given  INTC had preannounced 1Q15 was not going as well as expected.  The company thinks some, but not much, relief from the current doldrums will appear in the second half.

The culprit has been the traditional PC business.  Small-and medium-sized firms haven’t been converting their old Windows XP desktops to newer machines.  Maybe they’ve decided to wait for Windows 10, or they don’t want to update their (pirated?) Office programs or they just figure they’ll use XP until something breaks.  Whatever the reason they’re not buying.

This hurts INTC in two related ways:  OEMs don’t have to reorder parts   …and they run down their inventory levels to match weaker demand.  INTC thinks the second process was pretty much over by the end of March.

Notebooks and tablets were up, though, and the server-related businesses are going great guns.

picky stuff

INTC now thinks its full-year tax rate will be 25%, not the 27% previously forecast.  This suggests the current mix of business is more Asia, less US than the company previously thought.

INTC is cutting capital expenditure plans.  Weaker PC demand means less need for older factories, which can be refit for more cutting-edge use.  Hence, less need to build from scratch.

Tablet demand was up 45% yoy in 1Q15.  This is good news and bad.  Good that someone wants the chips, bad in that INTC is essentially paying users to take them.  Nothing new here.  However, INTC had expected to begin to show profits on them by yearend.  That apparently is not going to happen.  INTC was likely planning to get out of the hole both by raising prices and by driving down unit manufacturing costs.  My guess is that the first isn’t happening yet.  (My view is that whatever it takes to get INTC parts into the hands of manufacturers is the correct strategy.  Ideally, the prior CEO would have understood the movement away from big clunky tethered PCs and reacted years ago.  But that’s water under the bridge.)

the big change (in my view)

INTC has changed the way it is presenting results to investors, effective with 1Q15.  It is folding the loss-making Mobile and Communications Group into the former PC Client Group, now dubbed Client Computing Group.

Some of this is just optics–the MCG lost about $1 billion a quarter during 2014, mostly trying to jumpstart the tablet business.  So we won’t see the red ink any more.

At the same time, through the magic of subtracting mobile losses from PC profits, the server business  becomes the largest single earner INTC has.

conclusions

In a sense, INTC is saying it wants to be known as an internet infrastructure company that happens to make PCs, rather than as a PC firm that happens to make servers.

Who wouldn’t!, a cynic might comment.

I think  the move is more than that, however.  It may also signal a change in behavior.  The new line of business table neatly divides the company into a growth segment–servers, embedded internet-of-things chips, 3-D flash…–and a mature cash cow, Client Computing.

If so, the first will be run as a profit center and measured by growth, the second more or less a cost center and measured by contribution margin (the reason I wrote about this topic yesterday).

During the conference call (as usual, I read the Seeking Alpha transcript) INTC said the servers etc. are accounting for 60% of the company’s profits right now.  If we assume that these businesses can continue to grow at 20% annually and that CCG stays flat, then servers etc. would be 75% of INTC’s profits–and expanding in scale–in 2018.

This would presumably result in a higher PE multiple at come point, as well as higher earnings.  The question I’m currently pondering is whether this prospect makes INTC more attractive than a tech-oriented ETF.