Intel’s Software Moves

IDC’s recently released PC shipment report has shown very disappointing results. During the first quarter of this year, worldwide PC shipments fell 14% to 76.3 million units. The researcher had been projecting a decline of 7.7% over the year. This was the worst decline in any quarter that IDC has ever reported. The decline was fueled by the lackluster performance of Windows 8 and the continued infringement of mobile devices into PC territory.

Intel’s Financials
Chip manufacturer Intel’s (Nasdaq:NTC) Q1 revenues fell 3% over the year to $12.58 billion, marginally shy of the market’s expectations of $12.61 billion. EPS of $0.40 was also short of the market’s projections of $0.41 for the quarter.

Revenue decline was attributed to the continuing fall in PC sales. By segment, PC sales fell 6% over the year to $8 billion. Revenues from Data Center Group grew 7.5% to $2.6 billion, while revenues from the Architecture Group fell 9% to $1 billion.

But Intel is optimistic about the future. Not only do they expect their PC chip sales to improve, but they are hopeful that their mobile expansion efforts will also bear fruit. For the current quarter, Intel expects revenues of $12.4 billion-$13.4 billion, compared with the market consensus of $12.86 billion.

Intel’s Mobile Growth
Intel realizes that they have been left far behind in the mobile and tablet computing segment. While the company have managed to maintain their strength in the PC segment, they have yet to make a mark on the mobile segment. Intel’s newly appointed CEO, Brian Krzanich, intends to change that. They have begun meeting with manufacturing customers and are adjusting their architecture and product choice to be more focused on the mobile segment.  Intel believes that their strong manufacturing capabilities have them “well positioned” to expand within mobile processors. Within tablets, their Atom processor has seen strong reviews, but they need to improve the product to better suit the performance for the lighter smartphones.

As part of this mobile expansion, earlier this month, Intel revealed their latest chip architecture, Silvermont. The new fast processor operates at a lower voltage with less power leakage. It will feature an ability to change limits to where the CPU cores perform and thus dynamically adjust power consumption, making it more efficient for the lower battery life for mobile devices. Analysts believe that the new chip will offer Intel the ability to expand in the tablet market and will be able to control 75% of Windows-based media tablets and 7.5% of Google Android-based slates.

Intel also began shipping their next generation, Haswell, chip focused on the ultrabook segment. Analysts believe that Haswell will soon be powering Google’s Chromebook and Dell’s Windows-based tablet. The chip comes with enhanced battery life and improved graphics performance. The Haswell Iris graphics chip is expected to deliver a two-times 3D performance increase over the 3rd Gen Intel Core Ivy Bridge chips. Early reviews of the chip have been encouraging. Intel expects products with the new chip to be released by early next month.

Intel’s Acquisitions
Intel has also been acquiring organizations to expand their product offerings. Last month, they acquired cloud-based manager of Application Programming Interfaces (APIs), Mashery. Mashery’s services help their community of more than 160,000 developers with access to several API feeds, including those from services like Foursquare, Netflix, and The New York Times, to name a few. Through the acquisition, Intel is also strengthening their presence in software development. Terms of the deal were not disclosed, but analysts estimate that Mashery may have cost Intel between $120-$180 million.

Soon after, they acquired another API management company, Aepona. Northern Ireland–based Aepona has a presence in Belfast, Sri Lanka, and the U.S. Through their services, the company is able to offer API management tools that help with identifying mobile connection features such as tracking location and device type. The move will help Intel push further within the connected devices segment.

Intel’s acquisitions of the API management companies is part of their focus on releasing a suite of cloud-based services and other digital services such as storefronts, location services, network services, and security. The acquisitions of these API enterprises signals Intel’s diversification out of the chip industry into that of software and services. Over the past few years, Intel has been trying to build their services division through acquisitions. The biggest acquisition for the segment was the $7.7 billion acquisition of McAfee in 2010. The addition of Mashery and Aepona will help them expand their presence in cloud-based services.

Intel’s stock is trading at $24.15 with market capitalization of $119.44 billion. It touched a high of $27.75 in June 2012.

The company is treading in unfamiliar territories. Software is not in a chip company’s DNA, so if Intel has to diversify heavily out of chips, the journey will be painful and complex. However, other companies have made such journeys. IBM and HP have each become largely software and services companies, divesting their hardware businesses.

Thus far, however, no chip company has had to make such a dramatic shift.