Intel's Q3, outlook will depend on Windows 8.1, PC uptake

Intel's third quarter results should deliver, but the outlook is where things get tricky. Selling chips into a Windows 8.1 hardware cycle is easy. Getting consumers to buy may be a different game entirely.
Written by Larry Dignan, Contributor

Intel's third quarter earnings on Tuesday are expected to be solid, but the outlook for the fourth quarter is going to be tricky. Why? Intel's third quarter was highlighted by selling chips into the channel. For the fourth quarter, Intel will need all of those new Windows 8.1 convertible systems to actually sell well.

Wall Street is expecting Intel to report third quarter earnings of 53 cents a share on revenue of $13.47 billion. As for the fourth quarter outlook, Wall Street is expecting earnings of 53 cents a share on revenue of $14.02 billion.

Will these devices bolster Intel's fourth quarter confidence?

In the third quarter, Intel launched new processor families across the spectrum. These processors — Baytrail, Haswell, and Brickland — are expected to cover the tablet and mobile device markets well.

Deutsche Bank analyst Ross Seymore said:

Given the launch of so many new products into an uncertain demand environment for Windows based 2-in-1 devices and traction in the Android eco-system being modest (few high volume SKUs) we suspect Intel will be somewhat cautious on 4Q13 outlook.

The only relatively sure bet for Intel is the results for its data center, but economic worries may ding those results a bit. Many analysts are waiting for Intel's Nov. 21 analyst meeting to determine how the chip giant will deliver on gross margins and mobile growth.

Few analysts are expecting a fourth quarter budget flush and the PC spending that goes with it. Given that post-PC reality, Intel is going to have to closely watch its cost structure. Analysts expect Intel to project confidence about the Windows 8.1 launches, but few agree with the chip giant. JMP Securities analyst Alex Gauna sums up the view:

Server demand has failed to live up to Intel double-digit growth targets and PC demand has tracked toward double-digit industry declines, and we don't hold out much hope of budget flush, holiday season sales, or expiration of Windows XP support in 2014 materially altering these trends.

Gauna added that Intel faces some big threats such as the ARM-based ecosystem that dominates mobile and little progress in the smartphone and tablet market. Those negatives are offset by cloud and data center dominance and the ability to launch a foundry business to better utilize Intel's manufacturing strengths.

On the bright side, expectations for Intel are pretty low. Piper Jaffray analyst Auguste Gus Richard said that expectations for Intel's quarter were "lower than a snake's belly in a wagon rut," but that could be a positive. Richard said that Intel's market valuation reflects the reality "where PC growth is negligible to nonexistent."

The catch is that Windows 8.1 and new PCs could stimulate some demand. Should that scenario play out Intel will look a lot better. Richard added:

PCs are overdue for a bounce as PC demand has declined for the last two years. After three strong years, the tablet market will likely see slowing growth which should slow PC cannibalization.

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