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Analysts Focused More on Accounting Than PCs During Intel Earnings Call

Inside The 2016 Consumer Electronics ShowInside The 2016 Consumer Electronics Show
The Intel booth at CES was a shrine to the Internet of things. Image courtesy of Bloomberg Bloomberg via Getty Images

With its core PC business on the decline, Intel played defense during its fourth quarter earnings call on Thursday.

After reporting an 8% sales decline in its core PC business, CEO Brian Krzanich focused on the future and the post-PC world. He said wanted to grow revenue in cloud computing, the Internet of things and in memory, all of which accounted for 40% of the chipmaker’s revenue last year and 60% of its profits.

Both Krzanich and Intel chief financial officer Stacy Smith unapologetically told Wall Street analysts that they would continue spending in 2016 as the company continued investing in memory technologies. They also defended their investments in ensuring an successful $16.7 billion acquisition of chip company Altera that closed last month.

But mostly analysts wanted to talk about some minor accounting changes that Intel had made, such as lengthening its depreciation of factories to five years instead of four. Another bookkeeping issue involved the company’s putting an extra work week on the books for 2016 that requires it to pay employees for an extra week of work.

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When not discussing accounting, Krzanich fielded a few questions about a slowdown in growth in Intel’s data center data business to 5% during the fourth quarter. Krzanich blamed the slowdown on a difficult comparison the same quarter a year earlier, when that business grew much faster.

However, Krzanich also said that customers in the cloud segment tend not to buy equipment in the fourth quarter, which also leads to slower fourth quarters in general. It was a bit contradictory.

Analysts also wanted to understand how Intel plans to serve other segments of the cloud market outside of servers and how that would influence the company’s overall financial performance. Smith explained that Intel plans to continue sell to storage and networking gear makers, which generally pay lower prices for chips. But Intel plans to add more features to its chips, and gradually raise prices.

Surprisingly, none of the analysts asked about the threat of ARM-based chip competitors in the storage and networking sector. In November, an ARM executive had made the bold prediction that ARM chips would be in 25% of servers by 2020. In 2016 several vendors will launch or will have ARM-based servers in the market.

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Even the Internet of things and questions about customer adoption of Intel’s Curie chip, used in wearable devices and embedded computing, into products got little mention on the call. At CES, the huge consumer electronics show in Las Vegas, Intel showed off a lot of exciting technology (and, in the last few months, invested in everything from wearable devices to drones) but it’s hard to find a device that is using Curie.

Intel must also develop a story for Wall Street and a sales and distribution strategy that addresses a fragmented market for its chips. Instead of a few variations on PC chips for dozens of computers, Intel must make different chips for watches, drones, and bikes.

Like other companies selling chips for the Internet of things, Intel will realize that unlike PCs, servers and smartphones where there is a monolithic device for each type of chip it sells, the Internet of Things is a vast number of markets where a huge device might only sell a hundred million units. Given the economics of its manufacturing operation, it’s no wonder that Intel is trying to bring down its manufacturing costs.