Editor’s note: Stephen Belanger, an analyst at Technology Business research, offers his analysis of Intel’s (Nasdag: INTC) first quarter earnings report on Tuesday. The chip giant earned $2 billion, or 40 cents per share, down 27 percent from $2.74 billion, or 53 cents per share, a year ago. Revenue was $12.6 billion, slightly below the midpoint of Intel’s own forecast range, and down 2.3 percent from a year ago, according to The Associated Press. Intel said it shipped 7 percent fewer PC chips compared to a year ago, but 6 percent more server chips

HAMPTON, N.H. - Challenged Windows 8 demand and the proliferation of tablets and smartphones hampered PC Client Group performance in 1Q13 as Intel braces for a change in leadership.

The emergence of mobility and cloud computing as two business-defining technology trends are significantly influencing Intel’s operations in 2013. In the first quarter, poor PC sales drove Intel’s PC Client Group (PCCG) revenue losses of 5.4% year-to-year due to weak demand for the Windows 8 OS and cannibalization of PC sales by smartphones and tablets.

Meanwhile, demand for technologies supporting cloud computing and high performance computing (HPC) by enterprise customers drove Data Center Group (DCG) revenue growth of 5.4% from 1Q12. Intel’s top-line revenue fell 2.5% year-to-year to $12.58 billion, while gross profit decreased 790 basis points to 56.2% in the same period.

Intel has yet to announce a succession plan around CEO Paul Otellini’s impending retirement on May 16, 2013, which falls during the company’s annual meeting.

Intel’s choice for its new CEO will establish the company’s long-term direction and TBR believes there is a strong chance the new company leader will have a background in mobility, increasing the possibility a new CEO will come from outside of the company for the first time in its history.

In the short-term, customers will delay purchasing while there is significant uncertainty surrounding Intel’s long-term direction.

Intel Producing Third-Party Chips

Intel has established a significant process technology advantage over competing semiconductor manufacturers due to its longstanding presence in the industry. The firm announced it shipped its 100 millionth 22nm FinFET processor in 1Q13, while competitors have yet to ship their first 22nm processors.

The company’s process advantages such as cost per chip, performance-per-watt, and system integration services enable the firm to utilize a value-based pricing strategy for foundry engagements, while targeting semiconductor companies that are not direct competitors.

Intel won a deal with Altera in February 2013 to manufacture the company’s field programmable gate arrays (FPGAs). The deal reaffirms Intel’s strategy of producing chips as a foundry to utilize excess production capabilities and drive revenue while it expands in mobile devices. Producing third-party chips as a foundry will appeal to customers seeking a technological advantage in their market space through Intel’s 22nm and 14nm processors. Despite the short-term revenue boost of producing chips as a foundry, the process will pressure gross margins, as foundry chips generate lower margins for Intel than producing its own chips.

New Processors

Intel is developing new processors to increase competition with ARM-based competitors and expand capabilities outside its core PC business.

Intel is expanding the Atom processor family with new SoC offerings designed for smartphone and tablet manufacturers. In February 2013, the company released a performance and feature-optimized version of the Clover Trail processor, Clover Trail Plus, for use in a broader range of mobile devices while remaining on the 32nm platform. Clover Trail Plus devices will directly compete with devices that run on ARM-based chips, as they provide competitive battery life and performance while running x86 software on tablets and convertibles. Several companies are planning to use the Clover Trail Plus in upcoming smartphone releases throughout 2013 including ZTE, Asus and Acer.

Intel designed its 22nm Bay Trail quad-core processors for Windows 8 tablets, hybrid PCs and notebooks to target the low-end market, which TBR expects will enable touch technologies in the $300 – $400 range. The company is launching its fourth-generation Core processor, Haswell, which focuses on energy efficiency and offers higher performance and longer battery life in PCs.

In its 1Q13 earnings call, Intel noted that it increased production of Haswell products due to strong customer demand, causing a higher than expected inventory write-off in quarter. Intel also offers the Atom Z2420 processor (formerly referred to as Lexington) to power low-cost Android tablets for customers in emerging markets such as the Philippines.

Intel’s investment in mobile device-related R&D and marketing contributed to PCCG operating margin losses of 170 basis points sequentially to 31.4% in 1Q13. Additionally, Intel’s corporate operating margin declined to 20.0%, the company’s lowest operating margin since early 2009.

TBR expects the Clover Trail Plus, Bay Trail, Haswell and Lexington chips will help Intel compete with ARM; however, sales of the next generation of Intel-powered PCs will be threatened by weak demand and uncertainty surrounding Windows 8 adoption.