Editor’s note: Beau Skonieczny is an Analyst, Computing Practice at Technology Business Research. 

HAMPTON, N.H. – Weakening PC demand continues to drive down revenues and margins as Intel has reorganized to focus on growth opportunities in mobile form factors.

Intel (Nasdaq: INTC) continued to succumb to slower PC sales as manufacturers continued to thin out inventory levels in response to continued uncertainty in the global PC market. Consequently, single-digit year-to-year declines in both unit volume and average selling prices led to a 7.5% decline year-to-year in PC Client revenue as Intel reported Wednesday.

However, Intel sustained positive sales growth in data center, where processor sales were supported by continued demand for cloud-based environments and networking solutions. The net result was a near 6% annual drop in corporate revenue to $12.8 billion in 2Q13, while ASP and unit volume declines led to a 510 basis point decline in gross margin year-to-year to 58.3%.

In response to the rising pressures from ARM-based mobile devices and slowing PC purchase cycles, Intel’s new CEO, Brian Krzanich, announced a reorganization of Intel’s business units to require direct reporting to the CEO, as well as the creation of a new Devices unit aimed at strengthening Intel’s capabilities in the mobile space with low-power Atom processors. TBR expects the flatter reporting structure will enable more rapid decision making, aligning Intel’s strategies to a fast-paced mobile market. In addition, we expect greater collaboration between the business units, particularly between Core and Atom processor families, helping to streamline development costs while enhancing the flexibility of each of the product lines to appeal to a broader range of device form factors and price points.

Haswell and Baytrail Processor Designs Will Support Positive Growth Momentum

Haswell, Intel’s 4th Generation Core processors, strengthens Intel’s value proposition in premium mobile and hybrid devices by catering to mobile users’ expectations for battery life. With fanless designs that will more than double the battery life of last generation Core processors expected to come to market in the next few months, Intel is well positioned to compete in both energy efficiency and performance for touch-based Windows devices while maintaining x86 compatibility with legacy Windows applications. Following Haswell, Intel will launch Baytrail Atom processors in 2H13, touting performance and battery life improvements over prior Atom-based models to strengthen its competitiveness in tablet form factors.

With the backing of Intel’s new organizational structure and commitment to growing Atom sales, TBR expects Baytrail to be a powerful product launch for Intel to establish traction in the tablet space. With tablet and clamshell devices expected to come in at $300 and below, coupled with the ability to power both Windows and Android operating systems, Baytrail possesses the blueprint to accelerate Intel’s presence in the mobile space. Key design wins, such as Samsung’s next iteration of the Galaxy 10-inch tablet will further propel Intel’s share in tablets.

Mobile Device Expansion Means Margin Contraction

Intel has enjoyed industry leading margins historically, with gross margin peaking at over 63% in the last two years, supported by Intel’s dominance in the premium PC processor space. Intel’s Core processors, which generate ASPs over $100, have continued to climb Intel’s sales mix over the last few years. However, stagnant and declining PC demand has tempered the benefits of strengthening ASPs, resulting in margin contraction and Intel’s increasing focus on the mobile space to boost sales. With mobile Atom processor ASPs falling in the $30 to $40 range, Intel is unable to achieve the same margin levels as the premium Core offerings. As a result, TBR expects an increased focus on Atom growth will result in weakening margins for Intel, particularly as its sales volume remains limited in comparison to its PC client business.

The introduction of Baytrail will help soften the impact of lower ASPs, as Intel stated Baytrail products are expected to achieve stronger margins than the entry-level Celeron and Pentium processors they will replace.

TBR believes Intel’s margin contraction is a necessary consequence of the company adapting to the PC-plus era of computing. Intel will retain its dominance in the highly profitable PC and data center spaces as it positions itself to take on new opportunities in the mobile device market to combat ARM-based competitors and declining PC growth. The company will also explore alternative business opportunities that will help augment revenue, such as its focus on the multi-billion dollar television market with entirely new products and services.