Intel continued to encounter weaker PC demand in some markets and its margins declined in the first quarter of this year as the company made investments in new products and technologies, including ultrabooks.
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Consequently, TBR says that Intel's revenue growth was flat, increasing less than one percent year-to-year, with margins declining as investments were made in areas such as ultrabooks, mobile devices and the company's next generation PC Ivy Bridge processor architecture.
TBR says that Intel's investment in new technologies, and the slowing PC market, came at a price for Intel in the first quarter of this year, with increased Ultrabook and mobile device sales and marketing initiatives contributing to an 11 percent increase in selling, general and administrative (SG&A) expenses year-to-year.
According to TBR analyst, computing practice, Beau Skonieczny, the increase in Intel's SG&A, coupled with higher R&D expenses, which grew 370 basis points from the first quarter of 2011, have driven down the company's operating margin from 32.3 percent in 1Q11 to 29.5 percent in the first quarter this year.
'TBR believes Intel's margin performance in 2012 will continue to be challenged by aggressive investments in unproven product areas, such as Ultrabooks,' Skonieczny says, but he does stress that Intel remains 'relatively unchallenged' in servers and in the traditional PC space, and will continue to leverage new process technologies such as Ivy Bridge to drive global growth.
On Intel's investment in Ivy Bridge, TBR predicts that the company will ramp production rapidly to achieve volume cost benefits in the second half of this year, and that promotional activity, product investments and channel programs will fuel ultrabook demand in the same period, but limit profitability.
TBR says Intel has identified ultrabooks as a major point for investment to define a new PC category. 'Ultrabooks have already begun to excite the industry, as all major vendors are adopting the form factor without hesitation, with over 21 different models at various price points,' Skonieczny says.
However, Skonieczny also cautions that without Intel effectively informing consumers of the benefits and differences of ultrabooks, consumers will have 'less incentive to pay the premium for the devices, with average ultrabook prices currently hovering around $1,000.'
Consequently, Skonieczny says that marketing will play a crucial role in orienting consumers' perception of ultrabooks, and he makes the point that collectively, Intel and its partners are investing more than $1 billion in ultrabook marketing, spanning premium commercials, social advertising elements, branding, and retail positioning. 'TBR believes these initiatives will help drive higher ASPs and margins for Intel and PC manufacturers by promoting more premium ultrabook sales over traditional notebooks,' Skonieczny concludes.
