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Intel enjoys solid growth amid economic woes

Posted: 18 Jul 2008 ?? ?Print Version ?Bookmark and Share

Keywords:Intel market share? microprocessor? 45nm process?

From Intel Corp.'s seat atop the computing market, all is well with the world.

PC shipment continues to grow unfettered, higher margin notebooks now represent well over 50 percent of global computer shipment, and server sales are similarly robust. After two years of cost trimming, Intel's operating margins are looking healthier than they've been in years.

The world's biggest semiconductor company by revenue is enjoying solid growth despite rising economic worries globally.

The company benefits from strength in worldwide computer demand, positive contributions from R&D investments made years earlier, manufacturing process improvements, good execution and troubles at archrival Advanced Micro Devices Inc. that have helped temporarily ease pricing competition in the microprocessor market.

While Federal Reserve Board chairman Ben Bernanke and fellow economists worldwide are sweating over the negative bent of the U.S. economy, Intel is forecasting strong revenue and margin improvements for 2H 08 on higher microprocessor shipment and cost-control improvements.

"In the first half of 2008, we saw order patterns play out as anticipated. Inventories remain at healthy levels and our global footprint is helping us benefit from demand for Internet computing," said Paul Otellini, president and CEO of Intel during a conference call on the company's Q2 results. "As we look into the third quarter, we see continued healthy demand for our products."

Stark contrast
Otellini didn't set out to contradict Bernanke's dour economic outlook presented to a U.S. Senate committee July 15 but the chipmaker's strong Q2 performance and robust outlook for the year offered a stark contrast to what is happening in several other sectors of the economy.

Economists said inflation rate is surging, climbing in June at the fastest clip in 17 years on a sharp upswing in energy costs. The Consumer Price Index, which measures the cost of a basket of household goods, rose 1.1 percent in June, the U.S. Labor Department said, widening the cracks already noticed in the economy because of problems in the housing and financial markets.

The damage to the economy is evident in many other sectors with retailers reporting lower sales as consumers divert more of their disposable income to gasoline and other essential commodities.

High-tech equipment vendors and parts suppliers are also feeling the heatshares in Seagate Technology, for instance were clobbered after the disk drive vendor offered a weaker than expected fiscal Q1 outlookalthough the actual impact would only be known as more companies announce June-quarter results.

Intel, though, is firing on all cylinders, according to analysts, including Doug Freedman of American Technology Research who said, "macro headwinds have not slowed Intel's revenue or earnings growth as the company enters new high-growth markets with the Atom class processors." Indeed, Intel breezed past analysts' revenue and profit estimates in Q2 with net income up 25 percent to $1.6 billion, or 28 cents per share, compared with $1.3 billion, or 22 cents per share, in Q2 08. Intel's revenue rose to $9.5 billion from $8.7 billion in Q2 07.

Analysts were on the average expecting the company to report 25 cents in earnings per share and revenue of $9.3 billion.

Strong Q3 outlook
Even better than the strong Q2 results was the outlook Intel provided for the next quarter, which company executives said is looking strong globally. The company forecasts Q3 08 revenue would be between $10 billion and $10.6 billion versus $10.1 billion for Q3 07.

While acknowledging problems in the wider economy, Intel asserted it wouldn't be negatively impacted by these events. "We are very aware of the global economic issues that dominate the financial markets these days," Otellini said. "We are watching these very carefully [but] we are very comfortable with the guidance we've given."

Intel is able to engage in a round of chest thumping for several good reasons, according to analysts. First, the company's main rival AMD is only starting to pick itself up after tripping up several quarters ago.

During that period, Intel managed to reassert its leadership position, gained market share and stepped back even if only briefly from the destructive price competition that had eroded average selling prices at the two rivals.

Reaping the benefits
Furthermore, Intel is beginning to reap the benefits from its two-years long cost-cutting campaign during which the company reduced payroll by 20,000 to just under 82,000. Additional benefits from the cost-reduction initiatives and process improvements should roll in over the next few quarters especially as Intel begins to increase shipment of 45nm products, the company said.

"Our 45nm manufacturing process is performing superbly," Otellini said. "We remain on track to ship over 100 million units before the end of the year on this process technology."

Intel said its 45nm process ramp is already yielding better at the current stage than the 65nm ramp at the same period, resulting in "lower unit costs ahead of our original plans."

Achilles heel
Even Intel has its Achilles heel, however.

While the company remains bullish about its short-term fortunes, it's also possible that corporate IT spending could turn sluggish dramatically over the next several quarters. Additionally, AMD is believed to be back on its feet and eager to duel with Intel for market share in the server market, analysts said. This could result in price erosion at the two semiconductor companies, they said.

"We think that lower microprocessor unit costs from [Intel's] 45nm manufacturing and healthy server and desktop mix will be partially offset by a weaker mix in notebooks and a more competitive AMD in notebook and server," said Mark Lipacis, an analyst at Morgan Stanley & Co. Inc., in a report. "We are concerned that AMD's refreshed product line creates share and pricing pressures."

Intel isn't unaware of the challenges posed by AMD and the larger economy, according to company executives.

The company said it stands behind its Q3 forecast because chipsets salesa leading indicator of future microprocessor and PC assemblywere strong in the Q2. And as to what will happen in the fourth quarter, "we'll know a lot more three months from now when we see how the shipments are lining up," Otellini said.

- Bolaji Ojo
EE Times

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