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Intel heeds caution amid financial quandary

Posted: 17 Oct 2008 ?? ?Print Version ?Bookmark and Share

Keywords:microprocessor? mobile? quandary financial?

Buoyed by growth in revenue from microprocessors and chipsets for mobile computing, Intel Corp. this week (Oct. 14) posted a Q3 profit of $2 billion, an increase of 26 percent sequentially and 12 percent year-over-year.

Q3 earnings per share (EPS) came in at 35 cents, besting consensus analyst expectations of 34 cents. EPS was up 25 percent sequentially and 17 percent year-over-year. Intel posted a third quarter operating income of $3.1 billion, up 37 percent sequentially and 44 percent year-over-year.

Intel posted third quarter revenue of $10.2 billion, in line with consensus analyst expectations and coming in at the low end of its own guidance.

Looking ahead, the world's No. 1 semiconductor company acknowledged uncertainty for the current quarter in light of the current financial crisis. The company gave a broader-than-usual range for revenue guidance, $10.1 billion to $10.9 billion, and promised to provide a mid-quarter update on Nov. 4. Analysts had been expecting a higher fourth quarter revenue range of $10.4 billion to $11.18 billion, according to Reuters Estimates.

Signs of stress
In an analyst conference call following the earnings announcement, Paul Otellini, Intel president and CEO, said the financial crisis is creating some signs of stress on Intel's business, but that the impact is difficult to quantity. Intel saw steady demand throughout the third quarter and "business has been good" thus far in Q4 despite some softness from enterprise customers, Otellini said. But while some customers and sales channels are clearly worried, others are reporting little to no impact, Otellini said.

Intel guided for a fourth quarter gross margin of 59 percent, plus or minus a couple of points.

"The fact that the margin range remains tight and narrow tells us they are prepared to meet a number of scenarios," said Leslie Fiering, an analyst with Gartner Inc. "There is obviously a lot of variation about what their customers think is going to happen which adds to the uncertainty."

Intel executives said the company is well positioned despite the economic uncertainty, touting the company's healthy balance sheet and efforts to cut costs over the past two years. Otellini noted that the company's total headcount is down about 20,000 from its peak in 2006, thanks to a restructuring and layoff announced late that year.

Intel executives gave much of the credit for the Q3 numbers to strength in the company's Mobility product group. Net revenue from the Mobility group came in at nearly $4.7 billion, up from about $4 billion in the same period of 2007.

Intel said it recorded revenue of about $200 million in Q3 from its Atom microprocessors and chip sets for the so-called netbook product segment, commonly defined as a category of sub-$500 lightweight PCs. Analysts have been concerned that the lower average selling price (ASP) of Atom chips could drag on Intel's revenue, especially if Atom cannibalizes the market for other products.

Intel said its average microprocessor ASPs declined sequentially, but would have been flat excluding Atom products. Chief financial officer Stacy Smith noted multiple times that the Atom product has a good profit margin.

Gartner's Fiering said the products that are most in danger of being cannibalized are Celeron processors, which have lower profit margins.

'We are watching'
"To date we have not seen any evidence of cannibalization, and believe me we are watching," Otellini said. "The strength of the core mobile business independent of Atom is still very strong."

Earlier Monday, Craig Berger, an analyst with investment banking firm Friedman Billings Ramsey & Co. Inc., wrote that customers have been double-booking Atom orders to offset parts shortages and would like pull in Q4 demand.

Otellini said mobile products tend to have higher ASPs than desktop chips, but added that as mobile computing grows it is inevitable that ASPs will come down as OEMs demand volume pricing.

Smith said the whole point of Atom is to set new price points and bring the technology to more people. "If we are successful, you are going to see the ASPs for mobile come down," he said.

Fiering said Gartner's research indicates that the netbook market is growing strongly, particularly in Europe. But another quarter or two of data is needed to see if this trend is sustainable and if people are satisfied that netbooks provide the functionality they need, she said. She warned Atom could potentially cut into Intel's top line revenue at the same time it improves bottom line profitability.

Intel slightly lowered its capital spending forecast for 2008 to $5 billion from $5.2 billion, and reduced its R&D spending forecast for the year to $5.9 billion from $6 billion. Executives said this decrease would not slow the ramp of 45nm production or the planned migration to 32nm.

Otellini announced Intel began shipping products from its touted Nehalem family during the third quarter and plans to make a formal introduction in November.

Net revenue gains from the Mobility group offset a decline in revenue from the Digital Enterprise group. Revenue from this group fell sequentially to $5.3 billion from $5.5 billion.

Intel's Q3 revenue from the Asia-Pacific region totaled nearly $5.4 billion, roughly 53 percent of overall revenue. Revenue from the Americas declined to about 19 percent of overall revenue, $1.9 billion. Revenue from Europe and Japan accounted for 18 percent and 10 percent, respectively, of the company's overall revenue.

Otellini said Intel recorded record revenue in Q3 for the fifth consecutive quarter.

Otellini said the current economic climate is much different than the post dot-com bubble of 2001, when people stopped buying computers presumably because so many second-hand models were available from companies that had melted down. With business booming in places like China, there are more potential customers and the cost of computing has really come down relative to people's incomes, he said.

On the server side, there will remain a need for productivity enhancements provided by higher performance and the move to virtualization, he said.

"I'm of the opinion that tech will probably do well during a downturn just because of the simple fact that we sell tools of productivity," he said.

- Dylan McGrath
EE Times

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