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Intel uncertain about Q4 numbers

Posted: 17 Oct 2008     Print Version  Bookmark and Share

Keywords:microprocessors  mobile computing  financial crisis  netbook 

Buoyed by growth in revenue from microprocessors and chip sets for mobile computing, Intel Corp. posted a third-quarter profit of Rs.8,602.12 crore ($2 billion), an increase of 26 per cent sequentially and 12 per cent year-over-year.

Third quarter earnings per share (EPS) came in at 35 cents, besting consensus analyst expectations of 34 cents. EPS was up 25 per cent sequentially and 17 per cent year-over-year. Intel posted a third quarter operating income of Rs.13,333.29 crore ($3.1 billion), up 37 per cent sequentially and 44 per cent year-over-year.

Intel posted third quarter revenue of Rs.43,870.82 crore ($10.2 billion), in line with consensus analyst expectations and coming in at the low end of its own guidance.

Looking ahead, the 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, Rs.43,000 crore to Rs.46,000 crore ($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 Rs.44,000 crore to Rs.48,000 crore ($10.4 billion to $11.18 billion), according to Reuters Estimates.

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 the fourth quarter 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 per cent, 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.

Mobility products strong

Intel executives gave much of the credit for the third quarter numbers to strength in the company's Mobility product group. Net revenue from the Mobility group came in at nearly Rs.20,000 crore ($4.7 billion), up from about Rs.17,000 crore ($4 billion) in the same period of 2007.

Intel said it recorded revenue of about Rs.800 crore ($200 million) in the third quarter from its Atom microprocessors and chip sets for the so-called netbook product segment, commonly defined as a category of sub- Rs.21,505.31 ($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 cannibalises 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 cannibalised are Celeron processors, which have lower profit margins.

"To date we have not seen any evidence of cannibalisation, 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 fourth quarter 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.

2008 capex trimmed

Intel slightly lowered its capital spending forecast for 2008 to Rs.21,505.31 crore ($5 billion) from Rs.22,365.52 crore ($5.2 billion), and reduced its R&D spending forecast for the year to Rs.25,376.26 crore ($5.9 billion) from Rs.25,806.37 crore ($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 Rs.22,795.62 crore ($5.3 billion) from Rs.23,655.84 crore ($5.5 billion).

Intel's third quarter revenue from the Asia-Pacific region totalled nearly Rs.23,225.73 crore ($5.4 billion), roughly 53 per cent of overall revenue. Revenue from the Americas declined to about 19 per cent of overall revenue, Rs.8,172.02 crore ($1.9 billion). Revenue from Europe and Japan accounted for 18 per cent and 10 per cent, respectively, of the company's overall revenue.

Otellini said Intel recorded record revenue in the third quarter 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 virtualisation, 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 name of writer
EE Times source

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