Intel: 1Q steady, 2Q lower, but 2H07 looking better

April 18, 2007 – Intel saw profits rise 7% in 1Q to $1.61 billion from the previous quarter (helped by a federal tax settlement), despite a 9% sales decline to $8.85 billion, as the chipmaker seems to be faring well in its ongoing price war with rival AMD. Compared with a year ago, sales were down 1% but profits jumped 19%. Gross margins improved slightly to 50.1%, though down from 55% in 1Q06.

Unit costs for microprocessors have lowered, margins are up, and cost efficiency efforts have lowered spending from a year ago ($500 million/ -17%, and down six points as a % of revenue), all ahead of projections, CEO Paul Otellini indicated during the conference call to discuss the quarterly results. Microprocessor units were in line with seasonal patterns, “and ASPs held up well” despite the ongoing pricing war with AMD, he said. Pricing in mobile and desktop segments was flat Q-Q, and server ASPs were also down due to a shift to dual and uniprocessor servers, though core microarchitectural processors are still seeing strong demand and ramping “nicely.”

Flash, however, was weaker than anticipated due to lower NOR units and NAND ASP declines. “We all know it has been a struggle in the flash business and it continues to be a competitive business market right now,” said CFO Andy Bryant. “Profits certainly eluded us in that business in the first quarter,” and he indicated the plan will be to switch products to general-purpose products away from OEM customers “to try to bring in more of that business that will drive us to breakeven point faster.” Otellini dismissed the idea that Intel would “scale back” on its NOR commitment even if the price decline accelerates — “the business continues to have the right kind of MPV model long-term for us to continue to invest in,” he said.

Intel’s NAND business, meanwhile, is “still in the investment stage,” Otellini pointed out, with startup costs amid facility ramps and product migration. But NAND pricing seems to have firmed up a bit in the past month or more, so “there is some cause for optimism that has returned to more normal pricing curves,” he said.

Total inventories were approximately flat with 4Q; finished goods were down, while work in process and raw materials were up, Bryant noted, adding that “a very small percentage” of inventory is on anything older than 65nm process technology. Bryant indicated Intel will be building inventories again moving into 2H07.

Intel projects 2Q revenues of $8.2-$8.8 billion, down about 3%-4% from 1Q (based on midpoint) and 6% Y-Y, and gross margins also will be down a few points to ~48%. Bryant projected that gross margins would improve “significantly” in 2H07 to the lower-50% range (vs. 50.1% in 1Q, and projected 46%-52% in 2Q), and Intel has raised its forecast for FY07 margins too. Manufacturing startup costs will be concentrated in 1H07 and decrease in 3Q; gross margins should rise to 52%-54% in 2H07, Otellini noted.

Full-year 2007 capex remains unchanged at $5.3-$5.7 billion, while the R&D spending budget was hiked about 4% to $5.6 billion. Intel also expects to record a $60 million restructuring charge during the quarter for restructuring and asset impairment.

Otellini also commented on slow adoption of Microsoft Vista. “Essentially all the new consumer SKUs are Vista,” which is currently driving the demand, he said, but he expects enterprise-level adoption will gain traction once the service pack is released sometime in 4Q.


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