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Tuesday, January 15, 2008

Intel disappoints - tech will feel the pressure

Intel announced their fourth quarter 2007 earnings after the close today. Here are the headline numbers:

2007 Operating Income $8.2 Billion, up 45 Percent
• Fourth-Quarter Revenue $10.7 Billion, up 10.5 Percent Year-over-Year
• Gross Margin 58 Percent, up 8.5 Points Year-over-Year
• Operating Income $3 Billion, up 105 Percent Year-over-Year
• Record Microprocessor and Chipset Units and Revenue
• Net Income $2.3 Billion; EPS 38 Cents

Sounds great. So why did the stock drop over 13% in after hours trading? Q1 is always seasonally weak but this year the company sees weakness somewhat beyond mere seasonality. Many investors are taking this as another sign of economic weakness, another bellwether stock throwing in the towel even as management contends that the company is still a growth story.

Below I have provided my quick notes from listening to the conference call. Take a look and you can decide whether Intel's guidance is a disaster or merely a modest slowdown while still in growth mode. I have captured phrases that seemed important but I have not provided precise quotes.


Highlights from the Business Overview


Margins improved from Q3

Server business had a great 4th quarter

Mobile unit growth continues to be very strong, records set in Q4. Lower price points consistent with consumer purchase capabilities; Intel will be able to supply products with reasonable margins to these price points as planned

Desktop processor shipments up 40% from Q3

All segments up yoy

Channel inventories healthy

NAND environment worse than anticipated, ASPs down

Flat ASP for microprocessors

yoy gross margins 8.5% better than 4Q06

The company continued to reduce spending as a percentage of revenue during Q4

Staffing is down 8% yoy

Sequential decline of 9% in revenue using mid-point of estimated ranges tho 10% increase yoy (my emphasis)

1Q08 margins improved over 4Q07 but lower processor unit sales are expected (my emphasis)


Highlights of the Q&A portion of the call

NAND environment hurt Q4, will hurt Q1. NOR also will be weak in Q1.

In CPU, inventory is lower than preferred but no unusual cancellations seen in Q4, things seem normal

Q4 very strong in Europe; so far in January no significant signs of slowdown in Europe or elsewhere.

What is keeping margins flat sequentially? unit shipments seasonally lower than expected in Q1 but lower costs and better product mix should be yielding better margins as year progresses.

Combination of small impacts for Q1 shortfall: macro situation, Marvell business reduction continuing as expected, NAND pricing, etc.

PC market outlook: expectation is for growth in low double digits.

No signs of double ordering

Shift toward mobility is a growth driver. Lower cost notebooks opens more markets. Servers showing no signs of diminishing.

Emerging markets: big part of revenue growth, hit record in Q4, expecting good year in China in 2008, especially with Olympics coming.

With respect to economic or tech slowdown in 2008 - Intel and its customers "just don't see it", the problem is focused on US markets but 75% of Intel revenue is not from the US. Still, Intel feels it is "prudent" to be "cautious".
(my emphasis)

What products are coming:
• Low cost notebooks, more mobile devices, consumer devices
• more 45 nanometer products coming, 30 products already launched and shipping
• WiFi notebooks will be introduced
• new processor architecture will be introduced, code-named Halo


Conclusion

Intel is now under $20 per share in after hours trading. It has not been this low since the summer of 2006. Based on the conference call, do you think this is a company on the ropes? Management seems fairly confident that business is good yet they feel it is "prudent" to be "cautious" as they announce greater than normal seasonal weakness. Not exactly a ringing endorsement. Still, I don't think you can fault Intel management here; they don't exactly have a crystal ball. They are hostages to the macro environment and, though there are still signs of reasonable strength in the PC business, we could easily see weakness increase if the US enters a serious recession and emerging markets and Europe are affected.

Intel shares are down about 29% from their peak. This conference call will probably blast the tech sector again tomorrow. Still, this is a quality company, a clear leader in its sector and its stock has been marked down dramatically. After an initial period of volatility, a patient investor may want to start building a position in the stock as it vacillates in the teens.

Source: Intel Investor Relations - Earnings Results

Disclosure:
author does not own any share of INTC

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