INTC: Intel Misses on Revenue, Issues Overly Optimistic Margin Guidance
Intel First-Quarter Revenue $8.9 Billion: Financial News - Yahoo! Finance
Intel Corporation today announced first-quarter revenue of $8.9 billion, operating income of $1.7 billion, net income of $1.6 billion and earnings per share (EPS) of 27 cents. The results included the effect of a $300-million reversal of previously accrued taxes that increased EPS by approximately 5 cents.
The revenue line was lower than analysts were predicting, though earnings were in line. Unfortunately, however, that was because margins were artificially boosted:
First-quarter gross margin was 50.1 percent, higher than 49.6 percent in the previous quarter as lower microprocessor unit costs and the sale of previously reserved inventory more than offset the effects of higher 45 nanometer (nm) start-up costs and lower revenue.
Lower unit costs came about because semiconductor manufacturing costs are largely fixed. The more units produced, the cheaper each unit. But when the market is flooded with inventory (including the “previously reserved inventory” that normally implies obsolescence) all the lower unit costs do is make the market that much more out of whack. And with sales down 1% year/year and 9% sequentially, Intel still managed to boost its own inventory levels by 1% sequentially and more than 22% year/year. It looks likely that more reserves will be necessary.
Turning to guidance, on our preview we thought the $8.9 billion forecast for sales in the June quarter was too aggressive. And it turns out we were right. Intel’s forecast:
- Revenue: Expected to be between $8.2 billion and $8.8 billion.
- Gross margin: 48 percent plus or minus a couple of points.
For the full year, Intel expects gross margins to be “Gross margin: 51 percent plus or minus a few points, higher than the previous expectation of 50 percent plus or minus a few points.” While investors appeared impressed with the increase, we don’t see much to be excited about given that the one point increase is well within the “few points” margin of error. According to an article at TheStreet.com:
“We are planning for growth in the second half of the year,” CEO Paul Otellini told analysts in a post-earnings conference call Tuesday.
The thing is, they’ve been planning for growth for over a year (otherwise why increase inventories 22%). It just never seems to materialize. And now they’ve painted themselves into a corner. If they continue to produce flat out to reduce unit costs, the price war will be back with a vengeance and margins will go down. If they produce less in order to work down inventory, unit costs will be higher and margins will go down.
What is really hard for us to see is a scenario like the one Otellini envisions, where margins increase.
Disclosure: William Trent has a long position in SMH.
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[…] in April, when they issued their guidance, I said the margin forecast was overly optimistic. The way I saw it, if they continued to produce flat out to reduce unit costs, the price war would […]