The chipmaker reported record third-quarter earnings, but what really cheered worried investors was the upbeat sales outlook
Cash-strapped consumers may be hunkering down for a lean holiday this year, but you wouldn't know it from results released on Oct. 14 by chipmaker Intel (INTC). The tech bellwether issued a surprisingly upbeat sales outlook for the remainder of the year after reporting record third-quarter earnings.
Santa Clara (Calif.)-based Intel, the world's largest chipmaker, predicted current-quarter sales of $10.1 billion to $10.9 billion, in line with the $10.77 billion expected by analysts. And despite investor concerns that profit margins would narrow as consumers opt for machines sporting less expensive Intel chips, the company indicated gross margins would remain essentially flat at about 59%.
Third-quarter profit also demonstrated resilience. Net income rose 12%, to $2.01 billion, or 35¢ a share, from $1.86 billion, or 31¢ a share, a year earlier. Revenue rose 1%, to $10.2 billion.
Buoyed by Notebooks
Intel CEO Paul Otellini said the chipmaker is seeing early signs of weaker consumer spending and some reductions in orders from companies that distribute its chips. He also said the "financial crisis is creating some signs of stress…but the extent of that is difficult to quantify." Yet he added that inventories of unsold chips are "in reasonable shape" and that the company is benefiting from demand for notebooks and a new category of products called netbooks, which resemble notebooks but are meant mainly for Web surfing.
The remarks and fourth-quarter forecast were enough to console investors who had grown concerned that disappointing retail-chain results and a plunging stock market in recent weeks augured weakening demand for computers and the chips needed to run them. Intel shares, which, like the broader Nasdaq stock market had retreated in recent days, jumped 6.7%, to 16.99 a share, in extended trading.
Some analysts questioned whether Intel may have been too upbeat, given questions over how long the economic slump may last. "Right now, Intel is No. 1 with an asterisk in terms of tech companies best positioned to weather a downturn," says Avian Securities chip analyst Avi Cohen. "Whether you believe they can meet those numbers or not depends on where the economy goes from here." Otellini said the company is in a good competitive situation because it has been focused on improving efficiency for the past two years by slashing head count by 20,000 people worldwide and trimming $3 billion from spending. The company also has $12 billion in cash and scant debt. "We've made a large number of changes in our operations that have prepared us well," Otellini said.
Intel vs. AMD
Intel appears to be more insulated from economic woes than other tech companies because of its outsize market share in the fast-growing notebook chip market, an area where rival Advanced Micro Devices (AMD) has struggled to compete. The smaller chipmaker has been burdened by debt associated with its purchase of graphics chipmaker ATI and the distraction of a broad restructuring that resulted in a recent decision to hive off its manufacturing business (BusinessWeek.com, 10/08/08).
The tech landscape is quickly dividing into haves that remain upbeat about their prospects and have-nots exposed to poorly performing areas of the economy. Cisco Systems (CSCO) CEO John Chambers, speaking on Oct. 14 at a Florida conference sponsored by Gartner, said the company isn't planning any cutbacks in spending or staff levels. Hewlett-Packard (HPQ) executives also have said they expect to see continued strength in the current quarter. Results at IBM (IBM) are also holding up. By contrast, Dell (DELL) and SAP (SAP), which are more vulnerable to the slowdown in corporate spending, have painted a gloomier picture.
Otellini noted that unlike during the dot-com meltdown that erased tech earnings earlier this decade, emerging markets such as China remain relatively strong. During a downturn, companies around the world also will be looking for ways to drive costs out of their operations and will seek the latest tech innovations and services in doing so, he said. "Technology will probably do well during a downturn just because of the simple fact that we sell tools of productivity," he said.
Investors won't have to wait until fourth-quarter results are released in January to see whether Otellini's optimism is warranted. Intel scheduled an early December update—its first mid-quarter report in more than a year—to offer a clearer assessment of market conditions.