An Upbeat Street After Intel Report

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Temporary Flash Effect

But as forewarned on Mar. 3, Intel's quarter was hampered by its exposure to the NAND flash memory business (BusinessWeek.com, 3/05/08), where it has a joint venture with Micron Technologies (MU). Plummeting prices caused an overabundant supply of these flash chips, used in everything from music players and digital cameras to a growing number of laptop hard drives. As a result, Intel's first-quarter gross margin came in at 53.8%. Before the warning, Intel had forecast a first-quarter gross profit margin of about 56%. Yet despite this drag, gross margins were actually up 4% from the year-ago quarter (BusinessWeek.com, 4/18/07), as was operating income, which rose 23%.

Otellini reiterated his promise to shareholders that the NAND flash business would not become a long-term drag on Intel's overall results. "I want to assure our shareholders that we got into this business to make money," he said. Since Intel and Micron joined forces (BusinessWeek.com, 11/22/05) to enter the NAND market in 2005, industry manufacturing capacity has expanded rapidly, leading to oversupply and falling prices.

Chief Financial Officer Stacy Smith said Intel and Micron have jointly decided to delay the opening of a NAND factory under construction in Singapore. Smith said Intel expects the current market environment to continue into the second quarter. "What we've baked into our second-quarter forecasts is for the market to be oversupplied, but for our costs to get better quarter on quarter," he said.

If the NAND business doesn't improve, Smith and Otellini both hinted at "other options," suggesting that Intel might be willing to spin off the business entirely, though both declined to say that outright. Wu notes that Intel was making similar, noncommittal noises about its NOR flash business more than a year ago, only to spin it off into Numonyx. "Intel may just sell its share to Micron," Wu says.

Hesseldahl is a reporter for BusinessWeek.com.