July 19, 2006 1:50 PM PDT

Intel income pain not as deep as feared

Intel's quarterly revenue and profit dropped amid a bruising battle with Advanced Micro Devices, but the pain wasn't as much as expected.

The Santa Clara, Calif.-based chipmaker's net income fell 57 percent to $885 million, or 15 cents per share, for the second quarter. The results were still enough to beat Wall Street's profitability predictions, which were more pessimistic.

Analysts surveyed by Thomson First Call expected Intel to report net income of 13 cents per share for the second quarter of 2006. However, they also expected revenue of $8.262 billion, and Intel reported $8.009 billion, a 13 percent decline.

Intel also predicted its revenue for the third quarter would range between $8.3 billion and $8.9 billion, lower than the average $9.04 billion analysts anticipated.

Intel, while still a dominant chipmaker with immense manufacturing capacity, has been bruised financially in recent quarters. It has lost share to its longtime rival AMD, whose Opteron processor family has found its way into machines from the top four server makers. Intel also has a glut of inventory.

The company is fighting back with new desktop, laptop and server chips; an aggressive schedule for chip technology advancement; and an efficiency analysis that has already resulted in a 1,000-manager layoff.

The layoff, plus attrition and 1,400 jobs departing with Intel's sale of a communications chip unit to Marvell Technology Group, will reduce Intel's current headcount of 102,500 employees to fewer than 100,000 by the end of the year. But more layoffs are possible, Chief Financial Officer Andy Bryant said.

"On what we done today, we'll get below a hundred (thousand employees). We may have actions that will take it even lower before the end of the year," Bryant said.

The new products are key to the company's recovery, Merrill Lynch analyst Joe Osha said in a report Tuesday.

"The company clearly is on the cusp of the first real product cycle that it has had in two years, with all that implies for market share and margins," Osha said.

But the damage is done, he added: "Intel has given AMD breathing room sufficient to ensure that Intel will never again enjoy the semi-monopolistic status that helped underpin profitability for so long."

Excluding stock-based compensation, Intel's net income was $1.1 billion, or 19 cents per share.

Intel stock closed at $18.48 Wednesday, an increase of 27 cents, or 1 percent. In after-hours trading, though, it dropped 57 cents, or 3 percent, to $17.92.

Intel said processor unit shipments and average selling prices declined compared with the first quarter of 2006. However, flash memory shipments increased.

"Microprocessor unit sales were below seasonal patterns, as customers reduced their processor inventory levels to seasonally appropriate levels in a highly competitive pricing environment," Intel said.

It directed attention to more favorable elements of its business, too.

"In 2006 we are delivering the strongest product lineup in the industry, with many of these new products shipping ahead of schedule," Chief Executive Paul Otellini said in a statement. "We are also extending our lead in manufacturing technology, with the majority of microprocessor production this year on our advanced 65-nanometer process."

Some analysts expressed alarm that Intel's inventory didn't go down and probably won't until the fourth quarter. "Why run up inventory like this? It creates a problem that appears to be obscuring the progress you appear to otherwise be making," Osha said on the conference call.

But Bryant defended Intel's choices and said about $200 million of the inventory valuation is the result of the "Woodcrest" Xeon 5100 and "Conroe" Core 2 Duo processors going into production in the second quarter rather than the third, as Intel had expected.

"We generally take care of inventory pretty well," Otellini added. "We think we're starting wafers on the right products now. I'm very comfortable with the current build plans and factory loadings."

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Andy Bryant, OSHA, net income, layoff, competitive pricing

 

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