Updated at 4:25 p.m. PST throughout, including correction to mobile processor revenue
Intel reported Thursday a 90 percent drop in net income for the fourth quarter, as the company continued to cite an "uncertain" environment.
Revenue met the expectations that Intel set last week when it issued a warning on fourth-quarter revenue. The $8.2 billion in revenue amounts to a 23 percent drop from the year-earlier period, when it reported revenue of $10.7 billion.
Profits plunged 90 percent to $234 million, or 4 cents a share, for the quarter. This is in stark contrast to the same period the previous year, when the world's largest chipmaker posted net income of $2.3 billion on earnings per share of 38 cents.
For 2008, Intel had revenue of $37.6 billion, operating income of $9 billion, net income of $5.3 billion, and earnings per share of 92 cents.
Intel said it is not providing a revenue outlook at this time because of economic uncertainty. But it has an "internal" forecast of about $7 billion in first-quarter revenue.
Intel's earnings report comes just after IDC reported Wednesday that overall PC shipments worldwide dropped 0.4 percent to 77.3 million units during the fourth quarter. There hasn't been an overall drop in shipments since the second quarter of 2001, after the last recession.
IDC also said the growth of the portable-PC market--to date, the hottest PC market--was also down by almost half in the fourth quarter, year to year.
Reflecting these conditions, chief financial officer Stacy Smith said that he saw the "supply chain" (companies that either directly or indirectly order chips from Intel) significantly cutting back in the second half of the fourth quarter and that this contraction could carry over into the first quarter.
In order to control the inventory of chips and avoid oversupply, Intel will bring utilization of factories "dramatically down" in the first quarter, Smith said.
Financial Highlights from the earnings report:
- Fourth-quarter revenue $8.2 billion, down 19 percent sequentially
- Gross margin 53 percent, down 6 points sequentially; expected to decline to low 40s in Q1
- Operating income $1.5 billion, down 50 percent sequentially
- Quarterly net income $234 million; EPS 4 cents, meeting Wall Street forecasts
Product Sales Highlights from the earnings report:
- Mobile processor revenue fell to $2.584 billion from $2.989 billion in 2007
- Revenue from the Atom Netbook processor was $300 million, up 50 percent
- Total microprocessor average selling price (ASP) was flat, but up slightly if Atom is excluded
- Processor and chipset units were lower versus third quarter
The Atom processor--used most notably in Netbooks--holds much promise but is also a source of angst for Intel. While revenue from Atom shot up, its low price dampened ASPs overall. If Atom is excluded, ASPs would have been up slightly, chief executive Paul Otellini said. Still, he expects "substantial" year-on-year growth for Atom. And the "desirability in entering that segment" expressed by competitors "validates" Intel's view that Atom is an important market, he said.
Otellini was quick to claim that there was "very little cannibalization of notebooks" from Netbooks and said cannibalization is about 10 percent. Cannibalization of its higher-end silicon is a concern for Intel because Atom doesn't deliver the same level of profits.
In 2009, despite the "economic uncertainty"--a term used more than a few times during the earnings conference call--Intel said it will continue to invest aggressively and move quickly to the next generation of processors. "We will not slow down introduction," Otellini said, of next-generation 32-nanometer technology. Smith added that Intel's goal is to get to 32 nanometer "as fast as we possibly can" since moving to a new generation of technology can ultimately boost profitability.
New 32-nanometer chips should appear in the second half of the year, in mobile and desktop initially, Otellini said.
Intel's fourth-quarter warning is not only bad news but bad timing. With the Consumer Electronics Show kicking off Thursday adorned by all those bright, shiny gadgets, Intel effectively said: gadgets maybe, but not so bright and shiny.
And for an Intel warning, this one was particularly dire. The biggest chip bellwether said it now expects only $8.2 billion in revenue for the quarter, a 23 percent drop from the year-earlier period, and 20 percent from the third quarter. And this comes after issuing a warning on November 12.
So what's happening? The clearest example of the gloom that has descended on the chip industry, and by extension computer and gadget makers, came relatively early from another chip bellwether, Taiwan Semiconductor Manufacturing Company -- the largest chip contract manufacturer, which supplies chips to all the first-tier electronics and computer makers. Back on October 30, TSMC issued a forecast that set the tone for the rest of the industry: CEO Rick Tsai said the supply chain -- the myriad of companies that order chips from TSMC -- was "reducing inventory very aggressively."
That supply chain, either directly or indirectly, is the computer and gadget makers of the world.
So going into CES, the picture is not pretty. "We just heard consumer electronics sales over the holidays were down 26 percent year to year," said Broadpoint AmTech analyst Doug Freedman. "You want to head into CES with a pall over it? There it is, right there."
And go the other way, up the supply chain -- the chip gear makers who supply production equipment to chip companies -- and things are even more bleak, with some gear makers saying they don't expect any orders at all in 2009 for certain categories of equipment. In December, Netherlands-based ASML CEO Eric Meurice said that "never before have we witnessed such a sharp and sudden fall-off in lithography system demand."
Other examples are almost too numerous to list: for starters, Toshiba and SanDisk slashing flash memory output 30 percent, Taiwan's memory chip industry on the verge of collapse, and Micron Technology posting a massive $706 million loss.
Yes, there's probably a silver lining in all of this, in that chipmakers and gadget suppliers have to cut the fat and become lean and mean, but where does it end?
And how will this downturn transform the computer industry? Looking at it through the prism of Netbooks -- which are expected to catch much of the limelight at CES -- may provide some insight. These cheap laptop computers are on fire, partially because they are compelling designs but mostly because of price. Good thing? Yeah, great for consumers and small businesses that are finally realizing they don't have to pay $2,000 for a small, lightweight ultraportable notebook. Or simply can't afford a $1,000 notebook.
But not so great for Intel, Apple, and others. "What is the most expensive laptop out there? The Apple (MacBook) Air," said Freedman. "That's a $1,500 or $2,000 machine. Now all of a sudden I'm giving you ultraportability for $500," he said, referring to the price of a Netbook.
In this sense, over-priced notebooks could be seen as roughly equivalent to large SUVs -- overkill. Just as General Motors must wean itself off lumbering SUVs, so may Intel, Hewlett-Packard, Sony, Toshiba, et al., be forced, to some extent, to wean themselves off high-profit notebook computers. After all, what took Sony so long to bring out a Netbook? And why don't we see an Apple Netbook? It's not a stretch to say that those companies don't like the idea of selling a lot of inexpensive computers.
At CES, companies will be hawking flashy gadgets, as always, and maybe attendees can suspend disbelief for a few days blinded by the glare of the gadgets. But that's really just lipstick on a pig.
Updated at 2:50 p.m. with correction of comments in FORM 10-Q
Intel reiterated in an SEC filing Friday that business conditions may worsen and that demand for its chips may take a hit because of global economic conditions.
As a result of the recent financial crisis, "there could be a number of follow-on effects from the credit crisis on Intel's business, including insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies," Intel restated in a FORM 10-Q filing.
Intel also cited "increased expense or inability to obtain short-term financing of Intel's operations from the issuance of commercial paper."
"The current uncertainty in global economic conditions makes it particularly difficult to predict product demand," Intel said, reiterating what was stated in its third-quarter earnings announcement.
(Intel also plans to publish a mid-quarter business update on December 4, 2008.)
For the fourth quarter of 2008, Intel reiterated that it expects revenue of between $10.1 billion and $10.9 billion and a gross margin of 59 percent, plus or minus a couple points. Gross margin is a crucial indicator of profitability. The company repeated that economic uncertainty may result in lower than expected demand and may "negatively impact our gross margin if we fail to reduce manufacturing output accordingly."
Restructuring and asset impairment charges--as stated in its third-quarter earnings announcement--will be approximately $250 million, which includes charges related to Intel's joint decision with Micron to discontinue the supply of NAND flash memory from a facility within the Intel-Micron manufacturing network.
iSuppli warns on flash memory revenue
And speaking of NAND flash memory, iSuppli said Friday that its revised forecast for the flash memory market predicts that worldwide NAND flash memory revenue will fall by 14 percent to the $12 billion level in 2008, down from $13.9 billion in 2007.
This year will mark the first time that worldwide NAND flash revenue has declined on an annual basis.
In 2009, global NAND flash memory revenue will decline by another 15 percent, iSuppli said.
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