Post a Comment
Intel Q2 Disappoints
By Jessica Davis -- Electronic News, 7/20/2006
Intel disappointed Wall Street with Q2 revenues at the bottom of its previously forecast range and below analyst estimates as lower average selling prices in a competitive environment with rival Advanced Micro Devices (AMD) hit the chip giant’s top line.
Intel’s revenues came in at $8 billion. The previously forecast range was $8 billion to $8.6 billion. That compares with last year’s Q2 revenues of $9.2 billion. The world’s largest chipmaker reported earnings per share of 15 cents (or 19 cents excluding share-based compensation), down significantly from last year’s 33 cents per share.
The lower average selling prices came from both shifts in product prices and also shifts to lower end systems as the number of notebooks sold at the retail level increased while notebook sales into the commercial space were softer, CEO Paul Otellini told Wall Street analysts in a conference call Wednesday.
The market itself was also softer. In all geographies and in the channel, Intel said that revenue was lower than the seasonal norm.
And Intel itself has been looking at its pricing strategy and making some changes.
“There has been much speculation about pricing changes,” Otellini said. “The introduction of Core 2 Duo lets us reset our entire pricing.” Accordingly, he said, the price of Pentium and Celeron would also be reduced. Going forward, these three product groups will represent the Intel’s three tiered pricing and performance strategy. Intel plans to launch its first Core 2 Duo products next week, but they will face a more challenging environment than previous offerings since rival AMD has gained more traction in the market.
“We expect the company may face a greater than expected challenge in recovering market share losses this year versus AMD’s dual-core Opteron, particularly due to the qualification period required before rapid adoption and existing contracts AMD has in place for the remainder of the year,” said analyst Tim Luke of Lehman Brothers, in his report following the earnings call. “Additional growth potential in enterprise exists in Intel’s soon to be launched Conroe and Merom products for desktops and notebooks, respectively, potentially providing significant performance gains over prior generation products.”
Luke and other analysts expressed concern at Intel’s inventory levels, which the company had sought to reduce over the course of Q2. However, early qualification of Intel’s Conroe processor made those products part of inventory for the quarter, skewing the numbers significantly in the opposite direction.
“Inventory ballooned to 103 days from 81 days,” Luke said. Luke noted that the last time inventories rose above 100 days was in 1986.
Answering analysts’ concerns on inventory Otellini reminded them of a recent inventory shortage.
“If I’ve made one mistake since I’ve been in this role, it was that I didn’t build enough chipset inventory in late 2004, early 2005,” he said.
CFO Andy Bryant said during the call that he’d urged Intel’s executives to cut inventory during that period, which was a mistake.
“We are not currently in a danger zone for inventory,” he said. “I am not uncomfortable with the level of inventory today.”
Intel executives are also working to improve another concern of analysts – the company’s margins. Otellini said the internal operational review is ongoing, and repeated that Intel will cut $1 billion of expenses for 2006 and transform the company into a leaner operation.
“We are a bit over half way through the structural review process,” Otellini said in the call with analysts Wednesday. Intel first announced the major internal efficiency review in April.
The first half of the review resulted in Intel’s planned sale of its applications and communications processor business – its XScale business – to Marvell, which will reduce headcount by 1,400. In addition, last week Intel announced that it would eliminate 1,000 management jobs.
These two measures alone will reduce headcount within the company to below 100,000 by the end of 2006, said Bryant, who hinted that those numbers could go even lower than that when Intel implements the second half of its review.
On Wednesday evening Intel told employees that it would reshuffle its top management as well as another action stemming from the review.
For top line expansion, the Santa Clara, Calif.-based company is pinning much hope on the second half of 2006 to deliver better results as it ships the first of its Core2 Duo processors, dual core products that also implement the company’s new Core microarchitecture that Intel has touted as significantly improving performance and reducing power consumption.
Some industry watchers have speculated that some buyers delayed purchases to wait for the new architecture to become available.
“We look forward to business improving in the second half,” said Bryant.
