Intel Profits From Cost Cuts; Forecast Lags

Implications: The PC Market has slowed down. Intel's weak Q2 sales revenue guidance confirms this.

Intel did a good job of cost cutting and making yield improvements, but not as good a job in booking business so far this year.

PC Bookings were pretty weak in Q1; this negatively impacted Intel.

Better bookings will occur in June if stronger than expected back-to- school PC builds materialize.

 

Analysis:

Intel managed to show improvement due to a very heavy duty focus on cost reduction efforts. Intel has been very good at managing its own costs. For example Intel had from 10,000 to 15,000 employee layoffs in the past 2 years.

However, the fact that sales slipped 1% indicates seasonal market softness in PCs. Also Intel’s projected forecast for the second quarter is also below expectations. Intel is not riding a wave caused by a great surge of PC demand. Intel must now wait for better bookings to occur in June, This will happen if stronger than expected back-to- school PC builds materialize.

However, at the cost of lower pricing and gross margins, clearly Intel made AMD pay dearly for its market share gains of the past 3 years. Intel has regained the momentum they lost to AMD during the market share war.

The viciousness of the processor market share and price war shows in the drop to 50% from 55% in Intel gross margins year over year. While this has been difficult and painful for Intel, clearly it’s been a lot worse for AMD. The market share losses to Spansion and continued losses in Intel’s Flash Memory business also contributed to Intel’s lower gross margins.

But Intel shows no signs of letting up with its new array of processors planned for the second half of 2007. Intel’s forthcoming rollout of a wave of new processors will more than counter whatever AMD might bring out in the meantime, such as Barcelona.

AMD has been pummeled and battered by Intel. So one has to ask the question “Has AMD reached rock bottom?” I think so. I think they’ve gone down about as far down as they can in this cycle. Whereas Intel on the other hand will perhaps in the next year reach a point where it is as good as it gets. Hopefully that is not the case if Intel has a very strong second half in 2007.

Intel has been able to hold the price of its processors due to its rapid migration from 65 nm to 45 nm process technology and yield improvement. This has allowed Intel to keep it prices fairly flat while widening its gross margins. Intel is pressing forward with a vengeance.