RealMoney Silver - INTC Preview: All Eyes on End Demand

INTC Preview: All Eyes on End Demand
By Bob Faulkner
RealMoney Contributor
4/14/2008 3:51 PM EDT

Intel (INTC) is scheduled to report its first-quarter 2008 results after the close tomorrow and will have a conference call at 5:30 p.m. EDT. Current consensus estimates are for revenue of $9.63 billion (up 9% year over year but down 10% quarter over quarter) and EPS of 25 cents. The company announced on March 3 that its gross margin will be below guidance due to weaker-than-anticipated NAND flash pricing. All other targets remained unchanged.

In the prior quarter, revenue was $10.7 billion (up 11% year over year and 6% quarter over quarter), and GAAP EPS were 38 cents. The gross margin was 58.1%, up 850 basis points year over year and 670 basis points quarter over quarter, due to lower costs and higher volumes. The operating margin was 28.4%, up 1,310 bps from last year and 610 basis points sequentially. The cash balance increased about $4.8 billion in the quarter, up more than $900 million from the year-ago period. Accounts receivable decreased about $300 million, with days sales outstanding dropping four days, to 22 days. Inventory also decreased about $150 million but with cost of goods sold down sequentially, days of inventory actually increased two days, to 68 days.

The original guidance for the March quarter had revenue expected to be in the $9.4 billion to $10 billion range (up 6% to 13% year over year). The gross margin is now expected to be 54% (give or take 1 point) vs. the prior expectation of 54% (give or take 2 points). Opex was expected to be in the $2.8 billion to $2.9 billion range, with $100 million in charges and $175 million in other income with a tax rate of 31%.

The guidance for the March quarter was clearly a disappointment ,with the midpoint of guidance more than $1.0 billion below consensus at the time. That sent the stock down nearly 20% in the ensuing week. It has regained most of that loss in light of some estimate increases as well as an upgrade or two.

Certainly, one of the changes that will make it easier to tolerate the fundamentals has been the closure of the Numonyx joint venture with STMicroelectronics (STM) and Francisco partners. Numonyx will manufacture NAND and NOR flash, and Intel will contribute its NOR flash assets to the operation. The transaction is expected to add 100 to 150 basis points to the gross margin and will require a non-cash $300 million charge in the first quarter.

Intel is on a roll from a manufacturing perspective, with its 45nm parts ramping faster than the 65nm cycle. That continues to put distance between the company and rival Advanced Micro Devices (AMD) .

The critical element that everyone will be focused upon will be end demand. Management was anticipating low double-digit PC unit growth for 2008, and it's an open question if that remains a viable target. Certainly, some questioned that when AMD pre-announced several days ago, but I think that was the result of more share shift by Dell (DELL) to Intel, especially for servers. Early indications from Taiwan manufacturers are not suggesting plummeting PC demand by any means, so it's possible that Intel's guidance may turn out to be a positive surprise.

Intel is one of the many technology and telecommunications stocks that Bob Faulkner monitors and discusses weekly in The Telecom Connection.