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Intel Tarnishes Turnaround Story

Only a couple of years back, Intel regularly notched gross margins in the low-60% range. Increasing competition from rival Advanced Micro Devices (AMD - Get Report) has changed the rules of the game, though, forcing both companies to pick up the pace of product development and to cut prices of their microprocessors.

In 2006, Intel began a major restructuring to adapt to the new environment, eliminating 10% of its workforce.

AMD, meanwhile, has been bogged down by dwindling cash flow and a massive debt load incurred to acquired graphics chipmaker ATI.

During Tuesday's post-earnings conference call, Intel management painted an improving picture of profit margins going forward.

The investments to ramp up a new manufacturing process will taper off in the second half of the year, helping lift gross margins. Intel's improving mix of higher-end chips and bigger production output will also provide a boost.

And Intel's forecast for a 52% margin in the current quarter suggests that the company is confident about its prospects -- the chipmaker has not guided margins above 50% in the last five quarters.

Indeed, some Intel investors interpreted the weakness in the second quarter as a sign of strength for the months ahead.

"At this point, you ask yourself, even though the quarter wasn't everything we wanted it to be, do I lower my expectations? And the answer is no. If anything, they go up a bit," says Bill Gorman, VP of equity research at PNC Wealth Management, which owns Intel shares.
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