Intel's ( INTC) report to Wall Street on Wednesday afternoon won't be pretty. When it delivers its second-quarter results after the bell, the chipmaker is expected to announce that gross margins have dropped to the lowest point in recent memory and that sales have plunged well below normal levels for this time of year. But despite the bleak picture, many investors and analysts are looking outside the financial statement to assess the company's health and its outlook. Intel's stock has suffered recently along with the broader tech sector, but the shares have actually outperformed those of rival Advanced Micro Devices ( AMD) amid a feeling that the perceived performance gap between the two companies has begun to reverse. Intel shares closed Tuesday at $18.21, a jump of 37 cents. During the past few weeks, Intel has launched its long-awaited Woodcrest chip -- its answer to AMD's popular Opteron processor for corporate servers -- sold off its struggling handheld chip business and invested $600 million in a company developing wireless broadband products that complement its PC processor business. "We've probably already seen the biggest indication of what should drive the stock in the intermediate term. That's the launch -- on time -- of Woodcrest," says Stifel Nicolaus analyst Cody Acree. After all, Acree says, "if it was the poor products that got Intel into this, then shouldn't better products get them out of this?" Stifel Nicolaus has a noninvestment banking relationship with Intel. Intel is scrambling to right itself after a tumultuous year. Although still the world's dominant supplier of PC microprocessors, Intel has lost significant market share to rival AMD in the past 12 months. Many people in the industry deem AMD's processors superior to Intel's when it comes to performance and energy efficiency. But Intel is striking back with a volley of new products based on a new, more power-efficient microarchitecture. The Woodcrest processor, officially known as the Xeon 5100, is the first taste of the new chip generation, and Intel is slated to release new desktop and laptop processors as the summer progresses.
To make room for this new lineup, the company is furiously slashing prices on the inventory of existing products that has accumulated as sales have stalled. These pricing actions will contribute to what can only be called dismal second-quarter results. Intel has predicted that gross margins will slip to 49% in the second quarter, compared with 56% in the year-ago period. The company projected that revenue will range between $8 billion and $8.6 billion, representing as much as a 10% sequential decline. Although it's normal for second-quarter sales to be down seasonally, that's a much steeper falloff than the 2% sequential revenue decline that Intel experienced in the second quarter of 2005. And, of course, results might come in even weaker. With Microsoft's ( MSFT) new Vista operating system not due out until next year, steep discounts for PCs with inferior and soon-to-be-outdated chips may not be enough to spur sales. Intel did not preannounce with a profit warning, as some on the Street expected, but
AMD did , citing as one reason slower-than-expected demand for both notebook and desktop PCs. However, the shortfall also suggested that Intel's price cuts took their toll on its rival. Of course, it's quite possible that Intel's own results may still fall short of its mediocre guidance. But all that gloom may already be priced into Intel's stock. "My guess is that investors may be willing to overlook a bad number for Q2, in terms of weaker-than-consensus revenue or margin or earnings, if the guidance and story that they spin about new products and launch dates and such is sufficient to at least meet market expectations," says Standard & Poor's semiconductor analyst Tom Smith. Third-quarter revenue guidance may offer a hint of the kind of reception Intel's new processors are getting in the tech market.
Over the past five years, Intel's sales in the third quarter have picked up between 3% and 15% from the second quarter. With Intel's new processors due to come to market during the third quarter, some investors may look for guidance at the high end of this historical range as evidence that the company's comeback is under way. In addition to management's comments about upcoming product launches, Standard & Poor's Smith says he'll be interested to hear an update on the company's internal restructuring and cost-cutting plan, announced in April by CEO Paul Otellini. The $600 million sale of Intel's baseband and application processor business to Marvell ( MRVL) last month was the most significant result of the plan thus far. "They've announced a number of actions," says Smith. "How many more major actions are out there?"