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Intel Buoyed by Earnings Beat

The chipmaker tops sales and earnings forecasts, but revenue drops from last year.

Updated from Oct. 17

Shares of

Intel

(INTC) - Get Intel Corporation Report

rose early Wednesday after the chipmaker managed to beat Wall Street expectations, thanks to what it said was strong demand for its new lineup of microprocessors.

The Santa Clara, Calif., company said it experienced better-than-normal shipments of microprocessors during the three months ended Sept. 30, with notebook and server chips showing particular strength.

Shares of Intel were up 54 cents, or 2.6%, to $21.44 in early trading Wednesday.

But Intel also acknowledged that the above-seasonal uptick in shipments owed to an easy comparison with its bleak second quarter, when total microprocessor unit shipments declined.

And while the company wrote off $100 million of old microprocessors, its total inventory inched up about 3% to $4.4 billion, a level that CFO Andy Bryant said was "a little bit higher than I would like," although still not out of line, he said, given the ramp of new products.

Sales in the third quarter were $8.7 billion, at the high end of Intel's guidance and a tad higher than the average analyst expectation, which called for $8.61 billion in sales.

Intel's net income of $1.3 billion, or 22 cents a share, was down sharply from the $2 billion net income, or 33 cents a share that Intel reported in the third quarter of 2005.

Analysts polled by Thomson Financial, however, expected Intel to earn only 18 cents a share.

Excluding the effects of stock-based compensation, Intel said it earned 27 cents a share.

Intel is locked in a fierce price war with rival

Advanced Micro Devices

(AMD) - Get Advanced Micro Devices, Inc. Report

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, which reports its third-quarter financial results on Wednesday. AMD has stolen market share from Intel during the past year, but many analysts believe Intel will be able to turn things around with a fresh lineup of microprocessors.

In a postearnings conference call with analysts, CEO Paul Otellini said Intel has now shipped 6 million processors based on its new Core architecture and has begun revenue shipments of microprocessors packing four "cores," beating AMD to the punch.

Otelllini said he believed Intel had taken market share from AMD in the third quarter based on the company's record unit shipments for server and notebook chips, but he said it was still too early to know the exact figures.

In servers, Otellini said, "customers that had not been with Intel in the last couple of years were returning to Intel quite strongly."

While Intel has aggressively slashed prices on its various microprocessors during the past several months, its average selling price for server processors actually increased during the third quarter, the company said.

CFO Andy Bryant told analysts that the company's lineup of new microprocessors were already providing some "firming" of prices.

"The prices pressure we saw in the third quarter was less than we saw in the second quarter," said Bryant.

But he acknowledged that desktop chips continue to face "higher price pressure." And the company indicated that profit margins will continue to remain under pressure for the near term.

Intel's 49% gross margin was down nearly 10 percentage points from the same time last year, "primarily a result of lower revenue," said Bryant.

And while the company did not provide estimates for 2007, it projected fourth-quarter gross margin to be 50%, plus or minus a couple of points.

Intel projected that sales in the fourth, or current, quarter will range between $9.1 billion and $9.7 billion.

Analysts polled by Thomson Financial were looking for $9.4 billion in fourth-quarter sales.

Intel executives also said the company was making progress on a massive restructuring plan designed to save $2 billion in costs in 2007. According to Otellini, Intel's headcount decreased by 2,600 people in the fourth quarter and is on track to reach 95,000 workers by year's end.

The current workforce reductions resulted in a $98 million charge in the third quarter. Intel's third-quarter operating results also included a $100 million gain from the sale of a portion of an investment in

Micron Tech

(MU) - Get Micron Technology, Inc. Report

and a $130 million gain from divestitures.

Intel also trimmed its capital spending for the full year 2006, which now ranges between $5.7 billion and $5.9 billion, compared with a previous figure of $6.2 billion, plus or minus $200 million.

The chipmaker said the lower spending was due to "greater equipment reuse, productivity improvements and small timing changes."