COMMENTARY - Happy days are here again for Intel

TechOnline India - October 13, 2009

One year after the onset of a steep and frightening semiconductor industry downturn, the world's No. 1 chip maker is once again sitting pretty, forecasting that revenue will return to the $10 billion mark in the fourth quarter.

SAN FRANCISCO—One year after a perfect storm-type financial crisis created the mother of all semiconductor industry downturns, the world's No. 1 chip maker is once again sitting pretty.

Thanks to a surprising rebound in the PC market, Intel Corp. on Tuesday (Oct. 13) exceeded analyst expectations with its third-quarter results and a fourth-quarter sales target that, if accurate, would put the company essentially back to the same quarterly run rate it had before all hell broke loose.

The mid-point of Intel's fourth-quarter sales target is $10.1 billion, in the same well-to-do neighborhood as the $10.2 billion Intel reported for the third quarter of 2008. (For the record, fourth-quarter sales of $10.1 billion would represent a 23 percent increase over $8.2 billion in the fourth quarter of last year, after the financial crisis arrived in earnest, but would be off almost 6 percent compared to the $10.7 billion Intel pulled down in the fourth quarter of 2007.)

Intel (Santa Clara, Calif.) also surprised analysts by projecting that fourth-quarter gross margins would be between 59 and 65 percent. Stacy Smith, Intel's chief financial officer, said he continues to believe that the company's long-term gross margins will be between 50 to 60 percent. He attributed Intel's current strength to the combination of a recovering market, company execution and the success of its product portfolio.

Paul Otellini
Intel President and CEO
Smith said Intel expects capacity utilization in the fourth quarter to be between 80 and 90 percent. Craig Berger, an analyst with FBR Capital Markets, said in a research note that this means the company still has headroom to ramp revenues to $11.5 billion should demand exist.

Intel executives also acknowledged that the company owes its good fortunes primarily to the astonishing recovery of the PC market and, to a lesser extent, the fact that notebook systems are now outselling desktops. Intel President and CEO Paul Otellini said the company now expects 2009 PC volume to be flat to up slightly compared with 2008, a significant change from the industry's views six months ago.

"I think you are seeing, inside of that, Intel do well because of the shift to notebooks, where we enjoy a higher market segment share than we do in desktops," Otellini said.

Market research firm iSuppli continues to predict that 2009 PC unit shipments will be down 4 percent compared to last year. ISuppli estimates that Intel held 80.6 percent of global microprocessor market share as of the second quarter. {pagebreak}Despite continual efforts to diversify, as the PC market goes, so goes Intel. Otellini acknowledged as much Tuesday when he said he doesn't believe Intel can grow much above the PC growth rate. He said the company has picked up market share during the course of the year and may pick up more in the fourth quarter. "At the end of the day, we need the volume," he said. "We need the PC market to grow."

Things could get even better for Intel next year. The relative strength of the PC market in the third and fourth quarters has been due mainly to consumer purchases, with enterprise buyers still too cautious to spend on PC upgrades, according to the Intel executives.

Otellini declined to give an estimate for total PC sales growth next year. But he said most third-party forecasters are projecting that sales would increase by more than 10 percent. Intel wouldn't argue with those forecasts, he said.

"We remain encouraged that corporate PC sales will improve and recover some in 2010, potentially a baton handoff to the next growth driver," Berger said.

While enterprise servers have been relatively strong, sales of client-side PCs to enterprise customers have been very light, Otellini said. When the enterprise spending comes back, presumably early next year, the market situation could be even better.

"The compelling value for a refresh is there," Otellini said. "Machines that are four and five years old—which is the average fleet age right now—are costing more to keep than to buy new machines."

Otellini wouldn't hazard a guess for when enterprise buys would return, saying it would depend on whether CEOs and CFOs decided to "open the checkbook" when setting capex budgets for 2010. He added that Intel itself plans to buy a significant number of PCs next year because its fleet is aging.

"I suspect that a lot of other companies are coming to that same conclusion," Otellini said.

On Wednesday, analysts applauded Intel's third-quarter results and fourth-quarter outlook.

Daniel Amir, a semiconductor analyst at Lazard Capital Markets, raised his firm's price target on Intel's shares to $26 from $25. Berger raised his firm's price target on Intel shares to $27 and reiterated a rating of "market perform." Berger also raised his estimate for Intel's fourth quarter earnings to between 39 and 46 cents per share, which he said was significantly higher than Wall Street's estimate of 34 cents per share.

Hans Mosesmann, an analyst with Raymond James Equity Research, raised his firm's price target for Intel to $30 from $26 and reiterated its "outperform" rating on the stock. Mosesmann said Intel is executing in "exemplary fashion in 2009" and praised management for strategic and tactical steadiness through a difficult early part of the year.

Intel's shares traded at $20.49 in early morning trading Wednesday, up from Tuesday's closing price of $20.40.

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