Intel Indicates the Worst Is Over – Maybe

The tech industry had been looking to Intel, the world’s largest chipmaker, for a sign that the worst of the downturn may be past.

They aren’t likely to be disappointed. Intel (NASDAQ: INTC) today reported first quarter net income of $647 million and earnings per share (EPS) of 11 cents on revenue of $7.1 billion. That revenue was slightly above the $7 billion in unofficial estimates, since the company gave no guidance after its disastrous fourth quarter in January.

Of course, those numbers are still down a healthy amount when compared to other quarters. Q1 2009 revenue was off 13 percent compared to Q4 2008 and 26 percent compared to Q1 2008. The net income of $647 million was a 176 percent improvement over Q4 but a 55 percent plunge from Q1 2008.

Even more encouraging, Intel’s president and CEO, Paul Otellini seems finally ready to declare a bottom to the plunge that the industry took in the fourth quarter of 2008.

“We believe PC sales bottomed out during the first quarter and that the industry is returning to normal seasonal patterns,” he said in a statement.

Later, on a conference call with analysts, he added “The first quarter results reflect the depth of the efficiency work we’ve been engaged in for the last three years. We’ve adjusted quickly to a new environment, where demand is difficult to predict and lead times have contracted.”

To deal with this, Intel reduced inventory by 19 percent, or $700 million, as inventory slowly bled out to the channel and OEM partners. Of course, Intel paid a price for this. Its gross margin was way down, just 45.6 percent instead of the 53.1 percent in the fourth quarter of 2008 and 53.8 percent in the first quarter of 2008.

Margin took a hit because Intel idled or underutilized its fabrication plants. Fabs are to Intel what jets are to an airline; they only make money when they are in use. When they aren’t in use, they just drain money.

Microprocessor units were lower versus the fourth quarter, that’s a typical seasonal pattern for Intel, although the fourth quarter of 2008 was off by 25 percent, when it should have been up. The good news is average selling prices (ASPs) were flat. ASPs had been on a downward slope for some time.

While netbooks have been the hot market and were believed to be the one bright spot in the market, revenue from the Atom microprocessors and chipsets that drive them was $219 million, down 27 percent sequentially.

Next page: The worst is behind Intel, at least on one level

The worst is behind Intel, at least on one level

Overall, Otellini sounded upbeat on the call. “We’re seeing signs a bottom in PC market segment has been reached. I believe the worst is behind us from an inventory correction level,” he said. Desktop sales hit bottom first and have followed more normal patterns since early February.

Notebooks have a longer pipeline and manufacturing process, so it took longer to work through their inventories, but now have returned to normal levels, he added.

Not only did Intel see an uptick in orders, in March it even saw some expedited orders, where customers needed product right away. Mostly, though, it was a slow time, as is seasonal. “My sense is it will stay that way until second half of the year when you see normal seasonal growth back into the business,” said Otellini.

The consumer segment has held up better than the enterprise business. The installed base of enterprise notebooks is over three years of age on average and in need of a refresh soon. Given the reticence of businesses to adopt Vista in favor of the unreleased Windows 7, large-scale replacements won’t begin any time soon.

The US and China were Intel’s best markets while Europe, Japan and the emerging world were weakest. Every division, though, was down year-over-year. The mobility unit took a bigger hit because it took longer to clear inventory from the pipeline. He added that the company has already shipped one million Nehalem-generation processors.

Stacy Smith, chief financial officer for Intel, said Intel is on track to reduce 2009 spending by $700 million from last year’s expenses. Intel is now under 83,000 employees from a high two years ago of over 100,000. It also has cash and investments of $10.3 billion, down $1.2 billion from last year.

Due to a “high degree of uncertainty,” Intel made no precise projections for Q2 revenue. Smith did say the company expects revenue to be flat compared to Q1, with gross margin in the mid-40 percent range due to further underutilization charges, plus expenses as Intel moves its factories to 32nm designs.

During the Q&A segment, Otellini said that Larrabee, Intel’s entry into the GPU market, is now in silicon and being debugged by Intel and partners. The silicon will improve over the year, with volume production beginning next year.

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