With Sales Slumping, Intel Hunkers Down

Intel on Thursday reported a severe decline in gross income and net revenue due to a massive slowdown in sales worldwide, along with a major hit due to a reduction in the carrying value of one of its investments.

Despite the severe worldwide scenario, the world’s largest chip maker plans to continuing spending on advancing its fabrication plants and designing new products.

“We have always believed the best way to successfully emerge from recession is with tomorrow’s products, not by standing still,” CEO Paul Otellini told a conference call of financial analysts. “We won’t do it with yesterday’s products.”

Intel (NASDAQ: INTC) reported fourth quarter income of $234 million, or 4 cents a share, a 90 percent drop from the $2.3 billion, or 38 cents a share it earned in the fourth quarter of 2007. Sales plunged 23 percent over the prior quarter to $8.2. billion, a quarter when Intel traditionally does its best business.

Intel said the quarter’s results were impacted due to a $1 billion reduction in the carrying value of the company’s investments in Clearwire. Clearwire is a wireless broadband service that has partnered with Intel to build WiMAX services around the country.

Otellini said this was only the second time in 20 years that the fourth quarter was below third quarter sales, and that was in 2000, when sales dipped one percent. The decline in customers buying supplies was such that Intel had to reduce work at its factories, causing it to take a charge of $250 million for underutilization.

He said reduced demand and inventory contraction across the supply chain was what led to a sharp decline in customer inventories, which will continue into the first quarter.

It all overshadowed what had been a “tremendous year for Intel,” said the chief executive. It launched two major new architectures, the Atom and Nehalem, divested itself of non-strategic businesses, scaled out 45 nanometer manufacturing and completed design of the 32nm process.

“We delivered on our operating goals and nearly all elements under our control. This disciplined execution remains and important distinction for us,” Otellini said.

Next page: An efficiency gene pays off

Page 2 of 2

An efficiency gene pays off

Intel has had a three year project on efficiency and now has “the efficiency gene strongly engrained in how we do things. Not a point process but how to operate more efficiently.” This has resulted in $3 billion in savings since it launched in 2006, $800 million in 2008 alone.

Chief Financial Officer Stacy Smith said average selling prices (ASPs) were actually up slightly, flat with Atom sales added in. Atom is taking off, bringing in $300 million, up 50 percent from just the third quarter.

If only the other divisions were up. Every other was in fact, down, as were revenues in all geographies, both sequentially and year-over-year.

Intel took a few other hits in the wallet as well. Spending on research and development and general and administrative dropped $300 million, there was the $250 million in restructuring charges, $200 million of it related to shutting down 200mm fabrication facilities, plus the Clearwire and underutilization charges.

Going forward, Intel would not make solid projections because the worldwide economy “is creating a high degree of uncertainty around demand.” Q1, which is traditionally slow after a big Q4, is expected to be around $7 billion. There will be a significant gross margin decline significantly in Q1, in part due to more underutilization charges but also due to ramping up 32nm production.

Q1 margin will be in the low 40s as compared to the mid-50 percent range of prior quarters.

Cannibalizing notebook sales

Otellini said Atom sales have done “a little” cannibalization of notebook sales, but not much. The notebook market has greater momentum and will take longer to slow down.

The netbook market is growing in its own way. Otellini noted that in Japan there is a similar program to cell phones, in that you can buy the netbook for 1 Yen but then pay for an Internet service.

Smith said he’s waiting on the Chinese New Year to see what kind of restocking its Asian OEM partners make. He suspected not only would they shut down New Year’s week (February 9 ushers in the Year of the Ox) but for the week after that.

After that, it’s a waiting game. “We won’t see signs of recovery until you see orders in people’s hands,” said Otellini.