Intel raised further hopes of a recovery in the semiconductor sector with a strong rebound in its second quarter results. Atom was its main growth driver ‘ and it even managed to avoid the hit on margins that the low cost netbook processor was expected to inflict.
The world’s largest chipmaker beat analyst expectations on revenues and margins although it still posted a rare loss of $398 million for the quarter, because of the $1.5 billion fine imposed by the European Commission antitrust authorities. A year ago, it made a net profit of $1.6 billion. Excluding the fine, Intel said it would have reported net profit of $1 billion.
Revenue was $8.02 billion, up 13% from the first quarter though still 15% down year-on-year (and ahead of analyst forecasts of $7.3 billion). Further pleasing the markets, Intel said it expected its strong sales performance to continue in the current quarter, forecasting $8.5 billion, far ahead of analysts’ consensus estimates of $7.81 billion.
It also believes the recovery in its gross margins, seen in Q2 ‘ when they reached 50.8%, higher than the company’s expectation – will persist in Q3, though this will be helped partly by a deep cut in capex spending plans for the rest of the year. Intel is targeting a capex budget of $4.7 billion for the year, compared to $5.2 billion in 2008. Average selling prices were down because netbooks were stronger in the product mix and higher value enterprise products were weaker.
“Intel’s second quarter results reflect improving conditions in the PC market segment with our strongest first-to-second quarter growth since 1988 and a clear expectation for a seasonally stronger second half,” said CEO Paul Otellini in a statement.
PC recovery is important, but has been heavily reliant on netbooks, plus the PC segment as a whole will see declining growth for organic reasons, not just because of the recession, Therefore Intel needs, in this quarter and the rest of the year, to demonstrate that it can preserve its margins as the revenue mix shifts to netbooks and Atom, and to prove that, this time around, it can make a credible stab at markets beyond the PC, notably smartphones and MIDs, and a range of other device formats with embedded wireless and media.
The recent alliance with Nokia is a strong sign for the future, but analysts are looking for shorter term indicators in the current results. Certainly the Atom has been an impressive performer, though its task may get tougher as ARM-based challengers start to penetrate the netbook market, and take the initial high ground in emerging smartbooks too. Intel said consumer purchases, especially Atom, led the recovery while enterprise PCs remain weak. Otellini Atom revenue was up by 65% to $362 million, ‘reflecting a bit of a snap-back after the inventory correction we saw in late Q4 and in Q1. While netbooks are the main catalysts of the overall growth in Atom, we are pleased to see Atom now making its way into net-tops and embedded applications.’
On margins, he told the analyst call: ‘Netbooks, as they come on, will have a dilutive impact on ASPs, just by definition. We’re hoping to be able to manage margins such that the margins are accretive. But then the other secular trend is the notebook displacing the desktop and as that happens, notebooks are getting cheaper and cheaper.’
CFO Stacy Smith said in an interview: ‘I can ship a lot of Atoms and not bring down the gross margin of the company. In terms of gross margin, we saw volume go up and costs down. And we had lower excess capacity in our factories.” He added that Intel was ‘well positioned because of cost reductions and the ramp-up of new [process] technology.’ Intel is well known for continuing to invest in cutting edge processes during downturns, in order to reap the rewards on recovery.