Intel stock slammed on Q4 shortfall

Record revenue in Intel's Q4 was $88 million below mid-point expectation; the MPU maker contributed the shortfall to lower-than-expected NAND flash revenue due to sinking average selling prices.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 1/16/2008

Gains in Intel Corp’s revenue and profit weren’t enough to satisfy Wall Street, as investors sent the MPU maker’s stock down 14% post closing bell Tuesday when the company released its full-year 2007 and Q4 financials.

The Santa Clara, Calif.-based company announced that full-year 2007 revenue of $38.3 billion, net income of $7 billion, and earnings per share (EPS) of $1.18, were up 8%, 38%, and 37% respectively, when compared to 2006.

Intel further reported that Q4 saw revenue of $10.7 billion, up 10.5% year over year and up 6% from Q3 2007. However, the record revenue was $88 million below mid-point expectation, with Intel contributing the shortfall to lower-than-expected NAND flash revenue due to sinking average selling prices (ASP).

The sales came in on net income of $2.3 billion and EPS of 38 cents. Income was up 51% year over year and 27% sequential, while EPS was up 46% from the 2006 quarter and 27% sequentially. Gross margin for the quarter was 58.1 percent, up 6.9 points from Q3.

“Heading into the quarter, we believe investors were focused on Intel’s ability to provide slightly higher margin guidance, driven by AMD’s product delays, and Intel’s solid positioning, possibly enabling the company to provide full-year GM [gross margin] guidance above near the 60% level; and improved mix shift out of desktops into notebooks (which exhibit higher ASPs than desktops) as well as higher margin dual- and quad-core processors,” Tim Luke, an analyst at Lehman Brothers, said in a research note this morning. 

“Yet, as discussed above, while we believe these trends have begun to materialize, it is our opinion that a weaker-than-expected NAND ASP outlook, lower CPU shipments due to seasonality, and mix-shift to lower-end emerging market products, are all weighing on Intel’s gross margins. Thus, despite a strong [2008] product line-up, a troubled competitor in AMD, and an impressive position in both the server and high-end desktop markets, the company’s GM guide for 56% in Q1 (vs. Street estimate of 55.7%) and 57% in 2008 (slightly ahead of Street estimates of 56.6%) may weigh on the shares over the near-term,” he continued.

While Intel stated that revenue for computing-related products was as expected in Q4, the company’s Q1 guidance hinted at a weaker than normal seasonality start to the year. Cautiously, the chipmaker projected revenue between $9.4 billion and $10 billion, suggesting that Wall Street estimates of $10 billion may be high and adding fuel to concerns about a sluggish PC market and the possible recession’s impact on the tech industry.

“We remain optimistic about 2008," CEO Paul Otellini said on Intel’s conference call Tuesday afternoon. Otellini noted that near-term economy concerns tend to be focused on the United States market. The executive further stressed Intel’s strength overseas. Indeed, Q4 numbers showed the Europe, Asia-Pacific, and Japan regions made up 81% of Intel's sales, up from 79 percent in Q4 2006.

Looking to full-year 2008, Intel guided for gross margin at 57%, R&D at approximately $5.9 billion, and capital spending at $5.2 billion, plus or minus $200 million.

"The forward guidance is a disappointment from the standpoint of lower than expected gross margin leverage for the full year and Q1 revenue levels," Doug Freedman, an analyst at American Technology Research, said in a research note. "In hindsight, we wish we had turned more cautious on the stock last year at the $27 level as cycles are increasingly shorter. Intel remains a good house in a bad neighborhood, and we view the correction in shares as a good buying opportunity for long-term investors." 

After a small market opening recovery, Intel’s stock was at $20 at 10:45am eastern, down nearly 12% from Tuesday’s close of $22.69. The stock's low point for the day as of 2:35pm eastern was $19.70, less than $1 above Intel's 52-week low of $18.75.*

In related news, semiconductor manufacturing equipment company ASML also saw its stock tumble, dropping 7% in trading this morning, despite estimates for 2008 growth.

*Editor's note: Information on Intel stock prices has been updated since this article's first publication at 11:15am eastern.