Intel gross margin becomes NAND’s latest victim

The top MPU maker lowers its Q1 gross margin estimate to 54%, plus or minus a point, "due to lower than expected prices for NAND flash memory chips."

By Suzanne Deffree, Managing Editor, News -- Electronic News, 3/4/2008

Intel Corp has become the latest victim of the NAND flash market’s suffering average selling price (ASP) situation.

The top MPU maker Monday post closing bell announced it had lowered its Q1 gross margin estimate to 54%, plus or minus a point, “due to lower than expected prices for NAND flash memory chips.” The forecast compares to 56%, plus or minus a couple of points, which Intel projected in its January Q4 2007 earnings release.

The Santa Clara, Calif-based chip maker has felt NAND’s cold shoulder before. Indeed, in Q4 the company blamed an $88 million mid-point expectation revenue shortfall on lower-than-expected NAND flash revenue from shrinking ASPs.

NAND’s ASP condition has been brought about by oversupply in the electronics supply chain, which itself was brought about by the flash market’s top companies ramping volume and engaging in price wars to blitz their competitors.

Intel is far from alone in seeing the negative impact NAND ASPs are having on its business and the semiconductor industry at large. The Semiconductor Industry Association (SIA) Monday reported that NAND and DRAM weighed down worldwide semiconductor sales for January, forcing the month’s sales of $21.5 billion to be near flat year-over-year. Excluding memory products, semiconductor sales were up 8.1% year-on-year, the SIA data showed. Gartner also Monday nearly halved its 2008 semiconductor market growth estimate to 3.4%, pointing to NAND as a key factor. NAND, according to the market research company, will see market growth of less than 15% in 2008, compared with close to 30% the previous quarter. And iSuppli last week slashed its forecast for 2008 NAND memory market revenue growth from 27% to the single-digit percentage range on reports that Apple Inc has issued order reductions for the flash memory.

Intel’s lowered gross margin announcement came just two days before the company is set to address the analyst community this week. Market watchers now expect more information on Intel’s memory plans for cost and competiveness at the event, to be held Wednesday and Thursday in Santa Clara.

“Clearly, investors may question strategy of INTC [Intel] opting to ramp NAND memory into pricing pressures just as it sells its NOR memory unit,” Tim Luke, an analysts within Lehman Brothers’ semiconductor equity research group, wrote in a research note this morning.

Luke noted that Numonyx, the NOR joint venture with STMicroelectronics, is still on track for Q1, and further pointed to Intel’s flash agreement with Micron, IM Flash Technologies, which last month claimed NAND five times faster than the conventional flash memory.

“Intel management may underline the strategic importance they attach to their investments in NAND flash with Micron, as Intel seeks to help drive the development of the SSD market. Going forward, we believe Intel may view SSDs as an important platform element and management may suggest that yielding all the market to strategic longer-term rivals such as Samsung may not be prudent. We would expect Intel to highlight plans to sell SSDs for both notebook and server markets in 2008,” he said.

Lehman estimates that the flash memory segment contributed around $2 billion in revenues in 2006 and 2007. Of that, the company estimates NAND contributed $150 million to $200 million per quarter and NOR contributed $300 million to $350 million per quarter.

“We note that although flash is only 5% of Intel’s revenues, it has impacted revenue upside and margins significantly. In Q4 2007, Intel noted that the revenue miss of approximately $100 million was primarily due to flash revenues, with NAND flash ASPs declining almost 50%. Flash memory has been a drag on Intel’s operating margins resulting in margin degradation by 3 to 4%,” Luke concluded.

Intel did not change its other expectations for Q1. Intel’s stock was trading at $19.75 at 10:55am eastern, down from its previous close of $20.01, on the gross margin estimate change.