Intel Q1 results buoy tech stocks

The chip giant recorded Q1 revenue of $9.7 billion that included record server microprocessor revenue, overall revenue up 9% year-over-year, gross margin up 4 points and operating income up 23% year-over-year. As a result, tech stocks across the market saw a boost.

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 4/16/2008

Demonstrating what president and CEO Paul Otellini said is a strengthening core business and solid global market environment, Santa Clara, Calif.-based chip leader Intel Corp announced Tuesday afternoon that its Q1 revenue hit a record high of $9.7 billion, with operating income of $2.1 billion, net income of $1.4 billion and earnings per share (EPS) of 25 cents. As a result, Nasdaq tech stocks saw a boost.

During a conference call with financial analysts to review the results, Otellini said, “The first quarter marked a very good start to 2008, driven by strong industry demand for our leading edge processors and chipsets. Our revenues grew 9% from the first quarter of last year while operating income improved by 23%. Our improved financial performance and strong balance sheet allowed us to pay a record dividend in the quarter, announce a dividend increase, and buy back $2.5 billion worth of stock -- decisions we made to increase returns for our shareholders.”

The company noted a particularly strong demand for 45 nm products and said it is continuing to ramp that process rapidly, both in terms of volumes as well as in the breadth of product offerings – the benefits of this new process giving what the company said is a unique combination of outstanding performance with low power consumption.

In terms of the business, Otellini said the company saw all regions grow over last year with North America standing out, driven by strong server demand.

In looking at inventories, the overall supply/demand equation for processors and chipsets appears to be healthy and in balance, while the server business had a particularly strong quarter, turning in an all-time record in revenues, he continued, which was driven by three factors.

“First, we saw notable strength in the high-end, multi-processor segment, particularly in North America. This is due to the ramp of our Caneland MP platform. Second, in the higher volume dual processor category, we saw quad-core shipments continue to grow and now represent a majority of our Xeon DP shipments. And lastly, we saw our total Xeon processor shipments cross over to 45-nanometer based products during the quarter, further extending our leadership in this high volume segment,” Otellini noted.

PC Market Transition

In terms of the PC market’s transition to mobility, Intel’s results in Q1 showed continued acceleration of this trend as unit shipments were up sharply versus last year and with the introduction of the low cost Netbook category, Otellini said Intel believes that the shipment crossover of desktop PCs to mobile PCs will now happen this year and not next year, as originally anticipated.

Intel’s desktop PC business also had a solid quarter, with good year-over-year growth. “Quad-core remains a competitive strength in this segment and we are seeing two important trends in the desktop that offer good growth opportunities. First is the growth of the all-in-one category, where our power optimized 45-nanometer processors are a natural solution. The second is the growth of vPro technology in corporate environments driven by our unique manageability features,” he explained.

“Last month I committed to our investors that I would not let our Flash memory business become a long-term drag on the financials of the company. First, in our NOR business, we closed the Numonyx transaction. This is an important step for us and one that is good for Intel and its shareholders,” he said.

Next, in its NAND business, Otellini said Intel is making some decisions on capacity to mitigate the current over-supply situation, pointing to the recent decision with Micron to push out the timing of their joint Singapore factory, and will continue to look at other options.

“As I look at the results of the first quarter and out into the rest of 2008, I see three important trends unfolding. First, the competitive position of our core business is superb. The benefits of our 45-nanometer process technology are tangible. We expect our differentiation to grow as we aggressively ramp this new technology. The second trend is our cost structure. Our product costs declined quarter by quarter over 2008, which supports gross margin expansion throughout the rest of the year. And the final trend is momentum in our new growth initiatives where we are seeing real progress, both in terms of product development and customer engagement. Our strategy of bringing the Intel architecture to new market segments combined with the world’s most advanced process technology will prove extremely valuable to our investors,” Otellini added.

Looking ahead to Q2, Intel CFO Stacy J. Smith said the company is planning for revenue, which is typically lower in Q2, to be between $9 and $9.6 billion, with the midpoint of this range marking a decrease of 4% from Q1.

As a result of the Numonyx transaction, Intel expects NOR Flash revenue to decline by approximately $200 million from Q1. Excluding that revenue decline, revenue would be down approximately 1.5%, at the high end of the seasonal range.

Q2 NOR Flash revenue is expected to be approximately $100 million through a supply agreement with Numonyx, declining to approximately $50 million a quarter by year-end. On a year-to-year basis, the outlook anticipates revenue growth of 7%. Excluding the decline in NOR revenue, the growth would be approximately 11% year over year, Smith noted.

“Our expectation for gross margin percentage in the second quarter is 56%, plus or minus a couple of points. Quarter to quarter, the NOR Flash divestiture and lower chipset inventory write-offs contribute about one point each. The gross margin impact of the CPU business is slightly positive, better than the decline typically seen in the second quarter,” Smith continued.

“Spending for R&D and MG&A in the second quarter should be between $2.8 billion and $2.9 billion. Additionally, in a separate category for restructuring and asset impairment charges, we expect expenses of approximately $250 million. While we have no full year forecast for this category, we do expect charges as a result of our restructuring program announced in 2006 to decline through the remainder of the year,” he continued, noting that strength in the microprocessor business is offsetting the weakness in the NAND pricing environment.

Spending for R&D and MG&A for the full year is forecasted to be approximately $11.5 billion, up $100 million from the prior forecast, primarily due to foreign exchange impacts of the weakened US dollar. R&D spending is forecasted to be approximately $6 billion, up $100 million from the prior forecast and MG&A spending is forecasted to be approximately $5.5 billion, flat to the prior forecast.

“As we look into the second half of the year, we are planning for growth and improving financial results, driven by our product leadership, the ramp of the Atom processor, the build-out of three 45-nanometer high volume factories, declining unit costs, and the impact of our restructuring program,” Smith concluded.