Intel's Profit Surge Leaves Wall St. Cold

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Intel yesterday disclosed strong profits from the second quarter of 2004, still disappointing financial analysts on Wall Street who expected slightly better numbers. But the news raised less concern among VARs, who foresee continued strong sales based on Intel's recent raft of product introductions and the expectation that customers are poised for a massive replacement cycle of aging systems.

On the revenue side, the semiconductor giant took in $8.05 billion in the second quarter, up 18 percent from the comparable period in 2003 -- the measurement financial analysts focus on -- and fairly close to the $8.09 billion it took in during the first three months of 2004.

Intel's best news emerged from its profit picture. Second-quarter net income hit $1.8 billion, up 96 percent year-to-year.

Despite that bump, Intel's stock took a drubbing based on the company's projections that its gross margins for 2004 overall would be around 60 percent, as compared with 62 percent last year. (Gross margins are a standard indicator of projected corporate profitability.) As of 10:51 a.m. today, Intel's stock stood at 23.9, down 2.24 points from its Monday close of 26.14, for a drop of 2.24 percent.

"Intel posted Q2 revenue and earnings that were generally in line with our expectations," wrote Merrill Lynch semiconductor analyst Joseph Osha in a research report released today. "The microprocessor business was weaker than seasonal by our calculations, but a dramatic 41 percent increase [compared to the first month of 2004] in flash memory revenue helped Intel come in only slightly below its target."

According to Intel CEO Craig Barrett, the sag in microprocessor sales "followed seasonal trends." Traditionally, second-quarter chip sales aren't as robust as the first and fourth quarters, which are fueled by year-end and back-to-school purchasing, respectively.

The rise in flash revenue, which fueled Intel's results this quarter, stem from continued strong demand for flash in embedded platforms, such as cell phones, digital cameras, PDAs, and mp3 players.

Looking ahead, Intel appears poised to capitalize on recent product introductions, such as its Nancona workstation and server processor, Grantsdale desktop chip set and the introduction of processors built using 90-nm semiconductor fabrication technology.

"From a product perspective, they have lots of new stuff coming out," says Robert Schaffer, president of Source Micro, a Randolph, N.J.-based systems builder. "They're keeping everybody more than satisfied. You have Nancona, PCI Express, and a new socket. They're definitely doing what they can to keep the hardware market moving."

Indeed, some product categories appear to be proliferating rapidly. "There's probably even a little confusion because they have so much stuff," Schaffer says. "For example, you can get a 2.8-GHz Pentium 4 in at least five different configurations of different bus speeds, pin-outs and cache configurations."

According to Schaffer, Intel is working to help VARs resolve any confusion. "They're planning a new partnering scheme to solve that," he says.

For their part, Intel officials believe there will be continued strength in flash and a microprocessor rebound to drive third quarter revenue of between $8.6 billion and $9.2 billion.

"Looking to the second half, we will use our investments in leading-edge capacity to drive growth in our core microprocessor business and expand our presence in chipsets, flash,and other communication products," said Barrett in a statement.

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