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Intel: In stride or in slide?
World's largest chip maker reports in-line 2Q results, lifts 3Q sales guidance but stock falls.
July 19, 2005: 7:16 PM EDT
By Paul R. La Monica, CNN/Money senior writer
Shares of Intel have surged during the past year. Is it time for a pullback?
Shares of Intel have surged during the past year. Is it time for a pullback?

NEW YORK (CNN/Money) - A wise man once sang that you can't always get what you want.

Optimistic Intel investors, which were hoping for a blow-out second quarter following strong results from semiconductor rival AMD and hardware firms Apple and IBM, found that out on Tuesday when the company reported its second-quarter numbers.

Sure, the world's top manufacturer of chips used in personal computers and servers delivered earnings per share growth of 22 percent from a year ago. At 33 cents a share, profits were a penny per share better than expected. Sales came in at $9.2 billion, a quarterly record that was in line with consensus estimates.

Intel even boosted its sales guidance for the crucial third-quarter, which is typically strong for the company due to healthy sales of personal computers. Intel said that revenues should be between $9.6 billion and $10.2 billion. The $9.9 billion mid-point of this range is ahead of Wall Street's prediction of $9.76 billion in sales.

But gross margins, an important measure of profitability that measures earnings after subtracting cost of sales, came in at 56.4 percent just slightly below the 57 percent that Intel had forecast when it raised its second-quarter sales targets last month.

During a conference call with analysts, Intel chief financial officer Andy Bryant said margins were slightly lower than anticipated because of increased shipments of lower-priced chips used in Microsoft's Xbox gaming console during the quarter and also because of little bit of pressure leading to lower average selling prices for computing processors.

That latter observation may have spooked some investors considering that AMD has ramped up its efforts against Intel in the microprocessor market for PCs and servers lately. AMD also recently filed an antitrust complaint against Intel, alleging unfair competitive practices. Intel has denied that it has done anything wrong and did so again on Tuesday.

Amrit Tewary, an equity analyst with Standard & Poor's, also said that some may have been hoping for second-quarter sales to be even higher than they were because of how robust AMD's (Research) revenues were. "Investors might be disappointed because they might have been expecting better results on the top line," he said.

As a result, shares of Intel (Research) fell nearly 4.5 percent in after-hours trading according to INET.

In a bit of an ironic twist, Intel said that one possible cause for concern was that it was not able to boost its inventory to levels that it felt was appropriate to meet demand in the second half. Last year, Intel had the exact opposite problem. Inventories rose at a time when corporations were pulling back a bit on purchases of PCs and servers. The resulting excess of chips caused a hit to gross margins.

But in the second quarter, inventories slipped about 2.5 percent form the first quarter, to $2.74 billion. As such, Bryant expressed concern about product shortages to suppliers. "Inventory is lower than where it should be because it makes it difficult to respond to consumer needs," he said.

However, some analysts thought that overall, Intel reported a solid quarter and showed little signs that it was losing momentum. Intel bulls argued that the dip in stock may not necessarily be a reflection of negative sentiment since Intel has had such a solid run as of late. So it was only natural for investors to take profits.

Shares of Intel rose 1.7 percent in regular trading on the Nasdaq Tuesday to close at $28.71, only slightly below their 52-week high. The stock is up nearly 25 percent year-to-date, making it one of the top performers in the Dow Jones Industrial Average.

"Does the drop in Intel's stock worry me? No. It's an indication that people made money in Intel and are trying to lock in their gains," said Eric Ross, an analyst with ThinkEquity Partners.

To that end, analysts said it was hard to find much that looked worrisome in Intel's quarterly report. Paul Otellini, Intel's chief executive officer, said in a written statement that microprocessor sales were fueled by strong demand for chips used in notebook computers, a rapidly growing area of the PC market.

During the conference call with analysts, Otellini added that the company experienced tremendous growth in emerging markets such as China and Latin America. And Bryant said that there were no signs of demand falling off a cliff for computers or servers anytime soon.

In addition, the company said that it expected gross margins to increase on a sequential basis in the third quarter to about 60 percent. Apjit Walia, an analyst with RBC Capital Markets, said it's more important to focus on this promising outlook than the minor gross margins disappointment for the second quarter.

"Going forward, sales guidance could still be conservative for the third quarter and on gross margins we now have a more positive number. I'd be more worried if they beat in the second quarter and guided down for the third quarter," Walia said. "But the stock is just priced to perfection right now."

Tewary added that margins should continue to improve throughout the second-half of the year since the company will probably incur lower amounts of start-up costs for new manufacturing technology put into place in its factories in recent months.

But that was not enough to impress investors. It probably didn't help that other chip companies reported mixed results on Tuesday either.

Freescale Semiconductor (Research), the spin-off of telecom equipment firm Motorola (Research), and chip equipment firm Novellus Systems (Research) reported second quarter results that were better than expected But Freescale said that third-quarter sales could fall from second-quarter levels. And Novellus warned that revenues and orders would probably decline on a sequential basis.

For a look at Intel and other chip stocks, click here.

For more of CNN's coverage of earnings season, click here.

Analysts quoted in this story do not own shares of Intel or other companies mentioned and their firms have no investment banking relationships with the companies.  Top of page


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