Intel investors disappointed
Shares of chipmaker plummet after revenue, earnings miss
By Amanda Cantrell, CNN/Money staff writer

NEW YORK ( - While Intel's quarterly profit rose 16 percent and the company reported record sales and operating income, the chip maker blamed lower than expected desktop computer shipments and prices for an earnings and revenue shortfall.

Those results, plus lower than expected guidance, caused shares of Santa Clara, Calif.-based Intel to plunge more than six percent in after-hours trading. Intel posted fourth-quarter sales of $10.2 billion and net income of $2.45 billion, or $0.40 cents per share. Wall Street analysts had been expecting revenues of $10.56 billion and earnings per share of $0.43. Operating income came in at $3.3 billion. Revenue also fell short of the company's own forecast of $10.4 to $10.6 billion, issued in the middle of the fourth quarter.

"2005 was a great year punctuated by a difficult December," said Intel CFO Andy Bryant on a conference call with analysts. "Unexpected issues (around) chipset supply and lower than expected demand in the desktop segment resulted in less growth than we usually see in the final weeks of the year."

Bryant forecast revenue growth of 6 to 9 percent for 2006, to be led by the mobile computing unit and emerging markets. That means earnings would fall in a range of $41.1 billion to $42.3 billion. Wall street was disappointed by the guidance because the mid point in the range was below analyst's consensus estimates.

The company also issued disappointing guidance for the fiscal first quarter. It expects revenues of between $9.1 billion and $9.7 billion and gross margin of 59 percent, plus or minus a couple of points. That's below the first-quarter guidance of $10 billion that analysts were expecting.

Bryant also announced capital spending projections for 2006 of $6.9 billion and research and development spending of $6.5 billion, which includes $500 million for stock-based compensation. That is the most the company has ever spent on R&D, Bryant added.

Intel CEO Paul Otelinni also announced the company will no longer issue mid-quarter updates but will begin adding annual revenue and spending projections to its outlook issued in January.

"We believe this current process is not effective... and heightens attention to short term results," he said on the call. "Our goal is to have more meaningful discussions about the long term strategy and trends for our business."

Looking at the long term

Intel management painted the company's disappointing results as a temporary setback.

"We are staritng out in a bit more of a hole for 2006 than we had originally thought," said Otellini on the conference call.

The company said that it is close to sorting out inventory issues surrounding the constrained supply of chipsets, which are pairs of chips that surround every microprocessor. Intel has had difficulty in recent quarters keeping up with demand for the chipsets, exacerbated by late delivery from some third-party suppliers.

At the same time, some customers over-ordered in anticipation of high demand for the chipsets, leading to a build up in inventory. That, coupled with aggressive pricing, added to the disappointment caused by weak destkop sales. Stifel, Nicholus analyst Cody Acree said those combined factors most likely led Intel to adjust longer-term numbers as well.

"They seem to be pulling in numbers across the board," he said. "They probably, because of this disappointment, have to be a little more cautious."

Acree said that while he is disappointed in the near term, it does not derail his position on Intel, which is that the company appears poised to benefit in 2006 from new products.

Jim Fisher, vice president and portfolio manager with Souderton, Penn.-based Univest Wealth Management & Trust, which manages about $1 billion in assets that include shares of Intel, agreed.

"I'm disappointed, of course; their revenue came in below their own estimates so that's not a good sign, and on top of these numbers they are losing market share to (rival chipmaker) AMD (Research)," he said. "But we're longer term investors; I'm very positive about the future for Intel. It wasn't a good release, but we view it as a buying opportunity as the stock pulls back."

Apjit Walia, an analyst with RBC Capital Markets, said he wasn't surprised at the numbers, as his team had forecast a near-term correction for the semi-conductor sector.

"We feared weakness in desktops and overall PC demand; that was one of the major reasons for this weakness," said Walia of Intel's numbers. "People are saying [Intel's earnings are the result of] AMD gaining market share on Intel," but Walia thinks that weakness in PC demand is a bigger factor.

Intel CFO Bryant acknowledged Intel lost about a point of market share to AMD during the quarter.

Fourth-quarter gross margin was 61.8 percent, slightly below the company's updated expectation of 63 percent, plus or minus a point. The company blamed that miss on lower than expected revenue, a shift toward non-microprocessor products in its overall product mix, and a re-valuation of some inventory to reflect lower unit costs. Bryant said he expects full-year gross margin of 58 percent, excluding stock-based compensation costs.

Walia said Intel investors will likely express concern over gross margins, saying that most Intel investors believe that when its gross margin peaks, the stock price usually peaks as well.

Positive catalysts

But Walia said he thinks the stock will become attractive again in the next quarter or so due to several catalysts, such as the launch of a new line of dual-core processors and its deal to supply chips to Apple (Research). Last week, Apple unveiled its first computers to contain Intel chips and will overhaul its entire Mac line to contain Intel chips by the end of the year.

Just one week before, Intel unveiled its new "Core" chips, which feature "dual core" processing technology. This means that one chip essentially has two brains and can handle many more tasks simultaneously, and with better power consumption, than single-core processors.

At the same time, the company launched its new "Viiv" platform for home-entertainment PCs. Univest's Fisher said he views these moves as positives, particularly the Apple deal, and thinks the dual-core chips will give the stock juice in 2006.

Intel has made a number of bold moves in 2006, including scrapping its three decades old logo and changing its slogan, "Intel Inside," with a new slogan, "Leap Ahead".


RBC's Walia does not own shares of Intel. Acree does not own shares of Intel, but his firm has banking ties to the company.

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