Live: Notes from the Intel earnings call

July 17, 2007, 2:25 PM UTC

Intel (INTC)

-Results: $.19 per share profit ($.22 including a one-time tax benefit) on $8.7 billion revenue

-Avg. estimate, Thomson Financial: $.19 per share profit on $8.54 billion revenue

-Bottom line: Weak profit margins and a tepid forecast slam the stock after hours

I’ll be listening to the Intel call live at 5:30 PST, and updating this post; refresh the page for updates.

A price war with Advanced Micro Devices (AMD) took its toll on Intel’s profit margin during the second quarter. Combined with a third-quarter revenue forecast that fell within the low range of what analysts expected, investors found plenty of reasons to bid down the company’s stock in after-hours trading. But to get a true sense of how Intel’s doing, read closely for management’s explanation during the conference call with analysts. Among the topics likely to surface: Apple (AAPL), which uses Intel chips across its line of Mac computers, releases the latest version of its OS X operating system in October, which should spur sales; also, this holiday season will be the first for PCs running Microsoft’s (MSFT) Windows Vista OS.

The call has begun.

Pricing was competitive in low-end PCs, but Intel was stronger in performance laptops.

Intel has shipped more than 1 million quad-core servers.

Servers: Santa Rosa, units up more than 33 pct year over year

Mobile: Made up 40 pct of client shipments in Q2

Desktop unit demand was higher than seasonal

Chipsets: sequential growth across desktop, mobile and server

Intel has confidence in a solid second-half demand environment.

Flash results were mixed. NAND was better than NOR.

Inventories are down, which is good.

Andy:

Intel returned to y-y growth with higher revenues and higher operating profit. Laptop chips were up by double-digit percentages.

Intel expects an improving second half with the 45-nanometer process coming online.

Revenue from the digital enterprise group was down 2 percent.

The mobility group had lower revenue from microprocessors, higher revenue from chipsets.

Lower prices for just about everything hurt profit margins. Revenue was higher than the midpoint of the range, but gross margin percentage was lower.

Intel spend about the same amount on R&D as the quarter before.

Andy is emphasizing Intel’s success in cutting expenses. Revenue as a percent of spending is down 8 percentage points. Number of employees is down.

Total inventories were down more than 5 percent from the first quarter.

OUTLOOK FOR Q3:

Revenue will be between $9 billion and $9.6 billion. The midpoint of that forecast is up 7 pct, for growth year-over-year of 6 pct

Margins will be 52 pct plus or minus a couple of points

Spending on R&D will be $2.7 billion, slightly higher than Q2

$150 million in restructuring charges

Intel targets 51 percent gross margin target for the year, still; gross margin for the second half will be 52-54 pct

Intel expects to spend $5.7 billion on R&D for the whole year

Five-point improvement in gross margins for microprocessors: Lack of startup costs for the 45 nanometer chips, better volumes, lower costs.

Pricing will continue to be fierce in the third quarter. (This is not what the Street wants to hear.) Andy’s saying Intel’s best defense is better products. Pricing is particularly competitive at the low end of desktops and laptops.

Demand was strong in Q2 across all geographies across all computing segments. Notebooks will be particularly strong. Quad-core Xeon server products are also looking good. We would expect to see expansion from laptops and servers globally.

The low-end of the consumer laptop market is very competitive too — it’s not just the desktops where Intel is feeling the crunch.

Why is pricing so competitive? We know that AMD will continue to sell aggressively. Intel intends to continue to focus on the high end, where there’s less competitive pressure.

Inventory trends: Inventory is down 8 days (which is good). Intel shipped more product, throughput was better. Also, Intel had higher yields, which meant less inventory to satisfy the same demand. I would expect inventory to be flat, in a quarter with increasing revenue.

Why did desktops do a lot better than expected? The principal upside was in the channel — channel sales were up in a seasonally down quarter, and channel sales are principally desktops in emerging markets. (From what Intel’s saying, it seems that low-priced desktop chips sold into the channel are a big part of what hurt margins.)

Will pricing be just as tough in Q3 as in Q2? We’re trying to move as fast as possible toward a product mix that plays to Intel’s higher-end chip advantages.

How will Intel address the competitive low end of the market? Will the company give up market share, or fight for it? In general, Intel doesn’t expect to walk away from any segment of the market. But the company will decide on a case-by-case basis. In 2008, Intel will have lower-cost products to address that market segment — but until then, Intel will have to battle for low-end share and take a hit on margins.

“Low-end retail-type laptops” hurt Intel results as well, the company just mentioned again. This makes it sound like the holiday season could actually be tough for Intel.

Inventory will grow into the fourth quarter.

The overall trend in server ASPs is that they will erode with the shift from MP to DP. DP server chips sell for less. Quad-core DPs are accelerating the trend.

Intel just characterized, on the sly, its second-half forecast as “optimistic.” That’s because Intel feels good about laptops and servers.

The gross margin percentage for microprocessors was as expected, it was flash that brought Intel down a point.

The overwhelming issue for our customers is how they compete with each other in the marketplace. In pro notebooks and servers, I look at the relative product lines and see us in those segments much stronger. So I think it’s in our customers’ best interest to use our products. You’ll see us extend our lead in power efficiency over the second half of this year with 45 nanometer.

(Intel seems to be saying that whoever wins market share in pro notebooks and servers will win the margin battle.)

Question for Paul: The Pentium Duo has a very good price point, yet the competition seems to have higher unit growth. Why would the OEMs push AMD’s chip versus Intel’s? Answer: Yes, the duo is competitively priced. It’s doing quite well on a worldwide basis. In Europe, Japan and China, PC makers are using more Intel chips in the retail mix.

(Intel seems to be admitting that yes, even though it has a laptop chip that’s a really good product, PC makers aren’t giving Intel products a greater share of space on the shelf. This means that AMD’s gains in product line share might be tough to erase.)

What you’ll see us do in laptops: Move all advertising toward establishing the benefits of the laptop product line — power consumption, etc. In print, on TV, on the Web — across the board, Intel is going to push its laptop chips.

Intel says it has cleaned up its inventory heading into the third quarter, but says the rumor out there is that the inventory in other parts of the channel is a bit long right now. This is a not-so-subtle hit at AMD, which will face questions about its inventory levels when it reports results on Thursday.

The call has ended.