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Intel Profit Rises, But Shares Fall on Gross Margin Concerns

Reuters
Tuesday, 17 Jul 2007 | 10:01 PM ET
Intel's headquarters in Santa Clara, California.
Paul Sakuma
Intel's headquarters in Santa Clara, California.

Intel, the largest maker of computer processors, posted a rise in second-quarter earnings on Tuesday, but its missed its gross margin goal and its shares fell nearly 5% in after-market trading.

For its second quarter, Intel posted net earnings of $1.3 billion, or 22 cents per share, compared with $885 million, or 15 cents per share, a year earlier. Excluding a special gain of 3 cents per share related to a tax item, Intel's profit was 19 cents per share, in line with the average estimate.

Revenue was $8.7 billion, up 8% from a year earlier, and higher than the $8.5 billion forecast by Wall Street.

The numbers underscored the challenges Intel still faces despite having clawed back market share in a continuing, bruising price war with rival AMD and despite restarting profit growth after five quarters of slumping performance.

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Gross margin in the second quarter was 46.9%, short of the company's forecast of 48%. Intel said it expected the margin to be 52%, plus or minus "a few points," in the third quarter.

Profit margins were hit as lower prices for personal computer processors and weak demand for memory chips for mobile telephones offset higher revenue and unit volumes.

Expectations that the technology bellwether is on the rebound have sent Intel shares up 30% so far this year, and almost 9% in the last month alone.

"It's definitely a mixed bag because the stock has been so strong. Given the strength, it was going to be very difficult to please Wall Street with performance and outlook," Stifel Nicolaus analyst Cody Acree said.

"Of course margins will expand, it's just a question of what will be the trajectory. Right now they are keeping expectations pretty low," Acree said.

"We did see more pricing pressure than we expected, and that depressed margin by one point," Intel Chief Financial Officer Andy Bryant said, adding that weakness in flash memory also contributed to the low margin.

Intel, which lost market share to smaller rival Advanced Micro Devices, has fought back with a slate of new chips and price cuts on older ones. AMD countered by slashing prices, and is set to roll out a new processor in August.

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"They (Intel) had lower average selling prices, which I'd say reflects their move to sell older product or could be due to a more competitive AMD," said Jane Snorek, an analyst with First American Funds.

Margins also could have been hit by a shift away from more profitable notebook computers toward desktops, as well as a faster roll-out of advanced production techniques, which carry high start-up costs.

"We know they've been accelerating that and it does affect gross margin. And the fact that they are predicting such a large jump in gross margins, that would come with higher volumes following the ramp," said JoAnne Feeney, managing director with FTN Midwest Securities.

Intel also said it expected revenue for its current quarter to be $9 billion to $9.6 billion, compared with analysts' forecasts of $9.1 billion to $9.9 billion, as compiled by Reuters Estimates.

Intel shares , which rose 1.5% in regular trading to close at $26.33 on Nasdaq, fell 4.9% to $25.05 in extended trading after the results were announced. Shares in Intel have risen 30% so far this year, compared to a fall of 22% in those of AMD .

American Technology Research analyst Doug Freedman said Intel's profitability contrasts with what is expected to be another loss at AMD when it reports this Thursday. "It's pretty clear who's won the battle," Freedman said.

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