Intel On Deck; Swinging to a Loss? Or for the Fences?

Intel's headquarters in Santa Clara, California.
Paul Sakuma
Intel's headquarters in Santa Clara, California.

This was going to be a dicey quarter no matter how you slice it for Intel, with analysts anticipating a paltry 2 cents a share in earnings and the very real possibility that the company could report its first loss in something like 87 quarters. Yes, the potential for Intel's first quarterly loss since 1986. Of course, that dire forecast followed Intel's 90 percent collapse in fourth quarter earnings on a 23 percent decline in revenue.

The news of the loss followed comments purportedly made by Intel chief Paul Otellini. But after looking into the reports, I found that he wasn't projecting, or even predicting. The comments, I thought, were widely blown out of proportion. Fact was, with only a 2-cent profit expectation, the possibility existed that a loss could be reported, especially in the current climate.

Flash forward several weeks later, and while the Street still anticipates 2 pennies in profits, I'm having a hard time finding an analyst who thinks the company's quarterly profit streak will come to an end tonight. Analysts are looking for the 2 cents on revenue of $6.98 billion. But as important as those headline numbers will be, the Street will zero in on the company's margins which always seem to be the metric that matters. Last year, the company's gross margin 55.5 percent was a nice increase from 2007's 51.9 percent. But during the company's last quarterly report, executives warned that the number would dip into the low 40-percent range. That's still way ahead of the industry average, but a steep decline for Intel. Analysts I'm talking to expect somewhere between 43 and 44 percent.

But the reason for Intel's rally as of late stems from what analysts suspect might be a bottom for this company.

Intel has been engaged in some serious cost-cutting lately, shuttering plants, laying off thousands, freezing pay, slashing travel expenses. The company has saved billions, and if there's one thing this company is exceptional at, it's cutting spending to bolster margins.

Also, a new report detailed here last week from iSuppli shows just how much this company is tightening its grip on the global semiconductor industry, now controlling better than 80 percent of the market and stealing share from rival Advanced Micro Devices. Those market share gains largely came from Intel's successful launch of the Atom microprocessor last year, as well as the advent of so-called "netbooks," or inexpensive, stripped-down laptops that have also been a boon to Microsoft. There's also Intel's successful partnership with Apple, which continues to yield significant dividends with Apple still selling 2-million Macs a quarter.

A smattering of opinion: Pacific Crest Securities thinks Intel will beat tonight, and will likely increase gross margin expectations to the mid-40-percent range for its second fiscal quarter, but the firm still has concerns for the back half of 2009; Charter Equity expects a flat quarter with no earnings on $6.66 billion and 42.1 percent in gross margins; and Broadpoint AmTech is looking for an EPS and revenue beat, with a $17 target on its shares.

Guidance will be key for Intel, especially since the company no longer offers its traditional mid-quarter update. Analysts are anticipating a slight increase to $7.3 billion in revenue. Charter's Edward Snyder says revenue guidance above $7.1 billion, EPS guidance above 8 cents and margins above 46 percent would be bullish; revenue under $6.9 billion, EPS under 6 cents and margins under 45 percent would be bearish.

But with projections of an economic turnaround by year's end, and so much attention lavished on tech leaders, there's likely no company in better position to take advantage of a turnaround than Intel. It owns the market its in, it's got a big cash position, continues to sweat the bottom line. If good things come to those who wait, analysts I'm talking to say those lining up behind Intel might be rewarded handsomely.

The question, as always, is how soon.


Questions? Comments?