Intel Needs To Adjust With Pricing Trend

Many analysts believe that Intel is not only weathering the impact of a recession, but also battling the demand for “the same functionality for less price” phenomenon that is washing over the shores of the technology industry in every direction. I think there is a lot of truth to this, and it is a trend that will for sure impact Intel in a big way and will lead to significant restructuring and fat trimming. Let’s take a look.

On January 15, Intel Corporation (Nasdaq: INTC), the world’s largest chip maker, reported a weak fourth quarter that met Street estimates. For the first time since 2000, Intel reported a sequential decline in the fourth quarter as a result of reduced demand for PCs and servers as well as inventory contraction across the supply chain. The one bright spot in the results was the 50% increase in sales of Intel’s new Atom processor.

Annual revenue in 2008 was $37.6 billion, down 2% while net income was $5.3 billion ($0.22 per share), a decline of 24%. Over the year, Intel bought back shares worth $7.1 billion, paid dividends of $3.1 billion and generated about $11 billion in cash from operations. Gross margin was 55.5%, up from 52% last year. As part of its restructuring efforts, Intel saved about $800 million in the year and more than $3 billion since 2006.

Q4 revenue was $8.2 billion, down 19% q-o-q and 23% y-o-y. Net income was $234 million or $0.04 per share, down 90% y-o-y and 88% q-o-q. The results also included a $1 billion write down from the reduction in the value of its Clearwire investment. Analysts estimated earnings of $0.04 per share on sales of $8.214 billion.

Q4 gross margin was 53%, down from 58.9% last quarter mainly due to higher underutilization charges to the tune of $250 million and inventory write-offs. Cash flow from operations was approximately $2.6 billion, and the company ended the quarter with $11.5 billion in cash investments, about $250 million less than in Q3. It paid dividends of $800 million and did not repurchase any stock. Q3 analysis is available here.

By segment, Digital Enterprise Group revenue in the quarter was $4.5 billion, down 24% y-o-y but up 10.5% q-o-q. Mobility Group revenue decreased about 15% to $3.5 billion. Revenue from Atom-based microprocessor and associated chipsets was $300 million, up 50% q-o-q. The net microprocessor ASP was flat and the net ASP excluding Atom was up slightly. On Sunday, Intel announced up to 48% price cuts on its chips.

For fiscal 2008, Digital Enterprise Group revenue was $16.1 billion, up by less than 1% while Mobility Group revenue was $15.65 billion, up by 6.6%. By region, revenue in all geographies declined sequentially year-over-year.

Though earnings dropped significantly, Intel is optimistic about its strategy. In December, it started shipping its Nehalem dual-processor server offering. It is also on track to introduce its 32-nanometer process technology in the second half of the year.

Intel has not provided any formal guidance but has said that for internal purposes, it is planning for first quarter revenue in the vicinity of $7 billion. As a result of declining demand and underutilized factories, Intel expects gross margin to decline further to the low 40s. It is currently trading around $14 with market cap around $76 billion. The stock hit a 52-week low of $12.51 on November 18.