Semiconductors . . . Lehman Brothers analyst Dan Niles said he expects Intel to raise the lower end of its first quarter revenue target range to $6.7 billion to from $6.5 billion. The top end is expected to remain unchanged at $7 billion. Niles cited strength in its international business, better average selling prices, market share gains and a smaller than expected gross margin decline for the better outlook. Niles also lifted his earnings estimate for the current quarter to 13 cents a share from 12 cents, his full-year forecast to 63 cents from 60 cents and his 2004 projection to 82 cents from 80 cents.
Merrill Lynch had a chance to visit with the management of Dell yesterday and came away with a few observations that are relevant to Intel. Nothing that we heard vis a vis Intel, or the semiconductor business in general, came as a surprise to us, although Dell's comments did confirm several trends that we've been highlighting recently. First, Dell does seem to be seeing slightly firmer pricing from Intel, no doubt as a result of the still-declining competitive pressure from AMD. That fits with our own observation last week that Intel seems to be concentrating on sweetening its P4 mix, while leaving the lower-priced Celeron brand relatively untouched in terms of pricing and speed grades. The implication is positive for Intel - the company is seeing an overall improvement in its desktop product mix, which is positive for gross margin. Dell was also a little more positive on Itanium than we had expected given the tone of previous comments. Itanium is not significant financially for Intel and will not be for a long time, but note that Dell's comments regarding its support of the architecture were unequivocal. Centrino, Intel's attempt to bundle several pieces of silicon into a new mobile platform brand, drew the reaction from Dell that we had expected, and indeed the reaction that we think the PC industry is having in general. Dell indicated that it's perfectly willing to go with Centrino, but strongly emphasized that the price needs to be right. A lot of PC OEMs are informing Intel that premium pricing for Centrino is not going to be tolerated. Finally, Dell's management seems unconcerned with the possibility of supply problems in the DRAM market later this year, even given Dell's likely requirements for leading-edge DDR-400 memory. Of course, don’t expect Dell to admit a problem even if there was one, but we do find it interesting that there appears to be no special plan for assuring access to high-speed main memory this year. Intel's own comments at IDF two weeks ago were more guarded, and Intel is looking closely at major DRAM makers' manufacturing plans for DDR-400 this year. Earnings estimates and neutral opinion for Intel stand, and we heard nothing from Dell that inclines us to change our mind. The positive impact on margin resulting from better process mix is worth noting, but probably not enough to move our numbers.
Boxmakers . . . Analysts visited Dell management the day after stopping by HP. The contrast is striking as Dell shows no signs of slowing while HP mis-executed its quarter. Don't think the Dell model is running out of steam-annual revenue gains of 15% appear achievable to us. Dell ranked its growth opportunities as (1) servers, (2) storage, and PCs. Dell is looking to disrupt the printer model but admits it's still working out the details. Consumer PC margins are rising, and the return on capital is extraordinary. Management believes the direct approach will take hold overseas. Analysts are increasingly confident in our $1.00 estimate for the year. Dell PC unit assumption could prove conservative. The survey indicates that customers are accepting of Dell as an enterprise player. The stock is modestly undervalued and maintain our Neutral rating. Long term, we think Dell has the best strategy in the computer industry.
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