Intel Outruns a Lame PC Market
By K.C. Swanson
Staff Reporter
06/05/2003 07:16 AM EDT
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When Intel (INTC:Nasdaq - news - commentary - research - analysis) offers its midquarter update Thursday, investors will be trying to understand an odd disconnect: The tech bellwether's sales outlook is outrunning expectations for the broader PC market.
Intel's revenue is now on track to dip only about 1% from the prior quarter, and few analysts expect the company to change that forecast much. Yet the companies that crank out motherboards that incorporate Intel's silicon have seen their business deteriorate over the quarter and are likely to see sequential revenue fall in the high single digits.
How to explain the disparity? While some Intel-watchers are betting the company will be forced to lower the midpoint of its guidance, others think it can outperform the PC market, partly because of the rapid take-off of its pricey Centrino chip, which debuted in March.
On top of that, some analysts and investors think Intel could see a short-lived sales boost related to SARS, since customers seem to have built inventory to avoid potential supply disruptions. (To a lesser extent, SARS may have hurt Intel by reducing demand in the Chinese market.)
"I'm relatively comfortable Intel can maintain guidance," sums up Vincent Colicchio, manager of the All-American Equity Fund, which has about 1% of its holdings in Intel.
On April 16 the chipmaker said sales are likely to fall between $6.4 billion and $7 billion, with CFO Andy Bryant noting that business seemed to be "modestly better," after two and a half discouraging years. Its outlook for a 1% sequential slide in revenue is better than the usual 3% decline for the period.
Even at the low end, Intel's sales outlook is running ahead of last year's second-quarter sales of $6.3 billion. Analysts are looking for $6.6 billion on 13 cents in EPS.
Helping stoke sales, the Centrino chip seems to be ramping up faster than expected, and that should help inflate Intel's average selling prices. The new wireless LAN mobile chip carries a hefty price tag of around $325 per unit, compared to an average price of $152 for chips in general, estimates Lehman's Dan Niles.
"We believe the Centrino momentum is enough to offset perhaps both the seasonal decline and a modest SARS impact to make a flat overall revenue picture in Q2 for Intel," writes Robert Cihra of Fulcrum Global Partners, whose firm doesn't do banking. He thinks Intel could even nudge up gross margin guidance of 50%, on the basis of a higher proportion of sales from laptop processors and cost-cutting.
Still, Cihra predicts Intel will slightly lower the midpoint of its guidance by narrowing its outlook from the range of $6.4 billion to $7 billion to a range of $6.5 billion to $6.8 billion. Likewise, in light of bearish motherboard trends, Bear Stearns expects revised guidance of $6.4 billion to $6.8 billion, implying sequential sales will fall 2%. Assuming the best-case scenario, Intel would be able to post sales slightly above the prior quarter's $6.75 billion.
A more optimistic take comes from Lehman's Niles, who expects Intel to leave the midpoint of its guidance largely unchanged. As he points out, hardware companies are believed to have stockpiled chip inventory to guard against potential supply disruptions related to SARS. "Even Dell (DELL:Nasdaq - news - commentary - research - analysis) will admit to having one extra week of inventory than normal," he observes. In his model, the inventory build, combined with the debut of Centrino and Springdale (a new chipset), should be enough to offset relatively weak desktop sales. His firm has done banking for the company.
To be sure, the mere words "inventory build" usually give investors the heebie-jeebies. While SARS may give Intel a one-time lift this quarter, the company runs the risk of getting whacked by an inventory overhang next quarter. The High-Tech Strategist's Fred Hickey recently argued that an apparent chip inventory build in the first quarter -- this one guarding against war-related supply disruptions -- would hurt the industry by cannibalizing future sales.
"I'm worried about [inventory] , but if you believe in a second-half tech recovery, we will overcome that inventory problem," maintains Colicchio. He says he's upbeat because the economy should prosper from a combination of low interest rates, a weak dollar and more stable geopolitics.
It's worth noting that PC companies themselves don't seem to be betting on an improved second half, at least at this stage. Two weeks ago, H-P (HPQ:NYSE - news - commentary - research - analysis) CEO Carly Fiorina said she saw "no short-term catalyst for an improvement in IT demand" and noted "no signs yet of a large-scale PC refresh cycle taking hold." Both H-P and leading computer hardware distributor Tech Data (TECD:Nasdaq - news - commentary - research - analysis) have recently said business in Europe is showing signs of weakness.
Colicchio says he's taking those comments "with a grain of salt," brushing off both as "examples of bad business models." As for similarly uninspiring demand talk from Dell, Colicchio says, "They're just being conservative; that's in their interest." On the plus side, he points out, foundry Taiwan Semi (TSM:NYSE ADR - news - commentary - research - analysis) recently said it's cautiously optimistic on the third quarter.
"My point is, don't expect a very negative update. I don't see it being very positive, but I don't think it will be very negative either," says Colicchio.
With the PC market still struggling along, that's about the best face an investor can put on Intel's situation.
Intel closed regular trading Wednesday up 28 cents, or 1.3%, to $21.38. |
