Intel's Latest Report of Margin Pressure Is No Surprise

Jul.18.07 | About: Intel Corporation (INTC)

According to Bloomberg.com:

Intel Corp., the world’s largest computer-chip maker, said second-quarter earnings rose 44 percent on its first sales increase in six periods. The stock dropped after the company’s profit margin trailed forecasts. Demand for memory chips used in mobile phones missed Intel’s estimates, dragging down profit margins, the company said.

Back in April, when they issued their guidance, I said the margin forecast was overly optimistic. The way I saw it, if they continued to produce flat out to reduce unit costs, the price war would be back with a vengeance and margins would go down. If they produced less in order to work down inventory, unit costs would be higher and margins would go down. Yet the company bizarrely expected margins to increase.

As I pointed out in my earnings preview, the margins will improve once they complete the memory JV. I was a little surprised that they did not account for that business as discontinued. After glancing at the accounting guidelines, I suspect they were not breaking it out as a separate segment before, and thus it is considered a product discontinuation rather than a business one.

INTC 1-yr chart:

INTC 1-yr chart