Intel's Earnings Miss: Not As Bad As Reported (INTC, DELL, AMD)

Includes: AMD, DELL, INTC
by: Yankee Group

By Carl Howe

I've been reading all the wringing of hands over Intel's earnings call yesterday, where Intel forecast slightly lower revenue and earnings numbers for the coming year. So I went and fetched their 8-K filing from the Securities and Exchange Commission and read through it. And just for comparison, I plugged in similar benchmark numbers for another computer (but not semiconductor) manufacturer, Dell. Here are the results:
Dell Intel
Revenue $54.2 billion $38.8 billion
Trailing Price/Earnings 23 17
Profit margin 6% 22%
Operating margin 8% 31%
Quarterly revenue growth year-over-year 11% 6%
Quarterly earnings growth year-over-year -28.4% 21%
Cash $9.3 billion $13.9 billion
52-week stock price change -25% +11%
Click to enlarge
Now this isn't really a fair comparison, because Intel has much higher R&D costs and plant investments than Dell, and it is in an industry with much higher barriers to entry. But I think the comparison illustrates how strong Intel's financial performance is compared to another highly rated US manufacturer. I have a similar table for Intel versus AMD, if you'd prefer to do the comparison in the semiconductor industry:
AMD Intel
Revenue $5.3 billion $38.8 billion
Trailing Price/Earnings 498 17
Profit margin 1% 22%
Operating margin 1% 31%
Quarterly revenue growth year-over-year 23% 6%
Quarterly earnings growth year-over-year 73% 21%
Cash $1.3 billion $13.9 billion
52-week stock price change +112% +11%
Click to enlarge

Clearly AMD is improving its situation, but once again, Intel's performance comes across as outstanding.

What about that worrisome forecast for the coming year? Quite frankly, if Intel were still pushing Pentium 4s and Xeons, I would be quite negative on their prospects, but they aren't. Instead, the company has chosen a bold new path toward lower power, multi-core products, and therefore, they are in the midst of a product transition. Product transitions always incur greater risk and often affect revenues. So yes, we won't see the same clockwork-like "We boosted revenues, margins, and profits" numbers we've come to expect from Intel.

However, I also think the market has unfairly discounted the upside of the product transition. Intel making lower power products is a very big deal. Lower power means that the parts can be used in a lot of battery-powered products, such as laptops, palmtops, and other portable devices. But low power carries more benefits as well: parts can be put closer together with fewer heat sinks and fans. Closer together parts mean smaller boards that can be manufactured more cheaply and put in more places. Low power processors are to the computing industry what hybrid cars are to the auto industry: a whole new engine for innovation and growth.

Add into this equation Intel's new secret marketing weapon. No, I'm not talking about the new slogan "Leap ahead." I'm talking about signing Apple to use Intel processors throughout its product line. Never before has Intel had a customer who had the brand power and product cachet that Apple brings to the partnership. So not only will Intel be able to describe the benefits of low-power computing, they'll have a lead customer who has shown in the past that it can make technology cool. In short, they've got world class marketing to showcase their world-class technology.

The bottom line: Paul Otellini and Intel are taking their lumps this quarter for a whole new product and marketing strategy. In short, it is taking a risk, which never feels comfortable. But smart investors will understand that risk begets reward. And if this strategy pays off half as well as I think it will, investors won't have to wait more than about six to twelve months before they can see that reward.

Full disclosure: I own no shares of Intel, but do own shares of Apple Computer.

Related: Full conference call transcript from Intel's 4Q05 report

INTC 1-yr chart: