Intel Quarter Hints At AMD Trainwreck Coming Thursday

Includes: AMD, INTC
by: Larry Dignan

Following Intel’s (NASDAQ:INTC) decent–but not good enough to make Wall Street happy–second quarter it seems to be a good bet that AMD’s (NASDAQ:AMD) financial results will be a debacle.

We’ll know Thursday when AMD reports its second quarter earnings, but Intel is willing to suffer self-inflicted wounds on the chip pricing front. And if Intel is dinged AMD may really get whacked. According to Thomson Financial, Wall Street isn’t expecting much from AMD anyway–the company is expected to report a loss of 85 cents a share on revenue of $1.25 billion.

Intel’s quarter was in line with estimates, but the big takeaway was that gross margin was 46.9 percent, below Wall Street expectations.

On Tuesday night’s earnings conference call, Intel CEO Paul Otellini noted that chip pricing was tough. Otellini said:

“It was a more competitive pricing environment than we thought in Q2, and we expect it to continue to be somewhat competitive which is what you’re seeing in our margin outlook for the year. We believe the best defense against the competitive price environment is better product.”

When asked about the pricing pressure Otellini added: “It is much more targeted now at the low end of the desktop and even a little bit of the notebook marketplace, and a year ago it was higher in the stacks in many areas.”

He should have just said that AMD isn’t giving up market share easily even though the two rivals are headed in opposite directions.

Intel analysts appear mixed on the quarter. Some analysts say AMD is fighting back with lower prices. Others think Intel’s margins will improve as it thumps AMD some more. Others note that Intel’s game plan is unsustainable and part of the problem is bloated inventory. (See all AMD and Intel resources).

One of the more notable comments came from Merrill Lynch analyst Joe Osha:

Intel’s second quarter looks like it was a fire sale. As the company has sought to keep competitive pressure on AMD, keep its own fabs loaded and stay on its process technology roadmap, the result has been chronic overproduction. The company’s explanations regarding its gross margin seem to grow more complex every quarter, and yesterday was no exception. We’re not interested - the basic fact remains that in the fourth quarter of 2005, Intel finished the quarter with $10.2 billion in revenue and $3.1 billion in inventory. By the first quarter of 2007, Intel was at $8.9 billion in revenue and $4.4 billion in inventory. Intel is too big for the market opportunity that’s available to it.

Osha continued:

That situation is unsustainable, and Intel appears to have responded during the second quarter by increasing its efforts to put volume into the market, even at the expense of pricing. Intel’s management characterized the pricing environment in low-end products as weak, but we think a big part of that weakness was caused by Intel leaning on the market. We note that our model shows Q2 units up by 1%, which is unseasonally strong. Intel’s strategy seems to have worked – inventories dropped in both dollar and days terms – and also had the added benefit of putting more pressure on AMD. We expect AMD’s Q2 results to show the impact of Intel’s actions.

What’s truly a drag about this Intel outlook is that the PC market looks pretty healthy in spite of usual seasonal patterns. But a pricing war may mean that neither Intel nor AMD make as much money as they could.

In any case, AMD won’t give up market share to Intel quietly. AMD seems to be matching any race to the pricing bottom. And that means AMD is likely to post some ugly results on Thursday.