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From Briefing.com: 08:32 am Intel (INTC)

22.30: With Advanced Micro Devices (AMD) warning of a revenue shortfall for its fourth quarter last week, Intel investors adopted an optimistic view that their company's fourth quarter earnings report would show that AMD's struggles were the result of Intel's success. By most accounts, it did, but in the end, Intel's success didn't compute as profitably as many had hoped.

Intel's fourth quarter revenues of $9.69 billion jumped 10.9% from the third quarter and were at the high end of its guidance range. The increase was driven by higher average selling prices that were a by-product of Intel's upgraded product suite and growth in the mobile business as a percentage of the PC processor mix. Intel noted that records were set in the quarter for total microprocessor unit sales as well as server, mobile and flash unit sales.

Notwithstanding the company's success in the period, it was readily apparent in the gross margin line just how competitive Intel's business has become. To wit, its fourth quarter gross margin of 49.6% was down from 61.8% in the year-ago period. The added rub for investors is that it was no better than the midpoint of expectations which were pegged at 50%, plus or minus a couple of points. In light of the ramp of Intel's dual-core and quad-core processors, that qualified as a disappointment.

Intel acknowledged that higher selling prices helped, but that the positive impact was partially offset by higher factory underutilization charges along with flash memory write-downs and NAND start-up costs. For the quarter, Intel's net income declined 39% and earnings per share slipped 35% from the year-ago period to $0.26 per share.

Equally as disappointing was Intel's forecast for 2007 gross margins to be 50%, plus or minus a few points, as that implied little to no improvement from the 2006 level of 51.49%. Start-up costs related to the 45 nanometer process and factory underutilization charges - the bulk of which will be seen in the first quarter - were cited as factors in the gross margin forecast.

Intel's capex forecast for 2007 calls for spending of $5.5 billion, plus or minus $200 million. The bad news is that that is down from the $5.7 to $5.9 billion that had been forecasted for 2006. The good news for chip equipment makers is that Intel said a higher percentage of its capex budget than it has seen in a long time will be spent on equipment.

With Intel trading down close to 4.0% in pre-market action, there is little mistaking that investors aren't that pleased with its results. Their disappointment is understandable, but we think can easily be reversed in coming quarters since Intel has laid the technological groundwork to reclaim lost market share. Additionally, its aggressive cost-cutting actions combined with prudent inventory management, and the increasing use of higher margin mobile processors, suggests there is a strong likelihood of profit margin surprises down the road barring a meaningful, global economic slowdown.

In brief, we believe Intel is being deliberately conservative with its forecasting and would use interim weakness as a buying opportunity.

--Patrick J. O'Hare, Briefing.com

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