Intel Corp (INTC)

[DewDiligence]

wbmw: First, a correction to your arithmetic. If Astro were to have a 22% gross margin, TMTA would need to sell 1.42M units (not 1.73M) per quarter at an ASP of $64 to cover the $20M quarterly overhead: 1.42Mx64x0.22=20M.

However, the $64 ASP is not the ASP TMTA expects to obtain on Astro; rather $64 is the current ASP from the TM5800 and TM5500 (a smaller-cache version of the same chip) during 3Q02. Although the ASP for Astro is not known at this point, it is reasonable to assume that it will be considerably higher than the $64 aggregate ASP realized in 3Q02. Moreover, TMTA has stated that the company expects to realize a 40% aggregate gross margin in 2H03. Astro is expected to have a gross margin at least as high as the TM5800 (probably higher). So if you do the math, you will see that the unit volume needed for TMTA to break even is considerably lower than your analysis suggests.

--
Now let’s switch gears and talk about INTC and, more specifically, Banias pricing.

Analysts’ consensus estimates for INTC’s gross margin in the current quarter is 49%. As a new product in INTC’s most profitable segment (microprocessors), Banias should be able to command a gross margin above the company average. (Moreover, INTC’s aggregate ASP may improve a little between now and 1H03.) Here are the gross margins I expect for the 1.3-1.6MHz versions of Banias, respectively:

1.3MHz 50%
1.4MHz 56%
1.5MHz 62%
1.6MHz 68%

State-of-the-art high-tech products occasionally have a gross margin as high as 70%, but levels that high or higher are rare and such products generally have little or no bona fide competition. I expect Banias to be a fine product, but not one without competitive pressures.

Using the gross margins shown above together with the prices given in the Inquirer article for the 1.3-1.6MHz versions of Banias ($209, $294, $423, and $637, respectively) we can derive an implied cost of goods for each version of Banias. Please note that these figures do not even include any allocation for R&D costs – just the actual cost of goods shown on the P&L statement.

The arithmetic yields a cost-of-goods range from $105 for the low-end version of Banias to $204 for the high-end version. Hence my original comment that INTC cannot sell Banias at a profit for less than $100. Regards, Dew