Earnings up but margins hit at Intel

Intel has posted a 44 per cent rise in quarterly profit but missed its gross profits margin target, and its shares fell nearly four per cent after market close on Wall Street.

The numbers underscore the challenges Intel still faces despite having clawed back market share in a continuing, bruising price war with rival AMD and despite restarting profit growth after five quarters of falling performance.

Profit margins were hit as lower prices for personal computer processors and weak demand for memory chips for mobile telephones offset higher revenue and unit volumes.

Expectations that technology market is on the rebound have sent Intel shares up 30 per cent so far this year, and almost nine per cent in the last month alone.

“It’s definitely a mixed bag because the stock has been so strong. Given the strength, it was going to be very difficult to please Wall Street with performance and outlook,” Stifel Nicolaus analyst Cody Acree said.

“Of course margins will expand, it’s just a question of what will be the trajectory. Right now they are keeping expectations pretty low,” Acree said.

Gross margin in the second quarter was 46.9 per cent, short of the company’s forecast of 48 percent. Intel said it expected the margin to be 52 per cent, plus or minus “a few points,” in the third quarter.

“We did see more pricing pressure than we expected, and that depressed margin by one point,” Intel Chief Financial Officer Andy Bryant said, adding that weakness in flash memory also contributed to the low margin.

For its second quarter, Intel posted net earnings of $1.3 billion (£635 million), or 22 cents per share, compared with $885 million (£432 million), or 15 cents per share, a year earlier. Excluding a special gain of three cents per share related to a tax item, Intel’s profit was 19 cents per share, in line with the average estimate.

Revenue was $8.7 billion (£4.2 billion), up eight per cent from a year earlier, and higher than the $8.5 (£4.1 billion) forecast by Wall Street.

Intel, which lost market share to smaller rival Advanced Micro Devices, has fought back with a slate of new chips and price cuts on older ones. AMD countered by slashing prices, and is set to roll out a new processor in August.

“They (Intel) had lower average selling prices, which I’d say reflects their move to sell older product or could be due to a more competitive AMD,” said analyst Jane Snorek.

Margins also could have been hit by a shift away from more profitable notebook computers toward desktops, as well as a faster roll-out of advanced production techniques, which carry high start-up costs.

However, as analyst Doug Freedman put it, Intel’s profitability contrasts with what is expected to be another loss at AMD when it reports this Thursday.

“It’s pretty clear who’s won the battle,” Freedman said.

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