Intel's Numbers and Their Story

(MoneyWatch)  Late yesterday, Intel released its Q3 earnings, which sent a note of encouragement though the industry because they shot past analyst expectations and even its own guidance offered at the end of August. Personally, I smell a bit of a rat in this and think that going into what the numbers are saying about Intel's overall business is more illuminating.

On the rat detection patrol, there is a point at which companies should know how the quarter is shaping up. Roughly two months into the quarter in a good place to put the mark. If Intel was really that far ahead of its projection to investors as it had already turned the corner for the quarter, then it was indulging in a little sandbagging and expectation management. Come in where people expect and you're acceptable. Blow past, and your stock goes up. The only other explanation I could come up with is that Intel actually projected what it thought was likely in August and that management ended up surprised at the result. No comfort there, as it would mean the company couldn't adequately forecast demand, sales, and expenses even 30 days out. And that's as much striking out from a management view as is radically falling short.

Now that the adrenaline rush is over and no longer distracting everyone from the details, let's look at them:

• Microprocessor and chipset unit sales were at a "record number," which at least means more than last year.
• Net revenue for the quarter was down 8.1 percent.
• Gross margin was 57.6 percent, versus 58.9 percent same time last year.

I would say that is the huge object lesson to take away: margins are ever weaker in the big picture. When matched against record units, that says the perceived value, or at least the value that Intel can command, is hurting. Now look at the segment breakout:

Again, with record unit movement, sales are down in every single category of product, both year over year quarter to quarter and first six months. To maintain its revenue alone, Intel will have to continue ramping up new products that have a significant volume, because clearly the premium prices, and margins they bring, are not in the cards for now. Intel does expect growth in gross margin, but that could be from lowering costs. I'd suspect that netbooks and smartphones could be the root cause.