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Intel Six Month View Shows Tough Task to Come

Intel's announcement of second quarter earnings -- including a 12 percent rise in sequential quarterly revenue and 5.5 percent increase in margin -- made a lot of people happy. But from an industry view, I think the picture may be far more mixed and suggests that Intel will have quite a task getting off its dependency on the PC market.

Barron's Tech Trader Daily lists mixed reactions from equity analysts. And o the balance, that is probably right. It's good to see the increase in sales, but consider the following:

  • Because the third quarter brings vendor back-to-school sales, you'd have to expect the chip sales to happen first quarter. As such, at least in 2007 and 2008, there was a sequential drop of about 2 percent from first to second quarter. That suggests to me Intel seeing a bump from those chip sales, possibly with vendors having held out longer than usual. Given the more normal pattern, it would seem that usually the vendors buy in the first quarter to get ready for the third. What the third quarter should bring is a seasonable growth as vendors get ready for holiday sales.
  • Intel stressed non-GAAP as well as GAAP results because of the whopping large EU fine for antitrust activities. I can understand presenting pro forma financials to take into account the singular nature of a given event and to examine the underlying business dynamics. But given that the alleged behavior was supposedly ongoing for a number of years, perhaps the only intelligent way to examine this would be to amortize the fine over five or seven years to recognize that there was a long range impact of business practices and decisions.
  • It's also instructive to look at the six month totals from the first two quarters in the chart below. I think many people are assuming that Intel's problems have been from the generally depressed PC market, and that is certainly true; iSuppli is projecting the first PC market contraction since 2001. But look again and you see that literally every category of product took a hit. The relative bright spot has been mobile device chipsets because it was down only 17.3 percent.
Habits are changing, and as they do, Intel is no longer the dominant incumbent. That leaves a sticky task for management as it tries to continue pushing beyond its PC microprocessor core business.

Image courtesy of Intel.

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