Intel Sees Strong Demand for Servers, Notebooks

A strong demand for servers and notebooks helped drive Intel's earnings in the first quarter of 2008 and CEO Paul Otellini told analysts that the slowdown in the U.S. economy has not had a significant impact on Intel's core chip business.

Intel, which is considered a bellwether of the technology industry, reported its first-quarter 2008 results April 15, and while the results were not stellar, Otellini said the sluggish U.S. economy, especially within the financial sector, has not affected sales and shipments.

The chip maker reported first-quarter net income of $1.4 billion or 25 cents a share, down about 11 percent from the same time last year when the company posted income of $1.6 billion or 28 cents a share. Revenue for the first quarter was $9.7 billion compared with $8.8 billion from a year ago.

For the first quarter of 2008, Wall Street analysts had been predicting earnings of 25 cents a share and revenue of $9.6 billion. During the second quarter of 2008, Intel is calling for revenue of between $9 and $9.6 billion.

Still, Intel executives remained optimistic.

"We really don't see this impacting our business at this time and we haven't seen it in the last couple of quarters," Otellini said, adding that now 75 percent of the company's business comes from outside North America. "In my experience, when there are more difficult economic times, people do two things. They turn to information technology for productivity gains for their enterprises and they tend to buy the best-of-breed products out there. If that happens, Intel is in a pretty good position."

Otellini said the full ramping of Intel's "Caneland" platform for multisocket servers and demand for the company's new line of 45-nanometer "Penryn" processors helped drive the business. One reason for the increase is companies such as Google and Amazon.com building massive data centers for cloud computing and other efforts.

Intel also saw success with its notebook chips and is anticipating a growing market for low-cost notebooks built with its new line of Atom processors.

Leslie Fiering, an analyst with Gartner, said while Intel's notebook business did well this quarter, it could also be facing some problems.

For one, the mobile division's costs are going up, with Intel putting more R&D dollars and marketing muscle into the notebook division. At the same time, the average selling price of the chips fell, and those prices could drop more as Intel rolls out its low-cost Atom line.

"They believe right now that they can maintain margins, but that does put pressure on the business unit," Fiering said.

While demand for servers and notebook chips kept Intel moving along during the quarter, the company's NOR and NAND flash memory division proved to be a drag on the overall bottom line.

Even before it announced its quarterly numbers, Intel told financial analyst that its gross margins—a key number in determining profitability in the chip business—would be lower than expected because the market for its NAND flash memory is suffering from lower prices due to oversupply. For the quarter, Intel reported gross margins of 53.8 percent.

Another reason for Intel's lower numbers this quarter can be traced back to the spin-off of the company's NOR flash business into a new entity called Numonyx. The company spent about $300 million to spin that business off.

Intel's main competitor, Advanced Micro Devices, will report its own first-quarter numbers April 17. AMD has already said its first-quarter revenue will be down 15 percent compared with the fourth quarter of 2007.

While Intel may have taken market share away from AMD in the first quarter, especially within the server market, the smaller company is expected to offer a much stronger product lineup later in 2008, which could affect Intel's business.

In addition, a further downturn in the U.S. economy such as a reduction in consumer spending could also force Intel to change its current strategy in order to stay competitive, wrote John Spooner, an analyst with Technology Business Research.

"If this turns out to be the case, TBR believes that Intel is likely to resort to price cuts both to motivate PC purchases [and] to fend off the advances of AMD," Spooner wrote in a research note. "Resulting price competition could limit both chip makers' revenue and profitability potentials, as they fight for a larger share of fewer orders from PC makers."