Intel Earnings Offer Glimmer of Hope

As the first of the big tech giants to report earnings this season, Intel's assertion that the PC market has hit bottom and that seasonal buying patterns will resume came as welcome news to a recession-battered industry. However, most analysts saw the results as a mixed bag-Intel executed well in a tough fiscal environment, but the lack of detailed guidance from CEO Paul Otellini and poor visibility into the market for desktops and notebooks is worrisome. Consumers are driving the nascent revival in the PC market, but enterprises are still holding back as budgets remain tight.

Industry observers looking for a glimmer of hope from Intel's first-quarter earnings got just that-and not much more-when the chip maker kicked off the tech earnings season by announcing its numbers April 14.

Intel outperformed Wall Street expectations by posting $7.15 billion in revenues. In addition, CEO Paul Otellini said during a conference call with analysts and journalists that he believes the PC market-battered by the global recession-had hit bottom in the first quarter, and that a seasonal buying pattern would resume starting in the second quarter.

Revenues were down 26 percent over the first quarter in 2008, and 13 percent over the fourth quarter. The $670 million in profits was down 55 percent over the first quarter a year ago, but up 176 percent over the fourth quarter.

However, Otellini would not give specific revenue guidance for 2009, average selling prices continue to drop and some parts of Intel's business-such as its Atom processors-struggled, which threw off some analysts.

"Intel's commentary is somewhat of a mixed bag," Daniel Amir, an analyst with Lazard Capital Markets, said in a report. "Strong results are a positive indicator for the PC market, as its CEO Otellini's declaration that [the first quarter] was the bottom in PC sales. Nevertheless, management was not specific about revenue guidance (flattish) and visibility remains low."

John Spooner, an analyst with Technology Business Research, agreed. In saying the bottom had been reached in the PC market, Otellini "painted a picture of a PC industry that is on the path to growth again," Spooner wrote in a report. "Although it's on a slow path, Intel says that the industry has done away with its inventory glut and begun to slowly increase PC production again."

However, Spooner said, challenges to Intel remain. The company's average selling prices will continue to be under pressure as consumers and businesses "look for the greatest bang for the buck" when buying new PCs, searching in the lower end of the spectrum among computers with the Atom, Celeron and low-end Core 2 processors.

"The chip maker faces the difficulty of significantly boosting shipments in a market that is still extremely fragile," he wrote. "The bottom could drop out again should consumers, whose notebook purchases have helped to support the fledgling market turnaround thus far, suddenly retrench. Until the time in which businesses begin purchasing en masse again-and that doesn't seem likely until late in 2009 and more likely 2010-we believe that Intel will grapple with giving up some revenue and profits [for lower average selling prices] as it enables consumers to trade down to lower system price points to keep them coming back for more."