Intels 2005 Revenue Undercuts Expectations

Intel set several company records in 2005, but its fourth-quarter revenue disappointment has analysts speculating about rival AMD's strength.

The problem of chip-set sales haunted Intel Corp. during the fourth quarter.

Despite putting out record shipments of desktop, notebook and server processors during the fourth quarter, the Santa Clara, Calif., chip maker said supply problems, something its been grappling with all year, affected its ability to get its desktop chips into PCs.

The interruption, which Intel Corp. executives said was only partially eased by third-party chip-set suppliers, caused mismatches that hurt Intels desktop processor shipments.

Meanwhile, its rival Advanced Micro Devices Inc. was able to take advantage of the situation to gain as much as a point of market share, Andy Bryant, Intels chief financial officer, said in a Tuesday conference call with analysts.

The chip-set shortage, coupled with competition from AMD and a slowdown in desktop PC purchases in some geographic areas late in the quarter, all weighed on Intels desktop chip business, Bryant said.

As a result, Intel reported quarterly revenue of $10.2 billion, below most analysts expectations of revenue of $10.5 billion.

"The simple answer is, we anticipated third-party chip sets coming into the market quicker than they did," Bryant said. "The chip-set imbalance we think got us, hopefully, one last time."

Intel wasnt able to match up all of its desktop processors with a corresponding chip set of its own or from a third party, preventing all of them from making their way into PCs. At the same time, demand for desktops slipped in areas such as Asia. Thus, some processors ended up in inventory at some large computer makers, who couldnt secure the chip set supplies they needed.

"In reality, we dont believe [demand] went anyplace, except consumers kept more money in their pockets," Bryant said. "There were [fewer] desktops bought."

/zimages/6/28571.gifClick here to read about trends in PC pricing.

However, Intels CFO reported that notebook and server processor sales proceeded normally during the quarter.

"Mobile did fine," Bryant said. "I would not be talking about a revenue shortfall if we were dealing in the mobile business exclusively."

Nonetheless, Intel tuned its first-quarter projections to reflect higher inventory on hand as well as expected lower demand.

The companys first-quarter 2006 forecast, which calls for revenue of between $9.1 billion and $9.7 billion, expects the midpoint of its guidance—something analysts use as a de facto revenue estimate—to fall by about 8 percent compared with the fourth quarter of 2005.

Intels first-quarter revenue usually dips by about 5 percent, Bryant said.

The three points difference equals the amount of inventory—worth about $250 million to $300 million and accumulated over the course of the second half of 2005—Intel thinks is on hand at its major customers, he said.

Basically, "Youre seeing some effect of the constraints of chip sets. Its a fairly complex equation and you certainly wouldnt want to be caught short," he said. "I dont think its anything other than that at this time."

Still, Intels report surprised many analysts, some of whom saw it as a sign of strength from AMD.

/zimages/6/28571.gifClick here to read about AMDs recent gains in the retail PC market.

"This is a bit of curveball," said Dean McCarron, principal analyst at Mercury Research Inc. "To come in and miss by this much is not common on Intels part."

The event points to AMD "gaining some significant share," he said. "The pieces of the puzzle would also suggest that AMD is influencing pricing and is being quite competitive at the moment."

AMD, which garnered 17.8 percent of PC processor shipments compared with Intels 80.8 percent during the third quarter, according to Mercury Research figures, has been inching toward the 20 percent mark, McCarron said.

Although its still got some distance to travel, arriving at 20 percent market share would be a major milestone for AMD, McCarron said, adding that the company was last at that mark during early 2001, shortly after the onset of the 2001 PC market downturn.

But despite suffering a market-share dip in the fourth quarter, Intel said it believes it will be able to bounce back in 2006.

"We will be in position to gain share over the course of 2006," Paul Otellini, Intels CEO, said on the conference call with analysts, even though the company is "starting out in a bit more of a hole for 2006 than we thought."

Although he admitted that the quality of Intels products will ultimately determine whether it can gain back share and, if so, how much, Otellini maintained that the chip makers lineup will gain strength throughout the year based on the introduction of several new platforms based on dual-core processors.

Among them are its newly launched Core Duo-based Centrino notebook platform and a forthcoming server bundle called Bensley.

"Our product portfolio as we shift to dual core only gets stronger," Otellini said. "I believe youll be able to plot the take-back—the regain or market share—along the dual-core road map of the company."

/zimages/6/28571.gifCheck out eWEEK.coms for the latest news in desktop and notebook computing.