Hell For Intel; Sick and Bound To Get Sicker

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Intel released their financial numbers for the quarter, and they were bad. Here are the key numbers to show how bad they were:


Let’s first look at the Digital Enterprise Group, that’s the desktop processor division. CPU revenues dropped a little over 20% from the previous quarter. There’s nothing “seasonal” about that much of a drop.

We know that AMD had essentially a flat quarter, and since their ASPs went up a little, they didn’t make a lot more processors than they did the prior quarter, maybe a few less.

Based on initial figures from IDC, the 4Q/1Q drop off was more than usual (about 13% compared to the usual 10%), but even assuming the AMD dropoff was minimal, that would explain most but not all of the revenue drop.

Fortunately, we need not go far for an explanation; Intel’s gross profit margin declined from 59% to about 55%. Even more significant is that Intel expects its gross profit margin to drop another 5% to about 50% next quarter, so any price cutting/rebate will continue, if not intensify next quarter.

Has Intel had such gross profit margins in the past? Yes, but only when they were having big problems.

Tomorrow, we’ll try to trace the impact these difficulties have had and will have on Intel pricing, but now, we’d like to point out some numbers from the Mobility Group.

Their revenues dropped only a few percentage points (though in a pretty rapidly growing notebook market), any drop is a bit worse than it looks, something very odd shows up here.

The Intel figures show a net revenue and an operating income figure. If you take the difference between the two, you come up with expenses. If you do that for the Q4 2005 and the Q1 2006 figures, you find that the expenses for that division jumped up about 20%, without any corresponding revenue increase.

Either Intel made a hell of a lot more processors and got much less money for them, or it suddenly costs rather more to make them. Given the introduction of Core in the first quarter, the latter is the more likely explanation, and Intel mumbled a little bit about “higher microprocessor unit costs.” There’s no evidence of that being the case on the desktop based on those numbers, so it must be here.

Is Intel having problems making Cores, and if so, what might that say for Conroes and Meroms?

In summary, this is not a tale of AMD beating up Intel, though AMD’s market share ought to go up a few points for the quarter. It’s more a tale of Intel getting really sick, and it’s going to get worse next quarter.


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