An intense price war with rival chipmaker AMD (NYSE: AMD and a triple whammy of new product entries squeezed Intel's (NASDAQ:INTC) margins last year. With the first quarter of fiscal 2007 now concluded, Intel's numbers suggest that margins fared little better, with gross margin slipping 6.2 percentage points year over year.
The pressure's no surprise, since management made it clear in the previous conference call that gross margin would remain in the 50% range throughout fiscal 2007. Still, I think this Inside Value pick can expect better results as the year continues.
In this edition of Fool on Call, we'll discuss expectations for the rest of Intel's year. Don't let the margins get you down: It's a good time to be an Intel shareholder.
My chipset is cooler than yours
My Foolish colleague Anders Bylund noted in his latest analysis of Intel that the company's raw-material and work-in-progress balances are ramping up as it prepares to launch its new 45-nm manufacturing processes, codenamed Penryn.
In his opening statement of the call, CEO Paul Otellini affirmed that the company remains on schedule to unveil Penryn technology, using "breakthrough materials" to produce "faster, and more power-efficient microprocessors, that pack more features into smaller die." The new processors should post performance gains of "15% to well over 45%" (depending on the application and product types) when compared against current Core2 Duo and Xeon processors.
With the strength of its upcoming product lineup based on the new process, Otellini is "planning for growth in the second half of the year." According to CFO Andy Bryant, both revenue and gross margin are expected to grow faster in the back half of the year.
What about AMD, you ask? Won't the competitive environment be as nasty as ever, keeping prices lower, and thereby continuing to pressure profitability? In the question-and-answer session of the call, Bryant tried to soothe such concerns.
Though a "competitive price environment" remains, Bryant had reason for optimism. Over the past few quarters, Intel introduced a series of new products whose technological superiority helps them stand out from the competition -- and command higher prices. Microprocessors aren't the only ace up Intel's sleeve in this regard; Bryant highlighted improved NAND flash memory to help applications load faster, a new Wi-Fi chip, and a new graphics engine among examples of Intel's wave of souped-up offerings. Management is so confident in its current position that it believes AMD's new product entries in coming quarters won't dent its lead. That's bad news for AMD shareholders, but sweet music for Intel owners.
Time to inspect Intel
The previous call gave me good reason for optimism about margin and revenue growth in the second half of this fiscal year, and Intel's latest call only reaffirms this rosy outlook. True, the company should endure a transition in the second quarter, as lower sales and higher start-up costs drive gross margin down by two percentage points, to around 48%. But in the second half of the year, superior products should help Intel command higher price tags. Couple that with the company's recent cost-cutting efforts, and I'm betting Intel's bottom line will dramatically improve over the next few months.
Microsoft's (NASDAQ:MSFT) Vista and Apple's (NASDAQ:AAPL) trendy computers, both of which rely on Intel processors, are creating a nice buzz among consumers, which will only heighten as the holiday season approaches. Intel seems well positioned to profit handsomely in the coming quarters. The news sounds so sweet, only poetry seems fitting, courtesy of Arthur Hugh Clough's "All Is Well":
'Twill all be well: no need of care;
Though how it will, and when, and where,
We cannot see, and can't declare.
In spite of dreams, in spite of thought,
'Tis not in vain, and not for nought,
The wind it blows, the ship it goes,
Though where and whither, no one knows.
No need of care, Intel shareholders: The winds are favorable, and management knows exactly where the company is headed. If you're considering boarding Intel's ship, I'd use the second quarter for additional due diligence. This ship appears bound for brighter days in the very near future.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
