Intel warns of lower margins due to flash meltdown
In a move that had a negative impact on stocks in general today, Intel lowered one of its key measures of profitability for the first quarter of this year due to lower than expected prices for NAND flash memory.
Some analysts are attributing Intel's move to uncertain demand for Apple iPods and other consumer electronics devices that use NAND flash.
Intel is engaged in NAND flash chip production through a joint venture with Micron Technology, the world's fourth largest player in NAND for 2007 behind Samsung, Toshiba and Hynix, according to rankings by iSuppli. Intel ranked fifth last year in revenues from NAND flash.
Late last month, iSuppli reduced its NAND revenue growth projections for 2008 from 27% to the single-digit range.
"Apple Inc. has slashed its 2008 NAND order forecast significantly and has informed suppliers that its demand growth will slow in 2008 compared to 2007, according to iSuppli sources. This is expected to have a huge impact on the NAND market," the analyst firm said in a written statement issued February 20.
"Unless the economy recovers vigorously later this year, last year's DRAM market disaster could be repeated in NAND this year," said Nam Hyung Kim, director and chief analyst, memory, for iSuppli.
Intel is not the only chip supplier expected to be hurt by falling prices for NAND. Last year, for example, Samsung's profits took a tumble because of price drops in both NAND and DRAM.
But where the top three players in NAND last year saw combined revenue growth last year of 9.9% over 2006, according to iSuppli's statistics, Intel's and Micron's collectively skyrocketed by 170.1%, with Intel's alone soaring by 269.6% over 2006. Nevertheless, Intel collected only 7% of Samsung's revenue from NAND flash last year.
At this point, the full significance of Intel's newly lowered forcecast remains unknown, even among financial analysts.
Specifically, Intel said yesterday its gross profit for the first quarter will now come in at 54% of revenues, plus or minus a percentage point, as opposed to its previous forecast of 56%, plus or minus a couple of percentage points.
The gross profit margin is a measure of profitability referring to the percentage of sales left after subtracting manufacturing costs.
Since Intel issued its announcement, Intel's shares have fallen in Nasdaq trading.
"Intel will need to better articulate the reason behind its position in NAND before investors feel comfortable buying the stock," according to a report from James Covello, an analyst at Goldman Sachs. "The NAND business continues to have a pronounced impact on Intel's margin performance."