Intel says it's positioned for the coming economic storm
Of the American corporations that will be impacted -- some severely -- by the global economic downturn, Intel will be best positioned to withstand the storm due to its very low debt position, its senior executives told investors Tuesday.
So the only uncertainty facing Intel in the coming quarter and thereafter is not how much liability it will suddenly face, but how much demand for CPUs and technology products will drop. This from both CEO Paul Otellini and new CFO Stacy J. Smith, during the company's quarterly third quarter conference call.
For obvious reasons, Intel adjusted its fiscal fourth-quarter and full-year guidance lower, broadening the range of possible revenue down, and leaving open the possibility of a fourth quarter that brings in less than the third quarter. (So much for "seasonality.") But for the quarter just ended, the company performed brilliantly, with net income rising 12% annually to $2 billion on revenue up 1% annually to $10.2 billion.
Gross margin during this period rose three points to a stunning 59% -- thanks in large part to reduced costs -- which meant Intel kept a very healthy amount of its revenue during the relatively seasonal months of July and August.
But as CFO Smith spelled out, Intel's competitive position could be improved against its competition, he said, once both it and AMD emerge from the economic storm ahead. AMD, as you'll recall, has taken the unprecedented step of separating its foundry and innovation businesses into two entities, with its foundries left only minority-owned by AMD.
Intel has no reason to slow down its plans to ramp up 45 nm CPU production, or its transition to 32 nm, Smith and CEO Otellini both said; and they expect Intel to be more than one process generation ahead of "our competition" after the economic storm concludes. "We still plan to do 32 nm as fast as we possibly can," said Smith, citing that there should be a higher return on investment for the company as lithography grades get smaller.
Intel is planning for a rebound, as "China is becoming our largest market" very, very soon, said Otellini. "Right now, I'm of the opinion that technology will do well during the downturn."
10:55 am EDT October 15, 2008 - There is absolutely no doubt that the economic storm has hit, and that Intel is being affected along with everyone else. Demand in both the enterprise and consumer segments is lower, and to their credit, Intel's senior executives did not color over this fact during the conference call late Tuesday afternoon.
"It's clear that the financial crisis is creating some signs of stress that may impact our business," said CEO Paul Otellini just a few minutes into the call.
"But the extent of that is difficult to quantify. As a result, we've made two changes for this quarter: One, our outlook has a wider range than normal, reflecting our view of the boundaries of the risks; and two, we've decided to provide a formal mid-quarter update scheduled for December 4, to allow us to give you additional information about the state of Q4 business trends as the business and financial conditions unfold."
In a normally functional economy, it's easy for a company to predict the impact that demand will place on its supply capability, especially going into the seasonally higher-demand fourth quarter. But this time, Q4 demand could quite possibly fall below Q3 demand, in all segments of the economy -- and yes, that really means that shoppers will have bought more in August than they will for Christmas.
And since the economy could conceivably bounce back, depending on how world leaders handle the current crisis, it's impossible to predict just how big the bounce could be. Should the global banking situation stabilize, a sense of relief among consumers could trigger a buying surge.
So the job in front of new Intel CFO Stacy Smith is a daunting one. "While our results in the third quarter were strong, and we have high confidence in the fundamentals of our business, the financial crisis is creating a high degree of uncertainty around fourth quarter demand. Therefore, we feel there is a broader-than-normal range of possible outcomes for fourth-quarter revenue, ranging from $10.1 to $10.9 billion. The low end of this range is slightly down from the third quarter, while the high end of this range is at the lower end of seasonal patterns."
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