Intel Results Show That 2012 Will Be A Transition Year

Intel (NASDAQ:INTC) posted its much awaited Q1 results on Tuesday. The report shows that the company was after all able to weather the hit from the hard disk shortage and threat of a possible PC market slowdown in our view. Intel competes with AMD (NYSE:AMD), Nvidia (NASDAQ:NVDA), Qualcomm (NASDAQ:QCOM) as well as smaller players such as VIA Technologies (2388: TAIWAN).

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Hard Disk Shortage & Global PC Trends Impact Revenue

Intel reported revenues of $12.9 billion, a 7% decrease sequentially, and net income was down to $2.7 billion, a decline of 19% from the last quarter. The geographic distribution was more or less the same, with the Asia-Pacific region contributing around 57% to revenues.

The company believes that Q4 2011, which was impacted by the hard disk drive shortage, saw a significant reduction of inventory levels which continued in Q1 as well. The contraction in the supply chain justifies the depressed result.

However, Intel has a positive outlook for the year ahead and estimates revenues of $13.6 billion for Q2. ^[1] It expects a rise in volumes from the launch of Windows 8 and other product ramp-ups in 2012 to offset the current slowdown. It also believes the softness in the developed countries will be overshadowed by the strength in emerging markets in all segments, and maintains its expectation of high single-digit revenue growth for 2012.

Ramp Up in Ivy Bridge Processors effect Gross Margin

Gross margin stood at 64% compared to 64.5% last quarter. The company expects a lower gross margin range of 62-63% for Q2  as the quarter will continue to see ramp-up in Ivy Bridge production in three new 22-nanometer factories, which will result in higher unit costs.

Intel claims that Ivy Bridge will be Intel’s fastest ramping product ever. The company sees it comprising nearly one-fourth of its microprocessor volume in Q2 alone, while crossing over 50% of the microprocessor shipments by this fall. It is of the view that as the impact of the hard drive shortage wears off, the worldwide supply chain for PCs will be replenished by its Ivy Bridge processors, as opposed to older generation technology.

Improved Acceptance of Ultrabooks

The company introduced a $300 million fund to achieve improvements in Ultrabooks, which failed to garner the expected response in 2011. Earlier this month, the company launched its largest advertising campaign in a decade. It has more than 21 designs already shipping and another 100 in the pipeline for 2012. Intel expects to achieve mainstream pricing in a few months, which would help increase user adoption of Ultrabooks. It predicts that Ultrabooks will account for 40% of consumer notebooks by the year-end. The success of Ultrabooks could help Intel increase its share in the notebook segment.

Progress in Smartphones

This quarter the company also made significant progress in smartphones. Following its announcements with Lenovo and Motorola at CES, it followed on at the Mobile World Congress by announcing designs for Orange, ZTE and Lava, as well as a strategic partnership with Visa for mobile payments. It expects to see another important milestone with the launch of the world’s first Intel architecture-based smartphone.

Despite the relatively flat result, Intel is confident about its future performance. Major product and technology transitions such as the ramping of its 22-nanometer manufacturing process into high volume Ivy Bridge Chips, the move to Tri-Gate transistors and the upcoming launch of Centerton – the atom-based micro server System on Chip – are expected to have a positive impact on the company.

We are in the process of reviewing our model and will soon update our price estimate of 30.52 for Intel .

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1. Intel reports a flat $12.9 billion revenues in Q1 2012, Slash Gear, April 17, 2012 [↩]