Wednesday, July 19, 2006

Intel 2Q06 revenue dropped 13%, profit dropped 60%

Intel's 2Q06 result is out, far below analyst expectations. Worse of all, its 3Q06 outlook is only $8.3 to $8.9 billion revenue. Mid point $8.6b, 4Q06 follows seasonal pattern, 8% increase over Q3, so it will be $9.3b.

One thing I was wondering is Intel's sale of the coms division to Marvell. I hope Andy Bryant didn't book a profit from that. It should be at least $1.6 billion impairment on goodwill. Any way, I couldn't find it from the report. There is no loss of goodwill shown in the balance sheet.

Looking at the balance sheet, Intel is fragged for good. Inventory is now at $4.332 billion at cost, increasing 21.4% from 1Q06. With a margin of 49%, that's $8.66 billion of chips. I laughed out loud when Andy Bryant said that was only a whole quarter of sales. Only $0.2 billion inventory is Conroe. Its designers are working in bomb shelters. 3Q06 inventory level will go up further. 4Q06 gross margin may be even lower. Those Pentium D chips are piling up, folks. Cash is reduced by $1.2 billion, long term investment reduced by $0.4 billion.....Excluding inventory, current assets minus current liability is $4b. Total long term liability $2.8b, long term investment $3.5b. One step closer to cash burn out. Keep in mind that Uncle Sam says Intel owes $2b taxes.

Man, this company is going BK faster than I projected.


From this graph, you can see after AMD filed its lawsuit in 2Q05, INTEL started going straight downhill.

AMD is definitely gaining market share. Now, AMD's revene share of the CPU market is 18.6%.

49 Comments:

Anonymous Anonymous said...

Comms division sale is pending expected completion is 11/27/06. No one should really care about the book write down since it is old news now and they weren't getting any valuation for the business anyway.

2:04 PM, July 19, 2006  
Anonymous jack0fspeed said...

Looks to me like they fudged the numbers using a higher inventory valuation.

2:10 PM, July 19, 2006  
Anonymous Anonymous said...

what's the largest percent of this inventory that could be attributed to CWM ramp-up. Some of it could be the newer chips, right?

2:12 PM, July 19, 2006  
Anonymous Anonymous said...

I am not an Intel fanboy, but it is pretty hard for a company to BK when they are still making money every quarter.

Mike

2:16 PM, July 19, 2006  
Anonymous Anonymous said...

"CHIP FIRM Intel said it had turned in net income of $1.1 billion on revenues of $8 billion for its fiducial second quarter."

If making 1.1 billion is going broke....

2:26 PM, July 19, 2006  
Blogger fcf said...

just a stunning note of the already obvious... but intel does have some discretion w/ respect to cash... ie... they don't necessarily have to buy back stock (1bn in stock repurchases last q, or god forbid, pay a 500mm dividend) in a given quarter if they think they're circling the drain. Personally, I do hope they get the scare of their lives... I think Otellini and Barret have screwed up on a collosal (sp?) scale...

2:48 PM, July 19, 2006  
Blogger fcf said...

just a quick note of the stunningly obvious... intel doesn't have to spend 1 billion in stock buybacks or 500 mm in cash dividends in a given q if they thing they're circling the drain. personally I hope they get the scare of their lives... Otellini and Barrett have run the company into the ground.

2:50 PM, July 19, 2006  
Anonymous Anonymous said...

just a stunning note of the already obvious... but intel does have some discretion w/ respect to cash... ie... they don't necessarily have to buy back stock (1bn in stock repurchases last q, or god forbid, pay a 500mm dividend) in a given quarter if they think they're circling the drain. Personally, I do hope they get the scare of their lives... I think Otellini and Barret have screwed up on a collosal (sp?) scale...

2:52 PM, July 19, 2006  
Anonymous Riddler said...

Dear Shakirou,

I'm not an native english speaker. Just to get it right: Intel had a income of 1.000 million dollars this quarter.

The company has just introduced a new chip technology that is faster in 32 and 64 bit in perfomance/dollar than any other competitive technology. (Lots of review on every site I found in the net).

You're projecting, that this company is bancrupt in 5 quarters (about this time next year)? Don't you think this is a bit hard to imagine?

3:07 PM, July 19, 2006  
Blogger Sharikou, Ph. D said...

You're projecting, that this company is bancrupt in 5 quarters (about this time next year)?

Yes. When a company doesn't have the cash to meet debt requirements, it BKs.

3:11 PM, July 19, 2006  
Anonymous Anonymous said...

yeah they are reducing staff back to close to q1 05 numbers too

3:20 PM, July 19, 2006  
Anonymous Anonymous said...

it will create a very scary situation for them if demand is low in the next few quarters. demand might be high but if all their inventory is older P4's with ramping C2D, then those people who can't grab c2d aren't going to settle for P4's.

3:24 PM, July 19, 2006  
Anonymous Anonymous said...

Remember the strong rumors of Dell's full line of AMD products? Will that steer a couple of $100 mils of business from Intel to AMD?

I think so.

3:30 PM, July 19, 2006  
Anonymous Anonymous said...

They do say though that they will writeoff some inventory if demand is lowered from expectations by 15%...which may happen.

3:37 PM, July 19, 2006  
Anonymous Anonymous said...

Hi Sharikou,

I agree with you on most of the stuff, I think Intel is in for a heck of a hide. Intel hiding behind that 4.3 billion dollars in inventory is not good.

I have a couple of questions though, when will that inventory start effecting their bottom line(and how will it show up)? Also, if Intel burns through most of their cash, will they still be able to borrow on their equity? They still have other assets....I'm interested to hear your response. Thanks!

3:45 PM, July 19, 2006  
Anonymous Anonymous said...

Listening to the conference call, Intel says that "most" of the growth in inventory since Q1 has resulted from early qualification of the new Core Microarchitecture (Merom, Conroe, Woodcrest CPUs and the Broadwater chipset family).

There also seemd to be some uncertainty in the completion of a restructuring plan (the efficiency review). My read on this is that, if Core Microarchitecture tanks for whatever reason, Intel will do what it needs to do by end of Q4.

It was also said that the projection for Woodcrest is probably better than 50% of Xeon sales by Q3 and 75% by Q4.

Also, there was a very confident answer that all demand for Conroe and Merom would be satisfied. For Conroe, the ramp was quantified as "much faster" than the NetBurst ramp. The impression given was that if you want a Conroe, you'll get one. The question on my mind is, does this mean the $350 4MB-shared-cache E6600, or a mountain of expensive high-end E6700/X6800 and low-end 2MB E6300/E6400 Conroes?

3:57 PM, July 19, 2006  
Anonymous Anonymous said...

So a company that makes at least 1 billion profit every quarter is gonna go broke.

I guess I will come back tomorrow to see how you are going to spin AMD's dismal quarter into a situation where they will have 50% marketshare by year end.

If you applied your very astute financial analysis skills to AMD, you should come the the conclusion that AMD should have been out of business 10 years ago. As intel made more profit in this "slow" quarter than AMD has made in the last 11 years combined.

Please stop with the "intel is going broke" nonsense. You are making yourself look quite the fool.

--gr8mikey from THG forumz

3:57 PM, July 19, 2006  
Blogger Sharikou, Ph. D said...

If you applied your very astute financial analysis skills to AMD, you should come the the conclusion that AMD should have been out of business 10 years ago.

If Intel is quick in laying off its workers, it may be able to survive as AMD did in the last 10 years, living a frugal life with 20% market. But that won't happen. What you will see instead is Intel going BK with 100K workers.

4:00 PM, July 19, 2006  
Anonymous Anonymous said...

gr8mikey...you do realize that AMD's 2nd Q was 52% higher than the same period last year...2Q is always lower than 1Q so for them to see a 9% decrease wasn't really significant. Intel has WAY too much inventory, they increased inventory by about 20% while at the same time selling 10% less. It's not a good scenario

4:05 PM, July 19, 2006  
Anonymous Anonymous said...

Even without taking current invetory into account they still have 12 billion in short term assets. If their rate of decline stays steady or even increases (which is not unlikely) they will still have money to burn in 5 quarters. Intel certainly doesn't look like completely healthy with that sliding revenue, but they aren't going to die that fast.

4:16 PM, July 19, 2006  
Anonymous Anonymous said...

Hey PhD..

Can you put the AMD cumalitive by quarter next to INTEL.

or are you not brave enough..

LOL

The Doctor

4:17 PM, July 19, 2006  
Blogger Entrophos said...

Even without taking current invetory into account they still have 12 billion in short term assets. If their rate of decline stays steady or even increases (which is not unlikely) they will still have money to burn in 5 quarters. Intel certainly doesn't look like completely healthy with that sliding revenue, but they aren't going to die that fast.

Assets don't mean much if you can't liquidate them to produce cash to fund daily operations. I'm not an accountant but that much is pretty obvious.

That's basically AMD's plan with the price war: prevent Intel from quickly or easily converting these assets into cash while they eat away at their sales (which are progressively decreasing) and ensuring whatever sales they do make they do so at a lesser profit. Also, as these chips sit gathering dust, they are depreciating in value at a rapid pace, accelerated by Intel's own hyping of the Core marchitecture (ironically).

With 100,000 employees to pay, Intel needs a lot more cashflow to keep afloat. They have 4x the marketshare AMD does, but 8x the headcount. They were able to sustain operations before with their high ASP and 90%+ marketshare, but these have eroded and their operative costs have not.

This explains the desperation with which they have been hyping up Conroe/Woodcrest/Merom. They want people to hold off on high end PC processor purchases to get the extra ASP from this line, while accepting the loss of some short-term P4 sales.
This is obviously a very risky move.

They can't walk away from the mess they've created easily, that's for sure. They can make it a lot easier by chopping a lot of heads and taking the charges in severances, etc NOW while they still have some cash left to burn. If they do not being massive restructuring and head reductions until they are already in the red, they will be in very big trouble.

Although I can't see the company dying in 5 quarters like Sharikou is predicting, I can see that they are in for a very rough ride for the rest of this year. If AMD delivers on time or delivers early on K8L/Rev.G, and continues to steal away more high end server sales, they are in bigger trouble next year.

This will be a very interesting one to watch.

5:10 PM, July 19, 2006  
Blogger Sharikou, Ph. D said...

If they do not being massive restructuring and head reductions until they are already in the red, they will be in very big trouble.

Yes. At one point, Intel won't have the cash to lay off people, except by bankruptcy. Laying off people needs money -- contractual obligations on employee benefits etc...

5:16 PM, July 19, 2006  
Blogger Bruno Dieter Chan said...

Typical Intel fanbois... unlike supports they don't read facts, view from each and every angle the situation and compose a well thought out argue. Nope all they go is Intel is great! Nah nah! And laugh in your face.

Enjoy your trip on the Titanic Liner you wankers. Titanic Liner = I a Intel cretin.

5:21 PM, July 19, 2006  
Anonymous Anonymous said...

Just curious, when is K8L supposed to come out? Also, when are the 65nm cpu's going to start coming out from AMD?

5:30 PM, July 19, 2006  
Blogger Entrophos said...

Yes. At one point, Intel won't have the cash to lay off people, except by bankruptcy. Laying off people needs money -- contractual obligations on employee benefits etc...

Exactly. It costs money in the short term to reduce head count in return for the long term savings of not paying their salary.

However, if you have no money to burn to make those payments because you have billions of debt and inventory you can't liquidate, it's too late.

You can't pay your employees severances by giving them a shopping cart full of Netbust CPUs. :)

If they were smarter, they would have begun reducing staff and trimming production late last year in anticipation of the tough time they would have with the transition to Core and the continued erosion of ASP and sales. They should have been able to predict a price war and their inability to weather one and made the appropriate preparations. Instead, incredibly, they started the war themselves even though they are in a bad position to deal with one.

You were dead on with those predictions Sharikou.

5:33 PM, July 19, 2006  
Anonymous Anonymous said...

Dell came to the dance with Intel. If Dell’s warehouse is as full as Intel’s, it may limit his ability to help unload the junk.

6:12 PM, July 19, 2006  
Anonymous Anonymous said...

"2Q is always lower than 1Q so for them to see a 9% decrease wasn't really significant."

So why was AMD's original guidance at the end of Q1 "flat"? Are you saying that AMD's financial personnel aren't as sharp as you are? Clearly AMD wasn't expecting a 9% revenue decrease at the beginning of the quarter (or they lied to analysts which I don't believe). 10% revenue decrease is significant, unless it is a temporary blip.

6:42 PM, July 19, 2006  
Anonymous Anonymous said...

Very interesting to see Intel's numbers of late...

$4.3 Billion in inventory?? WOW!

The way I see it, or from the conference call... their "new" strategy going forward seems to be dumping their obsolete spaceheating Netburst stuff (ironic due to the Conroe hype) on developing countries... and these will continue to haunt Intel since that will comprise of over 70% of the product line.

Then those people will log onto the Internet for the 1st time, and realize they bought crap!!

Even the Intel fanboys after a drunken stuper will have a hard time going out and buying any netburst crapitecture... since they are now stuck on Core.

I see news of Dell going FULL line of AMD by year's end just to spit back at the MacInteltosh relationship... Let's see how Intel can stuff the channel now.

I don't know about Intel going bankrupt as that would be bad for us consumers... I like my cheap CPU's. ;) Your blog is a slight stretch at times, but gives visitors like me an alternative view of how things are really played out and "some" entertainment purposes.

If I wanted to jizz in my pants over Intel... I'd head over to Tom's, Anand, etc.

Hey Sharikou... how about some more of those Phone Calls Skits??
Now those were entertaining... :)

8:10 PM, July 19, 2006  
Blogger Sharikou, Ph. D said...

Hey Sharikou... how about some more of those Phone Calls Skits??

The Intel earnings confrerence call itself has become far more fun. I was laughing out loud when hearing the discourse between Paul O, Andy B and the analysts. You should listen to it. So funny.

8:24 PM, July 19, 2006  
Anonymous Anonymous said...

If intel goes under, this is bad for everyone, why is everyone who follows this blog too blind to see that.

10:03 PM, July 19, 2006  
Anonymous Jeach! said...

When you say $4.3 billion of inventory 'at cost'.

Does this mean that's the value of what it cost them to produce?

So if it costs them $60 to make a chip (on average), then they have about 71.6 million units.

Sold at an average of $150, this is $10.75 billion in 'could-of-had' revenue... but we're soon going to write most of it off in our books.

Am I close?

10:07 PM, July 19, 2006  
Anonymous Anonymous said...

Sharikou your track record on financial predictions is a bit sketchy. I wonder if you this message will see the light of days as it shows the accuracy of some of your recent financial predictions.

"My whipser number for Intel's 1Q06 revenue is $7.67 to $8.13."

That's from your blog " 1Q06 notebook sale drops by 35-40%". Actual Q1'06 - $8.9. It's a good thing you whispered it, maybe not too many folks heard it.

"The result will be continuing operating losses for Intel in the next 7 quarters."

From blog: "Intel may bankrupt in seven quarters". You must have meant after Q2?

"My advice to Ben Lynch: dump INTC at a loss and buy AMD, you can still triple your money."

This was written 4/7/2006, Blog: "Deutsche Bank AG to lose $1 billion on INTC". Had he followed your advice his investment would now be down ~35%, Intel is not a whole lot better at down 5% over that same time period, but down 30% is a bit different than +300%.

"I now project 2Q06 GAAP loss for INTEL due to charges associated with impairment on goodwill. I project operating losses for Intel's 3Q06, 4Q06, 1Q07 and beyond."

From Blog: "Intel to slash Pentium D prices by another 60%"

How about keeping a scoreboard for you predictions to see what your overall track record is?

10:26 PM, July 19, 2006  
Blogger Sharikou, Ph. D said...

"My whipser number for Intel's 1Q06 revenue is $7.67 to $8.13."

I officially projectedb 15-20% revenue drop for Intel's 1Q06, which was quite accurate. I also projected further drop for 2Q06, which was again proven true.

"I now project 2Q06 GAAP loss for INTEL due to charges associated with impairment on goodwill. I project operating losses for Intel's 3Q06, 4Q06, 1Q07 and beyond."

Somehow Intel didn't book the impairment for 2Q06, some say it will book it in 4Q06. As for 3Q06 operating loss, I think it is in the bag.

10:36 PM, July 19, 2006  
Blogger Eddie said...

Sharikou, I corrected my numbers of AMD revenue market share gains, and with official data it is 0.9%

The details are in my blog

>
http://chicagrafo.blogspot.com

10:39 PM, July 19, 2006  
Anonymous Anonymous said...

Let's look at some more predictions while we're at it:

"The fact there was zero sign of AMD64 capability means all NGMA chips as of today are 32 bit only." March 11,2006

"My projection for INTEL's 2006 EPS is -$0.15." Still have some time for this one to come true.

"I predict that Dell may acquire Intel in two years." March2006 Still have sometime for this one to come true as well.

"Various news indicate that AMD is ramping up FAB36 and Chartered FAB7 as fast as it can, furthermore, 65nm products will be shipping as early as June 2006." (March2006)

By shipping 65nm by June you meant engineering samples right?

"AMD poised to exit 2006 with 55% market share (run rate)" March 2006

Still some time for this one to come true.

10:56 PM, July 19, 2006  
Blogger Sharikou, Ph. D said...

"The fact there was zero sign of AMD64 capability means all NGMA chips as of today are 32 bit only." March 11,2006

This was true, wasn't it?

11:06 PM, July 19, 2006  
Blogger Sharikou, Ph. D said...

When you say $4.3 billion of inventory 'at cost'.

Does this mean that's the value of what it cost them to produce?

So if it costs them $60 to make a chip (on average), then they have about 71.6 million units.


Intel's gross margin is only 49% now, so the $4.33b inventory is $8.66b worth of chips.

11:08 PM, July 19, 2006  
Blogger Eddie said...

(chicagraf0/todospara1)

Sharikou, you have a material mistake in your post: Intel said it has 750 million dollars of inventory related to the new products:

<<
Mark Lipacis - Prudential Equity Group

Okay, fair enough. Second question, of the inventory that you have on the books, can you give us a sense of what percentage of those are from the new micro-architecture products?

Andy Bryant

If you look at the total, it's an odd answer. If you look at the growth of $750-some million, it is most of it. If you look at dual-core and you look add Broadwater, we grew in those spaces -- essentially all of the growth

11:24 PM, July 19, 2006  
Anonymous Anonymous said...

Sharikou, you do realise that using your logic, just about every major company in the US must be on the verge of declaring bankruptcy, don't you?

So, either we're on the verge of a Great Depression that'll make the 1930s look like a golden age by comparison, or the "Sharikou theory of economics" is somewhat flawed.

1:14 AM, July 20, 2006  
Blogger Sharikou, Ph. D said...

Sharikou, you have a material mistake in your post: Intel said it has 750 million dollars of inventory related to the new products:

No. Read the whole transcript again, they said specifically that Conroe/Woodcrest was 200 million.

I think the 750 million includes Core Duo32.

1:55 AM, July 20, 2006  
Anonymous Anonymous said...

If making 1.1 billion is going broke....

Depends...
How much do you have to spend to achieve 1.1 billions?

5:50 AM, July 20, 2006  
Anonymous Anonymous said...

No. Read the whole transcript again, they said specifically that Conroe/Woodcrest was 200 million.

yes, true, no one shall challenge Sharikou's reading skill. He is a PhD you know? And most likely from multiple fields, from finance to electricl enginnering.

6:15 AM, July 20, 2006  
Anonymous Anonymous said...

Weren't you projecting a loss for Intel this quarter?

8:52 AM, July 20, 2006  
Blogger Sharikou, Ph. D said...

Weren't you projecting a loss for Intel this quarter?

Yes. I was expected at least $1.6 billion impairment of goodwill from the sale of coms division. But Intel didn't book the impairment in this Q. It is being pushed to later quarters.

9:48 AM, July 20, 2006  
Anonymous Graham said...

I officially projectedb 15-20% revenue drop for Intel's 1Q06, which was quite accurate. I also projected further drop for 2Q06, which was again proven true.

Yes, but you neglect to acknowledge the many, many places where you are grossly wrong. Your recent prediction of Intel bankruptcy in 5 quarters just makes you look like a fool. I would love to make a bet with you. My $500 says that Intel won't be bankruptin 5 quarters. Do you have a $500 that says they will? I didn't think so. You look like a fool and no one takes you seriously.

10:28 AM, July 20, 2006  
Anonymous Anonymous said...

graham i love that you ask him to cough up 500 bucks but then say he wouldn't do it without a response. of course he wouldn't do it anyhow, who would. Predictions are just that, anyone can make them, educated or not, they have chances to fail. If someone asked me to put up $500 bucks for an outcome 5Q from now, I would tell them no too, why, cuz in 5Q I can turn that 500 into 1000 easy anyhow, so what would be the point ;)

1:54 PM, July 20, 2006  
Anonymous Anonymous said...

"Intel's 2Q06 result is out, far below analyst expectations"

Consensus Expectations:
second-quarter profit of 13 cents sales of $8.26 billion, (according to a survey by Thomson Financial)

Actual: 8Bil, 15 cents a share

So revenue was ~2% below consensus and profit was ~15% above --> this leads to a conclusion of reults being far below analyst expectations?

5:16 PM, July 20, 2006  
Anonymous Anonymous said...

"Consensus Expectations:
second-quarter profit of 13 cents sales of $8.26 billion, (according to a survey by Thomson Financial)

Actual: 8Bil, 15 cents a share

So revenue was ~2% below consensus and profit was ~15% above --> this leads to a conclusion of reults being far below analyst expectations?"

And in other news:

-The channel has been stuffed completely full... Dell just can't take any more Netburst in their completely full warehouse.
- Year over year, Intel's profit dropped 50%
- $4.3 Billion of Inventory filled with Netburst (Please fanboys... go out and buy one to support your beloved company) equivalent to ONE QUARTER'S worth of inventory.
- 10,000 more Intel heads will be chopped by year's end (This I feel bad for since I'm an engineer, and it's not the engineer's fault... it's the management)
- People in the 3rd world finally logged onto the Internet for the first time, and realized they bought crap that no one in the civilized world wanted...
- Intel decides to buy up land in 3rd world on the cheap to store their obsolete Netburst 32-bit processors.

3:37 PM, July 21, 2006  

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