COMMERCIAL NEWS
San Diego, CA — Michael Kanellos reports that it looks like the good times are here to stay in the semiconductor market, at least for the near future.
Despite chip shortages, an embarrassing motherboard recall, and likely market share losses to rival Advanced Micro Devices in the consumer sector, Intel is expected to report continued growth in operating profits when it posts its earnings for the second quarter.
Intel is expected to report earnings, excluding extraordinary events, of around 36 cents per share split-adjusted for the second quarter, according to a consensus of analysts polled by First Call/Thomson Financial. That would be a 39 percent increase over disappointing earnings of 26 cents a share for the same period a year before. Revenue is expected to come in around $8 billion.
By contrast, AMD is expected to report earnings of $1.14 per share on revenue of around $1.1 billion, making for a third straight profitable quarter.
While hitting numbers would mean that revenue and operating profits were roughly flat with the first quarter for both companies, that is good news. Historically, PC-centric companies dip in the second quarter because of a seasonal hiccup in demand.
A shortage of microprocessors and flash memory, however, has kept price cuts steady, to the benefit of both companies. Intel and AMD are, respectively, No. 1 and 2 in both markets.
“The pricing environment has been fairly benign,” said Dan Scovel, an analyst at Needham & Co. “Woe to anyone who bets against Intel. We also think AMD will do fairly well.”
Few see clouds on the horizon. Demand will continue to increase in the second half, said many, and Intel is likely to finally close the gap on processor shortages that have lingered since last October.
Increased production will also lead to the return of aggressive price cuts, Merrill Lynch analyst Joe Osha predicted in a written report. AMD and Intel are expected to slash prices later this fall. Intel reduced wholesale prices on select Pentium III chips earlier this week. Like recent price slashes, however, the effect of the cuts is likely to be muted by the shortage.
Debates on how the company did in the past three months, though, will likely linger for days, as a number of exceptional circumstances will make the numbers difficult to digest.
Overall, Intel is expected to report earnings of 98 cents a share, or 49 cents adjusted for a split that will be accounted for tomorrow. The figure includes income from investments totaling approximately $2.3 billion, far more than the $725 million in investment profits expected earlier in the quarter.
Intel also will take a $200 million charge to cover the cost of recalling faulty motherboards, which contained a chip called the memory translator hub. Acquisitions took place during the quarter as well.
“If you make a matrix, you can probably get 20 estimates,” joked Scovel. “It is going to be adjusted seven ways from Sunday.”
AMD’s earnings, by contrast, should be fairly straightforward. The main question surrounding the company’s conference call lies in its projections for the future. The company has said it wants to achieve 30 percent market share by the end of the year. To get there, AMD has said it will have to get into the market for computers used in business environments.
To date, most major companies have shied away from adopting AMD processors for the business market, but progress is occurring. Cobalt Networks, one of the leading manufacturers of special-purpose server appliances, uses an AMD K6-2 chip in its Raq line – one of the few cases in which an AMD chip is used in a server. Cobalt just upgraded to the 450-MHz model.
“Mustang,” a code name for a version of Athlon for servers, is due toward the end of the year.
In any event, a combination of strong public acceptance of AMD’s Athlon processor and shortages at Intel are likely to lead to market share gains for AMD in the consumer market. Most PC manufacturers, in fact, have begun to feature Athlons, rather than Pentium IIIs, in their top-of-the-line boxes. Despite the gains, improved manufacturing at Intel could slow progress.
“All of the trends are indicative of AMD gaining share,” said Dean McCarron, principal at Mercury Research. “The question will be, Where will they get it from in the future?”
Added Scovel: “Intel has been constrained by availability, and AMD has been grabbing as much market share as they can.” Nonetheless, he said, outward damage to Intel could be limited because of its dominance in servers and business desktops.
Both companies are expected to discuss future product plans. Intel will release Itanium, its first 64-bit chip for complex servers, and the Pentium 4, the successor to the Pentium III, later this year. The company will also, in conjunction with Analog Devices, unveil its first digital signal processor, a key component in cell phones.
AMD, meanwhile, will aggressively market its recently released Duron chip for inexpensive PCs and will come out with Mustang and “Corvette,” a version of Athlon for notebooks.
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