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Thursday, January 15, 2009

Intel (INTC) 4Q:2008 results

Intel reports in-line revenues, gross margins at the low end of their 55 +/- 2% forecast. We knew that, they preannounced twice.

Guidance is a little fuzzier than usual. They're planning for revenues around 7 billion. Putting that into typical Intel speak, that would be $6.7 - $7.3 billion, below the consensus of ~7.3 billion. Really this is a down 15% guide down, which is at the upper end of semiconductor industry guidance of down 15-25%. The lowest number I heard was $6.8 billion. The stand-out number from the guidance is gross margins in the low 40s. That's off the charts bad and frankly suspicious – one would think they could beat that number pretty easily. Clearly Intel is planning some price cuts.

Typically Intel bottoms out on large inventory charges which enable them to inflate gross margins as they sell previously written off inventory. I guess they're saving the charge for next quarter when they're planning for gross margins to bottom. Speaking of inventory, they're showing absolute inventory up 10% q/q on a revenue decline of roughly 20%. The lower gross margin guidance suggests they'll be throttling back manufacturing over the course of the quarter… and possibly implies a big inventory writedown. That's what they should do.

Intel's capex came in at $5.2 billion for the full year and guidance of flat to slightly down is better than the street's expectation of down 20%. Capital equipment companies exposed to Intel include: FORM, NVLS, ASML, AMAT, LRCX, COHU. There are probably more but those come to mind. That group is starved for positive news and Intel has one of the largest capital spending budgets in the world. Of course, my initial reaction to that number is it has to come down. They're spending as if revenues didn't just drop 30% for them in 6 months. Uh guys, it did.

Eye-balling this "full year spending" number they've never given before, 10.4 – 10.6 billion looks like its slightly higher than analyst models so there's some operating margin pressure.

Intel has the potential to be a reversal event – historically many bottoms and tops are set by Intel's quarterly report. That said, I would prefer to see the stock down off these numbers. We're getting close to $12 which is where I think picking away at a long position makes sense. Unfortunately, it doesn't look like we're going to get near-term capitulation in the name or the sector, which would make things a hell of a lot easier. It's never easy, is it.

No green lights from me here one way or the other. It's a lousy number. I still need to see a big inventory write-off and the stock at $12 to think about buying it.

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