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Intel too feels the pressure from the Q4 pricing war

While AMD was on the receiving end this past weekend for lower profits due to a heated price war, Intel wasn't able leave 2006 unscathed either. Intel's Q4 net income for 2005 totaled $2.45 billion USD while Q4 2006 net income fell 39% to $1.5 billion USD.

Revenue for Q4 2006 was also down 5% from the previous year to $9.7 billion USD. Despite the 5% decrease, Intel beat analyst estimates of $9.44 billion USD for Q4.

Looking forward, Intel expects Q1 2007 revenues to fall between $8.7 billion USD and $9.3 billion USD.

Intel pricing war with AMD was cited as the main reason for Intel's profit drop in Q4'06. Intel saw AMD's overall PC marketshare rise from 15.9% in Q3 2004 to 23.3% in Q4 2006. As a result, Intel has used a combination of lower prices coupled with a flood of new processors to combat the marketshare slide. "It looks like they are regaining share at some expense to price," said Greg Barlage of Baring Asset Management.

According to Intel Chief Financial Officer Andy Bryant, Intel's surge in shipments was due to demand for its Core 2-based processors introduced in mid-2006. Intel's Core 2-based processors closed the performance gap with AMD's K8 processors, offered cooler operating temperatures than previous NetBurst-based processors and added 64-bit functionality.

The news of Intel's profit slide comes just days after Intel launched a countersuit against Transmeta for patent infringements. Earlier today, it was reported that Intel may be closing down a manufacturing plant in Jerusalem and selling a flash memory facility in Qiryat Gat to trim costs.

Intel is also on schedule to open a new 65nm facility in China to satisfy demand for its processors. The plant will cost between $2.5 billion USD and $3.5 billion USD.

With 65nm production now becoming the norm for Intel's mainstream processor lineup, the company is now looking forward to 45nm production. 45nm samples of Penryn have already taped out and production silicon will find its way to consumers in the second half of this year.

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one step back to take two steps forwards
By nerdye on 1/16/2007 9:15:32 PM , Rating: 2
Intel may be off their overall profit margin from a year previous in the 4th quarter, but thats not a black and white figure. Intel continues to ramp up to 65 nm across the board, and will be at 45 nm cpu's coming soon. Intel is revamping old fabs, and building new ones, which ain't cheap. Amd has done rather well this last quarter, although also finding decreased overall profits. Yet Amd, obviously a smaller company, has not spent the same kind of clout future proofing their fabs, and needs to catch up quick. As expensive as it is to revamp and build new fabs, time can never be made up in the revamp and building process of fabs as fast as money can be spent, which is why the profit margin figures cannot be viewed in such black and white terms. Future proofing, one step back to take two steps forwards.




RE: one step back to take two steps forwards
By Viditor on 1/16/2007 9:37:26 PM , Rating: 2
quote:
Intel is revamping old fabs, and building new ones


Only 4 of Intel's 12 Fabs are able to be revamped...

quote:
Yet Amd, obviously a smaller company, has not spent the same kind of clout future proofing their fabs, and needs to catch up quick


Sure they have...Fab 30 is midway through it's revamp to Fab 38, and Fab 36 is brand new. Plus, AMD has helped build new lines at Chartered.


RE: one step back to take two steps forwards
By enumae on 1/16/2007 10:43:49 PM , Rating: 2
quote:
Fab 30 is midway through it's revamp to Fab 38


That is incorrect, FAB 30 is expected to begin transition to FAB 38 in the middle of this year.


RE: one step back to take two steps forwards
By Viditor on 1/17/2007 1:16:43 AM , Rating: 2
quote:
FAB 30 is expected to begin transition to FAB 38 in the middle of this year


Huh? They will be starting 65nm output by the middle of this year you mean...
Transition is to be finished by the end of the year.


RE: one step back to take two steps forwards
By gooser on 1/17/2007 10:33:42 AM , Rating: 2
....sources please


By enumae on 1/17/2007 3:46:41 PM , Rating: 2
Here is a link from AMD saying the transition will begin in the middle of 2007.

http://www.amd.com/us-en/Corporate/VirtualPressRoo...


Importance from an investor's POV
By Viditor on 1/16/2007 9:20:49 PM , Rating: 2
To be accurate, profits aren't the important metric at this point (for both Intel and AMD).

What's causing Intel to drop in after hours trading is the fact that their Gross Margin is at 49.6% (compared to 61.8% from a year ago).
When Conroe first came out, Intel promised to have the Gross Margin back into the mid-50% range by years end...obviously this hasn't happened.

It makes sense that by cutting the prices so low, Intel's profits (and GM) would drop, but that's a big drop!
The upside Intel was looking for was a gain in marketshare, but it doesn't appear that has happened...at least they wouldn't say that it had when they were asked (and of course they would have if it had happened...).

On the upside for Intel is that expectations were already fairly low, so they beat estimates on EPS and revenue




RE: Importance from an investor's POV
By Khato on 1/16/2007 11:34:36 PM , Rating: 2
Ayup, and Intel's gross margin being so low bodes quite ill for AMD's earnings release next week. It's too bad that AMD is willing to play the price war game still, else we could get back up to the mid-50's to low-60's level again. With AMD willing to kill their margins in order to try and keep their current marketshare, eh, it's difficult for Intel to not follow suit to some extent.

Sigh, where oh where did the $100 entry level celeron (or sempron if you swing that way) go? We miss you so.


By Viditor on 1/17/2007 2:36:21 AM , Rating: 2
quote:
Intel's gross margin being so low bodes quite ill for AMD's earnings release next week


But we already knew that...hence the earnings warning from AMD.
quote:
With AMD willing to kill their margins in order to try and keep their current marketshare, eh, it's difficult for Intel to not follow suit to some extent

To be fair, AMD's margins have been higher than Intel's the last few quarters...and Intel was the first to drop prices.


RE: Importance from an investor's POV
By ybee on 1/17/2007 6:17:18 AM , Rating: 2
Actually, the microprocessor segment results are great - the problems mainly lie in the flash segment and other smallish business segments.

CPU sales went up from $5.76 billion in 3Q to $6.52 billion in 4Q - a 13% percent increase in sales (compared to AMD's 3% increase). The margins in the microprocessor and chipset business are also very good. For a $0.76B increase in CPU sales (chipset sales didnt change significantly q-on-q) net income increased by $0.62B, meaning that the gross margin for microprocessors is well over 50%.

So intel increased its CPU market share by revenue and improved its CPU margins at the same time. Doesnt look good for AMD at all.


One more problem for Intel...
By Viditor on 1/17/2007 2:33:01 AM , Rating: 2
This just got posted on the news...

"European Union investigators have recommended that EU Competition Commissioner Neelie Kroes formally charge Intel Corp with illegally thwarting competition in the computer-chip market, the Wall Street Journal reported, citing people familiar with the case"
http://www.forbes.com/business/feeds/afx/2007/01/1...





RE: One more problem for Intel...
By cheetah2k on 1/18/2007 2:25:53 AM , Rating: 2
to shay


RE: One more problem for Intel...
By typo101 on 1/18/2007 5:45:42 PM , Rating: 2
haha. you mean touché?


Intel Hits Rough Waters, Profits Drop 39%!
By EglsFly on 1/16/2007 10:17:35 PM , Rating: 2
Obviously not a rosy story for Intel to have a profit drop of 39%.

Here is some info from AP:
http://biz.yahoo.com/ap/070116/earns_intel.html?.v...

quote:
However, investors were disappointed in the company's profit forecast for the current fiscal year and sent Intel's stock down 97 cents, or 4.4 percent, to $21.33 in after-hours trading.

quote:
The year has been a tough one for Intel in attempting to halt AMD's encroachment on turf Intel once claimed almost exclusively as its own.

Through the third quarter -- the latest period for which data is available -- AMD had gained about 5.6 percent in market share over last year, with much of those gains coming at Intel's expense, according to Mercury Research.





By coldpower27 on 1/16/2007 11:17:56 PM , Rating: 2
In comparison to Q4 2005 yes this is not so rosy looking, but the profit amount is larger then the prior quarter.

These percentages never tell the whole story, but their great for making good headlines. :D


Good for consumers
By Zurtex on 1/17/2007 7:42:22 AM , Rating: 3
Well AMD might not be making as much money as they had hoped, but the reason cited for both cases is the amount of effort they are putting in to getting good, cheap CPUs out there. After quite a period of AMD being able to charge very high prices for their products, because Intel wasn't even responding to the competition and just carried on over charging for their Pentiums, we now have what is as brilliant era for consumers to buy CPUs :D.




Big drop from last year
By DeepThought86 on 1/16/2007 11:06:14 PM , Rating: 2
Intel's Q4 2005 revenue: $10.2B
Intel's Q4 2006 revenue: $9.7B

Intel's Q4 2005 net income: $2.5B
Intel's Q4 2005 net income: $1.5B

Intel's Q4 2005 desktop + server net revenue: $6.4B
Intel's Q4 2006 desktop + server net revenue: $5.1B

Intel's Q4 2005 mobile net revenue: $3.1B
Intel's Q4 2006 mobile net revenue: $3.6B

This is pretty grim news. They're still very profitable in absolute terms, but that's a non-trivial drop in revenue and a huge drop in profits. They might have beat expectations, but that's because expectations were pretty low.

This is probably AMD's best year in a long while, and Intel's worst.




By ComatoseDelirium on 1/18/2007 12:18:10 PM , Rating: 2
Why is it that intels new 65nm Fab in China expected to cost 2.5 to 3.5 billion USD, with AMD's Dredsen fab topping 8.0 billion USD?




It's the same old song at Intel
By cornfedone on 1/16/07, Rating: -1
RE: It's the same old song at Intel
By slickr on 1/17/07, Rating: 0
By Viditor on 1/17/2007 2:29:34 AM , Rating: 2
quote:
intel is also opening 2 more fabs in vietnam and china

No, only one Fab in China...Vietnam is just a testing/assembly facility.
quote:
Not to mention that intel is curently 5 months ahead of AMD production

Intel is closer to 10 months ahead of AMD on process nodes (if that's what you meant).
quote:
when AMD releases it's 65nm Barcelona processors and level the difference in performance with intel, intel will release their NEW UBER HIGH TEcH 45nm processors

Uh huh...and the question is "so what?". 45nm doesn't improve performance, and we still don't know how good their yields will be.
quote:
intel costs of producing processors is 25% lower than AMD's

Ummm, somebody has been making numbers up...
1. Nobody outside of AMD/INTC management knows the true cost
2. Even as an estimate, the costs are at least very close to the same


By cheetah2k on 1/18/2007 2:22:46 AM , Rating: 2
While iNTEL will produce 25% cheaper processors with 45nm tech, doesn't mean that they will retail their chips 25% cheaper.

They have to absorb the transition costs from 65nm to 45nm, so don't expect any cost savings to be seen any time soon, especially if they're starting up 2 more fab plants.

The only immediate effect resulting from a 25% reduction in die size will be more cpus per wafer, and more cpus available on the shelves at the time of release.


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