Intel chief executive Paul Otellini's cost cuts last year seem to have paid off. At the company's second-quarter results meeting on Tuesday, he announced that profits had rebounded compared with last year.
The chipmaker posted a 47 percent increase in net income during its second quarter, up to $1.3bn (£634m), or 22 cents per share. Wall Street had been expecting 19 cents per share. Intel said it had 90,300 employees during the second quarter, way down from the 102,500 employees it had at this time last year.
Revenue was also a little stronger than had been expected, up eight percent to $8.7bn compared with analysts' expectations of $8.5bn. The stronger revenue growth came despite the continuing decline of Intel's average selling prices as a result of strong price competition with AMD.
The second quarter of the calendar year is almost always the slowest period of the year for the PC industry, so it was no surprise that revenue declined from the first quarter to the second. But profit fell substantially compared with the first quarter. Part of the drop could be explained by a benefit of six cents a share in tax items applied to first-quarter earnings. Intel also reported lower demand for its flash-memory chips.
Otellini and chief financial officer Andy Bryant said during a conference call on Tuesday that demand for PCs and servers was stronger than expected in the second quarter. Pricing is still tough, however, especially in the low end of the PC market.
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Intel is trying to be more judicious about the low end of the market, recently focusing more of its attention on servers and notebooks, Otellini said. Those are more profitable categories and Intel is fairly strong compared with AMD in those segments, he said.
Intel also did better from its channel programme in the last quarter, Otellini said. Intel and AMD both have channel programmes that supply smaller system builders with processors, usually low-cost builders in emerging markets that favour desktop PCs. AMD had trouble with this market in the past couple of quarters due to over-commitments, which would naturally give Intel a boost.
One issue for Intel in the quarter was its gross margin, which contributed to the profit drop mentioned above and a sharp decline in the price of Intel shares during after-hours trading. The company's gross margin percentage (revenue minus the cost of making chips) fell to 46.9 percent — lower than expected and very low against Intel's historical margins. Analysts used to be disappointed when Intel fell below 55 percent margins, but the year-long price war between Intel and AMD has taken its toll on both companies — AMD's margins were down to 28 percent during its first quarter.
This quarter, Intel blamed its shrinking NOR flash memory business for the margin disappointment. The company is currently setting up a joint venture with STMicroelectronics to rid itself of the NOR business, which is losing ground to the faster NAND flash memory made by Samsung and others and used in iPods and cell phones. Demand was soft again this past quarter, Bryant said.
Intel's manufacturing operation has become more efficient over the past year, and so the company is reducing the amount of money it expects to spend on capital expenditures, Bryant said. Inventories are down, and the company is on track to introduce 45nm chips later this year, he said.
