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Wall Street forks over Intel's future

How gross were the margins?

Intel told the best possible second quarter story, and few investors listened.

Wall Street pushed Intel shares down almost five per cent during Wednesday's trading. Investors seemed most concerned with the lackluster gross margins Intel reported. Meanwhile, the analyst crowd actually appeared to side with Intel's spin on the last three months.

From a chip sales perspective, Intel proved clear enough. It sold loads of laptop chips at decent prices, loads of server chips at not so decent prices, and less PC chips than it would like at indecent prices. AMD's presence continues to apply pressure on Intel's margins, but Intel remains strong enough to post an eight per year-over-year revenue rise against this pressure.

Or, as Alexei Oreskovic at The Street put it: "The main cause of consternation is Intel's gross profit margin, which came in at 46.9 per cent - the lowest level in years and short of Intel's own target of 48 per cent. Missing gross margins by about one percentage point isn't the end of the world. But the context of the margin weakness, which occurred during Intel's first quarter of year-on-year revenue growth since the end of 2005, was a red flag for some investors."

JMP Securities let everyone know exactly how it felt, downgrading Intel to market perform from market outperform. As mentioned, the analyst firm wasn't alone with investors selling off Intel at pace, during a pretty ho-hum day on the US markets.

A number of other analysts seem convinced by Intel's cheery story and think Wall Street mucked up on Wednesday.

JoAnne Feeney at FTN Midwest Securities placed blame with Intel's ever-flagging flash memory business - a unit that strapped Intel with a $300m loss during Q2 and that's going to be turned into a separate business run in conjunction with STMelectronics. She's feeling just fine about the long-term.

"With Intel's 2Q report last evening comes some uncertainty regarding pricing in MPUs," Feeney wrote. "NOR was the culprit, however, not MPUs.

"(Average selling prices) were lower, though, and this was disappointing, but INTC noted unusually high shipments in the channel and to emerging markets - where lower-end desktop and low-end notebooks comprise the majority of sales. This will tend to drag down average prices. Was AMD similarly affected? Perhaps, but less likely given AMD's mix, and our checks suggest costs there have fallen more and margins are likely to be up sequentially. We think the strong unit sales bode well for the second half - for both INTC and AMD."

And so a porcine Intel meets its lipstick.

You'll find more of the Revlon crew in Oreskovic's story.

It seems clear enough to us that Intel remains locked in a fierce pricing war with AMD. Intel executives suggested that some pressure has been pulled from server chips, although the surrounding evidence doesn't back up such claims.

CEO Paul Otellini, for example, argued during a call with analysts that customers will buy more and more two-socket systems instead of four-socket systems in the coming months. First off, that's an odd thing to say since more lower-end chips should only complicate Intel's pricing pressures. Secondly, Intel has its first new architecture MP chip coming for four-socket boxes. Why deflate this product before it ships?

Well, because AMD is about to put out Barcelona, which should shine on four-socket boxes. We suspect Barcelona will only add again to server chip pricing issues across the board as well.

Beyond the server, Intel admitted that desktop chip margins will remain tight. That leaves the notebook chip market once again as the place where Intel should shine in the coming months.

So, we're not sure the story gets a lot stronger, but it wasn't horrible to begin with thanks to a growing desire for mobile systems. ®

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