MANHASSET, N.Y. On the surface, the strong fourth quarter and full 2004 year financial results posted by Intel Corp. should silence skeptics critical of recent moves by the chip making giant. However, a closer look at Intel's results indicate the company faces stiff challenges in the year ahead.
At a time when rival semiconductor suppliers are burdened with lingering inventory issues and depressed earnings, Intel's results don't look that bad, considering the company exhibited less-than-stellar financial results through much of 2004 and stumbled through a series of missteps and reverses that even led outgoing chief executive Craig Barrett to fire off a letter to employees telling them to shape up.
Some of those moves included scrapping plans to enter the LCOS (liquid crystal on silicon) display market, pulling the plug on a 4-GHz Pentium processor and recalling several desktop PC peripheral logic chip sets for manufacturing flaws.
Nevertheless, Intel has stuck to its guns, continuing to push heavily into next-generation 300-mm, 65-nm process technology the company insists will result in more cost-effective processors. Barrett has been steadfast in telling analysts and investors Intel is marching down the right technology path.
During a conference call Tuesday (Jan.11), incoming chief executive Paul Otellini said Intel would continue its adoption of next-generation process technologies as the company increasingly focuses on technology platforms of multiple chips rather than individual microprocessors. To help accomplish this, Intel plans to raise capital expenditures over 30 percent in 2005.
While the strategy appears laudable, it has so far cost Intel a lot of money, said one industry analyst.
A report by Princeton Tech Research analyst Paul Leming noted that while Intel's fourth-quarter revenue rose 10 percent over a year, operating income declined 9 percent. In fact, margins on incremental revenue were actually negative during the fourth quarter.
The report said the culprit was manufacturing costs that have spiraled by 50 percent over the past six months due to poor manufacturing yields and low capacity utilization.
Intel's 2005 outlook appears to bear out analyst's concerns. Otellini told analysts Intel's gross margin would hover around 55 percent during the first quarter of 2005, reflecting startup and other costs involved with moving to 65-nm processes. Intel projects gross margin reaching 58 percent by the year's end.
Princeton Tech Research believes Intel's backloaded gross margin guidance is based on another strong finish, which the firm said is unlikely as the company's long term guidance has historically not been accurate in recent years.
The firm believes capacity utilization at Intel's 200- and 300-mm fabs is poor and can only be solved by closing several of the 200-mm fabs.
Another reason for concern is the fact that Intel rode 2004 to a strong finish because of a robust global market for both desktop and mobile processors. Intel said during the conference call a strong IT market drove sales last year and is expected to continue into 2005.
But how long can the IT market sustain positive momentum? Although several recent market studies project double-digit PC market growth in 2005, one can never be certain those projections will hold true, given the sometimes fickle behavior of corporations in a turbulent global economic and political climate.
Given Intel's wide ranging influence on the electronics industry, many hope that the company's optimistic outlook has a positive ripple effect. But many also hope that the company's recent checkered history doesn't repeat itself.