Intel earnings: A darker shade of green?

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Wall Street went nuts for Intel's strong earnings report after the company blew out expected numbers. Shares of Intel (INTC) rose from the $16 on July 8 to over $18 in the wake of the report.

But a closer read of the numbers shows that Intel, and by extension the global tech economy, is not out of the woods yet. Almost all of the improvement came from sales in Asia, where the Chinese stimulus package played an outsize role. The European Union appeared particularly weak and the U.S. had yet to recover. Most important, revenues for corporate sales of PCs and servers did not show any real signs of recovery. Traditionally, the tech sector cannot bounce until big companies start buying.
Here's a breakdown of the release with a dose of reality injected. Revenues were up from Q1 2009 by $879 million but were down by $1.4 billion from the same period in 2008, a more relevant comparison. Earnings, likewise, were down by 10 cents per share as compared to the same quarter last year, a drop of more than 50 percent. Gross margins were higher but that likely resulted from Intel lowering its headcount by 2,000 bodies rather than improvements in the market (ht to Karl Denninger on this).

Average selling price of microprocessors continued to decline, driven by the rise of netbooks. This is a longer term problem for Intel and for the tech sector, as the entire PC ecosystem finds it margins and revenues compressed by customer expectations driven by adoption of these popular, barebones machines. With its Atom processor Intel is a leader in this segment but that's doesn't mean Intel won't suffer significant margin declines as a result.

Inventories continued to decline. That's both good and bad. It means any snapback in Intel could be more pronounced since semiconductors tend to ricochet back off the bottom when inventories drop so low. But the fact that inventories are still dropping calls into question whether the sector has turned yet.

Curiously, Asia-Pacific revenues (read: China) rose by an impressive $762 million, constituting the vast majority of the sequential $879 million quarter-over-quarter revenue increase that so cheered the analysts. In other words, Intel's recovery at this point is almost entirely reliant on China. To what degree that means reliance on Chinese government stimulus remains unclear.

All of this said, Intel did not have a bad quarter. It was only a better than expected quarter and less bad news is good news quarter. But for all the optimism sprouting forth, a dose of reality is due as it seems Intel and the tech sector may not be entirely out of the woods yet.
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