Has Intel Turned a Corner Yet?

The first stages of Intel's latest massive corporate restructuring are just under way, but already, investors are looking for the first signs that the juggernaut is turning around and heading a positive direction. Yesterday's news from the company wasn't good, but wasn't unexpected either; and this morning, investors may be realizing that disaster is not on the immediate horizon after all.

During its third quarter 2006 conference call yesterday, Intel revealed its quarterly earnings are down somewhat over the same quarter in 2005 -- down 12% to $8.7 billion -- but slightly higher over the spring quarter. The company's release last July of its most important processors to date, the Core 2 Duo series, was very positively received.

The problem is, that introduction was costly to produce, and in order for the new chips to make a splash in the market -- especially against the value leader, AMD -- the company had to drop its average selling prices (ASP), almost three percent over prior levels.

And with Core 2 Duo's near-term success, the shelf value of pre-existing inventory dropped, so the company ended up making less on its Pentium Ds and Pentium 4s, in the midst of their being phased out.

The cost of Core 2 Duo's success ended up being the worst news of the day yesterday for Intel, as income continued to show discouraging numbers. Net income was down 35% over the previous year's third quarter, to $1.3 billion. But to put this into some perspective, in the second quarter of this year, net income was only $900 million, after having dipped from $1.3 billion in Q1. So after the last quarter's dismal drop of 57% annually, 35% may not be so bad.

More positive pointers for Intel included some positive numbers for its chipset business. Typically, when Intel has done well here, it hasn't meant much, because the company historically has sold to the "value" segment of the market where margins are usually low anyway. But with the onset of the Core 2 Duo era has come some welcome consumer interest in Intel chipsets on the high-end -- the 965 and 975 series, particularly -- and with others such as Nvidia only now coming out with competitive components, Intel has almost has this quarter to itself in chipsets.

However, slightly higher margins in the chipset arena, plus a $100 million pickup from the sale of the company's investment in Micron Technology, weren't exactly the full-course meal that investors were hungering for yesterday. The words investors were wanting to hear from Intel executives were not "high-end chipset" but "market share."

Specifically, is there any proof yet that Core 2 Duo may have acquired a couple of points from AMD's Athlon 64 X2? While independent figures have yet to be revealed, CEO Paul Otellini did indeed utter those two words, giving investors reason to believe the upswing may be in the works.

Helping give some momentum to that upswing may be the company's first positive guidance in several quarters. Revenue could be higher, conceivably by as much as $1 billion over the prior quarter to $9.7 billion (on the high side of estimates), with an anticipated restructuring charge of only $125 million, and gross profit margin staying about where it is now, at 50% - at least not headed any lower.

So for a change, Intel gets to contribute to this week's stock market rally, moving higher by about 1% in late morning trading Wednesday.