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Intel, Apple Results Show Reversal of Fortunes

April 20, 2006|Terril Yue Jones | Times Staff Writer

Intel Corp. on Wednesday posted its biggest drop in quarterly profit in four years. But the chip giant might have lagged further if not for a boost from an unlikely source: Apple Computer Inc., which this year switched to Intel chips and on Wednesday reported a blockbuster quarter.

Despite their new connection, the two Silicon Valley icons have followed contrasting trajectories in recent months. Intel's profit fell 39% in the first three months of the year as it fought intense competition from rival chip maker Advanced Micro Devices Inc. Apple, meanwhile, enjoyed a 41% jump in net income as sales of its iPod media players didn't miss a beat.

The changing fortunes of Intel and Apple illustrate the vagaries of the tech economy.

"In Silicon Valley, in general, you can have what seems to be a huge winner, but that changes very quickly," said Michael Cohen, research director for Pacific American Securities. "Apple is a great example. At one point their stock was ripping and people thought they'd own Silicon Valley. Then along came cheap IBM clones and scuttled the company. Now along comes the iPod and brings them back from the ashes.

"Intel's really the reverse," Cohen continued. "People think they're an invincible entity, and along comes AMD and shows them they're not the only one who can make high-end microprocessors." Cohen is a holder of AMD shares.

Intel, which for years differentiated its semiconductors with the "Intel Inside" campaign, has increasingly seen its products regarded as interchangeable commodities, giving AMD a larger opening to pitch its high-end chips to computer makers. Apple, by contrast, has kept its products fresh by frequently juggling its iPod lineup in particular and adding features.

Over the last three years, Apple shares have risen tenfold while Intel shares have barely budged. Apple gained 4% in extended trading after the earnings release. It fell 57 cents $65.65 during regular trading. Intel rose about 1% in late trading after climbing 17 cents to $19.56 during market hours.

"Things are not well at [Intel] right now," said Susquehanna Financial Group analyst Kevin Vassily, who owns Intel shares.

Although Intel remains the world's largest chip maker, powering more than 80% of computers, first-quarter earnings fell to $1.3 billion, or 23 cents a share, from $2.18 billion, or 35 cents, last year. Revenue inched down less than 1% to $8.94 billion -- still slightly higher than the $8.91 billion expected by analysts surveyed by Thomson Financial.

Like most technology companies, Intel's earnings were affected by a change in accounting rules requiring that stock option compensation be treated as an expense. Adjusting for those changes, the company said it would have reported profit of $1.6 billion, or 27 cents a share.

Martin Reynolds, a computer and semiconductor analyst with research firm Gartner Inc., said that despite Intel's deal with Apple, the company is being battered by AMD. "Apple only has 3% or 4% of the [U.S. personal computer] market," he said. "It's not that relevant compared with what they're losing to AMD."

AMD has gained market share in recent months, and analysts say its server and notebook computer processors are more advanced and efficient than those from Intel. Santa Clara-based Intel warned last month that it would fall short of expectations, while Sunnyvale-based AMD said last week that it recorded its best quarterly performance in five years.

"They're really under pressure from AMD," Reynolds said. "They're $600 million short from a year ago, and now you see all of that money sitting in AMD's coffers."

For the current quarter, revenue will be $8 billion to $8.6 billion, Chief Financial Officer Andy Bryant said on a conference call with stock analysts. Analysts surveyed by Thomson had expected $8.85 billion in revenue and profit of 21 cents a share.

"The first half of 2006 is a time to reset our business," said Intel Chief Executive Paul Otellini. "We are working to ensure that inventory returns to more appropriate levels, while adjusting for newer products in the second half of 2006."

Cupertino-based Apple said it earned $410 million, or 47 cents a share, compared with $290 million, or 34 cents, a year ago. Analysts had expected profit of 43 cents. Revenue rose 35% to $4.36 billion, trailing analysts' consensus of $4.5 billion.

"It was a solid quarter, a little light on revenue, but that was expected given seasonal patterns," said Shaw Wu, an analyst with American Technology Research. "They gave in-line guidance -- it was below consensus, but that's pretty meaningless given how crazy some of those [expectations] were."

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