Intel’s better than expected quarter not good enough

Santa Clara (CA) – Intel had good news yesterday for investors and since we know that Intel is typically a good indicator for the state of the chip industry, it should have been good news for chip makers the and the stock market. The problem: The market isn’t buying Intel’s optimism.

Intel’s first quarter earnings report is a sign of the times. There is so much negativity and pessimism that even an unexpected sight of light is met with doubt and skepticism. Intel reported better than expected revenue of $7.1 billion and net income of $647 million for Q1 2009. While sales were down 26% and net income was down 55% year over year, the company managed to increase its profit by 176% over Q4 (revenue was down 14% in the same time frame.)

The bad news was that overall CPU units were down while the average selling price for processors was about flat sequentially. However, since we were moving from the traditionally strong Q4 into a weaker Q1 that was not entirely surprising. And even Intel CEO said that “[Intel believes] PC sales bottomed out during the first quarter and that the industry is returning to normal seasonal patterns.”
He added: “Intel has adapted well to the current economic environment and we’re benefiting from disciplined execution and agility. We’re delivering a product portfolio that meets the needs of the changing market, spanning affordable computing to high-performance, energy-efficient computing.”

Strangely enough, the reaction from the stock market was negative. Intel shares dropped by as much as 4% this morning as investors apparently were not buying Intel’s message of an improving scenario. The situation is somewhat reminiscent of the Oracle Q4 2000 earnings update, during which CEO Larry Ellison said that the company did not see unusual developments and the earnings were in line with expectations. One analyst felt that Ellison’s comments were “not enthusiastic enough”, which sent Oracle’s stock into a 30% decline the following day.

It seems that analysts are also hoping for much more enthusiasm from Intel, which, however, is traditionally very conservative when making forecasts anyway.  Brian Piccioni of BMO Capital Markets said that “despite better-than expected results and management comment to the effect that it believes the PC market bottomed in the first quarter, it looks like that bottom is lower than we expected.” He noted that he sees “no signs an economic recovery has taken hold.”

But, in fairness, Intel somewhat agrees with this assessment. “There is still a lot of economic volatility out there,” said Intel chief financial officer Stacy Smith during yesterday’s conference call.

Still, we appreciate every piece of good news these days. And Intel’s quarter result was everything but bad.