Intel still optimistic despite some economic uncertainty

Though cable news pundits may predict hard times ahead, reports from IBM and Intel for 2008 show the technology industry isn't ready to mimic the banking industry's financial woes just yet.

Intel announced its second consecutive record-breaking quarter Tuesday, though earnings just barely met the company's own projections.

The chipmaker reported its highest-ever fourth-quarter revenue of $10.7 billion and earnings of 38 cents per share. Intel set expectations for this quarter at between $10.5 billion and $11.1 billion, while analysts were anticipating revenue of $10.8 billion and earnings between 38 cents and 44 cents per share.

While that's an increase in revenue of 10.5 percent over the same quarter a year ago, expectations were heightened following the company's record-setting third quarter, in which it blew away analyst forecasts. Intel shares were pummeled in after-hours trading, dropping more than 14 percent.

But let's not push the panic button quite yet. The company said revenue for its computing products was on target; revenue for NAND memory was below expectations; and while total microprocessor units set a record, average selling prices were flat for the quarter. It's not great news, but unless CEO Paul Otellini is throwing a smoke screen as bad as anything from the denial stage of the dot-com bust, Intel doesn't see the sort of tech sector meltdown that some fret could occur.

"In the fourth quarter we saw that computing-related products actually grew as we expected...on the back of a very strong (third quarter)," said Intel CFO Stacy Smith. "The part that caused us to be a little below (the) midpoint (of expectations) was the demand pricing environment was worse than we expected." He said demand in its CPU business in particular continued to grow in the fourth quarter, and the company said there were no unusual cancellations of orders or build-up of inventory. "All felt pretty healthy," Smith said.

Despite concerns over weakness in the U.S. economy, tech companies probably don't need to worry as much, as the U.S. makes less of a contribution to their success these days. As Otellini noted, "Seventy-five percent of Intel's revenue is not in the United States, and (outside the U.S. is) where most of our growth is coming from."

That way "a little bit of weakness doesn't result in an overall dramatic change to the overall forecast," said Dean McCarron, analyst with Mercury Research. "It puts a much smaller impact on the numbers than it did 10 years ago."

For the first quarter of 2008, Intel is projecting revenue between $9.4 billion and $10 billion, representing more than the usual seasonal decline of about 7 percent. Smith did not attribute the decline to any one significant factor, but a combination of continued weak pricing on NAND memory and an end to some supply agreements with Marvell.

But looking ahead, Otellini attempted to assure analysts that he is optimistic about the coming year.

"Q1 is not clouded by a pessimistic view of computing," he told analysts. He said he agrees with--and Intel is planning around--industry analyst expectations of "low double-digit growth" in PC unit volumes in the coming year. The continued shift toward mobile computing will be a main factor in driving growth in the industry, Otellini said.

He didn't seem too alarmed about the overall economy, despite uncertainty in the U.S.

"I said I have the same caution that everyone in America that watches CNBC has today. You hear all the pundits saying that the world is going to a trash basket, it makes you worry," said Otellini. "It may be a self-fulfilling prophecy. But, he emphasized, "We don't see anything on the horizon, our customers don't see anything on the horizon."

"It would be imprudent not to be cautious about it though," he added.

Big Blue on track
Another important indicator for the health of the tech industry, IBM announced earlier Tuesday that it anticipates better-than-expected revenue from the fourth quarter. The world's biggest technology services company is set to report a 10 percent rise in revenue. IBM's success can also be attributed to strong performance in markets outside the U.S.--Asia, Europe, and emerging countries--according to a statement by IBM CEO Sam Palmisano.

A combination of new products categories like smaller and more inexpensive mobile computing devices and the growth of emerging markets outside the United States are all good signs for the worldwide technology industry, said Mercury Research's McCarron.

One very tiny new product indicates that the demand for lower-cost computers is high, which should be beneficial to both Intel and the tech industry in general. The Eee PC from Asus, a sub-notebook selling at $399, is doing surprisingly well (between 350,000 and 400,000 units) since its recent launch, which is encouraging for a non-tier 1 computer maker. It's a product category that is doing well in emerging markets, and Intel's ability to address that demand has "significant potential of growing the market," said McCarron.

"It demonstrates there is significant price elasticity in the market," he added. "As we expand the lower-cost options that are available...we see expansion of the overall market, (so there) is a number of fairly positive indicators, whether it's the technology or the markets themselves."