It’s no secret that technology companies have been having a bit of a tough time of late, but their fortunes could be changing if industry bellwether Intel’s results are anything to go by. The chip-maker smashed analysts’ estimates in the quarter to December 26, as net profit climbed an eye-watering 875% to $2.3bn. However, the numbers were always going to look good after Intel’s shaky performance last year – and performance in this industry is notoriously cyclical. And greater challenges lie ahead…
At first glance, Intel’s results certainly make for impressive reading. Revenues jumped 28% to £10.6bn, while its profits topped $2bn despite the $1.25bn cost of its litigation with rival chip maker AMD. Intel says this growth was largely due to shifting lots of PCs at Christmas – it seems the signs of recovery in the economy have persuaded people that they can afford to upgrade their computer, while the launch of Microsoft Windows 7 clearly helped too. And at a broader level, the good news is that since Intel sits near the bottom of the supply chain, all those companies higher up the chain are presumably doing pretty well too.
But actually, these results aren’t quite as good as they appear. Intel recorded profits of $2.3bn in the same quarter of 2007, before a 90% dive to $234m in 2008. So all this spectacular rise does is take Intel’s profits back to pre-recession levels. That’s not to be sniffed at (some businesses would kill for a recovery like that), but it does mean that Intel is unlikely to be able to sustain this level of growth. In fact, CFO Stacy Smith thinks revenue for the current quarter will be about 8% down on last quarter, at about $9.7bn (apparently this is ‘consistent with the average historical seasonal decrease’).
And a post-Christmas slump may be the least of its worries. It remains to be seen whether the replacement cycle - the amount of time it takes corporates to replace their computers - will ever return to pre-recession levels. And although there's no sign of our appetite for technology diminishing (quite the reverse in fact), a bigger concern may be that the next generation of devices – smartphones, tablet PCs and so on – may not need the kind of power and performance that Intel’s chips offer. It’s like trying to put a jet engine in a Ford Fiesta. The result could be that Intel’s market position comes under threat from smaller rivals, whose chips are better suited to such devices. So despite this huge profit jump, it’s still a nervous time for Intel.
In today's bulletin:
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Intel chipper as it smashes forecasts
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