Thursday, December 14, 2006

Calls of Note Part 1

- JP Morgan notes their checks indicate Intel's (NASDAQ:INTC) 4Q06 is on track to meet their $9.4 billion (up 8% QoQ) revenue estimate, in line with company guidance of up 4%-11%, and roughly in line with Consensus of $9.5 billion (up 8% QoQ). Firm believes Intel is also on track to meet gross margin guidance of 50%, in line with JPM estimate, due to high utilization rates.

They believe Intel is experiencing strength in the notebook processor segment due to a strong seasonal build as JPM's Asia research team now expects 4Q06 notebook growth of 23%, slightly
above an average of 20%. Checks indicate Intel's desktop processor business (roughly 28% of 3Q06 revenue) is below plan due to poor demand.

Checks also indicate Intel is on track to build inventory in the December quarter and they view the high inventory levels (92 days in 3Q06, near a record high) as a risk to margins in the coming quarters. Firm's checks also indicate Intel's inventory is rising in the channel in hopes of stronger than seasonal PC demand in 1Q07 driven by Vista, which the firm does not believe will happen. Processor inventory in the channel normally decreases during the fourth quarter.

While the firm is positive on recent restructuring efforts they remain Neutral on INTC due to belief gross margins should decline to the high-40% range during 1H07 due to record inventory, higher start up costs, and higher depreciation. INTC is trading at 3.5X C06 sales, below the mid-point of a historic range of 3.0X-5.0X sales.

Notablecalls: Not actionable but good to know category. Mixed emotions about the Vista upgrade as research has shown that the last time MSFT's Windows created a meaningul upgrade cycle was when 95 was released. Must say I agree more with JPM here regarding the miniscule impact of Vista on the overall PC demand. However, I continue to see Micron (NYSE:MU) (and also QI) as the main beneficiary of Vista as most PC's running the system will need their RAM upgraded.

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