Taken aback by the steep and unexpected price declines in the NAND memory business, executives of top semiconductor are moving quickly to stem the resulting margin erosion they’ve experienced just in Q1.

"This business will not be a drag on Intel," declared Paul Otellini, Intel Corp. president and CEO, during the start of the company’s annual investor’s day conference last week. "We’re going to fix it. Or we’re going to make sure it’s profitable."

That take-no-prisoner attitude will resonate with Andrew Grove, the former chairman and CEO of Intel who in his 1996 book, "Only the Paranoid Survive," recommended companies remain on the lookout not just for new opportunities but also for treacherous market conditions that could derail growth plans.

Adept at pithy phrases that cut straight to the heart of business management situations, Grove, who retired as Intel chairman in 2005, seldom underestimated an opponent—or the likelihood that a predictable market condition, however remote, would eventually occur.

"A fundamental rule in technology says that whatever can be done will be done," Grove said on one occasion.

Missed forecast
Otellini and his management team are bound to apply Groves’ dictum even more closely to forecasting, an area of the technology business that has stymied even the most brilliant financial minds.

The stiff and unexpected pricing decline in the NAND memory market have generated concerns at Intel and elsewhere about demand strength and revenue growth in Intel’s main microprocessor business. These concerns have been magnified as the U.S. economy continues to sink.

Otellini assured analysts and investors that Intel remains on track in its other businesses, pointing out that Intel is already taking steps to focus the NAND business on higher-value products while "modulating investment in capacity" to reduce operating costs.

It would be an understatement to say Intel missed its forecast for a Q1 price decline in the NAND flash memory market. The company expected Q1 NAND pricing to fall 27 percent from the preceding quarter. Instead, prices tumbled 53 percent, clipping several percentage points from projected gross profit margins for the entire company in 1Q.

"Pricing has moved very rapidly, much more so than we thought," Otellini acknowledged.

Business projection
While the missed forecast mainly concerned the NAND memory market, it nevertheless calls into question projections about other Intel businesses. For instance, several analysts who track the company responded by promptly cutting their revenue and profit estimates for Intel. They did so despite Otellini’s assurances during his Investors’ Day presentation that intended to ease investors’ concerns.

At least one analyst thinks Otellini is taking Groves’ advice seriously. "We are encouraged by management’s apparent determination not to let this segment become a sustained drag on the company’s overall performance," John Barton, an analyst at SG Cowen Securities, said in a report.

- Bolaji Ojo
EE Times