WSJ on Intel Q1:
Intel Beats Earning Estimates
On Strong Demand for Chips
By DAVID P. HAMILTON
Staff Reporter of THE WALL STREET JOURNAL
Intel Corp., shrugging off concerns that PC sales might be slowing, beat
earnings expectations for the first quarter and announced plans to boost
capital spending in order to meet higher-than-expected demand for its
microprocessors.
The Santa Clara, Calif., chip maker also reported a substantial gain from
its large investment portfolio that helped offset the higher costs associated
with its expansion plans. Such offsets are sometimes criticized for
obscuring a company's true operating performance.
One-Time Gains and Charges
Intel said net income for the quarter rose 37% to $2.7 billion, or 78 cents a
diluted share, from $2 billion, or 57 cents a share, in the year-earlier
period. Results for the quarter, however, were complicated by a number of
one-time gains and charges.
The company's latest results included acquisition-related costs of $313
million for amortization of goodwill and other intangibles, as well as $62
million in one-time charges for in-process research and development. Intel
also benefited from the end of a U.S. government audit of its tax returns
through 1998 that led to the reversal of previously accrued taxes, reducing
the quarter's tax provision by $600 million, or approximately 17 cents a
diluted share.
Absent all such special items, Intel reported
profit of roughly 71 cents a diluted share.
Analysts surveyed by First Call/Thomson Financial had expected the
company to report earnings of 69 cents a share, excluding special items.
Revenue rose 13% to $8.02 billion from $7.1 billion in the year-earlier
quarter.
Stock Slips After Hours
Intel shares jumped $6 to $129 in 4 p.m. Nasdaq Stock Market trading
Tuesday on expectation of a strong earnings report, which was made after
markets closed. In after-hours trading, Intel stock fell back to $125.375.
"Demand was strong across all product lines," said Andy Bryant, Intel's
chief financial officer. "Our biggest problem now is getting enough product
out to our customers."
Mr. Bryant said Intel has consistently underestimated market demand for
most of the last year, and said the company isn't likely to resolve the
problem until the second half of this year. Shortages of several Intel parts,
including a key chipset and Pentium III microprocessors running at speeds
of 800 megahertz and up, have irritated several PC makers and created
opportunities for underdog competitor Advanced Micro Devices Inc.,
which last week posted quarterly profit that was double expectations.
Largely as a result, Intel plans to boost its own capital spending to $6
billion in 2000, up from an earlier estimate of $5 billion. "If you look at that
increase, it's an acknowledgment that says we need to think of the business
as having a higher underlying baseline than we thought," Mr. Bryant said.
Aggressive Expansion of Products
Intel, the world's largest chip maker, plans a particularly aggressive
expansion of its product line in the coming year. It has already spent
heavily to convert several of its factories to a new 0.18 micron
manufacturing process that allows it to make faster chips that dissipate less
heat.
Later this year, Intel plans to launch three new microprocessor lines,
including the Itanium, its long-awaited high-end microprocessor for
computer servers, as well as a successor to the Pentium III and an
inexpensive new processor for low-end PCs and other devices. The chip
maker has also invested heavily in the fast-growing market for
communications and networking chips.
Higher capital investment and spending on research and development
would normally threaten to depress earnings, particularly if revenue remains
flat, as Intel is forecasting for the second quarter. But the chip maker has
an ace in the hole in the form of its considerable investment portfolio, which
can generate gains to offset higher spending. In the first quarter, Intel
reported $449 million in net gains on its portfolio.
"Even though their expenses are higher, the company can continue to use
its investment portfolio to buffer [earnings] volatility," said Ashok Kumar,
an analyst with U.S. Bancorp Piper Jaffray. Mr. Bryant insisted that Intel
doesn't use its sales from its portfolio to manage its earnings, and said that
it makes investments strictly for strategic reasons, not to meet financial
objectives.
Despite renewed signs of life at AMD, whose new high-end Athlon
processor has proven unexpectedly popular with PC makers, Intel officials
said they aren't worried by the competition. So far, in fact, both Intel and
AMD appear to have gained market share at the expense of several
smaller chip makers, most of whom have since left the market.
According to Mercury Research Inc., Intel boosted its global market share
to 80.1% in the first quarter from 80% in the fourth quarter of 1999.
AMD, meanwhile, saw its share grow to 17% from 16.6% in the same
period.
Still, Intel's pricing remains under pressure. While the average price of its
microprocessors had started to rebound in the fourth quarter of 1999 after
a long fall sparked by a bitter Intel-AMD price war, Intel was unable to
raise average prices further in the first quarter. Mercury Research
estimated that Intel's average pricing remained flat at $193 in the first
quarter.
Paul Otellini, head of Intel's architecture group, conceded in a conference
call with analysts that Intel is unlikely to see opportunities to raise pricing in
the coming year. While he argued that Intel's competitive position is as
strong as it has ever been, he said prices won't rise "because we do have
competition, and we intend to be competitive in every segment of the
marketplace." |
