Why Intel earnings are not enough?
Why Intel Didn't Really Beat the Street
by Jeremy Lopez | 08:13 PM | 04-18-00
Intel INTC reported earnings Tuesday evening that were technically ahead of expectations, but the company?s first-quarter performance left something to be desired.
Leading up to the announcement of Intel's first-quarter results, the Street expected the company to produce earnings of $0.69 per share, excluding charges for the amortization of goodwill. On the surface, it appears that Intel?s first-quarter results easily beat those expectations. Earnings per share came in at $0.88 (again, excluding the amortization of goodwill).
While this would appear to be an earnings blowout, a closer look at the numbers tells a different story. The company reported a one-time tax benefit and higher-than-expected gains from the sale of equity investments. If one were to exclude these two one-time events from earnings, Intel would actually have missed expectations by a penny.
During the first quarter, Intel realized a tax benefit of $600 million dollars because the IRS reversed the amount of taxes it collected from the company through 1998. Because the gain was a one-time event, this $600 million -- or $0.17 per share -- should be subtracted from the company's first-quarter results. Before this tax gain, Intel?s earnings work out to $0.71 per share, which is still $0.02 better than expected.
But the story isn't finished yet.
Enter gains from the sale of equity investments. Intel operates a $10 billion venture-capital unit that owns equity stakes in numerous young technology companies. Intel regularly harvests gains by selling off portions of these investments as they appreciate. Because of the size of the venture-capital unit, Intel's equity gains are beginning to comprise a larger portion of the company's earnings. While this isn?t bad by itself, it?s arguable that these gains are not a part of Intel?s core business. Moreover, earnings from equity gains aren?t sustainable, since they're subject to the whims of the stock market.
For the past two quarters, Intel has realized much higher gains from the sale of equities than it had led investors to expect. In the fourth quarter of 1999, for example, Intel realized investment gains of $0.09 per share, or $0.04 higher than expected. The quarter just reported was the same story.
Intel led investors to believe that it would realize $500 million in investment gains in the quarter just ended, whereas it actually reported gains of $640 million. The resulting difference accounts for about $0.03 per share, which should probably also be subtracted from Intel?s bottom line. That leaves us with $0.68 per share in earnings, or a penny less than expectations.
Revenues were another source of disappointment in the quarter. Intel?s sales were down about 2% versus the prior quarter, mostly because the company still could not keep up with demand for its higher-end chips. In sharp contrast, arch-rival AMD AMD was able to boost its top line by 2%.
Granted, Intel?s first quarter wasn't awful. Intel held onto its market share, despite AMD?s stellar first-quarter performance. Intel also has some promising product introductions scheduled for the second half of the year that should put additional pressure on AMD.
But Intel?s supply issues probably won?t be fully resolved until the third quarter. Until then, it's unlikely that investors will see truly strong results from the microprocessor giant. |
