Intel: Chip maker exceeds
third-quarter earnings
estimates, but offers meager
forecast for fourth quarter
BY THERESE POLETTI
Mercury News
Chip giant Intel Corp. reported third-quarter earnings that were better
than Wall Street's reduced expectations, citing growth in all areas
except its core processor business.
But the world's largest semiconductor maker also disappointed Wall
Street with its forecast that revenues in the fourth quarter would grow four to eight percent from
third-quarter revenues of $8.7 billion. This anemic forecast surprised some analysts, especially since the
fourth quarter is typically the strongest period for the PC industry.
``A few months ago, everyone was expecting a blowout second half,'' said Linley Gwennap, principal
analyst at the Linley Group in Mountain View. ``It's not going to be the big blowout we expected. . . .
Intel is also trying to be conservative. They are coming out with a fairly conservative number for Q4
and they are hoping they will beat that.''
Last month, Santa Clara-based Intel warned Wall Street that its third-quarter revenues would come in
below expectations, due to sluggish sales in Europe. In the ensuing weeks, Intel's shares lost more than
half their value and closed Tuesday at $36.19, up 50 cents, amid a general downturn in chip-related
stocks as investors feared sales are peaking.
As Intel executives pointed out on the company's conference call with analysts, the chip maker reported
solid financial results. For the quarter, Intel reported net income of $2.9 billion, or 41 cents a diluted
share, excluding acquisition-related costs, vs. net income of $1.9 billion, or 27 cents a diluted share, in
the year-ago quarter.
Wall Street analysts had been forecasting earings of 38 cents a share, excluding acquisition costs,
according to First Call/Thomson Financial.
Analysts said that one cent of the earnings upside came from slightly better-than-expected investment
gains and other income of $966 million, which Intel now includes in its operating income. Analysts had
been expecting $900 million in gains and other income.
Including acquisition-related costs, Intel reported third-quarter net income of $2.5 billion, or 36 cents a
diluted share, up from net income of $1.4 billion, or 21 cents, a year ago.
Revenues grew 19 percent to $8.7 billion from $7.3 billion in the third quarter of 1999.
``We forecast that we would have a phenomenal third quarter and we got a pretty much normal one,''
said Andy Bryant, Intel's chief financial officer, during the conference call.
Intel executives said that Europe's results were below their expectations, but they did not give further
specifics. Paul Otellini, an Intel executive vice president, cited the declining value of the euro against the
U.S. dollar, higher oil prices, general economic conditions and weak consumer confidence as causing
the slowdown in PC sales in Europe.
Otellini declined to offer his own forecast for the worldwide PC market, but he noted that market
researchers are still looking for sales growth of 15 percent to 18 percent for this year and 2001.
Intel executives acknowledged that their forecast for the fourth quarter was conservative. ``We are
trying to gauge, like everyone else is, does it go from Europe and spread elsewhere?'' Bryant said. ``We
are going to be a little cautious.''
Intel said that sales of chip sets and motherboards were ``up substantially,'' and flash memory chips,
which go into cell phones and other handheld devices had ``record shipments.'' Sales of networking
chips grew more than 50 percent. But analysts said they were disturbed by flat sales of Intel's core
microprocessors.
``To me, that was a very sore thumb sticking out there,'' said Dan Scovel, an analyst at Needham & Co.
``That implies that there were some market share losses. I don't know how you can get around that.''
Indeed, last week, Intel rival Advanced Micro Devices Inc., which topped Wall Street's expectations,
said that it believed it had gained some market share in PC microprocessors in the quarter.
Still, all is not rosy for Sunnyvale-based AMD either, analysts warn. Both companies are manufacturing
like mad to meet once-unstoppable demand. In the quarter, Intel's inventories rose 20 percent from the
second quarter to $1.9 billion, causing some analysts to worry about a potential price war if inventories
get too high.
Intel lowered prices on some Pentium III chips Sunday, but executives said the moves were just normal
price cuts ahead of the peak selling season.
``The real challenge is the first quarter,'' said Drew Peck, an SG Cowen & Co. analyst. ``The demand
situation is going to weaken and we will see expansion of capacity. Pricing really becomes an issue for
them in the first quarter.'' |
