Intel Beats Lowered Forecast, Expects Better 4th Quarter
Technology bellwether Intel Corp. reported third-quarter profit that beat Wall Street’s lowered expectations Tuesday, but fundamental changes sweeping through the technology industry are threatening the company’s historic record of growth and possibly its long-term dominance.
The giant Santa Clara, Calif., chip maker provided beleaguered investors with some rays of hope, noting that revenue in the upcoming fourth quarter could be as much as 8% higher than the record third-period results.
The numbers, released after the markets closed Tuesday, halted--for a day at least--the pounding that Intel shares have taken since Sept. 1, including a nearly 12% drubbing on Monday. The company is facing a host of challenges
Part of the problem is the cost of success--microprocessors have advanced so rapidly that consumers and businesses find that older PCs can handle most software adequately, making upgrades to the latest and greatest PCs a game of diminishing returns.
Cognizant of this trend, Intel is moving rapidly into providing chips for digital appliances, cell phones and networking equipment. But in those areas, it lacks the monopoly power it uses to dominate in PC microprocessors.
Intel also is trying to fend off a rapidly progressing Advanced Micro Devices, which is making inroads as Intel is moving aggressively to build its networking equipment businesses. Intel also is trying to get through a difficult transition to a new family of more powerful Pentium 4 chips for personal computers during a period of lagging PC growth.
Intel clearly is showing signs of stress. In a series of recent missteps, the company:
* took a $200-million charge in June based on the recall of faulty motherboards, the chief circuit board of a PC.
* late last month discontinued a project to build a long-awaited low-cost chip, because of technical problems and market overlap with the company’s Celeron product.
* failed in its effort to push the industry to standardize on high-speed memory chips produced by Rambus Inc. because the chips proved more costly than other products for little performance benefit.
During the same period, Sunnyvale, Calif.-based AMD surged.
Intel holds some 83% of the market for PC microprocessors compatible with Microsoft Windows and grabs an even larger share of the market’s revenue, according to Mercury Research in Scottsdale, Ariz. But AMD has begun to take away some of the most lucrative sales--microprocessors that form the brains of the fastest PCs.
On Tuesday, AMD announced the latest iteration of its Athlon processor, running at 1.2 gigahertz, compared to 1.0 gigahertz for Intel’s top chip. It was the latest in a series of technical coups for the far-smaller competitor.
Even so, AMD lost $2--almost 10% of its value--in NYSE trading Tuesday, to close at $18.38.
AMD is probably not the biggest threat to Intel, analysts say, but it does have the power to engage Intel in a brutal price war.
Recently “Intel chips traded at a 17% discount [below list price], the deepest discount we recall ever,” according to a research report issued Monday by Jonathan Joseph, an analyst at Salomon Smith Barney in San Francisco.
Meanwhile, Intel is rapidly increasing chip fabrication capacity to respond to earlier problems in meeting demand, leading some analysts to suggest that by early next year--when two more large factories are up and running just as demand is at its traditional low point--prices will plunge.
“There’s another shoe to drop here--crushing price drops come in January,” said Drew Peck, an analyst with SG Cowen in Boston.
Intel also faces the pressure of rolling out the next generation of products based on the so-called .13-micron process, which refers to the scale of microscopic circuitry pathways. Current chips are built on the larger .18-micron process. Some analysts say that the company’s costs will be too high, and supplies unreliable until that change is completed in 2002.
“The company is stuck in a tough product transition,” said Mark Edelstone, an analyst with Morgan Stanley Dean Witter in New York. “They don’t really have their next-generation process technology ready to go at a time when they really need to have some significant volumes of Pentium 4s.”
On Tuesday, Intel reported earnings of $2.9 billion for the third quarter, or 41 cents per share, excluding one-time gains and losses.
A consensus of analysts compiled by First Call/Thomson Financial called for earnings of 38 cents per share. That estimate had been lowered in September after Intel warned that its European sales would lag earlier predictions.
The company also reported record revenue of $8.7 billion. In the same year-earlier period, Intel reported revenues of $7.3 billion and earnings of $1.9 billion, or 27 cents per share. In after-hours trading Tuesday, Intel shares rose $1.37, to $37.56, after gaining 50 cents in extraordinarily heavy Nasdaq trading, to $36.19 at the close.
“You see a collective sigh of relief from investors,” said Cowen’s Peck. “They had clearly reduced expectations dramatically.”
Intel shares have lost half their value since Sept. 1 amid a 1,110-point, 26% decline in the tech-heavy Nasdaq.
Andy Bryant, Intel’s chief financial officer, said that fourth-quarter revenue would be 4% to 8% higher than the record third-quarter results, but acknowledged that that level is lower than what would normally be expected in the biggest quarter for PC sales.
Intel’s spending on marketing and administrative costs rose 33% in the first nine months of this year compared to the same year-earlier period, while R&D; spending rose 30%. Revenue, by contrast, was up only 18%.
“That’s an artifact of all the acquisitions they are making--yet the companies they are buying are not offering much in the way of returns as yet,” Peck said. “[Intel] is scrambling to reinvent itself as a communications company and incurring a lot of costs to do that. But you can’t turn around an aircraft carrier quickly.”
But given Intel’s ability to transform its business at other key junctures, few analysts are betting against it.
“The PC business is maturing, slowing, but it’s still hugely profitable and they can use that cash to move into other sectors,” said Linley Gwennap, an analyst with the Linley Group.
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Top-Line Growth
Intel’s sales growth in recent years has slowed sharply from the mid-1990s, but the increase in sales this year is still expected to be the best since 1997. Percentage gain in Intel’s annual sales versus previous year:
*
2000: 17% (estimated)
Source: Intel
