Cutbacks Help Intel Increase Its Profit
Intel Corp. posted flat sales and higher profit as cost cutting by the world’s largest semiconductor maker helped compensate for tepid back-to-school sales and a continued reluctance by businesses to spend on new computer equipment.
Santa Clara, Calif.-based Intel posted a third-quarter profit of $686 million, or 10 cents a share, up from $106 million, or 2 cents, in the same period last year, when the industry was experiencing its worst downturn ever. Sales for the quarter were $6.5 billion, on par with $6.55 billion in revenue last year.
Investors interpreted Intel’s performance, announced after the markets closed, as a sign that a recovery in the technology sector is further off than expected. Intel shares dropped 13% to $14.39 in extended trading after closing Tuesday at $16.52, up $1.42, on Nasdaq.
“The good news is that the market isn’t contracting underneath them anymore, and you’re seeing the effects of cost management boosting profits,” said Martin Reynolds, vice president of Gartner Inc., a technology research firm. “The bad news is that the market is the same size it was last year, the worst year in the history of semiconductors.”
On an operating basis, excluding special charges, Intel’s $786-million profit, or 11 cents a share, fell short of Wall Street’s expectations. Analysts polled by Thomson First Call had projected 13 cents a share.
The holidays are unlikely to bring much cheer. Intel Chief Financial Officer Andy Bryant projected revenue to be $6.5 billion to $6.9 billion in the fourth quarter. Although that’s flat to 6% up from third-quarter revenue, Intel typically gets a 10% to 15% boost in the fourth quarter from the holiday buying surge. Intel also lowered its gross margins projection to 49% from 51%.
“The root of the problem is weak demand for personal computers,” said Mark Edelstone, analyst for Morgan Stanley. “Intel is a capital-intensive company, and if they can’t drive sales, it hurts their margins.”
For the last year and a half, Intel has cut costs by negotiating lower prices from its suppliers and trimming its work force. It reduced its capital spending estimate for the year to $4.7 billion from its previous estimate of $5 billion to $5.2 billion, primarily from lower construction costs. The company employs 81,700 workers, down from a peak of 91,200 in March 2001. That has helped Intel boost its net income amid stagnant sales.
But the cost savings have “hit a wall,” Bryant said.
Cost cutting can go only so far, analysts said. What’s needed is a resurgence in demand in PCs and other gadgets that require Intel’s memory and processing chips. When that will occur remains unclear as analysts have been forced to push back their forecasts of a technology sector revival practically every quarter this year.
“The industry is basically flat as a pancake this year,” said David Wu, chip analyst at Wedbush Morgan Securities in Los Angeles. Wu said corporate spending on technology, primarily to replace aging PCs that were last purchased in 1999 in preparation for the so-called year 2000 bug, should return “no later than the third quarter of 2003.” He quickly added, “It would be nice if that were actually true.”
Still, amid lackluster demand, Intel gained market share at the expense of its closest rival, Advanced Micro Devices Inc., which two weeks ago warned of a “substantial operating loss” for its current quarter. Intel’s share of PC microprocessors gained 3 percentage points to 86% for the third quarter, according to Mercury Research.
