Stronger-than-expected PC demand in the final quarter of 1998 laid the groundwork for the expected upbeat earnings reports. Some analysts estimate that AMD may have shipped as many as 5.3 million K6 and K6-2 chips. Likewise, retail PC sales, in terms of units, jumped approximately 26 percent in December over the same month in 1997.
After the market close today, Intel is expected to post quarterly earnings of $1.07 per share and $3.43 for 1998, according to the consensus estimate from First Call. A year ago, Intel reported quarterly earnings of 98 cents a share and $3.88 for the year.
Shares of Intel surged yesterday amid optimism on the earnings reports. Intel hit an all-time high yesterday before retreating to $139.75. Today, Intel was down $3.37 in midday trading. AMD gained $3.87 yesterday to close at $31.87 and was hovering around that price today.
Tomorrow, AMD is expected to post earnings of 18 cents a share, according to consensus, up from a loss of 9 cents a share for the year-ago period. The expected profit will mark the first time AMD has turned in successive profitable quarters since the first and second quarter of 1997. AMD shipped 5.4 million processors during the quarter, according to some estimates, while processor revenue jumped 31 percent up to $805 million.
The good times are expected to continue into the first quarter, according to Charles Boucher of Donaldson, Lufkin and Jenrette, thanks to "surprisingly strong demand heading into the March quarter." Boucher predicted $1.09 and 18 cents in fourth quarter earnings for Intel and AMD, respectively, in a recent report.
"Intel's and AMD's announcements should establish a very upbeat tone for the Q4 earnings season. We believe both companies will cite strong growth in microprocessor shipments," said Richard Gardner, an analyst with Salomon Smith Barney. "We see little in upcoming EPS reports with the potential to significantly dampen the current enthusiasm surrounding the PC sector."
Analysts further believe Intel could state even higher earnings as the result of cost cuts and increased sales of higher-margin Xeon chips. These factors "suggest the company's gross margins could offer a meaningful upside surprise in the fourth quarter," Mark Edelstone, an analyst with Morgan Stanley Dean Witter, wrote in a recent report. Edelstone raised estimates in December to $1.12 for the quarter and $3.48 for the year.
Low prices may impact financial performance later
But pricing pressures may begin to flatten the outlook toward the second half of the year, especially for AMD, according to Ashok Kumar, an analyst with Piper Jaffray.
Under pressure from AMD, Intel is drastically cutting prices in the low-end consumer segment, and shows no sign of letting up. The 366-MHz Celeron chip released this week at $123 will be selling for $80 by March, Kumar said. Intel will likely more than make up for the discounts with growing sales of its higher-margin Xeon, Pentium II, and upcoming Pentium III processors.
AMD, by contrast, does not have a higher-end microprocessor line to help it absorb losses in the consumer line. Its collateral chip businesses, moreover, remain relatively flat, Kumar said.
"It will clearly put the screws on AMD," he said. "If Intel drops its [Celeron] prices 30 to 40 percent, AMD will have to follow."
For Intel's strategy to work, the Santa Clara, California, chipmaker will have to convince customers to buy computers with the higher-margin Pentium II and Pentium III processors, said Nathan Brookwood, a consultant with Insight 64. This can take time. Additionally, AMD's chips are smaller and tend to cost less to produce, which can insulate AMD from some effects of potential actions from Intel.
A National fallout?
If AMD does come to feel pinched, then National Semiconductor, the third-ranking processor maker for the PC market, will likely feel the squeeze even more. Cyrix, National's microprocessor subsidiary, already sells its chips for less than both Intel and AMD. Further pricing pressure and aggressive marketing could begin to eat into National's niche of the sub-$800 computer.
"They [National] are probably the most uncertain player," said Dean McCarron, principal analyst at Mercury Research. "We're seeing a slightly deeper rate of [price] decline than we did last year," he added.
Steve Tobak, vice president of marketing at National, disputed that contention. "Intel and AMD have been pricing competitively for some time," he said. Cyrix's market share was larger than Intel's in the sub-$1,000 space in October and continues to grow in that segment, he added.