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THE DAY AHEAD: Diversity doesn&#039&#039t pay for Intel

COMMENTARY--In the last two years, Intel has gone on a spending spree to acquire companies that could allow it to target the networking and communications markets. It sounded like a good move for Intel to diversify away from PC processors.


Now that move into the communications market doesn't look so hot. Intel (Nasdaq: INTC) gave investors hope by saying its PC chip business, which accounts for roughly 80 percent of sales, has stabilized and is "returning to seasonal patterns."

But that other 20 percent--mostly Intel's communications businesses--is a headache. Intel's communications sales "are experiencing continued softness." On a conference call, Intel CFO Andy Bryant said the communications business may not bottom out until later this year. That's no surprise given Cisco Systems' profit warning and a series of profit warnings from the likes of communications chipmakers Vitesse Semiconductor, Applied Micro Circuits and others.

Courtesy of the recent acquisitions of Xircom and VxTel, the 2000 purchases of Giga and DSP Communications, and the 1999 buyouts of Dialogic and Level One Communications, Intel has built a sizable "other revenue" business that focuses on networking and communications products. In the first quarter, Intel derived more than 20 percent of its $6.7 billion in sales from the "other line," which includes Intel's various communications and networking businesses as well as other products. Intel topped reduced estimates with first-quarter earnings of 16 cents a share, excluding one-time items.

Intel's communications business is the primary reason why the company couldn't give much of an outlook for the second quarter and 2001. Intel predicted a second-quarter revenue range of $6.2 billion to $6.8 billion. "What you're seeing is a little more confidence for our microprocessor business and a weaker forecast for communications," Bryant said.

For investors, Intel's struggle in the communications market is troubling. Intel spent billions to expand into that market--wireless, telecom and networking--and still couldn't dominate. And what did Intel gain? Analysts used to gripe that Intel took its eye off the ball, now they're griping about how Intel's communications business has melted down in an industry-wide slowdown.

Given that Bryant said the communications business won't bounce back for a while, it's clear the diversification movement hasn't paid off.

Your serve AMD
Let's hope Advanced Micro Devices (NYSE: AMD) can deliver a little more of an outlook for the second quarter when it reports earnings after the bell today.

Intel's earnings show that the chip giant is girding for a price war. Gross margins will be down in the second quarter and the company refrained from giving a specific earnings range. Intel, which is reportedly losing market share to AMD, seems to be willing to sacrifice earnings to ship more units.

Intel officials were cagey about the market share questions, noting that it's early to predict share since AMD hasn't reported yet. Analysts were skeptical. How can Intel still be cutting prices when the Pentium 4 is ramping up well and market share is stable? Intel said it needs to move inventory so it can up the speed of its processors and hit the "sweet spot" in production volume for its new chips.

In a report Tuesday, Thomas Weisel analyst Eric Ross downgraded Intel and said the "Intel Inside" brand just isn't what it used to be. "We hear many OEM customers will opt for AMD alternative for price as well as better performance in some cases," he said. "We believe 2001 offers unprecedented opportunity for AMD to take share from Intel."

AMD is expected to report a first-quarter profit of 33 cents a share on sales of $1.12 billion, according to First Call.

Pushing the RegFD envelope
In the middle of praying that Intel has bottomed out and trying to believe its second-quarter outlook, you may have missed a very interesting Regulation Fair Disclosure footnote from its earnings release:

Intel expects that its corporate representatives will meet privately during the quarter with investors, the media, investment analysts and others. At these meetings, Intel may reiterate the outlook published in this press release. At the same time, Intel will keep this press release and outlook publicly available on its Web site. Prior to the business update and related quiet periods, the public can continue to rely on the outlook on the Web site as being Intel's current expectations on matters covered, unless Intel publishes a notice stating otherwise.

Translation? Intel may push the RegFD envelope slightly. Many companies have gone out of their way to issue a press release even if they burp in the presence of a Wall Street analyst. Other companies have just gone silent. Intel is saying it's going to have private meetings and talk about its prospects, notably at its analyst day April 26. Intel is telling investors that they shouldn't wig out because Intel is talking behind closed doors. It's an interesting step just a few days before RegFD gets its six-month report card next week.TDAIN

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