Intel, AMD earnings look bright but questions loom for 2000

What follows in 2000 remains to be seen.

Despite product delays and an acceleration in processor speeds, Intel is expected to report earnings of 63 cents a share, or $2.2 billion, when it reports its numbers after the market closes tomorrow, according to a consensus estimate from First Call. For the year, this means net income of around $7.7 billion, an increase of more than 24 percent over 1998, or $2.23 in earnings per share. Annual revenues are expected to come in at over $29 billion.

Although sales were impacted by chip shortages, most analysts seem upbeat about the quarter, especially in light of the second and third quarter when Intel turned in less than expected earnings. Meanwhile, 2000 looks good because of an expected surge in corporate buying tied to the passing of the Y2K bug, the coming of Windows 2000 and increasing demand for e-commerce servers. In recent days, some analysts have upgraded their ratings and stock-price targets for the chipmaking giant despite worries about low chip inventories and long-term price declines.

"Looking ahead at 2000, several of the issues that plagued [Intel in] 1999 are over, and we believe that the stage is set for the strong 2000," Charles Glavin, an analyst with Credit Suisse First Boston, wrote in a report yesterday. Glavin upgraded Intel to "strong buy" and raised his 2000 target price to $150. At 1 p.m. PST yesterday, the close of regular trading, the stock was up $3.94, or about 5 percent, to $89.69.

Not everyone agrees, however. While growth in earnings outpaced growth in revenues, much of the gain came through cost-cutting, which Drew Peck at Cowen & Co. termed "low quality" earnings.

"They are low quality in the sense that it's finite. Business is good, but the microprocessor business and the PC business have changed fundamentally and not for the better," he said. "Fundamentally there is no case to be made that 2000 will be better at all." Peck predicted earnings of 61 cents a share.

AMD, meanwhile, is expected to report a fourth-quarter profit of one cent a share, or $1.5 million, when it reports on Jan. 19 because of strong sales of its Athlon processor and demand for flash memory, which is used in cell phones.

Some say earnings could be higher. Dan Niles of Robertson Stephens estimates that AMD shipped 900,000 Athlon chips, a huge increase that helped raise the Sunnyvale, Calif.-based company's average selling price for microprocessors from the mid-$60 range to $87.

In total, Niles said net income for the quarter could come to $38.5 million, or 26 cents a share. AMD earnings per share estimates can soar rapidly, some have noted, because of the limited number of shares in circulation.

In 2000, Niles stated that AMD earnings could go to $1.50 per share, well above his earlier prediction and the consensus opinion of $1.05. "We believe this new forecast is also conservative," he stated in a note. The stock is currently resting at just over $34.

The results, if borne out, will validate to some degree the strategies of both companies. Intel, for instance, managed to neutralize the effect of declining chip prices through increased volumes and lower manufacturing and chip packaging costs. Although Intel will likely only see revenue growth of around 11 percent for 1999, net income will grow at around 22 percent.

For the fourth quarter, the average price of Intel's microprocessors held at around $185 while shipments barely increased sequentially to 31.5 million, according to Ashok Kumar, an analyst for US Bancorp Piper Jaffray. Chip supplies were tight, but the sales should open up next year.

Kumar predicts earnings of 67 cents a share for the quarter and $2.29 and $2.70 for 1999 and 2000, respectively.

Peck, however, reiterated that the microprocessor market will not be as profitable as in the past. Intel is trying to diversify its business by moving into communications processors. The Santa Clara, Calif.-based company spent billions this past year on acquisitions, but many of these new divisions may not add to the bottom line for a year and a half.

And when they do, the new businesses won't likely match the performance of the old microprocessor business. "Nothing is as profitable as the old microprocessor business used to be," Peck said.

A profit for AMD would prove the assertion that the Athlon processor has cemented a place in the market. Although historically the company has trailed Intel in terms of performance, AMD's top-end chip has been able to match, and even lead, Intel in processor power. IBM and Compaq Computer have been selling the processor in their PCs, and earlier this week Gateway finally agreed to adopt the chip. AMD is expected to make a push into the commercial market this year.

Of course, any sort of profit would be welcome news for AMD. If the sale of divisions and other extraordinary events are ignored, AMD has not turned a profit since the fourth quarter of last year.

For 2000, AMD could see microprocessor shipments grow to 23 million, predicted Niles, up from earlier predictions of 18 million, while flash memory sales could grow 52 percent.

Intel may also use the conference call tomorrow to announce they are working on a new fabrication facility in Chandler, Arizona. The company has filed for building permits there, a company spokesman said recently. Intel has other fabs in Arizona already.