The chipmaker reported earnings of $2.1 billion for the fourth quarter, or $1.19 cents a share, higher than the consensus estimates for earnings of $1.07 and even for optimistic projections of $1.15. The fourth quarter returns were up 18 percent over earnings of $1.7 billion for the same quarter in 1997 and 32 percent over third quarter earnings of $1.6 billion.
"Q4 was a great quarter for us," said Paul Otellini, general manager of the Intel architecture business group. The company, he added, shipped a record number of processors in the fourth quarter.
Revenue came to $7.6 billion for the quarter, up 17 percent over revenues of $6.5 billion for the same period last year and 13 percent over revenues of $6.7 billion last quarter. Gross margins for the quarter also rose to 58 percent as a result of cost-cutting and a slight shift toward higher end processors.
Intel actually fell slightly short of its sales goal for Celeron, but experienced higher-than-expected demand for Pentium II. To compensate, the company shifted manufacturing and testing resources to the higher end chips.
For the year as a whole, revenues were up over 1997 totals, but earnings were down, mostly due to a slow first half. Revenue totaled $26.3 billion in 1998, up 5 percent from the prior record of $25.1 billion in 1997. Net income was $6.1 billion, down 13 percent from $6.9 billion in 1997. Earnings per share of $3.45 declined 11 percent from $3.87 per share in 1997.
For the year, gross margins came to 54 percent, down from an annual gross margin of 57 percent last year.
"Intel achieved its 12th consecutive year of revenue growth in spite of the challenges of a turbulent market in 1998," said Craig Barrett, Intel CEO, in a released statement. "During the fourth quarter, we achieved record revenue in the Americas, Europe, and Asia-Pacific."
The company said that revenues, earnings, and gross margins would likely decline in the coming quarter due to seasonal softness. Some analysts, however, have said that the seasonal decline may be less steep than in other years due to continuing strong demand.
"The surprise was due to the higher margins with the increase in sales of the Pentium II," said Vadim Zlotnikov, an analyst with Sanford C. Bernstein & Company. "They were also extremely successful with cost reduction."
Zlotnikov added that the company may face price depression with the 400-MHz Celeron chip. The processor, released earlier this month, is comparable in performance to the 400-MHz Pentium II, which costs $200 more. New Pentium IIIs, however, will help widen that gap. Year 2000 issues will also not dampen sales, he added, as only a portion of corporate IT budgets revolve around hardware upgrades for the bug.
Both Otellini and Andy Bryant, Intel's CFO, painted a mix picture for the future. Costs will continue to go down, both said. A shift away from "Slot" packaging in the second half will reduce manufacturing cost. At the same time, Intel will likely invest less in new office buildings, manufacturing plants and equipment in 1999, said Bryant. "We are going to see cost improvements throughout the year," he said.
Nonetheless, competition will continue unabated. "There is a high probability as we compete in the lower end of the market that we could see some changes in average selling price," said Bryant. Gross margins for the year should hover around 57 percent.
Additionally, the outlook for demand in 1999 remains volatile because of the world economy and the Y2K bug, said Otellini. Although sales in China, the U.S., and Europe remain strong, Japan has stayed flat and shown few signs of improving. The Y2K bug, meanwhile, will likely effect corporate buying cycles, although exactly how that will play out cannot be determined as yet.
"It is still to soon to call the first half, given all of the variables," he said.
Overall, the future looks fairly positive. Average prices may go down but so will Intel's expenses per chip, noted Ashok Kumar, semiconductor analyst with Piper Jaffray, creating a wash. In addition, the company will likely see a larger mix of expensive Xeon processors.
Year 2000 spending could impact the company as well, but right now, "it's a crapshoot."