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Intel misses 2Q estimates, predicts better 3Q

Anticipate a normal year, said executives of the world's largest maker of PC processors.

"What we've actually seen ... is a pretty perfectly normal first half," said Andy Bryant, chief financial officer of Intel Corp. (Nasdaq: INTC) "Based on all the interest we've gathered, we believe it'll be a pretty good second half."

Despite reporting second quarter earnings that fell two cents short of Wall Street expectations, Intel executives on Tuesday told analysts to expect the expected. Use history as your guide in forecasting the rest of the year, Bryant said, during an afternoon conference call following the earnings report.

"Look at the last few years," he said. "We really don't see anything dramatically different ... based on previous years' experience."

Over the last six years, Intel has averaged third quarter revenue growth of 7.3 percent, although the actual increase ranged as low as 3.3 percent in 1997 and as high as 13.6 percent last year. Fourth quarter revenue increases averaged almost 12 percent from 1993 through last year, with a low of 5.7 percent in ྜྷ and high of 25.2 percent in 1996.

Continued cost cutting, improved efficiency, market share gains in the low end PC market, and ongoing strength in the high end will combine for second half growth this year, executives said.

Strong business in June for chipsets and distribution sales indicate that the second half should see increased processor demand, Intel executives said. Plans to introduce Pentium III chips based on 0.18 micron technology by the end of the third quarter remain on track. And Celeron has helped the company regain market share from rivals Advanced Micro Devices Inc. (NYSE: AMD) and Cyrix, Intel said.

Although Celeron chips -- carry lower profit margins than Pentium III and Xeon processors -- make up a larger portion of Intel's product mix than before, the company still expects gross margin improvements for the rest of the year. The company now expects gross margins of 60 percent for the year, up from a previous estimate of 57 percent.

Depreciation and writedowns will cost about $3 billion for the year, including $810 million in the third quarter, Intel said. Interest and other non-operating income will be about $275 million in the third quarter.

Expenses in the third quarter will increase 4 to 6 percent from the second, because of higher R&D spending, the company said. Look for R&D expenditures and capital costs of about $3 billion each for the year.

Second quarter weakness was largely the result of traditional seasonal trends, Intel executives said. In second quarter results released after market close Tuesday, the maker of PC processors posted net income of $1.75 billion, or 51 cents a share. First Call's survey of 31 analysts predicted a per-share profit of 53 cents.

Second quarter sales of $6.75 billion represent a 13.8 percent increase year-over-year and a 5 percent decline sequentially, which puts it at the low range of analyst estimates.

Intel shipped fewer microprocessors in the second quarter, which historically is Intel's weakest time of the year. Average selling prices for chips fell as cheaper Celeron chips made up a higher percentage of Intel's shipments, with the company making an aggressive push to recover share in the market for cheap PCs.

Analysts generally expected Intel's revenue to be flat or slightly down from the first quarter, largely because of the PC market's ongoing shift to computers priced well below $1,000. "There's continual pressure on chip pricing," CIBC Oppenheimer analyst Ken Pearlman said before Tuesday's earnings release.

Intel should see 15 percent year-over-year growth in unit shipments in the second half, predicted US Bancorp Piper Jaffray analysts Ashok Kumar and Paul Mansky. "Having recaptured design wins from AMD, we forecast that the pricing environment will be more benign for Intel in the second half," the analysts wrote in a research note released Tuesday morning, prior to the quarterly report. "Coupled with pricing recovery, we expect strong earnings growth over the next few quarters."

Analysts add that Intel has successfully boosted its share in the market for server processors, which have higher margins. That helps the company maintain most of its overall average selling price, Pearlman said. "I think they're in a position to do that for at least another two or three quarters," he said.

Intel executives in Tuesday's conference call refused to give specific revenue breakdowns by product type, in spite of repeated inquiries from analysts.

Among 38 Wall Street firms surveyed by Zack's Investment Research, 16 recommend Intel as a "strong buy", 14 maintain the equivalent of "moderate buy" ratings on the stock, and eight rate it as a "hold". Shares of Intel retreated 1/16 to 65 3/8 in Tuesday's regular trading prior to the quarterly report.