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Intel reports flat revenues

Intel, which underwent aggressive price cutting, missed analysts' expectations for its third-quarter results.

Intel (INTC), which underwent aggressive price cutting and experienced a much weaker-than-expected Flash memory market, yesterday missed analysts' expectations for its third-quarter results.

Shares of Intel fell as low as 7.4 percent in early trading, down from its close of 91-13/16 yesterday. The company announced its results after the market's close.

Intel posted net Intel at a glance profits of $1.57 billion, or 88 cents a share, for the quarter ended September 30, compared with $1.31 billion, or 74 cents, a year ago.

Analysts had expected the chip giant to post earnings of 91 cents, according to First Call.

Intel also noted that, sequentially, profits were down 4 percent from the previous quarter?s figures of $1.65 billion, or 92 cents.

Revenues, meanwhile, rose to $6.16 billion for the quarter--up from $5.14 billion a year ago. But compared with the previous quarter, revenues rose a slight 3 percent, from $5.96 billion in the second quarter.

Andy Bryant, Intel chief financial officer, said the company encountered declining volume and reduced pricing in its flash memory business during the quarter, which affected the company?s gross margins.

But one analyst had doubts that flash memory was the driving force behind the sluggish quarter-to-quarter revenue growth and declining sequential earnings.

"I?m pretty skeptical that that was the reason [for the downturn]," said Charles Boucher, an analyst with UBS Securities. "I strongly suspect it had more to do with pricing pressure in their Pentium market...."

Boucher said that, given Intel?s estimate of the damage the decline had on its flash memory business and gross margins, the company would be doing about $400 million in the flash memory business a quarter.

"I?m skeptical that Intel?s flash memory business is that large," he said. "It may be more like a couple hundred million in revenues a quarter." Intel does not break out its flash memory business from its overall revenues.

C.B. Lee, an analyst with Hancock Equity Services, said Intel?s revenues likely felt pressure from price cuts on its older Pentium classics.

Intel officials, however, described the quarter in positive terms.

Paul Otellini, director of world sales, said: "I would characterize Q3 as a solid quarter for us, in terms of record unit shipments of microprocessors, solid in terms of significant progress in managing the transition to products based on MMX technology, solid in terms of new product offerings for the fastest growing portions of the computing market--servers, workstations, and mobile products."

Intel, meanwhile, said it expects revenue for the fourth quarter to be slightly up from the third quarter, but that its gross margins in the quarter are expected to be flat to slightly up from the third quarter.

"I was surprised by their weak forecast for the fourth quarter," Boucher said. "They usually show a lot stronger growth in the fourth quarter over the third. I believe they have inventory issues that they?re having to deal with in the channel."

Analysts also said the company?s Pentium II is undergoing pricing

Intel CFO Andy Bryant on flash memory price decline
pressure in order to prompt customers to migrate. Intel has dropped the prices on its Pentium II over 20 percent since the first quarter, while Pentium MMX prices have dropped over 60 percent.

Analysts estimate that prices for the Pentium II 266-MHz chip will drop 9 percent in early November, from $610 to $555, while prices for the Pentium II 233-MHz likely will sink 14 percent, from $480 to $415. Meanwhile, prices on Intel-based Pentium II systems have fallen below $2,000 since their May introduction--a faster drop than that of previous systems based on a new series of Intel chips. In the past, Intel has tended to hold above the $3,000 mark for upwards of a year.

Another issue that is likely to linger in the fourth quarter is an adjustment to the fundamental change in Intel?s business, Lee said. The chip giant recently has had to deal with its original equipment manufacturers (OEMs) giving a shorter lead time when placing orders. As a result, cycle times have been compressed.

"OEMs typically in the past would book with Intel one quarter ahead. Now its more like a couple weeks of notice," Lee said. "Intel now has a greater risk. It has to guess on the unit volumes it will need and eat any inventory risk. In the past, it knew the number of units it would need in the quarter."

Lee noted that the third quarter marked the first quarter during which the effects of this change were manifested.

But, Lee added, Intel likely will see profits and revenues get a boost during the first quarter. That?s when Intel?s next generation of the Pentium II processors, code-named "Deschutes," is expected to be released.

That next generation of Pentium II will bring the higher profit margins that typically come with the introduction of a new chip.

Meanwhile, the company also has the first member of its 64-bit Merced chips scheduled for production in 1999.

Intel today detailed its 64-bit chip architecture at the Microprocessor Forum in San Jose, California.

(Intel is an investor in CNET: The Computer Network.)