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Intel skates past estimates on booming chip demand

Despite major product shortages and intensified competition, Intel beat expectations in the second quarter by reporting record revenue of $8.3 billion and earnings per share of 50 cents, excluding extraordinary events.

Despite major product shortages and intensified competition from Advanced Micro Devices, Intel managed to beat expectations in the second quarter by reporting record revenue of $8.3 billion and earnings per share of 50 cents, excluding extraordinary events.

The company was helped by surging demand for microprocessors and flash memory, two components that have been in critically short supply since last year. The shortage has allowed companies like Intel to sell off virtually everything they make as well as avoiding price wars.

The picture should continue to improve in the third quarter, added Andy Bryant, Intel's CFO, as both PC demand and Intel's ability to deliver chips improve.

"Manufacturing performance is improving product availability," he said. "We expect demand to continue to be strong. We expect supply to improve but continue to be tight."

Intel's numbers will likely be the source of debate for days to come because of a number of extraordinary one-time events, including acquisition costs, recall costs and a massive gain in investment income from selling shares in Micron Technologies. Nonetheless, Intel appears to have cleared most hurdles.

Intel shares rose almost 5 percent, to around $146, in after-hours trading, after decling more than 3 percent during regular trading.

Overall, the company reported net income, excluding acquisition costs, of $3.5 billion for the quarter, or 50 cents a share. Analysts polled by First Call/Thomson expected the company to report earnings of 49 cents a share.

The numbers account for a two-for-one stock split executed today. Without the split, earnings per share excluding acquisition costs came to $1. Analysts expected 98 cents.

Intel's gross income was boosted by $2.3 billion in gains from investments, as expected by analysts. The company beat estimates by a penny.

Ignoring all of the unusual events and outside stock activity, earnings came to 36 cents a share, said Bryant. "Revenue was up 23 percent and set a record," he said. "With or without the unusual gains and expenses, earnings growth year-to-year was substantial."

Including acquisition related charges, second-quarter net income came to $3.1 billion, or 45 cents a share.

Revenue also came in higher than expected. Revenue for the second quarter came to $8.3 billion, which represents a 23 percent hike from revenue of $6.7 billion the year before and a 4 percent hike over revenue for the previous quarter. Most analysts expected revenue to stay generally flat at around $8 billion.

Although profits came in slightly above expectations, the increase in revenue surprised analysts. Typically, revenue declines in the second quarter due to season slowdowns.

"The revenue was a little bit up on increased unit shipments," said Dan Scoval, an analyst with Needham & Co. "That is highly unusual for a second quarter."

Comparisons to last year's second quarter are skewed because of the unusually large investment gains. Last year, Intel reported net earnings of $1.7 billion, or 26 cents a share, on revenues of $6.7 billion in the second quarter. This represents a 92 percent increase in earnings. However, Intel at that time only racked up investment income of $290 million.

"Strong worldwide PC and server demand and better-than-expected manufacturing performance helped lead the company to greater than 20 percent revenue growth vs. the second quarter of last year," Craig Barrett, Intel's CEO, said in a prepared statement. "We saw strong demand in all business groups, especially for microprocessors, flash memory and networking silicon."

Nonetheless, all was not good news. The company said it expects to start recording revenue for its upcoming Itanium chip in the fourth quarter, rather than the third as previously stated. Effectively, this represents a delay in the release.

Rambus Questions
Intel also opened the door to speculation that Rambus may not be the only memory matched with the upcoming Pentium 4.

Paul Otellini, general manager of the Intel Architecture Group, stated that Pentium 4 computers will intially be matched with Rambus memory, otherwise known as RDRAM. "Our road map is RDRAM," he said. However, he added that the company may begin to look at other types of less expensive memory when the Pentium 4 becomes more widely used.

"We have a number of options as we look at other price points," he said. At another point in the conference call, he stated "We still view this memory technology as delivering the best overall performance...but this is not to say that we won't have other memory configurations to take advantage of other price points."

The statements are interesting in that, until today, Intel has only mentioned Rambus, which is more expensive than other memory designs, in conjunction with the Pentium 4. The Pentium 4 goes into volume production in the second half of the year, he said. The chips initially will be incorporated into high-end computers.

On other product issues, Otellini said it is likely the Pentium 4, Pentium III and Celeron chips will all coexist and be sold by Intel through 2001.