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Questions surround Intel earnings, future

The company reports first-quarter earnings that beat analysts' estimates, but the next three months will be a tough time for the leading chipmaker.

Intel reported first-quarter earnings that beat analysts' estimates, but the next three months will be a tough time for the leading chipmaker.

The Santa Clara, Calif.-based company yesterday reported earnings of 71 cents a share, excluding several extraordinary events, coming in 2 cents above First Call's consensus analyst estimate. The figure is 32 percent better the 57 cents per share reported in the first quarter of last year. Revenue came to $8 billion, 13 percent higher than sales in the first quarter of 1999.

But company executives were far from upbeat. Intel said it underestimated PC and mobile phone demand for the first half of the year. As a result, the company does not have the manufacturing capacity and other resources it needs to meet demand.

Although more factory capacity will come online to help erase the deficit for the second half, supplies for the next three months will be tight.

"We did not anticipate the level of demand for the first half, especially for microprocessors, chipsets and flash memory," said Andy Bryant, Intel's chief financial officer. "Supply will continue to be a challenge."

After rising before the earnings call, the company's stock has slid $6 to approximately $123.

Besides that admission, Intel's first-quarter numbers themselves may be a source of debate in the financial community.

Overall, the company reported earnings of $3 billion, or 88 cents a share. But the figure included a recently unveiled tax settlement with the Internal Revenue Service that raised earnings for the quarter by $600 million, or 17 cents a share, and ignored acquisition-related costs of 10 cents a share.

Excluding these events, earnings came to 71 cents a share.

The earnings figure also includes $640 million from interest and investment activities, which is more than the $500 million Intel earlier told analysts to expect. Those activities added "a few cents" to the final earnings-per-share figure, an Intel representative said.

Last quarter, analysts split over whether the company beat estimates or simply grazed by with a boost from its investment activities. Excluding acquisition costs, Intel reported fourth-quarter earnings of 69 cents per share on revenues of $8.2 billion. Investment activities accounted for an additional 5 cents a share.

A.A. Tad LaFountain III, an analyst at Needham & Co., stated in an email that one could argue Intel beat the estimates because of unanticipated gains.

Analysts also have raised the question of whether the company's aggressive acquisition and expansion plans in communications and networking are distracting the company from its core business of producing microprocessors like the Pentium III.

Ashok Kumar, an analyst at US Bancorp, lowered annual earnings estimates from $3.14 to $3.10 because of drag caused by the non-microprocessor business.

Investment income is likely to rise to $725 million in the second quarter, Intel's Bryant said. Other companies, including rival Advance Micro Devices, have seen increases in investment income as well.

More interesting to LaFountain, though, was the relatively anemic growth in microprocessor revenues and Intel's manufacturing constraints. The Intel Architecture Business Group, which makes PC components, saw revenues increase 3 percent, from $6.4 billion to $6.6 billion, from the first quarter last year. Profits for the same period for this division grew 7 percent, from $2.9 billion to $3.1 billion.

"I am perplexed how a leading supplier with a dominant market share sitting on $20 billion...and marketable investments could fail to invest enough to provide adequate supply to meet what has to be viewed as very modest demand growth," LaFountain wrote.

By contrast, Kumar stated that microprocessor revenues will recover in the second half. Intel's problem lay more with its communications activities. Revenues from Level One, acquired for roughly $4 billion last year, appear to be in decline.

"Level One hasn't contributed to the bottom line," Kumar said. "The company continues to rely on microprocessors, which is concerning."

Although chip supplies will be tight in the second half, Intel is putting in manufacturing to ensure against more shortages in the latter half of the year, when demand picks up again.

"We will have enough output to meet demand for the second half," said Paul Otellini, general manager of the Intel Architecture Business Group. The company also will sign on more suppliers for chip packaging, which has been a problem this year.

Otellini further added that the company continued to cut manufacturing costs, a move that is expected to add to profits for the year.