Intel beats estimates to end tough year

Intel closed a difficult 2001 by reporting revenue and earnings for the fourth quarter that were higher than expected, although the outlook for 2002 remains unclear.

The Santa Clara, Calif.-based chipmaking giant said that in the fourth quarter it achieved net income of $504 million, or 7 cents a share, on revenue of $7 billion.

Excluding acquisition costs, net income came to $998 million, or 15 cents in earnings per share. A consensus of Wall Street analysts expected the company to report 11 cents in earnings per share, excluding acquisition costs, and revenue of $6.84 billion.

Both revenue and earnings were down substantially for the quarter and the year from the same levels experienced in 2000 because of a slowdown in PC buying. Net income declined 77 percent from the $2.2 billion figure achieved in the fourth quarter of 2000, while revenue dropped 20 percent from $8.7 billion for the same period. Excluding charges, net income was down 62 percent.

Despite the slowdown in sales, the market for processors began to pick up toward the end of the year, or at least to beat overly pessimistic estimates, resulting in sporadic shortages. Net income and revenue, for instance, climbed from the third quarter. Both Intel and rival Advanced Micro Devices, which reports earnings Wednesday, raised revenue estimates for the quarter in December.

"2001 saw the worst downturn ever for the semiconductor industry and the largest decline for Intel in terms of revenue ever," said Andy Bryant, Intel's CFO, who nonetheless added that it was "a year that began with economic decline (and) ended with stability."

For the year, Intel's revenue came to $26.5 billion, down 21 percent from $33.7 billion in 2000. Net income came to $1.3 billion, or 19 cents a share, roughly down 88 percent from earnings of $10.5 billion, or $1.51 in earnings per share in 2000. Excluding acquisition costs, earnings came to $3.6 billion, down 70 percent from a comparable $12.1 billion seen in 2000.

The outlook for 2002 is hopeful but cautious. Revenue for the first quarter will come in at between $6.4 billion and $7 billion, roughly in line with the usual seasonal decline. Gross margins, however, will likely rise to 51 percent in 2002, up from the 49 percent seen in 2001.

Intel also managed to accomplish a number of goals during the past year, according to the company.

Intel was able to shed 7,000 employees--2,000 more than anticipated--mostly through attrition. Goals for reducing manufacturing costs were exceeded in the fourth quarter, according to Bryant. Microprocessor shipments grew in the low double digits, a sign that demand is returning to normal patterns.

"We exceeded our goal on shipments of Pentium 4, established in early 2001," said Paul Otellini, general manager of the Intel Architecture Group, which oversees PC components and processors.

Intel executives said they also believed the company gained on markets in different segments.

A lift from emerging markets
On the other hand, it remains unclear whether the company's traditional markets will begin buying computers again. Sales in 2001 got a strong lift from emerging markets, especially those located in Asia.

Greater Asia, which combines Japan and Asia-Pacific, accounted for more revenue than North America for the year. Asia-Pacific alone surpassed North America as the largest single market in the fourth quarter.

Gartner analyst Martin Reynolds says consumers, like enterprise buyers, have been waiting for signs of recovery...before reaching for their checkbooks. see commentary

These markets, however, purchase more PCs containing the Celeron, Intel's budget chip, rather than the Pentium 4, pushing Intel's average selling price down, Otellini said.

"We are all still waiting to see if there will be an increase in buying from the Fortune 500," Otellini said. "We see no large-scale evidence of this at this point."

"The only thing that concerns me in the first quarter is people buying PCs," added Bryant.

Intel's average selling price was also impacted by the Xbox. Microsoft's game console uses a Pentium III chip, which sells for less than the Pentium 4.

The company's plans to expand beyond the PC have also been stumped by the continuing economic slowdown. Intel's communications group and wireless group both reported losses and declining revenue for the year compared with the same quarter a year ago.

As a result of the losses, "more than 100 percent of the operating profit came from the Intel Architecture Group," noted Bryant. On the bright side, both the wireless and communications groups saw revenue increase and losses shrink from the third quarter.

In 2002, the company also expects to see a rebound in sales of notebook chips, which slowed slightly in the fourth quarter, and server processors, which were slow for a good portion of 2001. Notebook sales likely slowed in anticipation of the release of the first Pentium 4 for notebooks, Otellini said.

On other notes, research and development spending will increase to $4.1 billion from $3.8 billion, while capital expenditures will drop to $5.5 billion in 2002 from $7.3 billion.

McKinley, the long-awaited successor to the first version of Itanium, also began to emerge in test systems, said Otellini.

Nimal Vallipuram, an analyst with Dresdner, Kleiner Wasserstein, said that the decline in capital spending was largely expected. Intel had to spend more than usual on plants and equipment in 2001 to pave the way for the conversion to manufacturing on 300-milimeter wafers and for manufacturing on the 130-nanometer process.

"They never had a year like that before," he said. In 2002, the main issue for the company will be whether or not corporate PC demand returns. Economically, circumstances seem to indicate that PC sales shouldn't be worse than 2001, Vallipuram said, but he cautioned that a surge in buying by these customers may not begin until the second half.