Intel beats estimates, says growth may slow next quarter

The chipmaker beats lowered earnings expectations, but the outlook for the fourth quarter looks like it could be disappointing.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
Intel beat lowered earnings expectations Tuesday, but the outlook for the fourth quarter looks like it could be disappointing.

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Intel a "little cautious" for the fourth quarter
Andy Bryant, Intel CFO

The company reported net income of $2.9 billion, or 41 cents a share, for the third quarter, not including acquisition costs, an increase of approximately 52 percent over the same period a year ago. Revenue came to $8.7 billion, a record. Including acquisition costs, net income came to $2.5 billion, or 36 cents a share, up 72 percent from the third quarter of 1999.

The numbers beat lowered expectations. The company was expected to report earnings of 38 cents a share, or roughly $2.7 billion, according to the consensus estimate from First Call/Thomson Financial, on revenue of approximately $8.6 billion.

Intel's earnings include $966 million from interest and investments, higher than the $900 million anticipated for the quarter. Excluding that amount, Intel still beat the revised estimates.

It is unclear whether the results will make analysts and investors cheer. In its statement, Intel said revenue would grow by 4 percent to 8 percent sequentially in the fourth quarter, lower than expected for the traditionally strong holiday period.

"That is probably half of normal," Needham & Co. analyst Dan Scovel said in an initial reaction to the report. Before the call, he predicted revenue growth below 10 percent sequentially would indicate a change in normal seasonal patterns.

Intel's revenue predictions "are a little bit less aggressive than the historical norm," added Nathan Brookwood, principal analyst at Insight 64. "They are getting conservative here."

Intel CFO Andy Bryant said the company is erring on the side of caution in its forecasts because it is unclear whether the slowdown in European sales will spread globally.

"Four to 8 percent is lower than what you would normally expect to see out of Q4?we're going to be a little cautious," he said. "We forecast that we were going to have a phenomenal Q3, but we had a normal one."

In addition, the company gave a more bullish outlook for volume production of the Pentium 4. The chip is due this quarter, but some Intel executives and analysts have said that it won't displace the Pentium III as the company's volume chip until 2002.

Paul Otellini, general manger of the Intel Architecture Group, said the chip would move into the desktop market faster than the Pentium II, which went from introduction to volume production in a little less than a year.

"I feel very confident about ramping the Pentium 4 overall into very high-volume production, cost-effectively, into the performance and mainstream segments in 2001," he said. "We will refine (the Pentium III), but it is entering the last stages of its life."

Last year, Intel reported earnings of 28 cents a share (split-adjusted) on revenue of $7.3 billion, excluding acquisition costs.

On Sept. 21, the Santa Clara, Calif.-based chip giant surprised investors when it warned that revenue, and in all likelihood profits, for the third quarter would be lower than anticipated because of slowing PC sales. The announcement sparked a slide in both the company's stock and the market overall.

Although technology stocks have been relentlessly hammered in recent weeks, the PC market is not shrinking. In fact, annual unit shipments of PCs continue to grow around 15 percent. The problem is that unit shipments are not growing as fast as investors would like, and overall revenue is climbing at even a slower rate.

One of the major looming issues is how much the market will grow in the fourth quarter, traditionally the strongest quarter for PC sales.

Some analysts, such as Eric Ross of Thomas Weisel Partners, predict a fairly normal fourth quarter. For 2000, PC shipments should grow by 18 percent over last year, he wrote in a recent note. Others, however, have said rising oil prices and other factors could dampen holiday impulse spending.

Overall, Intel had hits and misses during the quarter. Microprocessor shipments and average selling prices stayed flat from the second quarter. Typically, shipments go up in the second quarter. On the other hand, shipments of motherboards and flash memory set records, while chipset sales went up from the second quarter.

Bryant added that the drop in demand in the third quarter happened suddenly when the gas crunch hit Europe and was not part of a declining trend. "It was a pretty abrupt stop across the board," he said.

The company will also not curb its capital expansion plans. Intel plans to spend approximately $6 billion on plants and equipment next year.

"We are refereeing between the different groups in the company to manage this," Bryant said. "We're not backing off putting plants in place."