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Intel beats Wall Street forecasts

The chip titan beats second-quarter expectations and blames its sequential decline in part on its strong first quarter.

Intel (INTC) today beat Wall Street's expectations for its second-quarter earnings and blamed its sequential decline on weakness in Europe, an inventory correction following a strong first quarter, and product transitions.

The world's biggest chip maker reported net income of $1.6 billion, or 92 cents a share, up 58 percent from second-quarter results in 1996 of $1 billion, or 59 cents a share.

Analysts expected Intel to report earnings of $1.80 a share for the second quarter, up from earnings of $1.17 a share a year ago, according to First Call. Without a 2-for-1 stock distribution paid to shareholders July 13, Intel would have posted earnings of $1.84 a share.

Intel released its earnings after the markets closed; the stock ended the day at 80-7/8, up from yesterday's close of 78-3/4.

In May, Wall Street cut its loftier expectations of $2.16 a share after Intel announced its revenue would likely fall below analysts' expectations.

Second-quarter revenue was $6 billion, up 29 percent from $4.6 billion for the second quarter of 1996. But those figures were off 7.6 percent from first quarter 1997 revenue of $6.4 billion.

Unit shipments of microprocessors, chipsets, and motherboards were down in the second quarter from the first quarter of 1997. However, motherboard units for the Pentium II processor were higher. Flash memory units shipped during the quarter set a record.

"Strong microprocessor shipments in the first quarter led to some inventory correction in the second quarter as the industry prepared for a rapid transition to processors with MMX technology," said Andrew Grove, Intel chairman and chief executive, in a statement. "Demand for the Pentium processor with MMX technology and the Pentium II processor is strong, and we are ramping production at a record rate."

Revenue from networking products increased in the second quarter compared to the first quarter. Units of fast Ethernet network interface cards and hubs were up in the second quarter from the first.

The company said the Japan and Americas regions had sequentially higher revenues in the second quarter. But the combination of seasonally lower demand and an inventory correction in Europe led to lower sequential revenue in that region.

The company expects revenue for the third quarter of 1997 to be flat to slightly up from the second quarter. Gross margins are expected to be flat to slightly down from 61 percent in the second quarter.

Paul Otellini, Intel's executive vice president of sales and marketing, said the month before price cuts is usually slow for Intel, and that was the case with July. He said August and September will likely see larger orders.

During the quarter, competitors Advanced Micro Devices (AMD) and Cyrix (CYRX) unveiled competing, cheaper multimedia microprocessors that forced Intel to cut prices to stay competitive.

Analysts have mixed views on how those cuts will affect Intel's financial future. Firms including Oppenheimer and Montgomery Securities have lowered earnings and revenue estimates for Intel, citing the chip price cuts.

AMD has won contracts from several Intel customers, including Digital Equipment, Vobis, and Fujitsu. And at least one analyst said AMD's new, cheaper chip is viable competition for Intel's Pentium II.

"In most performance benchmarks it is equivalent to or outperforms the Pentium II," said William Milton, Jr., an analyst at Brown Brothers Harriman, in an earlier interview.

Other analysts downplayed the negative impact of Intel's price cuts for the company.

"We're not going to see any drastic impact on the company's earnings," said Wendy Abramowitz, vice president of Argus Research. She said Intel needed to continue to pursue its aggressive pricing strategy as well as maintain a broadly focused product line.

Other challenges facing Intel include a more complete transition to chips with MMX technology in the short term. It must also ensure that developers create software that feeds long-term demand for its high-performance chips.

Many companies have been caught up in the product transition cycle, which temporarily leads to a revenue slowdown as customers debate whether to grab the latest and greatest. But many analysts say that most top-tier PC makers are still choosing Intel's processors, especially for high-end machines.

Intel is an investor in CNET: The Computer Network.