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Intel breaks out of 2001 doldrums

According to several analyst reports, the heavyweight chipmaker closed 2001 on a high note, thanks to unexpectedly large demand for its chips.

Intel had a happy holiday.

According to several analyst reports issued Friday, the heavyweight chipmaker closed 2001 on a high note, thanks to unexpectedly large demand for its chips.

Analysts estimated the sales would have Intel reporting fourth-quarter earnings of between $6.96 billion and nearly $7 billion--more than the company had predicted. On Dec. 6, Intel forecast earnings of $6.7 billion to $6.9 billion.

Although the company had prepared for the worst, it turns out that "everybody under-forecasted demand," said industry observer Dean McCarron.

Chip sales for Intel were up by as much as 10 percent sequentially for the quarter, analysts said.

Average selling prices also increased, they said, because of greater demand for the company's high-end Pentium 4 chips. These prices are the key to revenue, as every dollar above the cost of manufacturing goes straight into Intel's war chest.

The good news comes as a surprise after the doldrums of 2001. Last year a shrinking global economy contributed to a sour PC market, which turned in its first negative-growth year. The semiconductor industry hit the skids as well, turning in its worst performance in ages.

The uptick in sales for Intel fueled hopes of both better than expected sales in the first quarter of 2002 and an industrywide recovery by the end of the year. The more optimistic environment helped spark stock market gains by Intel and other tech stocks Thursday and Friday.

Consumers kept Silicon Valley rolling.

"Due to the heavy promotional environment," wrote Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray, "overall December quarter (motherboard) shipments increased 10 percent quarter over quarter. We expect Intel's unit shipments to mirror this data, up 10 percent to 32.5 million units, about 3 percent higher than our prior expectations."

As a result, Kumar said, "we expect (Intel fourth-quarter) revenues to approach $7 billion."

Salomon Smith Barney, citing solid fourth-quarter demand for Intel's Pentium 4 chips as well as better pricing, raised its projection for fourth-quarter revenue from $6.8 billion to $6.98 billion, analyst Jonathan Joseph said in the firm's report.

Merrill Lynch also raised its estimates for Intel, to $6.96 billion.

But while the company ended 2002 in much better shape than it was in when the year started, things could have been better.

As previously reported, chip shortages hampered the company during the fourth quarter. Dell Computer, for example, had difficulty keeping the 2GHz Pentium 4 in stock.

Demand for Pentium 4 chips was two times higher than shipments in the quarter, Kumar said, leaving Intel to lament missed sales opportunities.

This, Merrill Lynch said, opened the door for AMD.

"Tight Pentium 4 supply appears to have allowed AMD to shift its mix toward higher-priced Athlon products, away from the value-oriented Duron brand," the firm's report said.

As a result, the Lynch report said, AMD was able to increase its microprocessor revenue from $467 million in the third quarter to $647 million in the fourth quarter. The additional revenue came mainly from a rise in AMD's average selling prices--from $61 to $76--though AMD did boost shipments from 7.7 million units in the third quarter to 8.5 million units in the fourth quarter, the Lynch report estimated.

Happy holidays = Happy New Year?
But with Intel's fourth quarter beating expectations, analysts turned to thoughts of a bright 2002.

Early signs say the company can repeat a good performance during the first quarter of the year--if PC inventory levels remain in check. Excess inventories, such as those seen in early 2001, would force PC makers to cut chip orders.

But "evidence is accumulating that consumer PC sell-through has been solid," the Merrill Lynch report said, "which should reduce the risk of a first-quarter inventory hangover."

However, U.S. Bancorp Piper Jaffray's Kumar said the firm remained concerned about sales because retail inventory at important customers such as Hewlett-Packard and Compaq Computer was in excess of six weeks.

"A potential neutralizing factor," though, according to Kumar, "is the ramp of (Pentium 4) Northwood/DDR systems, which would force an inventory flush by the March quarter."

During normal years, first-quarter sales are about the same or down a few points from the fourth-quarter levels.

However, Intel could see slight gains from the fourth quarter, Kumar said, because "commensurate with the new product launch and the Chinese New Year in February, Intel's order books for March indicate modest sequential growth, which is better than seasonal trends."

Intel plans to launch its latest Pentium 4 on Monday. The chip, running at 2.2GHz, is of a new variety, code-named Northwood, and will be manufactured in an additional plant.

This gives Intel a better-performing chip and additional manufacturing capacity for the Pentium 4. Analysts said this should help the company fill more orders during the first quarter.

Intel is also set to introduce a new version of the 845 chipset for the Pentium 4, which pairs the chip with double data rate SDRAM.

But AMD will not let up the pressure in 2002.

The chipmaker is expected to launch its answer to the 2.2GHz Pentium 4, a new Athlon XP 2000+ desktop processor, on Monday. The new chip, running faster than 1.6GHz, will also be aimed at desktop PCs.

The first quarter will also see a new round of chip price cuts, analysts predict.

Intel is expected to cut chip prices toward the end of the month, after the introduction of its new desktop chips. The new cuts may be more modest than past price moves, though, as Intel tries to maintain higher-than-average selling prices.

AMD is likely to follow, setting the stage for a continued processor battle in 2002.