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Intel earnings better than expected

Intel posts stronger-than-expected earnings as shipments of its microprocessors hit a record and price stability returns to its flash memory market.

Intel (INTC) posted stronger-than-expected fourth-quarter earnings yesterday as shipments of its microprocessors hit a record and price stability returned to its flash memory market.

The chip giant, which also announced yesterday that federal regulators would not Intel at a glance contest its merger with graphics chip accelerator Chips and Technologies, said demand for its Pentium II and Pentium with MMX technology lines was strong.

"They performed very well," said David Wu, an analyst with ABN AMRO. "Revenues came in higher than expected, net income was higher than expected, and the gross margins were in line with our expectations."

Intel posted fourth-quarter revenues of $6.5 billion, up slightly from $6.4 billion a year ago. Meanwhile, net profits for the quarter reached $1.7 billion, or 98 cents a share, down from $1.9 billion, or $1.06 a share, reported a year ago. A change in the company's tax structure contributed 4 cents per share towards its fourth-quarter profits.

Wall Street expected Intel to post profits of 90 cents a share, according to First Call.

Despite Intel's seemingly good news, a number of analysts cut their 1998 earnings estimates on Intel today. Soundview chip analyst Scott Randall cut his forecast to $3.77 a share from $3.84 a share, setting a 1999 earnings-per-share forecast of $4.40 a share. Hambrecht & Quist cut its estimate to $3.61 a share from $3.90 to reflect a weak margin outlook and slow revenue growth. Gruntal & Co. also lowered its estimate, to $4.20 per share from $4.50. Finally, Loewenbaum & Co. analyst Ashok Kumar said the company's accelerated transition to the Pentium II processor is expected to hurt gross margins in 1998, and as a result cut his estimate to $3.90 per share from $4.15. He said he expects gross margins to recover in 1999.

"Revenues were up 6 percent sequentially, and flat over a year ago," Kumar said. "Clearly [Intel] saw a price stability in the flash memory market, which had hurt them in the third quarter, and they saw some price recovery in the fourth quarter that helped them."

The company's gross margin for the quarter was 59 percent, up a percentage point from the previous quarter. Intel said that its gross margins were hurt by the fact that it shifted more of its product mix to the Pentium II processor. In a conference call, Intel CFO Andy Bryant noted that margins will be further affected by this shift in the future.

The Pentium II requires a higher percentage of purchased components than its predecessors, a requirement that drives up costs. The gross margin of the Pentium II is about 60 percent to 65 percent, while the standalone processors usually have margins of 80 percent, Kumar said.

Intel said it expects the Pentium II processors to account for 50 percent of its product mix by the second quarter. The company expects lower gross margins for the coming year, in the mid-50 percent range, as a result.

Intel's revenues for the year reached $25.1 billion, up from $20.8 billion the previous year. The company's net profits climbed to $6.9 billion for the year, compared with $5.2 billion reported a year earlier.

Going forward, Intel expects first-quarter revenues to be flat compared with the previous quarter, and expects gross margins to come in a few percentage points below the fourth quarter.

[Intel is an investor in CNET: The Computer Network.]