Tech Industry

Intel earnings fall short of expectations

Pricing and expense pressures cause Intel to miss profit expectations for the third quarter as it reports earnings of $1.9 billion, or 55 cents a share.

Pricing and expense pressures caused Intel to miss profit expectations for the third quarter as the chip giant reported earnings of $1.9 billion, or 55 cents a share, excluding acquisition costs.

Like other PC-centric companies, Intel is shipping more products than ever before. Volume, however, is not completely compensating for lower prices, resulting in deflated earnings. Intel also missed profit expectations last quarter because of pricing pressure.

For the third quarter, Intel reported revenues of $7.33 billion, slightly more than the $7.3 billion expected. Earnings, however, came to $1.9 billion, or 55 cents a share, before accounting for acquisitions. While this represents an increase of 22 percent over earnings of 45 cents a share for the third quarter of 1998, it is less than was expected for the period. Analysts polled by First Call expected earnings of 57 cents a share, or nearly $1.97 billion. A number of analysts expected earnings to reach 59 cents per share.

The earnings results, which were released after the stock markets had closed yesterday, sent shares of Intel tumbling today in early trading. The stock fell 5.46 percent or 4.19 points to 72.5 shortly after the opening bell. Intel had been climbing steadily over the past week in anticipation of meeting its earnings outlook. The stock has traded as high as 89.5 and as low as 40.75 during the past 52 weeks.

Including acquisition costs, net earnings came to $1.56 billion, or 42 cents a share. Intel purchased four other companies this quarter--Level One Communications, Softcom Microsystems, Dialogic, and NetBoost--for approximately $3 billion. All four companies will be incorporated into Intel's networking and communications divisions, two groups formed earlier this year that are expected to play a larger part in the company's plan to become the "building-block" supplier to the Internet.

"Revenue growth was a little better than expected. Margin percentage was a little worse than expected," said Andy Bryant, Intel's CFO, on the conference call. Gross margin dipped from 59.4 percent to 58.7 percent, he said. Intel expected gross margin to rise.

The decline resulted from three factors, he said. The average selling price of Intel's PC chips fell because of an increase of low-cost PC sales combined with lost potential revenue from the delay of "some performance processors," Bryant said, or, in other words, the delay of the "Coppermine" Pentium III processors. Originally due in September, the Coppermine chips, which will run at 733-MHz, are now due on October 25.

In addition, Intel was hit with larger than expected costs associated with inventory and shifting to the more advanced 0.18-micron manufacturing process, which will be used with the Coppermine chips, he said.

In August, the company pushed back the release of the "Coppermine" Pentium III processors from an expected September release to late October because of problems in manufacturing the 600-MHz version of the chip. The delay also pushed back the release of Pentium III chips for notebooks.

"We think we have a better cost story and a better product story going into the fourth quarter," added Bryant.

Overall, Intel shipped a record number of processors for the quarter.

"Our microprocessor business was solid during the quarter," said Craig R. Barrett, president and chief executive officer, in a prepared statement. "Revenues were up, units grew substantially to a new record, and we introduced a large number of new products across all market segments."

Despite the less-than-stellar earnings, several leading investment banks maintained their ratings outlook on the chipmaker while lowering their earnings expectations.

Credit Suisse First Boston cut its 1999 earnings per share forecast for Intel to $2.23 from $2.31. The investment bank also lowered its 2000 forecast to $2.55 from $2.66, maintaining a "buy" rating on the stock.

Morgan Stanley Dean Witter maintained an "outperform" outlook on Intel, and SoundView Technology Group and U.S. Bancorp Piper Jaffray kept a "strong buy" rating.

"We are lowering fiscal 1999 and fiscal 2000 earnings-per-share estimates from $2.28 to $2.21 and from $2.65 to $2.55," Robertson Stephens managing director and senior electronic devices analyst Daniel T. Niles said in a statement. "Results were clearly worse than even we expected, and can be attributed to gross margins that actually declined quarter-to-quarter, driven by lower ASPs and the conversion to 0.18u process technology."

One topic that analysts will be acutely listening for on the conference call today is Intel's predictions for the fourth quarter. So far, the company has said it expects to see the traditional seasonal uptick in demand. Gross margin is also expected to go up, although expenses usually also rise during this period.

Some analysts, however, have cautioned that the growth rate may slow down. Corporate PC buying is expected to ease back on the eve of the Y2K technology glitch while companies may suffer lingering effects of the September 21 earthquake in Taiwan, said Charles Boucher, an analyst at Bear, Stearns, among others.

The third quarter was also not a banner period for manufacturing for Intel. The company experienced a rash of problems that forced the company to delay various products.

In September, bugs were discovered with the 820 chipset, a component for high-end PCs. The problem is delaying the release of Rambus-based computers.

To top it off, AMD during the quarter started selling its Athlon processor, which exceeds the performance of the Pentium III on many benchmark tests. Although Athlon volumes are still small, the existence of the chip means that Intel does not hold the performance crown in a market it continues to dominate.

The big questions for the holiday season, therefore, are whether Coppermine systems will be able to close the performance gap with Athlon and whether consumers will steer away from price to look at performance.