Intel earnings looking up

Despite weeks of doom and gloom in the hardware sector, a better-than-expected second quarter from Intel today could prove the first step in a turnaround.

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
3 min read
Despite weeks of doom and gloom in the hardware sector, a better-than-expected second quarter from Intel today could prove the first step in a turnaround.

The Santa Clara, Caliornia, chipmaker, which will report its second-quarter results after the market closes, is expected to announce earnings per share of 65 cents or more, excluding charges, on revenues of approximately $5.9 billion.

While this would represent a decline in earnings and revenue over the same quarter a year ago as well as a slight decline from the previous quarter, the prospect seems to be buoying investors, reversing as it would a string of bad news for the chipmaker. Intel stock rose $2.625 yesterday to end at $82.375.

More important, the oversupply in computers and microprocessors appears to be easing, which will clear the way for sales, at possibly higher prices, in the second half. (Intel is an investor in CNET: The Computer Network).

"The quarter actually ended up being okay. There was a lot of worrying about how the quarter was going," said Mark Edelstone, semiconductor analyst at Morgan Stanley. "A lot of the inventory correction is done."

Edelstone predicted that Intel would post earnings per share of 65 cents, "but they could exceed that," he added.

Price cuts in June lead to a surge in sales: Close to 50 percent of the chips in the quarter sold last month. The quarter-end blowout also cleared the decks for second-half sales, according to Ashok Kumar, semiconductor analyst with Piper Jaffray.

"Recent comments made by contract manufacturers, distributors, resellers, PC [makers], retailers, and semiconductor component suppliers all speak to PC demand picking up in June and continuing through July," said Dan Niles, an analyst with BancAmerica Robertson Stephens, who predicted 72 cents a share. "We believe that the Q2 conference call will give guidance to stable ASPs, increasing gross margins, and increasing rates of growth." ASP refers to average selling price.

So far, 1998 has not been a banner year for the processor giant. First-quarter sales slumped because of a slowdown in computer demand, leading the company to announce a reduction of 3,000 employees. Subsequently, Intel had to delay the release of its 64-bit Merced chip until 2000.

The company released its high-end Pentium II Xeon processor right at the end of the second half this year, but had to postpone the release of a chipset that would allow computer vendors to make four-processor systems because of a bug. In addition, the company kicked off the current quarter by shutting down two chip fabrication facilities.

On the legal front, the company lost a major injunction in its suit against Intergraph while the Federal Trade Commission filed an antitrust action in June.

1998 has also seen an acceleration in processor price reductions due to slowing demand and competition from companies such as Advanced Micro Devices (AMD).

Intel cut desktop processor prices three times in the first half, including once in June, the first time that the company has cut processor prices in the last month of a quarter. More cuts are scheduled for July, September, and October. While the price cuts have mostly been focused on low-end chips, high-end processors have been affected as well. An upcoming 450-MHz version of the Xeon chip due in September has been knocked down in price from around $4,500 to $3,700.

In the second quarter, price reductions all but wiped out gains made on the growth in sales, pointed out Piper Jaffray's Kumar. Units shipments grew 17 percent on a year-by-year basis, he pointed out, but the ASP for all Intel microprocessors dropped by 14 percent. Market share also dipped a bit because of incursions by AMD into the low end of the product segment.

Nonetheless, Kumar expected worse. He upgraded his estimate for the second quarter from 62 cents a share to 70 cents yesterday. Excluding a charge, the result will come in at around 65 to 66 cents.

Like Niles, Kumar said that the second-half market conditions could lead to more stable, and possibly even higher, average processor prices.