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Intel earnings up, shares down

The chip giant sees its stock dip as much as four percent despite reporting first-quarter profits that beat Wall Street's expectations.

Intel (INTC) saw its stock fall as much as four percent today despite reporting first-quarter profits that beat Wall Street's expectations.

Shares of Intel traded as low as 128-1/4 in the morning before finishing the day at 131, down 2-3/4 points from yesterday's close.

Meanwhile, Alex. Brown and CS First Boston upped their earnings estimates for the company.

Alex. Brown raised its 1997 estimate to $8.94 a share from $8.80 and reiterated its "buy" rating on the stock. CS First Boston also raised its estimates to $9.28 a share from $8.96 for 1997. Its 1998 rating was also upped to $11.09 a share from $10.82; the investment house also repeated its "buy" rating on the stock.

High demand for Intel's multimedia MMX Pentium processors drove earnings as Intel reported a net income of $2 billion, or $2.20 a share, for the first quarter, up from $894 million or $1.02 per share a year earlier. Analysts had expected the chipmaker to report $2.06 a share, according to First Call, a firm that tracks financial estimates.

Analysts suspected that some investors were spooked by the chip giant's 1997 gross margin forecast of 60 percent, sending shares down to 129-7/8, said C.B. Lee, an analyst with Hancock Institutional Equity Services in San Francisco. He added that Wall Street failed to consider Intel's ability to expand its gross margins for the quarter.

"I think what Wall Street didn't latch onto was the expansion of its gross margins," Lee said. He also noted that many analysts had expected Intel's expenses to run up in the range of 3 to 4 percent, when they later came in around 2.5 percent.

Revenues reached $6.4 billion for the quarter, up 39 percent from $4.6 billion a year ago. And, as Intel had predicted, first-quarter revenues were roughly the same as the previous quarter's results.

Intel got a boost in the first quarter from worldwide retail sales driven by its Pentium processors with its MMX multimedia chip technology, according to Paul Otellini, executive vice president of sales and marketing, in a conference call with analysts.

Volume shipments to original equipment manufacturers of its next-generation processor, Pentium II, also pushed up Intel's sales. Pentium II computers will be introduced in May, Otellini added.

Pentium Pro shipments also grew during the quarter as businesses moved to the Windows NT operating system. At the same time, some areas of Intel's business slowed.

Shipments of Intel's Pentium "classic" processors declined over the fourth quarter as the company shifted to the newer products. Flash memory units increased, but competition drove prices down from fourth-quarter levels.

Investors, meanwhile, are concerned about Intel's quarterly price cuts, which are expected to be announced on April 28.

"It's not unlike the February move in terms of overall impact," Otellini said. "It's focused on moving our higher-performance parts into the mainstream."

Historically, Intel has made quarterly price cuts of 20 percent to move sales or reposition itself against competitors, but there is no consensus on how deep and how far the cuts will range across Intel's product line.

The financial impact of any cuts announced this month will not be seen until the company reports its results for the second quarter ending in June. Nevertheless, the increased attention on competition and possible price wars has already brought investors' attention to possible future financial implications.

Moreover, since legal wrangling over Intel's MMX trademark was settled, Cyrix (CYRX) and AMD (AMD) are challenging Intel's tight grip on the market this quarter by releasing fast chips at low prices.

Intel last week settled a suit with Cyrix that required the competing vendor "to use MMX with the appropriate attribution," Intel said. The chip giant lost a separate court battle, however, with AMD, which does not have to attribute the term to Intel. AMD formally introduced its K6 MMX processor the day after the court decision was announced.

Intel is an investor in CNET: The Computer Network.

Reporters Brooke Crothers and Dawn Yoshitake contributed to this report.