Legal bills ding Intel's earnings

First-quarter profit falls a penny short of expectations, after Intel settles a patent suit brought by Intergraph.

John G. Spooner
John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
4 min read
Legal costs took a bite out of Intel's first-quarter earnings.

The chipmaker on Tuesday reported quarterly earnings that represented double-digit increases over the same period a year ago. But it missed analysts' expectations by a penny, due to charges related to the settlement of a patent suit filed against it by Intergraph.

The chipmaker's net earnings for the quarter totaled $1.7 billion, or 26 cents per share. Revenue for the quarter, which ended March 27, was $8.1 billion. The numbers were significantly higher than for the same period a year ago, when Intel reported earnings of $915 million, or 14 cents per share, on revenue of $6.8 billion.

But, on average, 33 analysts had expected Intel to earn a profit of 27 cents a share, according to a survey by earnings tracker Thompson First Call. Meanwhile, a group of 29 analysts expected the chipmaker to turn in $8.16 billion in revenue, on average.

Intel did meet its own predictions for the quarter. On March 4, Intel said it would turn in revenue of between $8 billion and $8.2 billion.

However, a $162 million charge, related to the settlement of the Intergraph suit, reduced Intel's per-share profit by 1.7 cents. The lawsuit claimed that Intel's Itanium processor violated patents related to Intergraph's Clipper processor. Intel and Intergraph settled the suit for $225 million on March 30. The remainder of the settlement, $63 million, will be paid out over five years, Intel said in its earnings release.

Despite the charge, Intel executives said the company had a good quarter.

"Intel's first-quarter results showed healthy growth in both revenue and earnings, compared to a year ago, led by improvement in worldwide IT spending," Craig Barrett, Intel's CEO, said in a statement. "We ramped our (90-nanometer) process into high volume, with the launch of several new desktop processors, and plan to substantially increase shipments in the second quarter, including our first mobile and server products. The combination of these products, plus new processors and platform innovations coming over the course of this year, positions us well for continued growth."

Looking ahead, Intel expects revenue of between $7.6 billion and $8.2 billion in the second quarter of 2004, meaning that it might fare either slightly worse or slightly better than in the first quarter.

As usual, the company's first-quarter performance was fueled by its Intel Architecture Group, which is responsible for producing its PC processors and the lion's share of its revenue.

Architecture Group revenue was $7 billion, up from $5.8 billion a year ago. Although processor unit shipments were lower sequentially during the quarter, as is normal, its average selling prices were higher, Intel said. First-quarter sales typically decline, following the fourth quarter's traditionally strong consumer and corporate-buying season.

Still, Intel appears to be having difficulties in meeting the demands of some PC makers for its newest chips. Two of Intel's largest customers, Dell and Hewlett-Packard, have said Intel can't meet the demand for some of its latest Pentium 4 processors. The two companies have said they can't get as many of Intel's latest Prescott Pentium 4 processors as they desire and are therefore using an older variant of the chip, dubbed Northwood, in its place in some PCs.

Intel also appears to be late in delivering a 3.4GHz Prescott Pentium 4, despite promising its wide availability for the end of the first quarter. Neither Dell nor HP are yet offering the chip, the companies have said.

The chipmaker did, however, begin shipping its latest mobile processor, a Pentium M chip known as Dothan. The shipments are designed to build up inventories before the chip's official launch, which is scheduled for May, Intel said in its earnings statement.

While they didn't address the status of the 3.4GHz Prescott chip, Intel executives said that Prescott is generally on track and will begin to overtake Northwood in the upper reaches of the PC market during the second quarter.

"We shipped millions of Prescott units in Q1 and expect to have Prescotts cross over (with) Northwood in the performance (desktop PC) segment by the end of the quarter," said Paul Otellini, Intel's president, in a conference call to discuss the company's earnings. "Our goal is to ship double-digit millions of Prescott processors in Q2."

Later, Otellini added, "We plan a very steep ramp of both Dothan and Prescott this year."

Meanwhile, Otellini said Intel's customers had some leftover notebook processors at the end of the fourth quarter. However, those companies were able to clear out the extra chip inventory during the first quarter, showing that the trend toward increasing notebook sales is still alive and well.

But, when it comes to inventory, Intel has a little extra on its books as well, thanks to its transition to a new manufacturing process.

The company has built up nearly $300 million worth of extra inventory--mainly work in progress--according to CFO Andy Bryant. That inventory came by way of higher-than-expected yields of chips manufactured in Intel's newest, 300-millimeter wafer plants. Wafers are the silicon discs that semiconductor manufacturers mint their chips on. The larger diameter of the 300-millimeter discs allows the chipmakers to carve out more chips from a given plant. Although Bryant said the number of good chips per 300-millimeter wafer was higher than expected, initially, moving Intel ahead of its production schedule for the year.

Although, in the grand scheme, the extra inventory represents only about a week or 10 days worth of sales and is something Intel could sell off relatively easily over the remainder of the year, he said.