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Cheap PC explosion expected to buoy Intel profits

Despite a few embarrassing missteps during the third quarter, Intel is expected to report another strongly profitable period because of a surge in sales of cheap PCs.

Despite a few embarrassing product delays during the third quarter, Intel is expected to report another strongly profitable period because of a surge in sales of cheap PCs.

After the market closes today, the Santa Clara, California-based chipmaker is expected to report earnings of nearly $2 billion, or 57 cents a share, on revenues of nearly $7.5 billion, according to a poll of analysts by First Call. Some analysts, however, have said that the "whisper" number, or latest informal estimate, is closer to 60 cents a share.

For the same quarter of last year, Intel posted profits of 44 cents a share. Earnings last quarter topped $1.7 billion, or 51 cents a share, slightly lower than expectations.

The company is scheduled to discuss the latest earnings report with analysts during a conference call at 2:30 PT.

A hefty portion of Intel's revenues and profits for the past quarter likely came from Celeron processors, the relatively inexpensive processors that are found in many low-end consumer PCs. Sales of consumer PCs took off with a frenzy this past summer after CompuServe and other ISPs teamed up with PC makers to offer $400 and higher rebates on new systems.

Celeron sales likely accounted for 35 percent to 40 percent of Intel's desktop processor sales, more than in past quarters, said Charles Boucher, an analyst with Bear Stearns, who predicted Intel would report earnings of approximately 60 cents a share.

The increased percentage of Celeron sales likely depressed Intel's average selling price from $205 in the second quarter to $195, he added, but the increase in volume compensated for the drop in average price. The lower-than-anticipated profits last quarter resulted from price pressure, executives and analysts said.

The drop in price, in fact, was likely more due to the increased mix of Celeron chips rather than competition from AMD and others. "There has actually been some net improvement in pricing," in the low end segment because competition has eased, said Boucher.

Despite an expected rise in profits, however, the third quarter was not a banner period for the company. Intel experienced a rash of problems that forced the company to delay various products. 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.

In September, bugs were discovered with the 820 chipset, a component for high-end PCs that effectively delayed the release of Rambus-based computers. In addition, Intel also delayed the release of two Xeon processors, which forced server manufacturers to put the brakes on some eight-processor servers.

To top it off, AMD during the quarter started selling its Athlon processor, which exceeds the performance of the Pentium III on many benchmarks. 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 growth rate may also slow down in the fourth quarter, according to, among others, Mark Edelstone of Morgan Stanley Dean Witter. A slow down in corporate PC buying is expected on the eve of Y2K while companies may suffer lingering effects of the September 21 earthquake in Taiwan, said Boucher.

Strategically, the third quarter marked an increased emphasis on networking and communications, which are expected to become a larger segment of the company's business. Intel introduced its first networking processor family in early September and acquired NetBoost, which specializes in processors for routers and other communications equipment, for approximately $50 million on the same day.

After the quarter closed, the company acquired IPivot, a maker of equipment that manages high volumes of Internet traffic, for $500 million for its communications group.

"We continue to expect more acquisitions over the next 12 to 18 months," wrote Dan Niles, semiconductor analyst at BancBoston Robertson Stephens, who expects earnings of 59 cents a share.