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Profits up but sales a concern at Intel

Intel tops earnings estimates by reporting net income of $2 billion today, or 57 cents a share after accounting for a split, but sales were lower than expected.

Intel topped earnings estimates by reporting net income of $2 billion today, or 57 cents a share after accounting for a split, but sales were lower than expected.

Revenue for the quarter came to $7.1 billion, an increase over revenues of $6 billion for the same period in 1998, but lower than the $7.5 billion analysts were expecting. Profits didn't sink accordingly, because Intel accelerated ongoing cost cutting efforts and gained $347.9 million in outside investments, more than the expected $200 million.

Sales are expected to stay flat or drop slightly in the second quarter, the company said, because of traditional seasonal slowness. Sales should pick up in the second half, as usual, despite the Y2K bug, the company said. Various analysts have said that sales may slow for the PC business because of this issue.

"Microprocessor units declined slightly from record highs in Q4 because of seasonality," said Paul Otellini, general manager of the Intel Architecture Business Group. "The second half remains uncertain, but we are planning for a normal second half."

Otellini further added that Intel gained back market share toward the end of the first quarter and that sales in Japan rose for the first time since the second quarter of June 1997.

Analysts expected Intel to report $1.10 in earnings per share, or 55 cents before the split, according to the consensus estimate from First Call, with some predicting that the result would be higher. Mark Edelstone of Morgan Stanley Dean Witter predicted a profit of 57 cents a share on revenue of $7.5 billion. The "whisper number," or rumored result, reached as high as 58 cents in the past few days, according to sources.

The result represents an increase over profits from a fairly disappointing first quarter in 1998, when the chipmaker posted revenues of $6 billion and net income of $1.3 billion, or 40 cents in earnings per share minus non-recurring adjustments and accounting for the split. At the time, Intel said it would cut 3,000 jobs.

Last quarter, Intel reported record revenues of $7.6 billion and record earnings of $2.1 billion, or $0.59 a share. The fourth quarter is historically stronger than the subsequent first quarter for chipmakers and others in high-tech.

Today's results will likely prompt a half-full/half-empty debate among industry watchers. On the positive side, the results show that unit sales of processors, and by extrapolation PCs, have continued to grow annually. Earnings have also kept moving up on a yearly basis. Gross margins also surprisingly ticked up from 58 percent in the fourth quarter to 59 percent.

"On a pre-split basis, the company would have come out with a four-cent upside surprise," said Askok Kumar, semiconductor analyst with US Bancorp Piper Jaffray. Although the revenue figure was disappointing, it likely does not represent a threat to the long-term health of the company. Price declines will likely be absorbed through more expensive performance processors and more cost cutting.

On the other hand, prices have been eroding rapidly in the processor and PC market, a trend that culminated in an announcement that earnings at Compaq would be approximately half of expectations.

Seasonal slowdown
The decline in sales largely came from the traditional seasonal slowdown in computer buying, but also a decline in PC and PC processor prices, say observers. Intel and rival AMD, which will likely announce losses tomorrow, have been slashing prices all year in an effort to solidify or take market share from each other. Intel recently has been particularly aggressive in the consumer PC market and laptop space, where AMD has made inroads.

Intel enjoys some degree of insulation in this price war through its Pentium III and Pentium III Xeon processors, which it can sell for hundreds and even thousands more than its low-end Celeron processors. AMD has yet to substantially directly challenge Intel in the higher-end product lines.

"We are pleased with our substantial year-over-year growth in profitability resulting from our cost control efforts. As we expected, revenue declined from the prior quarter reflecting a seasonally slower selling period," said Craig Barrett, Intel's chief executive, in a prepared statement. "We are seeing positive results from the launch of new products across all segments, including the introductions of the Pentium III and Pentium III Xeon processors."

Still, the long-term pricing trends will affect the Pentium III, which has become a major concern among analysts and PC executives. Consumers and businesses will continue to buy more performance-oriented machines, but they will inevitably cost less. As a result, the major PC and chipmakers may see an erosion of revenue over time.

Compaq earlier this week sent shock waves through Wall Street when it announced that its earnings for the quarter would be roughly half that of earlier expectations. Price declines and a slowdown in demand were cited as causes of the problem. Today, Hewlett-Packard CEO Lew Platt said that competition among the major PC makers for large corporate accounts has become particularly fierce.

"There is no stopping the relentless price decline," he said. "The performance segment is going to drop down until in 2002 it is below $1,500," said Roger Kay, computing analyst with International Data Corporation.

Late last year, a number of PC executives and analysts predicted that fears about the Y2K bug would stimulate desktop demand in the first half as corporations put the finishing touches on their upgrades. That didn't materialize, said Kay, contributing to the funk.

Bloomberg contributed to this report.