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Intel profits jump 57 pct
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April 13, 1999: 9:06 p.m. ET
Revenue jumps by 18 percent, but chipmaker warns of 2Q slowdown
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NEW YORK (CNNfn) - Intel Corp. reported a 57-percent surge in first-quarter profits Tuesday, but analysts said weaker-than expected revenues could be a sign that the chip giant is starting to feel the heat from a price war in the computer business.
The Santa Clara, Calif.-based chip giant earned $2 billion, or 57 cents per share, in the period, up from last year when the company earned $1.3 billion, or 36 cents per share. Revenues rose 18 percent to $7.1 billion, but that was still about $300 million less than analysts were expecting.
While the profit topped Wall Street's consensus estimate of 55 cents a share, S.G. Cowen analyst Drew Peck said a small portion of that profit, about 2 cents a share, came from the sale of securities during the quarter. It was not immediately clear if Wall Street analysts included the securities sale in their estimates.
Revenue growth a surprise
On the revenue side, Peck said he was surprised Intel's revenue wasn't stronger, given the launch of Intel's newest chip, the Pentium III during the quarter.
"That was, to me, pretty shocking since they were delivering Pentium III for the first time this quarter which should have given a little boost to the revenues so there's something going on out there and it ain't pretty," Peck said.
Intel has been locked in a price war with rival chipmakers Advanced Micro Devices (AMD) and Cyrix (NSM) as the price for personal computers continues to tumble.
Peck, speaking on CNNfn's "Digital Jam" Tuesday night, said the shift toward low cost PC's is likely to accelerate in the months ahead, putting pressure on the company to keep its costs under control.
"The whole world is going to $600 PC's," he said. "It's got to have some impact on them and I think we're just starting to see that now."
Cost-cutting a key driver
Analysts attributed Intel's ability to keep profits on track to the company's ongoing cost-cutting program, which allowed Intel to reduce the average cost for manufacturing microprocessors faster than expected.
The company, for example, cut its headcount to 64,800 from 65,600 in the year-ago quarter.
"The focus on the last several quarters has been on cutting costs across the board -- in their manufacturing process, in using older fabrication facilities instead of building new fabs," said Jeffrey Maxick, an analyst at Madison Securities.
"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 and higher speed Intel Celeron and mobile Pentium II processors," said Craig Barrett, Intel's president and chief executive officer.
Intel shares fell to 57-3/4 in after-hours trading on the Instinet trading system after closing at 60-1/2, down 3/4, on the Nasdaq stock market.
Caution on 2Q revenue
While Intel (INTC) has focused on cutting costs, the company said it expects second-quarter expenses to be 6- to 10-percent higher than the $1.6 billion in first-quarter expenses, citing higher spending associated with merchandising and increased research and development.
Intel also cautioned that it expects second-quarter revenue to be "flat to slightly down" from first-quarter results due to seasonal factors.
The company added that second-quarter gross margins will likely be flat with the 59 percent margins it posted in the first quarter. But for the year as a whole, margins could be down about 2 percentage points, which analysts reckon could mean Intel is planning further price cuts.
Two years ago, Intel had a lock on the personal computer market with nearly 95 percent of all PC's sold at retail containing Intel chips. A year later, Intel's share fell to 67 percent due to the popularity of low-priced PC's containing chips from Advanced Micro Devices and Cyrix. Intel's retail share tumbled to 36 percent in the first quarter, but Intel officials say they are determined to win back that market share.
"What we're trying to do is win back market segment share at the low end, and we did that in the first quarter," Intel chief financial officer Andy Bryant said. "You'll see us continue to compete very aggressively. On the other hand, you won't see us lowering prices more than we need to to win the business."
Analysts said the second quarter usually brings a slight sequential increase in revenue.
Bryant noted in a conference call with analysts that additional supply of Pentium II chips helped satisfy "unfulfilled demand" from the fourth quarter.
While Intel has been locked in a war with AMD, the company has been working to build its presence in the networking market, which should give a boost to its gross margins.
In March, Intel acquired Level One Communications for $2.2 billion in stock. Intel also recently entered into a joint venture with Microsoft Corp. (MSFT), Nortel Networks (NT) and Hewlett-Packard Co. (HWP) to develop a new line of voice- and data-networking equipment.
-- by staff writer John Frederick Moore
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Intel
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