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Intel 3Q misses mark
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October 12, 1999: 7:07 p.m. ET
Chip maker falls short of estimates despite record level of shipments
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NEW YORK (CNNfn) - Intel Corp., set back by declining chip prices and rising expenses, reported third-quarter earnings Tuesday that missed Wall Street estimates despite record shipments of PC microprocessors.
The Santa Clara, Calif.-based firm earned $1.9 billion, or 55 cents a share, in the three months ended in September, falling short of analysts' estimates of 57 cents a share. Revenue rose 9 percent to $7.3 billion.
Those results don't include acquisition-related charges. Including those items, Intel earned $1.5 billion, or 42 cents a share. In the year-ago quarter, Intel earned $1.6 billion, or 45 cents a share, on $6.7 billion in revenue.
Intel (INTC) made the announcement after the market closed.
Intel shares rose 3/16 to close at 76-11/16 before the company announced its earnings. Its shares dropped to 71 in after-hours trade.
Gross margins decline
Intel missed analysts' estimates despite record microprocessor shipments. Andy Bryant, Intel chief financial officer, said the average selling price of its chips declined more than expected from second-quarter levels, though he did not give specifics.
Analysts had expected strong PC sales to lift Intel's third-quarter results. But Christopher Chaney, semiconductor analyst at A.G. Edwards, told CNNfn that most of the growth in the PC industry has been in the low-cost segment of the market, meaning Intel had a higher mix of its low-cost Celeron chips during the quarter.
"They made an aggressive campaign in lower-cost PCs, and those low-cost chips are a problem for Intel," Chaney said. "They gained market share, but it hurts their gross margins."
Lower gross margins
Intel's gross margins declined to 58.7 percent from second-quarter margins of 59.4 percent.
Bryant attributed the drop in average selling prices to market-share gains in the value-PC segment, as well as "underestimating the effects of delays of some performance processors" based on the 0.18 micron manufacturing process, which allows the company to make smaller, cheaper and cooler chips.
In July, Intel said shipments of its Coppermine chip, which was scheduled for a September introduction, would delayed due to production problems. Intel is now set to introduce that chip on Oct. 25.
Chaney also said that while Intel met analysts' revenue forecasts, the company's operating expenses, which grew 15 percent to $5.3 billion, were higher than expected.
Bryant said Intel's expenses jumped as it made more acquisitions and investments, but he noted the increase doesn't signal a "long-term philosophical change" at the company regarding expenses.
Intel's revenue totals included sales from companies it acquired during the quarter, which included Dialogic Corp. and Level One Communications.
Fourth-quarter optimism
Craig Barrett, Intel's president and chief executive officer, said the company is looking forward to higher fourth-quarter quarter revenues and gross margins, as PC sales get a boost from the holiday shopping season. He added that the company's performance also should improve with the sales of its latest high-speed Pentium III chips, which Intel began shipping last month.
"We look forward to seasonally strong business in the fourth quarter," Barrett said. "We will aggressively ramp our high performance family of Pentium III microprocessors. At the same time, we are accelerating our new business activities in networking, communications products, and online services, as illustrated by the number of acquisitions made in the third quarter."
Intel has been expanding beyond its core PC chip business into the networking and Internet-services businesses as the market shifts from a PC-based to an Internet-centric model.
Taiwan effects?
Chaney noted that Intel may face a tough fourth quarter as a result of the recent earthquake in Taiwan, which caused damage to the region's chip foundries. Though Intel's chips aren't directly affected by the situation, manufacturers of graphics chipsets - which control the graphics performance of PCs - are the most vulnerable.
"The supply chain is only as strong as its weakest link," Chaney said. "If companies can't supply chipsets, that could weigh down PC sales in the fourth quarter."
In a conference call with financial analysts, however, Paul Otellini, general manager, Intel architecture business group, said the firm should not experience any negative effects in the wake of the earthquake.
"We believe our suppliers of materials have not been impacted," Otellini said. "At this point, our customers have not asked us to do anything differently as a result of the earthquake."
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