NEW YORK (CNN/Money) -
Intel Corp., the leading manufacturer of microprocessors used in personal computers and servers, reported strong first-quarter results but missed Wall Street's sales targets.
The company also issued sales guidance for the second quarter that was below what Wall Street analysts were expecting. But Intel hinted that corporate demand for technology items is improving, which seemed to encourage Wall Street.
The Santa Clara, Calif.-based company earned $1.7 billion, or 26 cents a share, in the quarter, an 89 percent increase from net income of $915 million, or 14 cents a share, a year ago. Analysts were expecting earnings of 27 cents a share, according to earnings tracker First Call.
However, the results did not include a charge related to a $225 million settlement of a patent infringement case with Intergraph. Intel took a one-time $162 million charge, which reduced earnings by about 1.7 cents a share. The company said the remaining $63 million will be amortized over the next five years.
Intel's sales rose 20 percent to $8.1 billion, slightly below the consensus estimate of $8.16 billion.
The company's gross margins, a widely watched measure of how profitable a company is after subtracting the cost of sales, came in at 60 percent, in line with the gross margin guidance that Intel gave Wall Street last month during its mid-quarter update.
During a conference call with analysts, Intel CFO Andy Bryant pointed out that gross margins, excluding the legal charge, were closer to 62 percent.
Shares of Intel (INTC: Research, Estimates) initially rose after-hours following the news but then slipped into the red. The stock inched slightly higher in regular trading on the Nasdaq Tuesday, gaining 7 cents to close at $27.67.
Corporate tech spending on the rise
The Dow component's stock has fallen more than 13.5 percent so far this year due to concerns about notebook computer inventory problems in Asia, increased competition from rival Advanced Micro Devices and fears that the chip cycle may soon be reaching its peak after a strong 2003. Shares of Intel more than doubled last year.
But in a written statement, Intel CEO Craig Barrett said that the first-quarter results were "led by improvement in worldwide IT spending."
Investors have been waiting for large tech companies like Intel to indicate that corporations are starting to buy more PCs, servers and other devices that feature Intel's semiconductors.
During the conference call, Intel president and chief operating officer Paul Otellini added that the company was seeing a more healthy and sustainable pickup in corporate demand than it did during the bubble years of the late 1990s.
Still, several analysts expressed concerns during the call about the fact that Intel's inventories increased 11 percent from the end of the fourth quarter even though sales fell sequentially in the first quarter. A buildup of inventory can create a glut if sales growth is not as strong as expected.
Intel said second-quarter sales should be between $7.6 billion and $8.2 billion. The $7.9 billion midpoint of that range represents a 16 percent increase from a year ago. But it is below analysts' consensus estimates of $8.09 billion and also about 2 percent lower than Intel's first-quarter sales.
Adam Parker, an analyst with Bernstein, wrote in a report Thursday that Intel usually reports a sequential sales decline of between 1 percent and 5 percent. So Intel's guidance is calling for no more than a typical seasonal slowdown in the second quarter.
But investors might have been hoping to hear that the company would report sales growth, despite the seasonality, since the first quarter was weaker than expected.
After all, Intel did report a small sequential increase in sales during last year's second quarter. That increase, however, was driven partly by the introduction of Intel's Centrino chipset for wireless notebooks in mid-March of 2003.
Wall Street loves the margins
Nonetheless, Michael McConnell, an analyst with Pacific Crest Securities, said it was reassuring to see that Intel said gross margins for the second quarter should remain at around 60 percent. Intel also reaffirmed full year gross margin targets of about 62 percent. By way of comparison, gross margins for 2003 came in at just under 57 percent.
"A lot of the weakness is in the stock already, especially with gross margins still sitting at 60 percent. That's a strong statement about what Intel is doing with costs," said McConnell.
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To that end, hopes are high for new chips that were manufactured using more efficient 90 nanometer processing technology such as Prescott, which is a more advanced version of its Pentium 4, and Dothan, which will be used in notebook computers starting in May.
And considering that Intel has been punished this year even though corporate spending is improving, the stock might be starting to look attractive, said Sunil Reddy, a portfolio manager with Fifth Third Asset Management, which owns Intel in the Fifth Third Quality Growth fund.
Shares of Intel trade at about 23 times 2004 earnings estimates, a discount to many of its semiconductor rivals.
"The economy is clearly picking up and with the pullback, I like the stock's valuation now," said Reddy.
However, Intel's report may not allay some investors' worries about the fact that the company is catering to a slower growth part of the technology market than many other chip makers.
Texas Instruments (TXN: Research, Estimates), for example, is expected to post stronger first-quarter growth in sales and earnings than Intel after the bell Wednesday thanks to its exposure to the cell phone market and other areas of consumer electronics.
And Linear Technology (LLTC: Research, Estimates), which makes analog chips used in MP3 players and digital cameras, reported better than expected fiscal third-quarter earnings Tuesday. Shares of Linear rose 2.5 percent in after-hours trading.
Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationship ties to them.
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