Intel outperforms

Daniel Sorid

SAN FRANCISCO: Intel Corp. reported its highest-ever quarterly revenue and boosted its budget for factory and manufacturing investments by more than $1 billion as profits exceeded Wall Street expectations.

The bellwether report, the first earnings release of the year from a major U.S. technology company, boosted Intel's stock by three percent and lifted shares of semiconductor equipment manufacturers, for which Intel is a top customer.

Earnings in the fourth quarter that ended December 25 fell to $2.12 billion, or 33 cents a share, compared to a year-earlier profit of $2.17 billion, or 33 cents a share, as profit margins eroded in part due to heightened competition. Sales rose to $9.6 billion from a previous record of $8.74 billion.

The results topped analysts' average expectation of earnings of 31 cents a share and sales of $9.42 billion. "It's a terrific report. Intel is clearly the bellwether, and this report could easily turn the tech sector," said Stephen Leeb, president of Leeb Capital Management in New York.

The report, coming a day after a negative financial forecast from rival AMD Inc., lifted semiconductor stocks, which had been hit hard in 2004. Intel shares rose three percent to $23.20 from a close of $22.54 on Nasdaq, although the stock has lost about a third of its value over the past 12 months.

The Santa Clara, California-based company targeted sales of $8.8 billion to $9.4 billion in the current period, at the higher end of the average analyst estimate of $8.94 billion, as measured by Reuters Estimates. Due to a calendar quirk, the quarter will have 14 weeks, giving it an extra week of sales.

Speaking to analysts, Andy Bryant, Intel's chief financial officer, said the company had overcome a nagging problem with swollen chip inventories, and acknowledged that its sales forecast might even be a little cautious, adding to the optimism among Wall Street analysts.

"The first-quarter numbers could be well above what they're saying," said Apjit Walia, an analyst with RBC Capital Markets.

Pointing to strong sales of chips for notebook and server computers, and rapid growth in India and China, Intel president Paul Otellini said the company was poised for a good year. "In 2005, we expect another year of solid growth," Otellini said on a conference call with analysts.

Intel, whose microprocessors run 80 percent of the world's personal computers, boosted its annual budget for spending on factories and chip-making equipment to about $4.9 billion to $5.3 billion from a $3.8 billion level in 2004.

INCREASED COMPETITION

Faced with a resurgent rival in AMD, Intel has seen its gross profit margins suffer, falling to 56 percent in the fourth quarter from 63.6 percent a year earlier. Gross profit margin is the percentage of sales left over after accounting for production costs.

AMD's Opteron chip for server computers has more than doubled its share of the market to about 8 percent, forcing Intel to trim the premium prices it had been able to charge for Xeon, its server chip, analysts say.

Intel said profit margins are expected to decline further in the first quarter, to about 55 percent, and are targeted at 58 percent for the year. While competition from AMD has weighed on those margins, gains in manufacturing productivity in 2005 could push those numbers higher, said Eric Ross, an analyst with ThinkEquity Partners.

"It doesn't bother me quite as much that gross margins are down. I think margins probably come up a little bit," he said.

At the same time, Intel has found clear success with Centrino Mobile Technology, its brand of chips for notebook computers. The so-called platform brand -- encompassing a microprocessor, a supporting chip set, and a wireless communication chip -- has helped Intel take a bigger piece of the notebook computer market.

Even there, however, a threat looms. AMD last week introduced its own new brand of mobile chips -- Turion Mobile Technology -- that goes after the same thin-and-light notebook market as Centrino.

Intel is the most advanced manufacturer of chips, with a factory footprint that dwarfs that of AMD, and is preparing a series of manufacturing upgrades that will lead to chips with features of 65 nanometers, or billionths of a meter, in size.