Intel posts lower profit, but margins shine

SAN FRANCISCO: Intel Corp. posted lower earnings in line with expectations but managed higher margins than forecast by controlling manufacturing costs and boosting sales of pricier notebook chips. Intel said it expected to post revenue of $6.4 billion to $7.0 billion -- with a midpoint of $6.7 billion -- in the current quarter. That would be about 6 percent up from a year ago, slightly below last quarter but slightly above analysts" current average forecast of $6.62 billion, as tracked by Thomson First Call.

Second-quarter revenue is typically flat to a few percentage points down from the first quarter, Chief Financial Officer Andy Bryant told Reuters. Intel"s guidance is "inside a seasonal second quarter but at the high end of seasonal expectations," he said.

Bryant said he was encouraged, even though he was hesitant to declare a recovery in the battered chip industry. "We don"t see any sign of inventory build-up," he said in a conference call with analysts. "But it feels different. Does it feel like a recovery? No, but it feels modestly better. We actually feel a little bit more confident."

In regular trade on the Nasdaq, Intel shares closed at $17.13. The stock then jumped to $18.06 on Instinet in extended-hours trading that followed release of the earnings report. The technology bellwether was the second most active stock on the exchange after the close.

"I think the guidance is actually surprisingly strong -- the mid-point of the range is for flat revenue," said Dan Scovel of Needham & Co. "I think that"s a pretty good sign, given the second quarter is usually down a few percentage points from the first quarter (revenue)."

Said Michael McConnell, an analyst at Pacific Crest Securities: "This is a pleasant surprise, especially on the gross margin line, which is what people most focus on."

Intel"s gross margin, or the percentage of revenue left after subtracting production costs, was 52 percent in the first quarter, considerably above its earlier guidance of "slightly below" 50 percent.

Gross margins were higher because Intel was able to sell some microprocessors and chipsets that were previously reserved and because of lower-than-expected manufacturing costs, neither of which will recur in the current quarter, Bryant said. "This was a solid quarter. Inventories have come down, impairments are lower and we continue to drive costs down."

Net income for the first quarter fell 2.2 percent to $915 million, or 14 cents per share, from $936 million, or 14 cents per share, a year earlier, the Santa Clara, California-based company said. Excluding items, Intel posted a profit of 15 cents a share in the year-ago period, according to First Call.

Revenue declined to $6.75 billion from $6.78 billion.

Analysts, on average, had expected Intel to post earnings per share of 12 cents with forecasts ranging between 11 cents and 13 cents. Last month, Intel narrowed its revenue forecast range to between $6.6 billion and $6.8 billion.

For the second quarter, gross margin percentage is expected to be about 50 percent, plus or minus a couple of points, as compared to 52 percent in the first quarter. For 2003, gross margin percentage is expected to be about 51 percent, plus or minus a few points and research and development spending about $4.0 billion.

Capital spending for 2003 is expected to be between $3.5 billion and $3.9 billion, in line with Intel"s earlier forecast that it would lower its 2003 capital spending budget by as much as $1.2 billion from 2002"s level of $4.7 billion.

Price hike backfire

Intel had cautioned earlier that higher reserves for flash inventory would weigh on its first-quarter gross margins. In a mid-quarter update last month, Intel cited weaker-than-expected sales of flash memory used in cell phones and other devices after a price hike in January backfired.

Intel President Paul Otellini said the company has lost flash market share as a result of the price hike and was looking at ways to regain market, whatever it takes. "We"re committed to growing this business and returning it to profitability," he said.

The microprocessor business did better than expected, led by strong demand for notebook computers, although desktop and server sales were down slightly, as expected, Otellini said. The Santa Clara, California company is investing heavily in products as well as companies that make technologies for computer users to surf the Web using wireless networks, especially with its Centrino line of processors and chipsets.

Still, what Intel and PC makers are waiting for is a resumption in spending by corporate customers, particularly replacing personal computers that are four years old or more and due for an upgrade.

© Reuters