Intel's Q3 earnings rise, outlook cautious

By Duncan Martell

SAN FRANCISCO: Intel Corp. has posted higher third-quarter earnings but cautioned that revenue for the holiday sales-driven fourth quarter would be lower than Wall Street had expected, saying there was no sign yet of a recovery in the personal computer industry.

Intel shares fell as much as 14 percent after the earnings report, as the chipmaker posted per-share earnings below consensus estimates and forecast fourth-quarter revenues below current Wall Street expectations.

Intel forecast fourth-quarter revenue of between $6.5 billion and $6.9 billion, implying sales ranging from flat with the third quarter to up by about 6 percent -- far less than 10 percent to 15 percent increase that is typical for Intel and the personal computer industry. In last year's fourth quarter, Intel posted revenue of $6.98 billion.

In addition, Intel lowered its capital spending budget for the year to about $4.7 billion, lower than the previous expectation of $5.0 billion to $5.2 billion. That sent shares of chip-equipment companies, such as Applied Materials Inc., tumbling in after-hours trading.

"They're still waiting for a recovery and have not seen it," said Hans Mosesmann, an analyst at Prudential Securities. "This is bad news and worse than a lot of people were expecting."

Soft market means lower earnings

Shares of Intel fell as low as $14.25 in trading after the close of regular U.S. trading, after rising $1.42 to $16.52 during regular trade on Nasdaq. Intel shares are down by almost 50 percent this year. "As long we have a soft market, earnings are going to be lower than we would like," said Andy Bryant, Intel's chief financial officer, in an interview. "The economy is still not recovering in our industry."

Santa Clara, California-based Intel said net income rose to $686 million, or 10 cents per share, from $106 million, or 2 cents per share, a year ago. Revenue fell slightly to $6.5 billion, compared with $6.55 billion.

Excluding one-time acquisition-related costs of about $108 million, Intel said it earned 11 cents a share. On that basis, analysts had forecast Intel to earn 13 cents a share, within a range of 10 cents to 14 cents, on revenue of $6.52 billion, according to Thomson First Call.

Intel said the majority of its planned capital spending reduction came from cost-savings. The company said it would slightly reduce such investment in the fourth quarter by reusing some equipment.

"With demand being mediocre for so long, Intel now is to the point where cutting capital spending again is fairly major in that many were estimating an annual spending run-rate of $5.6 billion at the beginning of the year," said Justin McNichols, portfolio manager at San Francisco-based Osborne Partners Capital Management.

Intel said its gross margin in the fourth quarter would be 49 percent and it cut its forecast for gross margin for all of 2002 to the same 49 percent. Intel had earlier held steady a forecast for a gross margin of 51 percent, "plus or minus a couple of points," in 2002 despite softening revenue.

"The margin guidance they gave in early September was disastrous," Lehman Brothers analyst Dan Niles said. "When you think about it, higher gross margin on lower revenue just doesn't make sense."

Market share gains at AMD’s expense

Advanced Micro Devices Inc., Intel's principal rival in the market for microprocessors that are the "brains" of PCs, warned on Oct. 2 that its third-quarter revenue would be 18 percent below Wall Street expectations at the time, leading to a large operating loss. AMD cited a weak PC market and a build-up of chips at PC makers, and analysts cited bruising competition with Intel.

Advanced Micro is scheduled to report its second-quarter financial results on Wednesday after U.S. markets close.

On a conference call with analysts, Intel's President and Chief Operating Officer Paul Otellini said Intel gained about 3 points of market share to a four-year high, principally in the market for desktop PCs, where its Pentium 4 processors gained ground against AMD.

Intel had in early September tightened its projected revenue range for the third quarter to $6.3 billion to $6.7 billion compared with its previous projection of $6.3 billion to $6.9 billion, reassuring investors at the time that the beleaguered PC industry was not getting far worse.

With a few notable exceptions such as Dell Computer Corp., the PC industry is having a bad year, with some analysts calling for flat sales in 2002, following a dismal 2001, when year-over-year sales fell for the first time since the mid-1980s. Analysts and market research firms have steadily ratcheted down estimates for 2002 worldwide shipments of PCs.

© Reuters