Intel's Q3 profits tumble 77%

SAN FRANCISCO: Intel Corp. on Tuesday reported third-quarter profits that

tumbled 77 per cent as it struggled with slowing economies and weak personal

computer sales, prompting it to forecast sluggish sales in the fourth quarter,

typically the industry's strongest.

Intel, the No. 1 chipmaker, said that net income before acquisition-related

costs fell to $655 million, or 10 cents a share, from $2.89 billion, or 41

cents, a year ago, before 5 cents a share in acquisition-related costs. Sales

fell 25 per cent to $6.55 billion from $8.73 billion.

The Santa Clara, California-based company had been forecast to report a

per-share profit, excluding the costs, of 10 cents a share, within a range of 8

cents to 11 cents, according to Thomson Financial/First Call. Sales were

forecast on average at $6.38 billion.

Intel, which has been buffeted this year by weak demand and competitive

pressure from rival Advanced Micro Devices Inc. (AMD), said that it expects

fourth-quarter sales of $6.2 billion to $6.8 billion, the same range it has

given for the past two quarters. Analysts, on average, had forecast

fourth-quarter sales of $6.8 billion, suggesting those estimates will need to

come down in light of Intel's guidance.

"The good news is that Intel basically made the numbers everyone was

expecting, so no disaster there," said analyst Drew Peck at SG Cowen.

"The bad news is that the guidance for the fourth quarter suggests that

things are still deteriorating."

Intel shares rose 58 cents to close at $24.96 on Nasdaq on Tuesday. The stock

has declined 20 percent this year, while the stock price of main rival AMD has

tumbled 23 percent amid the worst-ever slump in the semiconductor industry.

Intel shares climbed to $25.67 after the earnings release.

Guidance prompts some confusion



But Intel's guidance for the fourth quarter prompted some confusion among
analysts. Executives said on a conference call, for example, they hadn't seen

any real change in business following the attacks on Sept. 11. "There was

really no discernible difference before or after the 11th," said Paul

Otellini, who runs Intel's PC-related business.

"It's hard for that to match up with all the other data points you're

getting on the worldwide economy," said Lehman Brothers analyst Dan Niles.

"You've got declining GDP, layoffs everywhere and the retails numbers look

horrible."

Including the acquisition costs and in accordance with generally accepted

accounting principles, Intel's net income plunged 95 per cent to $106 million,

or 2 cents a share, from $2.51 billion, or 36 cents. "It would be

irresponsible if not dishonest for any semiconductor company to be bullish right

now," said analyst Doug Lee at Banc of America Securities. "For most

of this year we've been operating with very little visibility."

A bit of good news for Intel were gains it marked against AMD, which has

increased its share of the microprocessor market for much of the year at Intel's

expense. "There's absolutely no doubt that we gained market segment share

in the third quarter, probably two to three points," said Intel's chief

financial officer Andy Bryant in an interview.

According to Mercury Research, preliminary estimates show Intel's market

share in the third quarter at 77.5 per cent, up from a revised 76.7 per cent in

the second quarter. AMD's share slipped to a preliminary 21.5 per cent from 22.2

per cent in the second period, and Mercury attributed Intel's gains to its

aggressive price cutting on the Pentium 4. Analysts now expect further

reductions on Oct. 28.

AMD on Oct. 5, warning of weaker-than-expected results, said third-quarter

sales tumbled 22 per cent, more than the 15 per cent it had earlier forecast and

warned of a large loss, blaming a price war with Intel.

'A little more cautious’



"If I were forecasting based on a traditional, historical basis, I would
have forecasted a seasonally stronger fourth quarter," Bryant told Reuters.

"When you look at the drop in consumer confidence, the weakness in the

worldwide economy, it prompts us to be a little more cautious."

Otellini said on the conference call that sales rose from the second quarter

in all geographic regions with the exception of Japan, where revenue sank to

levels of two years ago. Shipments of PC chips, motherboards, chipsets, flash

memory and network processing chips all rose from the second quarter.

The ramp-up to Pentium 4 is also going extremely well, he said, noting that

Intel shipped four times as many Pentium 4 processors than it did in the prior

quarter. Otellini and Bryant said that Intel is perfectly positioned when the

economy bounces back and consumer confidence strengthens.

"There's this thing out there that nobody knows and that is, are people

going to continue to buy given the current environment," Bryant said.

Intel said that it expects its gross margin percentage, or the percentage of

revenue left after subtracting product costs, to be 47 per cent in the fourth

quarter, "plus or minus a couple of points," versus 46 per cent in the

third quarter. "It looks like they hit the absolute bottom in gross

margins," said US Bancorp Piper Jaffray analyst Ashok Kumar.

Flat quarter



Its spending on research and development will be about $3.9 billion, $100
million less than its previous expectations, due to cuts in discretionary

spending in ongoing programs, Intel said.

Also, for the first time, Intel broke out sales from its communications and

wireless businesses, where it is spending aggressively to broaden its revenue

base. Revenue from wireless products, which include flash memory, fell to $509

million from $667 million a year ago, while sales from communications chips fell

to $580 million from $948 million.

Intel Architecture Group, which makes PC chips, motherboards and chipsets,

saw its sales fall to $5.39 billion from $7.04 billion a year ago, and accounted

for 82 percent of sales, executives said on the call.

"Their guidance suggests the best they can do is a flat quarter,"

Peck said. "It's just not happening for them, or, for that matter, for the

entire PC business this year."