Intel Toes the Mark -- Exactly

Updated from 4:49 p.m. EDT

Intel (INTC) did exactly what it said it would do. Nothing more, nothing less.

Intel announced revenue of $6.8 billion in the first quarter of 2002, a 3% sequential fall in a quarter that for the past several years has seen the chipmaker's revenue dip 5% to 10%. Using generally accepted accounting principles, Intel notched 14 cents a share in earnings.

Excluding the effects of acquisition-related costs, the company posted pro forma profits of 15 cents a share, even with Wall Street consensus of flat sequential earnings. Analysts expected $6.78 billion in revenue, according to Multex.com.

"While demand in emerging markets remains solid, established markets such as the United States and Europe continue to be impacted by weak IT spending," CEO Craig Barrett said in a prepared statement. Intel got a boost from Taiwanese, Chinese and Indian markets, but U.S. revenues inched down as corporate IT spending continues to sit in lockdown.

The same statement went on to say that uncertain global economics made it "particularly difficult" for the company to predict demand.

The chip giant kept investors' hopes low for the typically stubborn first quarter, and appeared to do the same for its second quarter on Tuesday afternoon. Intel outlined a wide revenue range from $6.4 billion to $7 billion for the June quarter, signaling that weak visibility is still limiting the company's ability to pinpoint its upcoming performance.

During the first quarter, Intel tinkered with estimates during a midquarter call, but avoided inferences that business was picking up. While fourth-quarter results jumped 7% sequentially on stronger-than-expected PC sales, Intel's March guidance called for a 3% revenue decline in the first quarter.

Intel shares climbed 5% in an earnings-related rally Tuesday to close at $29.51. After the earnings announcement, shares were up another 5%.

Several analysts have been grousing lately about Intel's valuation, with the stock trading at around 30 times 2003 earnings at the moment. While the chipmaker is no doubt an industry leader, current analyst forecasts call for a mere 67 cents a share in earnings this year, an improvement over the 52 cents a share clocked in 2001 but a pittance compared with the $1.73-a-share profits reaped in 2000 and $1.17 a share culled in 1999.

With lower first-quarter revenue, management was expecting narrowly weaker margins. The company turned in 51.3% gross margins, exactly matching the fourth quarter's finish. Intel explained, however, that if it weren't for a $155 million lawsuit settlement announced Monday, Intel's gross margin would've been 53.6%.

CFO Andy Bryant attributed a more than 2% sequential improvement to higher average selling prices (sparked by increased Pentium 4 sales) as well as manufacturing efficiencies.

Leading PC makers Dell (DELL) and Compaq (CPQ) have provided investors with confidence that January and February sales were stronger than anticipated, but March did not necessarily follow suit with increased PC sales. Nonetheless, Intel expects to maintain its 53% margins for the full year, the major snippet of good news in the report.

Bryant cautioned analysts not to be skittish about the start of the second quarter, saying that the quarter is typically back-end loaded with June providing the bulk of sales. As for the second half of the year, he says Intel's current full-year estimates don't "take a lot of growth, it just takes business being kind of steady" to meet expectations.

Intel's capital spending will not be seeing growth, according to Tuesday's report. Intel is miles ahead of its competitors in cash outlays, and the company coughed up $1.43 billion of its $5.5 billion 2002 budget for manufacturing facilities and equipment.

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