Chipping Away at Growth: Intel Sees Weak First-Quarter Revenue

Earnings Scorecard
Estimated*	Actual	Year-Ago
$0.37	$0.38	$0.35

Updated from 5:11 p.m. ET

Intel (INTC Quote - Cramer on INTC - Stock Picks) on Tuesday reported that fourth-quarter earnings were slightly better than lowered expectations, but it offered a glimpse of a darker future for the chip market this quarter.

The Santa Clara, Calif., company said excluding acquisition-related charges earnings per share in the quarter ended Dec. 30 were 38 cents a share, down from 41 cents a share in the previous quarter. The consensus among analysts had been at 38 cents and fell to 37 cents just recently, according to First Call/Thomson Financial. Including charges, the company booked 32 cents a share in earnings. Revenue was $8.7 billion, in line with expectations.

But Intel said that its best estimate for first quarter revenue is a roughly 15% decline from the fourth quarter "due to seasonal factors and the impact of slowing worldwide economies." That puts first quarter revenue at about $7.4 billion.

Intel executives said during a conference call the year's second half should improve. Paul Otellini, general manager of the Intel Architecture Group (which includes microprocessors), explained that Intel is planning for the typical strengthening in the second half, and that he foresees renewed growth in personal computer demand as PCs act as the center for other consumer digital products. Such products include digital audio players and personal digital assistants. One sign of this planning is that the company's capital spending on equipment and factories will increase about 12% this year to $7.5 billion from $6.7 billion in 2000.

Then There's the Economy

But it's clear to the company that the overhanging economic situation may change that. "If the economy kind of stays where it is, we would see a seasonal uptick in the second half. If the economy continues to get worse, we may not see that," Chief Financial Officer Andy Bryant said.

The weaker economy was in part behind Intel's decision to close its Puerto Rico computer systems manufacturing plant by mid-2001. The plant employs 1,360 people who make motherboards for PCs and network interface cards.

Despite the doom and gloom, Intel booked another year of growth, with earnings per share increasing 44% in 2000 over 1999. But Wall Street is beginning to worry about competition from chipmakers such as Advanced Micro Devices (AMD Quote - Cramer on AMD - Stock Picks) in areas like the corporate market. AMD is hitting hard at the same time the personal-computer market is weakening.

Intel first predicted flat revenue for the fourth quarter on Dec. 7, saying that revenue was hit by slower PC demand. But until Tuesday, Intel hadn't made projections for any part of 2001. In addition to the lower revenue, it now appears that profit margins will be squeezed, falling to about 58% in the first quarter from the 63% in the fourth quarter due primarily to the lower revenue. The company's goal for 2001 is to at least hit 58%.

Worries

Concerns about 2001 have been building in recent weeks, as evidenced in the declining earnings estimates on Wall Street. Merrill Lynch analyst Joseph Osha, for instance, last week lowered his estimate to $1.41 per share from $1.56. (Merrill hasn't done underwriting for Intel.) The consensus estimates for 2001 meanwhile is now at $1.49.

Osha also said that despite the fact that Intel's stock is now trading at lower price-to-earnings multiples, it's still not a value. Intel shares have been hard hit in recent months by the falloff in technology investing, having given up more than half their value since the end of August.

While Intel, like other investors, has found that investing in the Nasdaq can be a risky and costly business, its investments aided its quarterly results. During the period, the company booked $450 million in gains on investments and $349 million in interest and other income, above expectations. In December, Intel said that gains on investments, interest and other income would be closer to $675 million than the $950 million to which it had originally guided Wall Street.

In the first quarter, the company expects no gains on investments from its venture capital funds and will book about $180 million in interest and other income. The value of that venture capital portfolio fell by about 36% during the quarter to $3.7 billion. Unlike many other companies that invest in technology companies and stocks, in part to help grow demand for their own products, Intel has persuaded analysts that this number should be included in its earnings estimates.

Intel seems to be counting on a little diversification to push growth. The company announced plans on Monday to buy Xircom (XIRC Quote - Cramer on XIRC - Stock Picks), a company that makes PC cards and other products that connect mobile computing devices to corporate networks and the Internet. That comes just a few weeks after it announced its intention to start selling a digital audio player.