Intel Climbs After Topping First-Quarter Estimate

Updated from 4:33 p.m. ET

Semiconductor giant Intel (INTC Quote) said Tuesday that it earned 16 cents a share excluding acquisition costs in the first quarter, beating lowered Wall Street expectations by one penny.

The company also said that its microprocessor business may have bottomed and is now experiencing "normal seasonal patterns." More specifically, after falling 23% in the first quarter, Intel sees revenue declining at a slower pace in the second quarter and possibly even growing. Microprocessors are the brains behind personal computers.

"We believe that our PC-related businesses have bottomed out and are planning for a seasonally stronger second half," Paul Otellini, general manager of the Intel Architecture group, which includes personal computing, said during a conference call.

That came on the back of comments from Chief Financial Officer Andy Bryant, who explained Intel doesn't mean blockbuster when it says normal. It simply means that the pattern -- including a slightly weaker second quarter sequentially -- appears to be falling in line with historical patterns.

Still, that's fairly good news from a company that has been struggling with slowing growth since the fall, when demand for personal computers first began to wane and microprocessor inventories began to build. As the economic climate worsened, other sectors suffered too, such as telecom products, which in turn caused flash memory inventories to increase and prices to fall. Intel lowered expectations for the first quarter on March 8 when it warned that revenue would come in 25% below the fourth quarter and said that profit margins also were coming in lower.

Questions

Intel's improved outlook comes just days after some analysts began to question whether the fundamentals of supply and demand have deteriorated to such an extreme that a bottom is around the corner. Others worry that those falling prices -- and perhaps even a price war -- will push profit margins down at Intel, causing it to miss earnings estimates later this year.

Intel said that margins in the second quarter would indeed decline to about 49% from the near 52% they reached in the first quarter, in part because of lower prices for microprocessors. For the year, Intel foresees margins at about 50%, due to those lower chip prices and the higher manufacturing costs of ramping up production of its Pentium 4 chip.

But investors liked the report. In after-hours trading on Island, Intel was changing hands at $29.05 after finishing regular trading Tuesday at $26.04.

Analysts had expected earnings of 15 cents a share, according to Thomson Financial/First Call. The 16 cents a share figure Intel posted is down more than 50% from the 38 cents a share it booked in the fourth quarter and the 36 cents a share it earned during the year ago quarter. Including acquisition-related costs, Intel earned 7 cents a share.

Revenue also slightly beat analysts' expectations as Intel brought in $6.7 billion, above the $6.59 billion expected. But it's clear that the first quarter wasn't a strong one. Revenue fell from $8.7 billion in the fourth quarter and $7.99 billion in the first quarter of 2000.

The Forecast

Intel said it expects second-quarter revenue to come in between $6.2 billion and $6.8 billion. Analysts had been forecasting revenue of $6.76 billion.

And Intel stuck by its commitment to spend $7.5 billion on equipment in 2001. Some analysts had expected the company to trim that number by $1 billion to $2 billion because of the slowing demand for chips.

But while Intel may believe the worst is behind it when it comes to microprocessors, that's not the case for its high-growth communications business, which has stagnated along with the rest of the industry.

"Communications began to decline about one quarter later [than microprocessors] and are coming off of higher growth. As a result, it will have a longer and slower recovery beginning sometime later this year," Bryant said during the call.

Earlier this year, Intel combined its nascent communications businesses, which have been weighed on by a slowdown in telecommunications spending.