How Intel Got Its Groove Back

The No. 1 chipmaker is cautiously optimistic on the first quarter, but 2002 capital expenditures get whacked.
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Updated from 5:07 p.m. EST

Intel

(INTC) - Get Report

gave the PC market something to be happy about and then some.

The company posted a robust $7 billion in revenue, surpassing optimistic Wall Street forecasts of $6.85 billion and blowing by the numbers from its own midquarter update when it reported fourth-quarter earnings after the market closed Tuesday.

The chipmaker earned 7 cents a share, according to generally accepted accounting principles (GAAP). Deducting $550 million in acquisition-related costs, Intel achieved a pro forma profit of 15 cents a share, topping Wall Street analysts' consensus of 11 cents, as gathered by Multex.com.

Chip-equipment companies won't join the celebration, however, after Intel lopped 25% off its

capital spending plans for 2002. The goliath will spend only $5.5 billion on equipment in the coming year, compared with $7.3 billion in 2001.

Equipment provider

Applied Materials

(AMAT) - Get Report

dropped 6.5% in after-hours trading, while smaller cohorts

Novellus Systems

(NVLS)

and

KLA-Tencor

(KLAC) - Get Report

shed 6% on the news, according to Instinet.

After weeks of hints of a stronger-than-expected holiday season, Intel's strong quarter shed the first light on the PC market, including a 7% sequential revenue boost from the third quarter's $6.5 billion and a 50% improvement in pro forma earnings.

Nonetheless, Intel's results were a far cry from 2000's fourth-quarter revenue of $8.7 billion and 38-cents-a-share pro forma profit, which came at the front end of what has become a slump of several quarters in the computer business.

Investors will be pleased with Intel's first-quarter forecast, which details a wide range of $6.4 billion to $7 billion in revenue, reflecting the continued uncertainty in the chip business and the economy.

According to Multex.com, analysts were predicting $6.5 billion in revenue in the first quarter. CFO Andy Bryant explained during a Tuesday afternoon conference call that Intel has suffered from flat to down revenues sequentially during its first quarter in each of the past five years, and that a 5% drop would be normal. Yet Bryant is leery of ruling out macroeconomic impacts that could push revenue higher or lower.

Intel fell 16 cents during Tuesday trading, closing at $34.68.

The company updated its fourth-quarter forecast on Dec. 6, raising revenue estimates from an original range of $6.2 billion to $6.8 billion to heights of $6.7 billion to $6.9 billion. Intel remarked that it was seeing some seasonality in the fourth quarter -- which usually lifts revenue more than 10% as holiday shoppers wrap up PCs.

More consumers than expected may have bought PCs in the December quarter, but critical signs of a revival of corporate spending have yet to surface.

Paul Otellini, general manager of Intel's Achitecture Group, said that Intel is still waiting for

Fortune

500 customers to loosen their wallets. "There has been no large-scale evidence of that at this point," he lamented.

Gross margins leapt from the 47% Intel predicted during its midquarter update to 51.3%, which Intel attributed to higher unit shipments and lowered spending on manufacturing. Average selling prices for Intel's chips were not the engine behind the growth as they fell sequentially.

The market is prepared for Intel to rapidly increase the amount it makes per chip once the newer Pentium 4 microprocessors fully replace the older Pentium 3 chips in the marketplace. Intel expects Pentium 4's will represent 50% of chip shipments by mid-2002, and reported that the new chip represented about 40% of worldwide microprocessor sales in the fourth quarter.

Then again, Intel warned during its midquarter update that investors should not expect significant gains in average selling prices in the fourth quarter, acknowledging that it was having trouble keeping up with Pentium 4 demand for that quarter.

Intel predicted that in the first quarter gross margins would settle back to 50%, give or take a few percentage points. Otellini said that Intel still would be grappling with the supply of Pentium 4 chips at times during the first quarter but that it would satisfy overall demands.

Short End of the Stick

Intel's equipment suppliers got the dreary portion of the news, as expected, when Intel slashed its capital spending budget for 2002 by 25% to $5.5 billion. Intel said 50% of the $5.5 billion would purchase equipment -- it emphasized a move to 300 mm and 0.13 micron technologies -- with 33% to be spent on construction. That would eliminate almost $1 billion from Intel's coffers for equipment buys.

Some experts predicted before Tuesday that Intel would cut as much as 40% out of its budget. While a 25% cut is steep, it was widely believed that Intel's historically huge spending in 2001, compounded by a harrowing fall-off in business, would combine for more drastic cuts to the capex budget for 2002. At the same time, Intel will raise its research and development spending from $3.8 billion in 2001 to $4.1 billion.

In 2001, other chip powerhouses such as

Taiwan Semiconductor

(TSM) - Get Report

and

Texas Instruments

(TXN) - Get Report

dramatically scaled back equipment outlays, while Intel consistently maintained its $7.5 billion budget.