Intel sees bleak 1Q

Intel squeaked past lowered fourth-quarter earnings expectations Tuesday, posting net income of $2.6bn, or 38 cents a share.

Analysts polled by First Call had expected the company to earn 37 cents a share.

Earnings were up 4 percent from the same period a year ago but down 13 percent from the previous quarter.

Intel lowered its estimates last month amid signs of a serious slowdown in PC sales growth.

The company’s outlook for the first quarter of 2001 doesn’t hold much hope for a speedy recovery. Intel forecast a 15 percent decrease in revenue for the first quarter of 2001 compared with the fourth quarter of 2000, the company said in its earnings statement.

The decrease in revenue will partly come from a seasonal slowdown; the first quarter is usually a slow time of year for Intel and the PC business as a whole. But Intel said it also expects to feel the effect of a slowing worldwide economy.

Based on its lowered revenue expectations, Intel predicted a decrease in gross margins from 63 percent in the fourth quarter of 2000 to about 58 percent for the first quarter of 2001.

"This was a year of record annual revenue and earnings; yet slowing economic conditions impacted fourth-quarter growth and are causing near-term uncertainty," chief executive Craig Barrett said in a statement. "Looking forward, we are confident in our business strategy and competitive position."

Fourth-quarter revenue was $8.7bn, up 6 percent from the same quarter last year and about the same as the last quarter.

Annual figures for 2000 came in at revenues of $33.7bn, up 15 percent from 1999, and net income of $12.1bn, up 49 percent.

Intel also pocketed $799 million from investments and interest in the fourth quarter, the company said. The gain was higher than the company's revised expectations, which called for a gain of $675m. Intel attributed the $117m gain from transferring its Interactive Media Services division to Convera, a new publicly traded company formed with Excalibur.

But Intel's expectations for investment income in the first quarter, $180m, were lower than analysts had expected. Merrill Lynch analyst Joe Osha, for example, projected investment income of $400m.

Critics of Intel have called the chipmaker's portfolio a "crutch" used to hit Wall Street estimates, as the $180m target assumes no net gains from the sale of equity investments, the company said. Indeed, Intel's massive investment portfolio has taken a hit amid the stock market correction, with its value decreasing from $5.85bn in September to $3.74bn in December.

Despite its gloomy first quarter forecast, Intel said that it expects to see a seasonal increase in the second half of the year, depending on the direction of the overall economy.

"Although we have the people and the products to take advantage of a turn [in the economy], we can not predict when a turn will happen," Andy Bryant, Intel's chief financial officer, said in a conference call following the announcement.

"Assuming the [economic] situation improves... we would expect and are planning for an increase in seasonal demand in the second half," he said.

Despite the dour first-half economic outlook, Intel will increase research and development spending to $4.3bn in 2001 from $3.9bn in 2000, according to its earnings statement. Capital spending for 2001 will increase to about $7.5bn in 2001 from $6.7bn in 2000.

Looking at Intel's plans to forge ahead with spending, some analysts felt encouraged.

"I think Intel almost feels the worst is behind it," said Nathan Brookwood, principal analyst at Insight64, in Saratoga, Calif.

Intel is being very cautious in its predictions, "but it's not cutting back at all on some of the long-term essential issues, such research and development and manufacturing, so I was encouraged," he said. "Intel is clearly hoping for a rebound in the second half."

Indeed, the company is shooting for the fastest introduction yet for its Pentium 4. Looking ahead to the second half of the year, the company is working to launch its new 0.13-micron manufacturing process and beginning preparations for a move to larger 300mm wafers, which will decrease manufacturing costs by creating more chips per wafer.

"We are pleased with the launch and ramp of our new microarchitecture, the Pentium 4 processor," said Paul Otellini, executive vice president and general manager of Intel Architecture Group. "We are rapidly accelerating from hundreds of thousands of units in the fourth quarter to well above 1 million units this quarter.

"Our plan is to use the slowdown to accelerate the ramp of the Pentium 4 and to transition as quickly as possible from Pentium III," Otellini said. "We want to be in a position to use the first half slowdown to reposition all of our products... to be in a stronger position should that growth occur."

Intel had stated earlier that Pentium 4 shipments would surpass Pentium III early in 2002. Otellini said Intel's goal is now to reach that point this year.

"Intel needs to do that to get people excited about why they would want a new PC," Brookwood said.

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