Intel tops Q1 estimates but sales lower than expected

Intel Corp. once again beat analysts' estimates in its first quarter Tuesday, returning a profit of $2bn (£1.21bn), or 57 cents a share, on sales of $7.1bn. However, it expects its second-quarter sales to be "flat to slightly lower." First Call consensus pegged the California chipmaker for a profit of 55 cents a share, adjusted for Monday's 2-for-1 stock split.

The stock closed off 3/4 to 60 1/2 ahead of the earnings report.

The $7.1bn in sales represents an 18 percent improvement versus the year-ago period when it earned $1.27bn , or 72 cents a share, on sales of $6bn. However, the $7.1bn in sales was about $400m below most analysts' estimates. Intel apparently was able to make up the difference with higher-than-expected profit margins and income from other investments.

Despite the shrinking profit margins experienced by PC makers, Intel enjoyed a 59 percent profit margin in its first quarter, well above most analysts' forecasts. "We are pleased with our substantial year-over-year growth in profitability resulting from our cost control efforts," said CEO Craig Barrett in a prepared release. "As we expected, revenue declined from the prior quarter reflecting a seasonally slower selling period."

Intel officials maintained their typically cautious tone, saying the company expects second-quarter sales and profit margins to be "flat to slightly down" from the first quarter. It also reiterated its expectation of profit margins of about 57 percent for the fiscal year. "Intel is really good at making money," said Dan Scovel, an analyst at Fahnestock & Co. "But the PC environment is really challenging right now. We just don't see them being able to maintain the gaudy sales and earnings growth they've enjoyed in the past couple years."

Intel's results were closely watched because of mixed signals from some of the company's largest customers such as Compaq Computer Corp. The decline of average selling prices and demand for PCs, particularly high-priced consumer models, has been well documented. On Friday, Compaq became the latest and perhaps most significant box maker to warn that it would fall short of analysts' estimates in its first quarter.

Intel officials said Compaq's profit warning had been factored into its second quarter outlook. But if Intel's plans for the rest of the year are any indication, the chipmaker is expecting a normal year. Paul Otellini, executive vice president, said on a conference call he was pleased with production of its new products and said Intel was planning for a business-as-usual 1999. "While there are uncertainties about the second half we are assuming normal seasonality will occur," said Otellini. "We're planning for a normal year."

Though competitors such as AMD are taking a bite out of Intel's low-end market, it has taken steps to stop the bleeding. Some of the most significant cuts last week came from Intel's mobile line, a market that AMD was trying to capture. The 366-MHz Pentium II mobile processor will drop about 30 percent to $530 while its 333-MHz and 300-MHz Pentium IIs, will be cut 30 percent to 40 percent to $316 and $187, respectively. Of course, AMD still can't get it together as its latest profit warning demonstrates.

While analysts were never really concerned that Intel would meet or exceed the First Call estimate, some said the problems facing major PC vendors will eventually take their toll. Of 37 analysts following the stock, 31 rate it either a "buy" or "strong buy" despite its price-to-earnings ratio of 38.

On Monday, BancBoston Robertson Stephens analyst Dan Niles downgraded the stock from a "strong buy" to a long-term "attractive" rating. Though Niles was unavailable for comment, it's safe to assume the move was partly influence by Compaq's profit warning. It's not as if Intel's stock has underperformed. It shot up to 143 and change in January after bottoming out at 65 5/8 in June. Even in the day of Internet stock madness, that's damn good return. "I don't understand the consternation about this market right now," said Joseph Osha, an analyst at Merrill Lynch. "Everyone's worried about PCs and that's understandable, but Intel's going to hit the number this quarter and the next not only from chip sales but from workstations and servers."

A quick glance at its first-quarter results in the past two years illustrates just how difficult it is for Intel to improve on its own success. In the first quarter of 1997, it earned $1.98bn, or $1.10 a share, on sales of $6.4bn. In the year-ago quarter, it pocketed $1.27bn, or 72 cents a share, on sales of just over $6bn.

In this quarter, the company repurchased a total of 21 million shares of common stock, at a cost of $1.3bn. Since 1990, the company has repurchased 609.6 million shares at a total cost of $14.9 bn.