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The Day Ahead: Intel races to meet demand

Intel has confirmed the widespread rumours of continued top-end chip shortages, but insists it won't get into a price war with AMD

Intel has a nice problem -- demand is so strong that it is struggling to keep up. But don't dismiss that capacity risk. Intel is in no position to be constrained with supply problems with a second half boom on the horizon.

Chief financial officer Adam Bryant said the company's biggest problem is delivering enough products to its customers. For the last year, Intel has underestimated demand. The first quarter was no different.

"Demand in the first quarter was stronger than we expected at the beginning of the year and continues to be stronger as we enter the second quarter," said Craig R. Barrett, president and chief executive officer. "We also expect a strong second half, and are accelerating our investments in capacity to meet future demand."

On a conference call with analysts, officials said Intel's inventory is low and "supply remains a challenge". You have to wonder why Intel keeps underestimating demand. Is Intel forgetting its core business as it chases new revenue streams from Web hosting and communications chips?

Intel's recent shortages of parts have opened up opportunities for Advanced Micro Devices. AMD, which posted a blow-out quarter last week wasted no time taking advantage of the situation. AMD has relationships with every PC vendor except Dell Computer. Gateway ditched AMD and came running back after Intel couldn't deliver the goods.

Intel is likely to strain to meet demand in the second quarter, but said it should be prepared in the second half of the year. Intel said it will boost its capital expenditures to $6bn (about £3.6bn) for 2000, up from projections of $5bn. Intel can afford the extra billion because of its hefty investment portfolio -- it raked in $449m in the first quarter from its investments.

"Supply is constrained, but we'll have enough output for the second half," said Paul Otellini, executive vice president

The increased capital expenses means one thing -- buy more shares of Applied Materials. The chip equipment maker counts Intel as its biggest customer.

Poor Intel. It couldn't raise prices in the first quarter because of AMD. Otellini said he wasn't worried about the competition, but did add that prices aren't going up. "We intend to be competitive in every segment in the marketplace," he said.

It's likely that prices will remain steady for Intel and AMD. Otellini hinted that the chip giant wasn't going to get in a price war with AMD. That's a switch. When Intel was knocked out of the low-end chip market, it went for the low pricing approach. Of course, it helps that AMD is competitive at the high-end of the market these days.

"The rising tide has lifted both of us," said Otellini, who added that Intel held market share against AMD. Both Intel and AMD are headed for a happy coexistence as long as chip demand holds up.

In fact, the rising tide has lifted all the chip makers. Cypress Semiconductor, Lattice Semiconductor, Vitesse Semiconductor and Texas Instruments: all topped estimates.

Super Tuesday grades

America Online -- It doesn't happen often, but AOL managed to meet whisper numbers with earnings of 11 cents a share. Third quarter revenue rose 47 percent year-over-year to $1.8bn. Why is revenue jumping? Subscribers to the AOL Service averaged 64 minutes online daily in the third quarter. Grade: A.

Inktomi -- Welcome to the club of profitable Net companies. Inktomi delivered a profit surprise Tuesday after the bell. Concerns about the company losing focus were overblown. Grade: A.

RealNetworks -- RealNetworks delivered an upside surprise, and its user statistics were impressive. A quarter of sales comes from outside North America these days. Grade: B+.

Qualcomm -- Qualcomm topped estimates, but the quarter was far from clear and concise. Numerous charges muddled the picture. But the outlook is strong and analysts said the seasonal slowdown is over. Will Qualcomm's outlook be enough to bring back 1999's glory days? Nope, but it's good for a one-day pop. Grade: B.

IBM -- Big Blue delivered a so-so quarter, but we knew that was coming. The outlook was all we were waiting for. And IBM's outlook was so-so too. The company said it thinks 2000 will be "a good year", but some analysts noted IBM was expecting "a very good year." In either case, IBM won't make up for its Y2K hangover. The tech sector is booming and IBM is merely mediocre as competitors such as Sun Microsystems and EMC reported blowout quarters. Grade: C.

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