Intel shattered analysts' estimates in its third quarter Tuesday, returning a profit of $1.6bn (1bn), or 89 cents a share, on sales of $6.73bn (4.1bn). Intel officials said fourth quarter sales would be "up slightly" compared to the third quarter.
First Call consensus expected Intel, the world's largest chipmaker, to earn 80 cents a share in the quarter. Shares closed off 1 5/8 to 83 13/16 ahead of the earnings report.
Company officials credited strong PC demand for the upside surprise as the $6.73bn (£4.1bn) in sales represents a 14 percent improvement versus the second quarter and a 9 percent gain versus the year-ago quarter when it earned $1.57bn (£0.96bn), or 88 cents a share, on sales of $6.15bn (£3.75bn).
On a conference call officials said Intel was barely meeting demand in the first part of the fourth quarter. Adam Bryant, Intel's financial chief, said third quarter sales were strong in September with demand keeping pace in October. "We are pleased with our overall performance in the last quarter," said CEO Craig Barrett in a prepared release. "We had growth across nearly all of our geographies and product lines, including strong microprocessor sales. In the third quarter, the PC industry recovered from its inventory problems and is benefiting from strong seasonal demand."
In the past week, several analysts have raised their third- and fourth-quarter earnings estimates to reflect the company's growing presence in the high-margin server and workstation markets. Earlier in the quarter, Intel officials said the third quarter should provide sequential sales gains of between 8 percent to 10 percent.
Looking ahead, Intel officials expect fourth quarter sales to be "slightly" higher than those in the third quarter with gross profit margins that will be flat or slightly higher than the 53 percent recorded this quarter. In the second quarter, Intel enjoyed profit margins of 49 percent.
Last week, both Advanced Micro Devices Inc. and Motorola Inc. managed to top analysts' estimates in their third quarter thanks to strong sales of low-end microprocessors and better-than-expected sales in North America. Last quarter, Intel returned a profit of $1.17bn (£0.71bn), or 66 cents a share, on sales of $5.92bn (£3.61bn). Just before releasing the second-quarter results, Intel shares hit a 52-week low of 65 5/8 in June.
Intel officials said its strategy of covering all segments -- high-end and low-end markets -- kept average selling prices steady for the quarter. Analysts on a conference call sounded skeptical, but Intel executive vice president Paul Otellini said there were a host of reasons selling prices held despite competition on the low-end from AMD. "Our segmentation strategy is working," said Otellini. "The high-end growth is offsetting erosion in the lower-end." Otellini, who declined to give exact figures, said the company had strong growth in its Xeon line while Pentium II and Celeron products "grew nicely."
As far as market share projections, Otellini dodged the question. "We don't want to give guidance on market share going forward." On Friday, Piper Jaffray analyst Ashok Kumar raised his third- and fourth-quarter earnings estimates from 80 cents a share to 84 cents a share and 86 cents a share to 92 cents a share, respectively.
In his report, Kumar was on target when he predicted sequential revenue growth of about 13 percent for the quarter to more than $6.7 billion. "Intel's move up-market into the server/workstation segment, where the pricing environment is less malignant and growth opportunity large, should provide it with both a refuge from the desktop price wars and an engine of growth," Kumar said in his report. "We expect that Xeon class processors should grow to comprise about a quarter of their unit shipments over the course of the next few quarters."
Geographically, Intel's third quarter sales in the Americas were up to 47 percent of revenue in the third quarter, compared to 44 percent in the second. Europe sales were down slightly from the second quarter at 26 percent. Asia-Pacific sales represented 20 percent of revenue and Japan came in at 7 percent.
For 1999, officials said growth will depend on Intel's ability to go into the high-end market with Xeon and Merced and demand in U.S. and Europe. Otellini said a rebound in Japan is a wild card. "We are playing Asia one day at a time," he said. "In Japan, we're bouncing along at a lower level. I don't see that changing in the foreseeable future."
Twenty-five of the 34 institutional investment firms following the stock still maintain either a "buy" or "strong buy" recommendation.
Analysts are looking for earnings of $3.12 a share in fiscal 1998 and $3.75 a share in fiscal 1999.