Intel falls short of revenue estimates

Intel's second-quarter revenue increased 18% on last year, helped by a strong increase in flash memory shipments, although it was...

Intel's second-quarter revenue increased 18% on last year, helped by a strong increase in flash memory shipments, although it was still slightly short of analysts' expectations.

Nevertheless the chip maker expressed confidence about its prospects for the third quarter.

Intel recorded $8.05bn (£4.6bn) in revenue during the second quarter, the period ending 26 June. This compared to revenue of $6.8bn in the same period last year. Net income was $1.8bn, up 96% from the second quarter of 2003, Intel said.

Analysts polled by Thomson First Call had expected Intel to record $8.1bn in revenue, the midpoint of an updated range that Intel provided in June.

The second quarter is considered the worst for PC sales, and chip companies typically see their revenues decline from the first quarter to the second.

Intel's revenue was flat compared with the first quarter as chipset, motherboard and flash memory unit sales all increased sequentially, while shipments of Intel Architecture products such as the Pentium 4 and the Pentium M were lower in the second quarter than in the first, following the usual seasonal trends.

Intel probably regained several points of market share in flash memory, said Paul Otellini, president and chief operating officer.

The company had lost share in 2003 after an ill-timed rise in flash memory prices, but it has successfully renewed relationships with its flash memory customers and erased much of that decline, he said.

Intel expects to record revenue of between $8.6bn and $9.2bn in the third quarter.

Several financial analyst firms, such as Merrill Lynch and Lehman Brothers, expressed caution about the short-term strength of the PC market this week on fears that Intel would provide a cautious outlook for the third quarter.

But the midpoint of Intel's third-quarter guidance is $8.9bn, higher than Lehman's revised third-quarter estimate of $8.6bn and its original estimate of $8.75bn.

"We're planning for seasonal growth in microprocessors and exceptional growth in other categories," said Andy Bryant, Intel's chief financial officer.

Intel did express caution about its gross margins for the remainder of the year, which it now expects to decline slightly to 60%, from predictions of 62%, as Intel produces less processors than it had planned going into 2004, Bryant said.

The chip industry is transitioning from an older manufacturing process to a newer, 90-nanometer process. These transitions can be difficult as chip makers work out kinks in the new process, and both of Intel's first 90-nanometer products, the Prescott desktop processor and Dothan notebook processor, were launched later than expected.

However, the situation has turned around. Intel has produced a greater number of usable chips from the new manufacturing process than it had forecast going into the year, Bryant said.

Intel will deal with the consequent higher inventory costs by easing back on the number of processors it produces in the second half of the year. The company still plans to aggressively ramp Prescott and Dothan to account for half of all shipments in their respective categories by the end of the year, but the ramp will not be as strong as the company had planned, Otellini said.

That means overall costs per chip will not decline as fast as Intel had earlier predicted. The smaller transistors enabled by the new process technology, coupled with a shift to larger silicon wafers from which processors are cut, means that Intel is producing more chips per wafer. The company will still enjoy that advantage, but it will have less "wafer starts" in the second half of the year than it had originally planned, Bryant said.

Gross margins will also decline slightly, because lower-margin products such as flash memory and desktop processors will make up a greater percentage of Intel's overall revenue in the second half, Otellini said. Emerging markets are expected to be strong in the second half of the year and those markets are weighted toward desktop PCs and mobile phones, he said.

Corporate demand for PCs and servers remains strong, Otellini said. Shipments of desktop, notebook and server chips were up 16% compared to last year's second quarter, he said.

Despite the increase in flash memory sales, the Intel Communications Group still posted a $126m loss for the second quarter. However, that was about half the loss posted in the second quarter of 2003 and in the first quarter this year.

Tom Krazit writes for IDG News Service

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