Intel Profit Nearly Doubles in Q1

Intel said its first-quarter revenue hit a record of US$8.1 billion and profit nearly doubled as faster sales of high-end servers augmented its booming mobile-chip business.

Even so, the bellwether technology company, whose earnings are scrutinized for hints of how the overall tech sector is faring, failed to provide economy-watchers and investors with solid proof that they could bank on the continuance of the recovery.

In fact, Intel fell short of analysts’ revenue expectations for the first quarter and set an outlook for the second — for sales of between $7.6 billion and $8.2 billion — that, while still showing growth, ranged below what analysts had been predicting.

Victim of Circumstances

To some extent, the number one chipmaker may have fallen victim to expectations sparked by its sharp turnaround and upbeat outlook heading into 2004.

Even though the Santa Clara, California-based company already had moved to temper optimism by guiding results lower in mid-quarter, its shares fell slightly in early trading Wednesday, down less than 1 percent to $27.50.

In a conference call, Intel chief financial officer Andy Bryant said signs still point to more technology buying by enterprises.

“There is an improved economic climate out there, but the year is young, and economic uncertainty is always with us,” Bryant said.

Picking Up

Total sales were up 20 percent over the same quarter last year, and net profit soared 89 percent as sales of server chips with higher profit margins than those sold to PC makers picked up. However, the company’s bottom line was dampened a bit by its recent $225 million patent settlement with Intergraph.

Intel CEO Craig Barrett cited an “improvement in worldwide IT spending” as a driver of the results, but he noted that new manufacturing capabilities that were brought online helped boost results as well.

In fact, IDC analyst Shane Rau said Intel’s migration to a 90-nanometer processing standard for many of its chips will help the company stay profitable into the future.

The Chips Are Up

Additionally, Rau told the E-Commerce Times that while Intel dampened its second-quarter outlook slightly, the forecast for all of 2004 for the chip sector remains bullish.

IDC is predicting an 18 percent increase in worldwide chip sales, driven largely by more enterprise spending and continued growth in mobile chips, but also by new product releases from Intel — which is on track to debut its Prescott Pentium 4 line and Grantsdale chipset — and others. In fact, Intel already has started to ramp up new rollouts, debuting a new family of chips for handheld devices.

“The second half of 2004 still looks like it will be strong,” Rau said. “We expect newer, more powerful chips to drive more purchases by both consumers and enterprises.”

Bulking Up

At least two analysts who follow Intel noted that the company is carrying higher inventory levels and cautioned about those levels in their breakdown of the results, saying they pose some threat to strong earnings going forward and could reduce projected profit margins.

But Gartner analyst Martin Reynolds told the E-Commerce Times that the inventory backup does not reflect a slowdown in buying by Intel customers as much as ramped-up production by Intel to respond to surprising increases in demand late in 2003.

“Intel still has the power as the market leader to use price to keep the right balance of demand and supply and clear out inventory before it becomes a drag on results,” Reynolds said. He said if inventory across all business lines were backing up, that could be cause for alarm, but that was not the case in the first quarter.

Intel CFO Bryant acknowledged the extra inventory is “a risk” but also emphasized that the oversupply is limited to some desktop processors.

Mobile Growth

Growth of mobile chips is helping to dilute relatively poor performance by Intel’s communications product lines, which have struggled to regain profitability and which were the subject of a restructuring at the company.

Intel president Paul Otellini said Intel remains the chip company in the best position to take advantage of what he calls a “megatrend” in the mobile space.