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Intel Shares Fall More Than 8 Percent

Posted on: Wednesday, 14 July 2004, 06:00 CDT

SAN JOSE, Calif. - Shares of Intel Corp. fell more than 8 percent Wednesday as investors shrugged off sharply higher earnings and revenues and focused on the chip maker's prediction of lower-than-expected profit margins as it works through a buildup of inventory.

After the close of markets Tuesday, Intel reported that second-quarter earnings nearly doubled, and revenues jumped 18 percent, as strong sales of memory chips for cell phones helped offset a seasonal weakness in the semiconductor giant's microprocessor business.

The company also predicted strong revenue growth in the current quarter, but said profit margins would be squeezed.

Intel shares lost $2.15 to $23.99 in morning trading on the Nasdaq Stock Market.

Despite investors' reaction, Intel executives remained optimistic.

"For the full year, we're on track to deliver double-digit growth in revenue, with high levels of profit and cash generation," said Andy Bryant, Intel's chief financial officer.

For the three months ended June 26, Intel earned $1.8 billion, or 27 cents per share, compared with $896 million, or 14 cents per share, in the same period last year. Sales increased 18 percent to $8.05 billion.

Analysts were expecting Intel to earn 27 cents per share on sales of $8.1 billion, according to a survey by Thomson First Call. In early June, the company said revenues would be between $8 billion and $8.2 billion.

The flash memory rebound is a dramatic turnaround for Intel, which saw sales decline after it boosted prices at the start of 2003. From the first to the second quarter of 2004, sales increased more than 40 percent, Bryant said.

"It's a very good recovery for that business," he said.

Microprocessor sales were down 4 percent from the first quarter to the second, which Bryant called "perfectly seasonal."

The company said it expects third-quarter sales of between $8.6 billion and $9.2 billion - slightly higher than the range analysts were expecting for the period that's typically bolstered by back-to-school PC sales.

Still, there were some signs that could point to trouble, including inventory levels that grew by $427 million during the second quarter. Bryant blamed the increase on greater-than-expected production - not a weakening of demand.

Intel also predicted narrower margins as sales of lower-margin products like flash memory increase and other prices are cut to reduce inventory.

"In a sense, the quarter was fine, but the fact that inventories grew 15 percent sequentially when revenues were flat ... that definitely isn't a good sign," said Erach Desai, an analyst at American Technology Research.

In recent weeks, several Wall Street analysts downgraded Intel and other semiconductor stocks, saying the industry's upswing that started last year may be near or at its peak. The Philadelphia Semiconductor Index has fallen 11 percent this year.

Bryant disagreed.

"I see no signs of a change in the overall nature of the business," he said.

During the second quarter, Intel launched several microprocessor upgrades and other technology updates.

Last month, Intel unveiled new chip sets that integrate video and audio, claiming them to be "among the most significant PC platform changes in a decade," according to a news release. It also bumped up the top speed of its flagship Pentium 4 processor to 3.6 gigahertz.

Some of the chip sets, however, were recalled after an assembly flaw was discovered. On Tuesday, the company said it took a $38 million charge for a chip set manufacturing glitch during the quarter.

Intel also recently introduced workstation processors that can process data in 64-bit chunks, matching rival Advanced Micro Devices Inc.'s Opteron chip, which was introduced more than a year ago.

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On the Net:

Intel investor relations: http://www.intc.com

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