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    Fewer Sales, Swelling Inventories Keep Intel Earnings Flat

    Written by

    Mark Hachman
    Published July 13, 2004
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      Dragged down by lower microprocessor shipments and skyrocketing inventories, Intel on Tuesday reported flat revenue and earnings for the second quarter.

      Intel Corp., based in Santa Clara, Calif., reported a net income of $1.8 billion on revenue of $8.05 billion, slightly lower than the $8.1 billion in revenue that analysts expected. While the companys earnings and revenue failed to improve over the first quarter of 2004, Intels net income increased 96 percent year-over-year, and revenues increased by 18 percent.

      Intel reported $5.75 billion in microprocessor revenues, a slight drop from the $5.98 billion the company reported in the first quarter. Chip set and motherboard revenue also fell from $1.05 billion to $1.02 billion, although the company reported increased sales of chip sets, and motherboard sales reached a record high.

      More troubling was a corresponding $427 million increase in inventories, roughly half of them from Intels new 90-nm “Prescott” chips. During the second quarter, Intels inventory levels reached an all-time high of $2.8 billion. The additional inventory bloat again added to Intels on-hand stocks, pushing the figure up to $3.2 billion.

      Rising inventories can be a problem for companies such as Intel, which are forced to warehouse the parts until just-in-time PC OEMs are ready to build product. Since Intel wont be making as many parts, its manufacturing cost per processor will increase, and profits will fall over the next quarter or two.

      Historically, the additional inventory can lead to extreme pricing discounts or even a write-off of inventory. But Intel is expected to cut prices on its Pentium 4 processors by only 20 percent to 35 percent this August, analysts and other sources have said.

      “I dont think well have to take an inventory write-off,” Intel chief financial officer Andy Brant told analysts during a conference call Tuesday afternoon. “I dont want to say it cant happen … [but] I feel fairly comfortable right now.”

      Intel executives said the company decided in the last weeks of June that it would slow production during the third and fourth quarters to let the companys inventories slowly dwindle.

      But the company said it isnt putting its fab expansion plans on hold. “Were not idling anything; were just not ramping it as fast,” Paul Otellini, Intels president and chief operating officer, said during a conference call with analysts Tuesday afternoon. “On the other hand, the effect is the same.”

      Next Page: Flash sales made a huge jump from the previous quarter.

      Jump in Flash Sales


      Flash sales, meanwhile, jumped 40 percent from the previous quarter to $587 million, and were part of the justification for Intels midquarter announcement that the midpoint for its revenue guidance had been increased to $8.1 billion.

      /zimages/2/28571.gifFlash has also boosted income for rivals such as Advanced Micro Devices Inc. Click here to read more.

      Although Intels revenue base has broadly diversified in recent years into communications, networking and enterprise semiconductor products, the chip giant is still regarded as a bellwether for the PC market.

      One of the key transitions for Intels shift to next-generation platforms has been its Intel 915 or “Grantsdale” chipset, which suffered a glitch or “manufacturing excursion” late in the quarter. The glitch, which affected the IHC (I/O Controller Hub), has been fixed, and Intel resumed shipments. But the delay cost the company $38 million in one-time charges.

      “Many of our brethren on the sell side have already concluded, perhaps for different reasons, that [Intel] will not be able to achieve their daunting ramp of 50 percent Grantsdale-based desktop PCs in 4Q,” analyst Erach Desai of American Technology Research wrote in a note to clients before Intel reported second-quarter earnings.

      /zimages/2/28571.gifClick here to read about PCs based on the new Grantsdale and Alderwood chip sets.

      “In any event, there is little doubt that the PC market will continue to be in a funk through 3Q,” Desai wrote. “Yes, there will be the usual back-to-school season driving lower-end notebooks. However, the corporate market will only add PCs when and where it is absolutely necessary, until the kinks have been worked out of the Grantsdale systems.”

      Intel said it expects a crossover in total microprocessor shipments during the third quarter to its new 90-nm technology and that the vast majority of its microprocessor shipments will be converted to 90-nm technology by the end of the year. Intel also plans to begin production of the companys first 90-nm flash products on 200-mm technology during the third quarter, it said.

      /zimages/2/28571.gifIntel in May picked up several design teams from microprocessor design house Elbrus MCST. Click here to read more.

      Intel expects an increase in revenue during the third quarter to between $8.6 billion to $9.2 billion, the company said, as it plans to more than double its Prescott shipments during the quarter. A version of its “Nocona” processor for servers is also expected in the “next few weeks” or in August, Otellini said.

      Editors Note: This story was updated to include more details about Intels finances and company officials comments during a conference call with analysts.

      /zimages/2/28571.gifCheck out eWEEK.coms Infrastructure Center at http://infrastructure.eweek.com for the latest news, views and analysis on servers, switches and networking protocols for the enterprise and small businesses.

      Mark Hachman
      Mark Hachman

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