Intel Reports Record Revenue

UPDATED: Sales of microprocessors, chip sets, logicboards and Ethernet products reached record levels in the fourth quarter. "Dothan" Pentium chip is delayed.

Intel Corp. reported record revenue for its fourth fiscal quarter on Wednesday, an indication that its sector of the tech economy is back on the growth curve. However, officials said the company has delayed its code-named "Dothan" version of the mobile Pentium processor until the second quarter to make "circuit modifications."

"2003 began with a question mark and ended with an exclamation point," Andy Bryant, Intels chief financial officer, told analysts in a conference call.

Intel, of Santa Clara, Calif., reported net income of $2.2 billion on record revenue of $8.74 billion for the quarter. Revenues climbed 22 percent from a year ago and 12 percent sequentially. Officials said Intels income increased 107 percent compared to a year ago and 31 percent from the third quarter.

Intels financials were affected by a $611 million write-down in the companys communications group, partially offset by a $420 million tax benefit. Gross margins reached 63.6 percent, the highest ever recorded by Intel in the fourth quarter, Bryant said.

Sales of microprocessors, chipsets, motherboards, and Ethernet products reached record levels, the company said, and one of the companys few blemishes was in flash sales, which remained flat.

For 2003 as a whole, Intel reported net income of $5.6 billion, on revenue of $30.1 billion. Net income and revenue increased by 13 percent and 81 percent, respectively, compared with the 2002 fiscal year.

Intels predicted revenue for the first quarter of 2004 is expected to be between $7.9 billion and $8.5 billion, Intel said. Sales of microprocessors and computer equipment typically decline somewhat in the first and second quarters, picking up in time for the "back to school" selling season and the end of the year holiday sales. On average, the decline in revenue should be about 6 percent from the fourth quarter, but up about 21 percent from the same period in 2003.

Bryant said that revenues in the Intel Architecture business climbed 31 percent from the fourth quarter 2002 to $7.7 billion, a new high; about $6.5 billion derived from microprocessor sales, President and Chief Operating Officer Paul Otellini added.

Server processor shipments climbed 20 percent, and Otellini said Intel had shipped over 100,000 Itaniums during the year, far more than some analysts expected. Otellini admitted, however, that Itanium shipments were heavily "back-loaded," with sales growing in the latter part of the year.

Dean McCarron, principal at Mercury Research Corp. of Cave Creek, Ariz., suspected that the growth in IA-64 processor shipments came from Intels Itanium 2 that the company introduced last fall. This chips is less expensive than the previous version, and costs about $1,000 even in low-volumes purchases.


Meanwhile, mobile processor shipments increased 30 percent year-over-year, and roughly half of Intels mobile processor shipments during the fourth quarter were Pentium M chips, Otellini reported.

The delay of "Dothan," the successor to the Pentium M "Banias" chip, was one of the few sour notes in an otherwise triumphant earnings report and therefore unexpected.

Both "Prescott," the successor to the Pentium 4, and "Dothan," the corresponding processor for laptops, are Intels first to use its 90-nanometer process. Although Intel delivered "revenue shipments," of both chips during the fourth quarter, the company formally launched neither chip, prompting rumors that Intel was having growing pains with its new manufacturing technology.

"We were disappointed that we did not begin shipping Dothan as planned," Otellini said during the conference call. Dothan will now launch during the second quarter, while Prescott will be launched within the next few weeks, Otellini said.


Even with the Dothan delay, however, one analyst said the 90-nm process remains on schedule. "Prescott is more-or-less on track, so this is definitely processor specific," McCarron said.

McCarron said he believed that the issue was tied to a "speed path" or some other element that would lower the yields of functional processors below Intels threshold. The chip has been redesigned, and will now launch early in the second quarter, McCarron predicted. During the interim, OEM PC vendors will have to continue shipping units with Banias processors, McCarron said.

For his part, Otellini said the delay in shipping the two processor would affect neither first-quarter revenue nor the 90-nm ramp.

"While the performance of the product is as we expected, our validation processes recently showed the need to make some circuit modifications to enable high volume manufacturability," spokeswoman Barbara Grimes confirmed in a statement provided to "The issue we identified did result in the need for a new stepping."

Meanwhile, Intels networking business grew 9 percent to $592 million, and sales of embedded applications processors, such as the Xscale, jumped 50 percent versus a year ago.

Intel is now the largest provider of applications processors for smartphones and PDAs, Otellini claimed. Sales of Ethernet products also fared well, and Intel expects laptops with a new 802.11a/b/g combination Wi-Fi chipset to be available soon, he added.

However, Intels wireless and communications business, driven largely by sales of flash memory, plunged 29 percent compared with a year ago, baffling Intel executives.

"We have been moving in the right direction and have been living this nightmare for four quarters in a row," Bryant said. Intel has "every intention of turning this business around," Bryant said, including a shift to a cheaper 0.13-micron process.

Inventories bubbled up slightly from preparations to launch Prescott, the companys next-generation processor, this spring. Intel also began revenue shipments of Prescott during the fourth quarter.

"The PC market supply chain has now reached a normal steady state … in which inventory levels are normal to lean, and chip shipments reflect end market consumption," wrote Hans Mosesmann, an analyst with Schwab Soundview Capital Markets of Jersey City, N.J., in a note to clients Wednesday morning. "We expect other end-markets are lagging this steady state seen in PCs by roughly one quarter."

Intels capital expenditures during 2004 are expected to total between $3.6 billion and $4.0 billion, versus $3.7 billion in 2003. Intels pace of capital expenditures has slowed a bit in recent years, although company executives the money is being well-spent on cost-effective upgrades to Intels manufacturing equipment.

In 2004, the company expects to shift more chip manufacturing over to 300-mm wafer processing equipment, as well as to move to more advanced 90-nm lithography. By the end of 2005, five 300-mm wafer fabs will be in production, Bryant said.

Intel will also spend $4.8 billion in R&D this year, the bulk in preparing for the transition to a next-generation 65-nm process, Otellini said.

"In 2004, our focus will be to drive double-digit growth through technology leadership and global market expansion, and by pursuing adjacent opportunities in communications and the digital home, while using our 90-nanometer and 300-millimeter factories to reduce costs and improve profitability," said Craig Barrett, Intels chief executive, in a statement.

Editors Note: This story was updated to include information and comments from a conference call with analysts.