December 5, 2002 3:44 PM PST

Intel ups revenue expectations

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Maybe the PC industry won't have its blue Christmas after all.

Despite suffering through difficult second and third quarters, Intel on Thursday said that revenue for the fourth quarter will likely fall between $6.8 billion and $7 billion--somewhat higher than its original projection for the quarter--due to strong demand for PC processors and for flash memory, a key component in cell phones.

So far this quarter, Intel's communications chips have seen an anticipated uptick in sales while the chipmaker's Intel Architecture business, which includes PC processors and chipsets, has been performing above expectations.

This trend doesn't necessarily reflect a major shift in either consumer or business buying. Instead it reflects what's shaping up to be a more average quarter. Consumer sales have stayed strong instead of falling off as Intel feared they might, when it issued its original guidance for the quarter in October, said CFO Andy Bryant on a conference call with analysts and reporters.

"What we think we're seeing is pretty much a seasonal fourth quarter," Bryant said. "We were concerned about whether consumers would continue buying. There's been some business buying, but pretty much as expected. I don't think we're seeing anything unusual anyplace other than that things are a little better than we expected."

The Santa Clara, Calif.-based company said in October that it expected revenue for the fourth quarter to come to between $6.5 and $6.9 billion, or flat to 6 percent higher than the third quarter, a relatively gloomy outlook. Typically, revenue rises 6 percent to 12 percent from the third to the fourth quarter because of the holiday shopping season and budget blowouts by government agencies and businesses.

Before Intel's update, analysts estimated that the chip giant would achieve revenues of $6.7 billion and earnings per share of 13 cents for the quarter, according to First Call.

While the United States and Europe are performing up to expectations, processor sales in Asia have been better than anticipated.

"We see that mature markets are performing about as expected, and we see stronger-than-expected revenues in Asia-Pacific and Japan--both local consumption and product shipped back to mature markets" like the United States or Europe, Bryant said.

Bryant would not comment on Intel's sales mix, the percentage of Pentium 4 chips its sells versus its less costly Celeron processors.

Other companies have recently reported that sales will be stronger than earlier, pessimistic forecasts, due to an upturn that seemingly began in October.

Earlier Thursday, Intel rival Advanced Micro Devices said it expects revenue for its fourth quarter to total about $700 million, a 35 percent increase from its third-quarter revenue of $508 million. AMD originally forecast a fourth-quarter increase of about 20 percent.

Hewlett-Packard and Emachines, meanwhile, said they were pleased with the early holiday sales results, although Gateway warned that, unless it sees a significant acceleration in sales, it may have to lower its estimates.

Cell phone sales have also been encouraging. In November, Intel said it would raise the price of flash memory by 20 percent to 40 percent Jan. 1 because of manufacturer demand for high-end cell phones.

A year of ups and downs
The more optimistic turn of events caps a chaotic year. At the start of 2002, PC sales slightly exceeded forecasts, driven by consumer purchasing. The market then slowed down in May and June, resulting in an excess supply and declining prices of processors, memory, monitors and other components.

AMD in particular was affected by the component glut. Revenue turned sharply downward, and the company lost several market share points to Intel.

For its part, Intel adjusted to the new reality by announcing it would reduce its headcount by 4,000 by the end of the year and decrease capital spending in 2002, from $5 billion to $4.7 billion.

While the mood stayed gloomy through September, a thaw began the following month. "All the indications are that October has been a good month," Mercury Research analyst Dean McCarron said at the end of October, after conducting interviews with manufacturers and distributors.

The big question for 2003 still looms, though: When will corporate buying pick up?

Bryant gave no real answer to that question, but Intel executives have said in the past several weeks that the advanced age of the installed base of corporate desktops will begin to prompt an upgrade cycle, if only a small one. The last big run of corporate upgrades occurred in 1999. Those desktops, which contained 500MHz processors, are slow by today's standards and inevitably break down, said Steve Asbjornsen, manager of business demand creation at Intel.

Security will also drive purchases. More and more companies are requiring employees to regularly run virus scans and download software patches. (Inside Intel itself, employees are required to download patches, or else their computer locks up.) Older computers bog down when trying to perform these tasks while simultaneously running other applications, such as e-mail programs.

Microsoft also will discontinue issuing security patches for Windows 98 and Windows NT by the middle of next year. Since most people upgrade their operating system by getting a new PC, a surge of Windows XP upgrades could mean increased computer sales, Asbjornsen said.

Still, executives at other companies point out that these are upgrades driven by entropy. A flourishing upgrade cycle won't occur until new applications come out.

 

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