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Intel's Q3 Conference Call
About as expected

By Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Oct. 13, 1999) -- Few surprises awaited investors in Intel's (Nasdaq: INTC) third quarter results. The company's conference call began with words that describe the situation: "In summary, revenue growth was a little better than expected, margin percentage was a little worse than expected, and everything else was about as expected."

It was, except it wasn't enough for today.

The stock tripped as analysts lowered earning estimates for the quarter and for the year. Some disappointment in Intel stemmed from Q3 product delays. However, the launch of Intel's imminent Coppermine chip should go far to curtail any sadness. Today's column isn't commentary, though. The column is notes from the conference call. You can hear the call in totality by visiting Intel's investor relations site, or by calling the replay number via phone through October 15th. The replay number and confirmation code are listed at the end of yesterday's column.

Behold, ye royal Foolish conference call summary!

Q3 Summary

Third quarter revenue rose more than expected from the second quarter to $7.33 billion. Sales were up 7% sequentially before adding revenue from Intel's recent acquisitions. They rose 8.9% including acquisitions. Year-over-year, revenue grew 8.9% as well. Gross margin was expected to rise from Q2, but it fell 0.7% to 58.7%. Gross margin dollars landed at $4.3 billion, up 7% from Q2 excluding acquisitions. Year-over-year, gross margin dollars rose 21%. Expectations were for spending to increase 4% to 6% -- results were inline, up 5%.

Third quarter earnings excluding one-time charges hit $0.55 per share, up from $0.52 last quarter and $0.42 per share in the third quarter of 1998. Strong Pentium and Celeron ramps continued to drive the business to new records. Intel's shipment of CPUs hit record volume in the just-ended quarter as demand expanded, led by Pentium III.

Gross margin percentage declined slightly from the last quarter as average selling prices (ASPs) of chips were lower than expected. There are a few reasons for this. First, Intel is gaining market share in the value PC segment where chips are sold for much less. Second, the company underestimated the impact of a delay in making some chips on 0.18 micron technology. 0.18 micron chips are less expensive to make.

The third factor in the margin "miss" versus management's guidance was inventory valuation. The valuation granted to inventory last quarter was higher than anticipated due to lower than expected unit costs on 0.18 micron production. This was a negative for the third quarter, but it will be a positive in the fourth. A final element affecting ASPs was an increase in start-up costs in bringing new 0.18 micron chips into production, even though everything is on track as far as costs are concerned. Despite these factors, year-over-year gross margin increased nearly 6 percentage points and -- as we showed yesterday -- this year gross margin is still slated to be within a few points of Intel's all-time record of 62% reached in 1993

Third quarter spending increased 5% excluding acquisitions. Interest and other income was $316 million, far above the $275 million estimate. This was due to higher gains from the sale of equity investments. Intel's average share count was 3.5 billion shares, up slightly from the previous quarter. The company bought 12.8 million shares back during the quarter, which compares to 25 million bought in the second quarter (you can visit the Fool's Q2 conference call summary for other comparisons).

To end Q3, inventory declined to a level that is less than desired. Intel will increase it as quickly as possible. Cash and investments rose to $11.9 billion, a gain of 12% from the second quarter, while net cash increased 19% from $13.3 billion to $15.8 billion.

Looking Ahead

Strong seasonal demand is expected for all products and all product segments to end 1999. Revenue should rise in Q4 from Q3's $7.3 billion. Gross margin should gain a few points from 58.7% due to more high-end processors being delivered at lower cost thanks in part to improved manufacturing efficiencies. Intel's average cost of producing a microchip remains below the desired level presented last year.

Spending in Q4 should rise 9% to 12% due to typical seasonal marketing expenses and acquisitions. Research and development should be near $3.1 billion for the year, up slightly from the $3.0 billion in guidance due mainly to research and development costs at acquired companies.

The Pentium III is now the highest-volume shipping processor at Intel and therefore in the world. The company's overall shipping mix of high-end chips vs. low-end Celerons remained flat from Q2. The company will refresh its high performance product line in October with new Pentium IIIs on 0.18 micron technology for notebooks, servers and desktops, with desktop speeds topping 700 MHz.

Intel's shift to 0.18 micron is on track and it has production ramping in four fabrication facilities. Many new Pentiums were offered in Q3, including the first one for notebooks. New Celerons at up to 500 MHz were also introduced. Intel's first Ianium processor, formerly code-named Merced, is testing well. It remains on track for systems shipping in the second half of 2000. In Q2, the company introduced a new highly integrated chipset, called 810E, that supports all Intel processors and incorporates integrated graphics. Performance and flexibility have led to strong demand and a strong ramp.

All geographies and all product segments are strong. Asia/Pacific is improving in several areas and Taiwan had a strong Q3 despite its major earthquake. So far, nothing has changed in the area going forward as a result of the quake. In Europe, growth and stabilizing prices exist while retail sales are strong. Japan was the only region with revenue below Q2's level, but PC sales in Japan are strong. Sales are fueled by Internet-related demand. The Americas remain on track for stronger second-half growth and Intel's weeks in inventory remains the same as at the end of Q2. Flash memory revenue was up strongly from record Q2 levels and is shipping record volume. Finally, the company is pleased with the launch of its Intel Online Services. The first two facilities are open and signing customers.

Intel's Xeon chip revenue did rise quarter-to-quarter but delays in shipment due to board problems that have since been resolved led to lower than hoped for performance in Q3. This added to the situation of ASPs not being high enough as hoped, which was compounded by strong sales on the low-end as market share was gained. Some high-end processors were pushed to Q4 from Q3. This hurt Q3, but will be a plus in Q4.

To discuss the company as a Drip investment, please visit the Drip Companies message board. For more discussion of Intel's business, hit the Intel board.

Fool on!

Drip Portfolio

10/13/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-1 7/16$39.88
INTCINTEL CORP-4 9/16$72.13
JNJJOHNSON & JOHNSON-1 7/16$95.31
MELMELLON BANK CORP-1 1/4$32.94

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip -4.02% -4.69% -.60% 7.76% 22.56% 9.63%
S&P 500 -2.09% -3.78% .22% 4.58% 36.94% 15.27%
S&P 500(DA) -2.09% -3.78% .22% 5.16% 39.56% 16.26%
S&P 500(DCA) n/a n/a n/a n/a 17.36% 7.51%
NASDAQ -2.48% -2.96% 2.01% 27.75% 78.47% 29.93%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9721.0839INTC42.592$72.1369.34%
11/14/9710.215JNJ78.341$95.3121.66%
11/5/9825.5267MEL34.137$32.94-3.51%
4/13/988.174CPB54.586$39.88-26.95%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9721.0839INTC$898.01$1,520.68$622.66
11/14/9710.215JNJ$800.25$973.62$173.36
11/5/9825.5267MEL$871.40$840.79($30.62)
4/13/988.174CPB$446.18$325.94($120.24)
  Cash: $24.37  
  Total: $3,685.38  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.