Drip Portfolio Report
Thursday, October 23, 1997
by Randy Befumo (RandyB@fool.com)

ALEXANDRIA, VA (Oct. 23, 1997) -- Our lone holding, INTEL CORP. (Nasdaq: INTC), reported third quarter earnings last week. Here at the Motley Fool -- and especially in the Drip Portfolio -- we counsel looking at how the companies you own are doing at least four times a year. Every publicly traded company in America reports earnings four times a year, so earnings time presents the ideal opportunity to take a peek under the hood and see how things are going. Since for many of you this is the first time a company you have owned has reported earnings, I thought that it might be nice to go through the press release.

Revenues at Intel grew 19.7% to $6,155 million in the third quarter compared to the same period a year ago. This means that overall sales increased at a very solid clip, in line with growth in the overall market for personal computers. Even more encouraging is an item disclosed on the first line of the "Q3 1997 BUSINESS REVIEW" -- "Unit shipments of microprocessors set a record in the third quarter." As microprocessors and microprocessor-related products represent roughly 80% of Intel's total revenues, higher demand for microprocessors is a key criterion for Intel's continued success.

Unfortunately for Intel, revenues (also known as sales) only grew by $195 million versus last quarter. This 3.3% rate is only 13.7% if you stretch it out over a year, which is pretty anemic. Given record unit sales and slowing earnings, it is clear that the price per microprocessor has dropped significantly. Part of Intel's long-term strategy has been to make aggressive price reductions on a regular basis. The price cuts have been particularly aggressive in this cycle, with the lowest priced Pentium chip now selling for $95. Intel's attempt to reach the sub-$1,000 PC market with one of its microprocessor offerings while making its newest Pentium II models more attractive on a price/performance basis is restraining revenue growth.

Gross margins, a measure of how much money the company spends on manufacturing, dropped more than three percent versus last quarter. Gross margins, defined as gross profit divided by revenue, can be calculated by taking gross profit ($3,551 million) and dividing it by revenues ($6,155 million). In the third quarter, the gross margin was 57.7% ($3,551 / $6,155) compared to 57.2% a year ago. Last quarter the gross margin was 60.7%, meaning that for every dollar of sales, Intel spent three cents less on manufacturing. Intel blamed this 3% drop on lower-than-expected sales of flash memory (2%) and increased sales of Pentium II's on motherboards (1%). Intel makes lower gross margins on the Pentium II motherboards, possibly because of expenses related to the new design.

Even though this slump in gross margins is a disappointment, the company has stressed for quite some time that its long-term gross margin goal is 55% "plus or minus a few percent." The gross margins have been much higher than their historical average over the last two or three quarters because of the "product mix." Intel's business plan has it selling its microprocessors to customers in any stage of assembly. Some of these stages, like putting the chip on a motherboard, carry lower margins than others, like selling just the chip. With the introduction of the Pentium MMX, Intel was selling a lot of chips alone, whereas now it is selling more of these chips in various lower-margin states of assembly. As we had expected gross margins to go down to the 55% range for a while, the fact that this has happened pretty much all in one quarter is not alarming at all.

TOMORROW: More Intel Inside


              Stock   Close    Change
              Intel  $81 7/8  -2 1/16

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%

        Rec'd   #    Security         In At      
       9/8/97   1      Intel         $94.69      

                        Base: $800.00
                    Expenses: $ 55.50 (Moneypaper)
                   Purchases: See above
                        Cash: $649.10
                 Total Value: $735.00 apprx.

The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 by August of the year 2017.