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Intel's Earnings
Our thoughts on the Web & '99

by Jeff Fischer ([email protected])

Alexandria, VA (Jan. 12, 1999) -- Intel's year began with a whimper and ended with a great big bang. 1998 will be remembered as the year that Intel overcame obstacle after obstacle in order to -- just as it crossed the finish line -- report its best quarter in history.

Slam! All net. Three pointer. (Yes, we'll miss Michael Jordan during his second retirement, too.)

Intel (Nasdaq: INTC) reported record fourth quarter revenue of $7.6 billion, up 17% from last year's record fourth quarter results. The company made a cool $2.1 billion in income, up 18% from 1997, while gross margin (the money made after the cost of the product itself is deducted) rose sharply to 58%. Earnings per share totaled $1.19, up 21% and well above estimates of $1.07 to $1.10 per share.

The strongest quarter in its history also marks Intel's twelfth consecutive year of revenue growth. Sales for the year reached $26.2 billion, up from $25 billion last year, while estimates for 1999 call for sales of above $30 billion. Rather than reiterate the results like everybody else, the full earnings report is available here, at Intel's website, and the company's fourth quarter conference call will be available tonight here, and we'll offer a written summary of the call soon. The conference call replay by phone is available later tonight, and until January 15th, at the phone number of 402-220-0156.

We wrote in-depth about Intel's possible 1999 results on December 28, 1998. Fourth quarter sales typically surge over the holiday season, and then decline in the first quarter of the new year. Per the usual, today Intel shared that first quarter sales should be lower than fourth quarter results, and gross margin will likely decline from its 58% level to near 55%. (Only 55% gross margin was expected this quarter anyway, so Intel's margin will decline from a higher-than-hoped-for base. We can't complain.)

Time for some potentially interesting news on PC sales.

Although Intel said that the first quarter will be slower, it has been estimated that computer sales are not slowing as much as they usually do at this time of year. The strong momentum of the fourth quarter is apparently carrying somewhat into 1999. It is estimated by IDC that microprocessor sales for personal computers topped 30 million in the fourth quarter of 1998, which is up 35% from the same quarter of '97. The run-rate then (which is the quarter's results multiplied by four) is about 120 million chips -- a run-rate that is already above IDC's total forecast of 117 million in CPU sales for 1999. Plus, the run rate assumes no growth.

This indicates that the early estimates for CPU sales in 1999 are towards the low side.

If CPU sales grow 12% to 14% this year from the last quarter of 1998 -- as the long-term estimates call for -- then total PC sales could reach 138 million. That would represent an increase of about 38%, up from 100 million in 1998. That's quite huge.

Part of the argument that could make such an impressive increase possible involves the new inventory practices of most companies involved: 1998 was the year that PC manufacturers tightened inventory models greatly, lowering order lead-times and lowering inventory-on-hand. This inventory correction was painful to go through last year (at least according to the Wise it was painful; for us last year was a great chance to buy shares while they were depressed), but this year companies reap the benefits of a tightly-run ship. The chance for an inventory glut and all of the expenses that result (which we experienced last year) are much lower now. And with little inventory on hand, if consumer demand is able to maintain merely a half-decent pace even throughout the slow time of this year, then the growth numbers presented above are much more likely and new product will be needed to meet them.

What is driving demand?

The Internet (of course). I continue to believe that the flood of consumers to the Internet will overwhelm current growth estimates for the industry and for all of its related parts. Still only about 30% of U.S. homes have Internet access, and many of those homes (a majority) are using outdated computers. I don't believe in "hyping" the situation, at all. There's no reason to. However, I believe that estimates are too conservative. I think that more people will get online sooner than expected, and that they will spend more money online and generally use the Internet for more services sooner than expected, too. Next, more of us will buy new or second computers as prices continue to decline, and as our use (and hence need) for the Internet increases.

Intel is trading at 31 times the current EPS estimate of $4.32 per share for '99. That estimate should be raised in the coming days.

On a bit of a sidetrack (but one that I think you'll enjoy), we'll cover the Next Big Drugs to come from various pharmaceutical companies tomorrow, including Johnson & Johnson (NYSE: JNJ) and many other leaders. But don't worry: we haven't forgotten our oil study! Next week, Brian and I will dive back into the oil industry. After about four columns on Downstream operations, we'll begin to look at our list of oil companies one by one, up close.

To discuss Intel or Drip Investing, please visit the message boards linked in the top right of this page. Fool on!

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