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Intel's Q2 Call
Investors are dialin' and smilin'
by Jeff Fischer (TMFJeff)
ALEXANDRIA, VA (July 14, 1999) -- Uh oh. It's mid-July and Intel is 15% above the price at which we were told to sell it by an analyst because the "summer will be slow." When will he suggest everyone buy it again? Will a good opportunity arise?
One might have expected Intel (Nasdaq: INTC) to decline after yesterday's earnings report, and for a while yesterday in aftermarket trading, the stock did decline. However, the subsequent conference call was enough to swing the heartache in the other direction. The 51-minute call can be heard at www.intc.com. I listened to it last night while eating three cartons of ice cream. As usual, Intel executives kept their comments brief, they spoke slowly (one appreciates that when taking notes), and they refused to predict specifics or break product sales out by segment. This is all fine and good.
Here are the highlights from the call:
Business benefited from successful, quick ramps of new Celeron and Pentium III processors. The premium Pentium II to Pentium III shift has gone well. In fact, Pentium III volume was more than three times its first quarter volume. As of the current quarter, the Pentium III should be highest volume CPU on the market.
As expected, total chip shipments declined in Q2 from Q1. It's estimated that shipments were 24.8 million, down from about 26 million chips (estimated) last quarter. However, Intel regained market share in the value PC market as Celeron shipments rose from Q1.
This increase resulted in lower average selling prices (ASPs) for all Intel chips. Intel doesn't disclose ASPs, but estimates range from $219 per chip to $197 per chip. This compares to estimates of about $225 per chip last quarter. The high-end of the estimates ($215 to $219) are probably most accurate.
Gross margin was stable at 59% and Intel provided guidance of about 60% for the year, up from last year. The decline in unit selling prices was offset by declining unit production costs due to a continued focus on productivity. Cost savings allowed market penetration on the lower-end without damaging margins compared to Q1. Intel promises that even more costs will be removed from low-end platform in the near future.
All geographies except for North America saw sales below Q1 results. Europe was below expectations, while Asia/Pacific was very strong in June. In general, mobile PC product shipments were healthy and volume grew sequentially. In other products, chipset shipments were flat, motherboards were down, and Flash had a great quarter with higher ASPs and shipments. Cell phone demand for Flash represents the strongest demand; the one-hundredth-million Flash product shipped into cell phones this quarter. Networking also grew from Q1.
As you probably know by now, Intel expects a strong second half. Third quarter sales should rise slightly. (September and October chip shipments are always difficult to predict, however). Also, gross margin should rise slightly from 59%, as gross margin guidance for all of 1999 was raised from 57%, plus or minus 2 points, to 60%, plus or minus 2 points. Many are expecting gross margin to land at over 60% for the year. Lower product costs and increased efficiency make this possible.
In Q2, new products included the Pentium III at 550 MHz, which is shipping in volume; the Pentium III at 600 MHz, which began to ship in preliminary sizes; and the first 0.18 micron product, a mobile Pentium II chip at 400 MHz began to ship, too. New chipsets are on target to meet planned shipment dates, and the first high-end Merced chip is on schedule to be sampled later this quarter, too (contrary to rumors that it would be delayed, apparently). A 466 MHz Celeron will also ship within one month, and the new Coppermine chip is expected to ship in Q4.
As the end draws near (the end of 1999, that is), management stated that it sees zero Y2K disturbances in purchase patterns (although it might be early for that, I would think). June chipsets and distribution sales were strong. Chipsets are a 6 to 8 week leading indicator for CPU sales, so the strong June is indicative that August CPU sales could be strong. Meanwhile, distribution sales are indicative of Intel's ability to reclaim market share in low-end PCs. This market share should most likely be kept. Once a company has tried another CPU maker but later returned to Intel for any reason, it isn't likely to patronize a different vendor with open arms again.
Intel's total inventories grew 3% in the quarter but all of the growth was in work-in-process inventory; finished goods inventory declined. Strong June sales contributed to low inventories. Management is comfortable with the current inventory level.
The company's sharecount at the end of Q2 was 3.4 billion shares, down slightly after a buy-back of 25 million shares the past 90 days. (That means 277,777 shares were bought back daily, on average, including weekends).
Cash and short-term investments totaled $10.6 billion at the end of Q2, about the same as Q1. Net cash decreased slightly to over $13 billion, reflecting increased investment and capital expenditures as well as the share buyback for $1.5 billion.
Finally, subsidized or "Free PCs" -- a rising business -- don't impact Intel's ASPs. A third party takes care of absorbing costs -- a party such as the Internet Service Provider (ISP) that is actually offering the cheap PC. A number of such companies want to provide multi-tiered offerings to consumers. Consumers will pay more per month for a model with a higher-end chip, and less for lower-end models. Intel likes this approach in that it highlights the benefits of faster machines but it also provides low-end machines as an option.
Intel will use all 0.18 micron technology by the end of the third quarter next year. Currently, the ongoing conversion from the Pentium II to the Pentium III is at the forefront, while Celeron should continue to grow with the low-end market.
We shared our thoughts on the quarter and the company's overall position yesterday in our column titled "Intel Intact." It seems that we have things covered for now. Intel should rake in about $8.1 billion in after-tax net income this year. That's a lot of clams to rake in. As shareholders, we're happy that this value is in effect being distributed to us. At $66 per share, Intel trades at about 27 times 1999 earning estimates. To discuss Intel, please visit our Drip Companies board or the Intel board.
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