Intel Quarterly Profits Down 82%, Still Exceed Expectations

SAN JOSE, Calif. – Intel Corp.'s first-quarter profit fell more than 80 percent, and the chip-making giant warned that the effects of the economic slowdown will continue to be felt for months to come.

Intel's net income was $485 million, or 7 cents a share, for the three months ending March 31. That compares with $2.7 billion, or 39 cents a share, in the same period last year.

Exluding acquisition-related charges, Intel earned $1.1 billion, or 16 cents a share, down 64 percent from last year's $3 billion, or 43 cents a share, the company said Tuesday.

Analysts were expecting earnings of 15 cents a share, according to a survey by Thomson Financial/First Call.

Revenue for the period was $6.7 billion, down 16 percent from $8 billion in the same period last year.

Last month, the company said its first-quarter revenue would be off about 25 percent from the fourth quarter of 2000. It also said it would be trimming 5,000 jobs through attrition.

In Tuesday's announcement, Intel said it expects second-quarter revenue between $6.2 billion and $6.8 billion. Last year's revenue for the period was $8.3 billion.

Analysts say Intel's bottom line will face pressure from unprecedented price cuts planned on its high-end Pentium 4 processors.

The Santa Clara-based chip manufacturer this week reduced prices by as much as 19 percent. Later this month, the price of the top-of-the-line Pentium 4 is expected to fall as much as 50 percent, analysts say.

The entire semiconductor industry has been hit hard by the economic downturn and subsequent slowdown in demand. As a result, companies are fighting over smaller markets -- and Intel so far has been lagging.

"We had significant inventories and a downturn in demand," said Eric Ross, an analyst at Thomas Weisel Partners. "Those two on top of each other really did a whammy on the market."

Beyond the economy, however, the Pentium 4's sales have suffered because of its higher cost and performance issues. Critics say existing programs run just as fast on a high-end Pentium III as on a Pentium 4.

"Cost is king, and that makes the Intel Inside brand less valuable," Ross said. "If they don't have the performance that's well above the competitors, they're going to have to drop their price down to competitors' level in order to compete."

Intel's market share has been eroding -- dropping roughly 1 percent in five of the last six quarters, according to Mercury Research.

In the fourth quarter of 2000, Intel processors powered 81.5 percent of PCs while AMD had 17.1 percent. In the first months of 2001, Intel's share fell to 77.3 percent and AMD's grew to 21.1 percent.

"It had been declining slowly," said Dean McCarron, principal analyst at Mercury. "Our estimates for Q1 showed a little bit more of a dramatic change. The industry downturn impacted Intel more directly."

Intel will not discuss its pricing strategy or market share, said spokesman Robert Manetta. AMD also has not disclosed whether it will match the prices set by its competitor.

Intel's most surprising cut will involve its yet-to-be-released 1.7 gigahertz Pentium 4. Analysts believe it initially will be priced at $700 when released Monday, and then cut to about $350 on April 29.

That would put the pricing in line with AMD's speediest processor, the 1.33 GHz Athlon, which currently runs for about $350.

The pricing could result in high-end consumer PCs costing less than $2,000, which would have bought a machine half as fast six months ago.

Intel has dominated the market with fast processors while its competitors lagged. AMD, in particular, struggled with getting competitive processors to market.

Now, the table has turned. AMD appears to have worked through its challenges while Intel had to deal with the Pentium 4's performance issues and a requirement that it use a more expensive type of memory.

Intel's bottom line will feel more of a pinch from price cuts than before because demand and margins for the company's highest-end server and workstation processors, which earned more profit, have decreased with the economy's slump.

"They don't have that fat store, that profitability to fight AMD," McCarron said. "They're going to feel that pinch of pricing pressure directly."