Intel's third-quarter revenue came in a little higher than the company had expected after a midquarter update in September, but was still lower than hoped earlier this year as inventories rose at Intel's customers amid a weaker market for microprocessors.
Third-quarter revenue was US$8.47 billion, up 8 percent from last year's third-quarter revenue of US$7.83 billion. Intel shipped a record number of processors in the quarter, but it had forecast even higher growth coming off of its second-quarter earnings conference call.
In September, Intel said third-quarter revenue would fall between US$8.3 billion and US$8.6 billion, citing a weaker than expected market. Analyst estimates for the third quarter reflected a midpoint of that range at US$8.44 billion.
Net income for the quarter was US$1.91 billion, up 15 percent from last year's third-quarter net income of US$1.66 billion.
Earnings per share for the third-quarter were reported at US$0.30 per share. However, that number included one-time tax benefits that added US$0.036 per share to the earnings per share total. Intel reduced its tax provision for the third quarter by US$195 million and generated a higher percentage of its profits in locations with lower tax burdens, the company said.
Without the tax benefits, earnings per share were a little less than estimates of US$0.27 from analysts polled by Thomson First Call.
Earlier this year, Intel said it planned to slow the rate at which it produced microprocessors in order to deal with greater-than-expected yields from its new factories as well as weaker demand than it had expected in the second half of the year. The company has managed to reduce its own inventories, but the inventories of its large customers rose during the quarter, said Intel President and Chief Operating Officer Paul Otellini on a conference call following Intel's press release.
This will have an impact on the number of orders placed by those customers in the fourth quarter as they work through their existing inventories, said Chief Financial Officer Andy Bryant on the conference call. Some of Intel's largest customers are Dell, Hewlett-Packard, and IBM, as well as contract manufacturers in the Asia-Pacific region.
Intel will also have to take an underutilization charge in the fourth quarter to account for lower-than-expected production at its 200mm factories, Bryant said. Intel has moved more of its production in recent quarters to newer 300mm factories, which produce larger wafers from which individual processors are cut.
Using larger wafers means that more chips can be produced from each wafer, reducing the unit cost of each processor and improving margins. However, achieving those desirable margins comes at the expense of overhauling existing factories or building new ones, which can cost several billion dollars per factory.
Intel did not produce as many 300mm wafers as it would have hoped due to the voluntary slowdown in production and produced far less 200mm wafers than it had expected, Bryant said. The company will need to account for that lower level of production with a charge, Bryant said, declining to specify the size of that charge.
Intel hopes to be able to increase the utilization of its factories in the first half of 2005, which will allow the company to finally record those cost benefits, Bryant said.
Corporate demand for products with Intel processors remained strong in the third quarter, especially in Asia-Pacific and Western Europe, Otellini said. Shipments of mobile and server processors set records in the quarter as corporations around the world continue to replace existing desktops with notebooks, he said.
U.S. consumer demand was weaker than expected, Otellini said. The growth in desktop shipments to mature markets such as the U.S. are much lower than desktop shipments to emerging markets such as China, he said.
The Intel Communications Group encountered a setback during the third quarter in its attempt to record a profit for 2004, Bryant said. The division's quarterly loss doubled to US$251 million from the second quarter of this year even though revenue increased to US$1.3 billion.
Revenue from flash memory increased, but shipments were lower in certain areas resulting in an increase in inventories, Bryant said. Intel is still planning for the Communications Group to record a profit this year, but with accumulated losses of US$596 million through the third quarter that goal will be difficult to achieve.
Intel expects fourth-quarter revenue to fall between US$8.6 billion and US$9.2 billion. This would be an increase of five percent over the third quarter, reflecting an outlook that is at the low end of seasonal patterns, Bryant said. Fourth-quarter growth is usually around eight percent, looking back at the past five years, he said.g