Capital and R&D: The Wind in Intel’s Sales

Intel continued its profit streak during the fourth quarter of 2003, despite a three-month period in which it took a $611 million write-off.

The Santa Clara, Calif.-based chip making giant said its net income for the period was $2.2 billion, (33 cents per share), up more than double from $1 billion (16 cents per share) it reported for the same time last quarter and up 31 percent from the prior quarter.

Revenues hit $8.74 billion in the fourth quarter, which is slightly higher
than the previous record of $8.73 billion set in the third quarter of 2000.

Intel’s CEO Craig Barrett pointed to the company’s substantial investments in capital and R&D over the past few years as the reason behind the numbers.

“We ended the year on a high note as ongoing strength in emerging markets coupled with improving demand in established markets drove revenue to record levels,” Barrett said in a statement. “In 2004, our focus will be to drive double-digit growth through technology leadership and global market expansion, and by pursuing adjacent opportunities in communications and the digital home, while using our 90-nanometer and 300-millimeter factories to reduce costs and improve profitability.”

This has been a busy quarter for Intel. The company spent the last three months expanding into other businesses such as wireless, embedded consumer processors, “digital entertainment PCs”, and chips for big screen HDTVs.

The company said its one dark spot is a $611-million goodwill write-down
related to the Wireless Communications and Computing Group (WCCG). The
division, responsible for Intel’s XScale processors and cellular phone chips, had been struggling financially. The group is now under the wing of Intel’s Communications Group (ICG).

Looking forward, Intel said it plans on spending about $4.8 billion on R&D in 2004, as compared to $4.4 billion in 2003. The company said the increase is primarily driven by development of the Intel’s next-generation
65-nm process technology, scheduled for production in 2005 on 300-mm wafers.

Intel’s financial statements exceeded estimates by financial analysts. Those surveyed
by Thompson/First Call expected the chip making giant to earn 25 cents a
share (Intel said its earnings per share hit 33 cents) and revenue of $8.64
billion. At its mid-quarter update last month, Intel narrowed its revenue
range between $8.5 billion and $8.7 billion, as compared to the previous
range of $8.1 billion to $8.7 billion.

Intel’s stock slipped in after hours trading, as the company’s
first-quarter guidance of $7.9-8.5 billion was lighter than analysts were
expecting.

Industry analyst Rick Whittington of American Technology Research said he is concerned that the chip
giant may be spreading itself too thin.

“There are plenty of Intel positives,” he said in a research note. However, “it also appears that Intel is facing the “perfect storm and they’ve never had to do this
before.”

Whittington said Intel’s Itanium effort has consumed billions of R&D
dollars but hasn’t achieved more than minimal traction and their 32-bit x86
chips like Pentium and Xeon are showing their age while a competitor, AMD,
has successfully announced and shipped both a desktop and server processor
that more than competes with Intel’s 32-bit family and has the promise of
easily evolving to 64-bit applications.

“They seem to have a significant power-related problem with their new
90nm
process technology that is the foundation for all of their new processor
products in 2004 – 2005 as witnessed by significant product delays for
Prescott and Dothan,” Whittington said. “If they choose to stay with Itanium
as their only 64-bit solution, AMD could capture significant share. If Intel
announces its own x86-64 processor, any traction Itanium has will be slowed
to a crawl and force Intel to play catch up.”

Despite Intel’s latest software extension that lets its Itanium lineup
run 32-bit applications, Whittington said its unlikely Microsoft would support two separate x86-64 processing lines.

“So Intel would have to adopt AMD64,” Whittington said. “Perhaps Intel
lets enough leak out about its own x86-64 extensions for Prescott or Tejas
that if forces customers to wait and AMD’s momentum slows. In the mean time,
customers will enjoy the highest value per dollar computing power of all
time because Intel will be forced to trim prices for their aging x86-32 line
while AMD responds to compete. In this scenario, the market has always
responded elastically and this will be one of the key drivers for
2004-2005.”

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