Update: Intel exceeds expectations for Q4 earnings

Analysts polled by Thomson First Call expected the Santa Clara, California, company to amass $9.4 billion in revenue.

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Intel reaped the benefits of strong demand across all segments of the economy and all areas of the world, said Paul Otellini, president and chief operating officer, in a conference call following the release of Intel's results.

This year's fourth-quarter holiday consumer sales were strong, especially in notebooks, Otellini said. Corporate purchases were equally strong, leading to record shipments for Xeon server processors and notebook processors, he said.

"I see nothing on the horizon that will stop that trend next year," Otellini said, referring to corporate demand. Consumer demand is expected to soften in 2005, according to analyst predictions.

Net income for the quarter was $2.1 billion, down 2 percent compared to the same period in 2003. Earnings per share were $0.33, $0.02 more than analysts had expected.

Intel earlier this year implemented an aggressive strategy to reduce excess inventory, and that move has caused the inventory balance to swing the other way, where Intel now believes it has a little less inventory than would be ideal, said Andy Bryant, chief financial officer, on the conference call.

Intel reduced its production of silicon wafers in the third quarter to cut back on the number of chips available for sale. This had the desired effect of keeping excess inventory out of Intel's warehouses, but fourth-quarter demand was stronger than Intel anticipated, reducing inventories faster than planned, Bryant said. Intel still has plenty of inventory to fulfill demand for its products into next year, but a slight increase in inventory levels would be welcome in the first quarter, he said.

For the full year, the company managed to top its previous record for yearly revenue, set in 2000. Intel recorded $34.2 billion in revenue during 2004, up 13.5 percent from 2003 and slightly higher than the $33.7 billion recorded in 2000. Net income for 2004 was $7.5 billion, up 33 percent from the $5.6 billion Intel earned in 2003.

Intel spent $4.8 billion on research and development and $3.8 billion on capital expenditures in 2004. Spending in both categories is expected to rise in 2005, Bryant said. Intel will spend about $5.2 billion on research and development, its highest level ever, and between $4.9 billion and $5.3 billion on capital expenditures such as new equipment for the 65-nanometer process technology generation.

The company plans to start producing 65-nanometer chips in 2005, with mainstream production of the new chips expected in 2006. Yonah, a dual-core processor for notebooks, will be Intel's first 65-nanometer processor sold to the public.

The company shipped record numbers of processors for servers and notebooks during the quarter, which is usually the strongest quarter of the year for IT hardware companies.

Shipments of Intel's Nocona server processor tripled, making it the fastest introduction of a new Xeon chip in Intel's history, Otellini said. Nocona features support for PCI Express interconnects, DDR2 (Double Data Rate 2) memory, and 64-bit extensions to the chip's 32-bit architecture.

Intel also recaptured the lead in NOR flash memory shipments during the quarter, Otellini said. The company had been fighting to regain that position since a poorly timed decision to raise flash memory prices cost the company a great deal of market share in 2003.

However, that wasn't enough to vault the Intel Communications Group, which includes flash memory operations, into profitability for the quarter. Despite increases in flash memory and wireless LAN chip shipments, the group lost $196 million in the quarter and $791 million for the year.

Intel had once hoped that the Intel Communications Group would post a profit in 2004, but Bryant said Tuesday that the company can't even be sure whether the group will be profitable for 2005 or 2006.

For the first quarter of 2005, Intel expects revenue to come in between $8.8 billion and $9.4 billion. Intel's business typically moves in a seasonal pattern, with a strong fourth quarter followed by a weaker first quarter.

The midpoint of that range, $9.1 billion, would be a little weaker than usual seasonal patterns would indicate, but still within the usual range of fluctuation, Bryant said.

Next week, Intel plans to update its Centrino notebook platform with a new chipset and wireless chip, code-named Sonoma, Otellini said. That product is expected to quickly replace the existing Centrino technology in 2005, Intel executives said last week at the International Consumer Electronics Show.

After it decided to cancel a 4GHz Pentium 4 processor, Intel unveiled plans to increase the performance of its flagship desktop chips by adding cache memory to processors it has already introduced, the company said earlier in 2004. Those new chips have started to ship to PC vendors, and the chips will carry model numbers starting in the 600s, Otellini confirmed during the conference call.