Update: Intel slightly off Q2 revenue estimates

Intel Corp.'s second-quarter revenue increased 18 percent from a year earlier, helped by a strong increase in flash memory shipments, although revenue still fell slightly short of analysts' expectations. The chip maker expressed confidence about its prospects for the third quarter.

The Santa Clara, California, company recorded $8.05 billion in revenue during the second quarter, the period ending June 26. This compared to revenue of $6.8 billion from last year's second quarter. Net income was $1.8 billion, up 96 percent from the second quarter of 2003, Intel said in a statement Tuesday.

Analysts polled by Thomson First Call had expected Intel to record $8.1 billion in revenue, the midpoint of an updated range that Intel provided in June. Intel's second-quarter earnings per share of $0.27 were in line with analyst estimates.

The second quarter is considered the worst for PC sales, and chip companies typically see their revenue decline from the first quarter to the second. Intel's revenue was flat compared with the first quarter as chipset, motherboard and flash memory unit sales all increased sequentially, while shipments of Intel Architecture products such as the Pentium 4 and the Pentium M were lower in the second quarter than in the first quarter, following the usual seasonal trends.

Intel probably regained several points of market share in flash memory, said Paul Otellini, president and chief operating officer, on a conference call following Intel's announcement. The company had lost share in 2003 after an ill-timed rise in flash memory prices, but it has successfully renewed relationships with its flash memory customers and erased much of that decline, he said.

Intel expects to record revenue of between $8.6 billion and $9.2 billion in the third quarter, it said in the release.

Several financial analyst firms, such as Merrill Lynch & Co. Inc. and Lehman Brothers Holdings Inc., expressed caution about the near-term strength of the PC market this week on fears that Intel would provide a cautious outlook for the third quarter. But the midpoint of Intel's third-quarter guidance is $8.9 billion, higher than Lehman's revised third-quarter estimate of $8.6 billion and its original estimate of $8.75 billion.

"We're planning for seasonal growth in microprocessors and exceptional growth in other categories," Andy Bryant, Intel's chief financial officer, said on the conference call.

Intel did express caution about its gross margins for the remainder of the year. It now expects gross margins to decline slightly to 60 percent, from predictions of 62 percent, as Intel produces less processors than it had planned going into 2004, Bryant said.

The chip industry is transitioning from an older manufacturing process to a newer, 90-nanometer process. These transitions can be difficult as chip makers work out kinks in the new process, and both of Intel's first 90-nanometer products, the Prescott desktop processor and Dothan notebook processor, were launched later than expected.

However, the situation has turned around. Intel has produced a greater number of usable chips from the new manufacturing process than it had forecast going into the year, Bryant said. "It's one of those good surprises you have to deal with," he said on the conference call. That good surprise caused inventory to rise by about $427 million.