Intergraph settlement weighs on Intel Q1 results

Intel hit its own narrowed targets for first-quarter revenue, but just missed Wall Street estimates for revenue and earnings per share due in part to the company's settlement of a legal dispute with Intergraph.

Revenue for the quarter was $US8.1 billion, up 20 per cent from last year's first-quarter revenue of $US6.8 billion. Net income was $US1.7 billion, up sharply from first-quarter 2003 net income of $US915 million.

Corporate IT spending had increased, especially in Europe, Intel president and chief operating officer, Paul Otellini, said.

The PC industry was going through a healthier replacement cycle than the bubbles caused by Europe's conversion to the euro in 1998 and the Y2K replacement cycle in the US, he said.

Even though it was announced three days after Intel's first quarter ended on March 27, the $US225 million settlement agreement between Intel and Intergraph resulted in a $US162 million charge to first-quarter cost of sales, Intel said. This reduced earnings per share by $US0.017, the company said.

The remaining settlement costs would be amortised over five years, the company said.

Intel agreed to license Intergraph's parallel instruction computing technology for its Itanium server processors as part of the settlement.

Intel told investors in early March that first-quarter revenue would come in between $US8 billion and $US8.2 billion based on higher-than-expected levels of inventory, especially in Asia-Pacific. This was at the low end of the guidance Intel provided after its fourth-quarter earnings presentation in January.

Some of the excess inventory was attributed to the improvements in yields from Intel's 90-nanometre manufacturing technology, which produced more working processors than the company had anticipated, chief financial officer, Andy Bryant, said. As a result, Intel now has an extra week to 10 days of inventory that needs to be consumed during the rest of the year, but a normal seasonal increase in demand in the second half of the year should take care of that excess inventory, he said.

The chip industry's first quarter is generally down from the fourth quarter, as purchasing slows from the consumer-driven spending caused by the holidays.

Processor shipments were lower compared to the fourth quarter, but the average selling prices of Intel's processors, including those made for Microsoft's Xbox, were higher, Intel said.

Processor shipments increased by double-digit percentages throughout all product segments and geographies in the first quarter, Otellini said. The server processor business was especially strong, with shipments rising 40 per cent compared with last year's first quarter, he said. Intel's first x86 server processor with 64-bit capabilities was still on schedule to ship in the second quarter, Otellini said.

Servers with the new chip, code-named Nocona, should ship in July, he said.

Intel is also preparing for the launch of Dothan, the 90-nanometre successor to the Pentium M, and Grantsdale, its next-generation desktop chipset.

The company is currently shipping Dothan to notebook manufacturers and plans to announce the chip in May, Otellini said.

Grantsdale would be announced in the second quarter, with systems available in time for the third-quarter back-to-school shopping season, he said.

This was the first full quarter for the combined Intel Communications Group, but the new organisation is still losing money.

Intel folded the Wireless Communications and Computing Group (WCCG) into the ICG group in December after a poor year for WCCG's flash memory and cell phone processor businesses.

ICG revenue rose to $US1.1 billion in the first quarter from $US963 million in last year's first quarter, but the group's operating loss remained flat with that quarter at $US219 million, according to a company statement.

The company's flash memory business actually increased sequentially, which usually didn't happen going from the fourth quarter to the first quarter, Bryant said.

But costs increased as Intel shifted to a new flash memory manufacturing technology, he said.

The second quarter historically is considered the worst of the year, and Intel's revenue guidance for the upcoming quarter reflected that trend. The company expects to post between $US7.6 billion and $US8.2 billion in revenue during the upcoming quarter. The midpoint of that range would be $US7.9 billion, down from its first-quarter 2004 revenue.

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