Intel sets record breaking Q2, supply still tight

US chip giant Intel Tuesday had some very good news to announce -- strong second-quarter financial results with both the company's revenue and unit shipments of its microprocessors and flash memory setting new records. However, Intel senior executives cautioned that the company is still experiencing difficulty in meeting customer demand and that the supply of some Intel processors is likely to remain tight.

For the second quarter of fiscal 2000, which closed July 1, 2000, Intel recorded revenue of $US8.3 billion, a new company record, up 23 percent from the year-ago quarter, the chip vendor said in a statement. Excluding acquisition-related costs, net income was $3.5 billion and earnings per share were 50 cents, increases of 98 percent and 92 percent respectively on the second quarter of fiscal 1999.

"We are very pleased with our second-quarter results, demand was unseasonably high," said Paul Otellini, Intel executive vice president and general manager, Intel Architecture Group, on a conference call Tuesday afternoon. He attributed the burgeoning demand to Internet adoption and the buildout of Net infrastructure in both the consumer and commercial markets.

The company saw strong demand in all business groups, especially for microprocessors, flash memory and networking silicon and expects strong demand for Intel's products to continue into the second half of this year. "The second quarter was very good for our mobile products, they continue to outgrow the desktop market," Otellini said. Revenue for Intel's third quarter will be above this quarter's $8.3 billion mark, according to the company.

However, that enthusiasm was tempered with Intel's admission that it continues to be unable to fully meet demand for some of its chips. "Our ability to respond to changes in demand will remain limited," said Andy Bryant, Intel senior vice president, chief financial and enterprise services officer, on the teleconference. "We expect current supply to improve, but to remain tight." He described the company as "still chasing capacity," pointing to Intel's announcement last month that it will invest $2 billion to expand manufacturing operations by adding a new wafer fabrication facility in Ireland.

The shortcoming was also noted by the company on the release of its first-quarter results back in April when Bryant said the chip maker had effectively "undercalled demand" since the third quarter of fiscal 1999.

Intel's ramping up of its 0.18-micron manufacturing operations goes some way towards helping the company address the chips supply shortfall, Bryant said. Moving to the smaller 0.18-micron technology from the older 0.25-micron manufacturing shrinks the size of the processor die, thereby facilitating both faster processor speeds and lower power consumption, according to analysts.

This quarter marked the crossover point between 0.18-micron and 0.25-micron manufacturing, according to Intel's Otellini. More than 50 percent of Intel's chips are now produced using the 0.18-micron process and the company is still on track to exit the year at 90 percent 0.18-micron manufacturing, he said.

Factoring in the acquisition-related costs in the order of $415 million, net income was $3.1 billion and earnings per share were 45 cents. Intel noted in the statement that all share and per share amounts have been adjusted to reflect the company's 2-for-1 stock split, which is payable to Intel shareholders July 30.

A group of 20 brokers polled by First Call/Thomson Financial July 13 estimated that Intel would record earnings per share of 99 cents for the second quarter of fiscal 2000 up from 51 cents for the year ago period. The First Call estimate did not reflect the 2:1 stock split. Intel said the pre-split earnings per share excluding acquisition-related costs were $1, while earnings per share including the costs were 90 cents.

Second-quarter net income and earnings per share include Intel's previously announced charge of around $200 million to cover the remaining costs of a program to fix faulty PC motherboards based around the company's 820 chip set. The chip set's MTH (memory translator hub), which translates signals from SDRAM (synchronous dynamic random access memory) to the 820 chip set, was faulty, potentially causing systems to fail or data to be corrupted.

Intel also announced Tuesday that it will shortly start shipping its Itanium processor for use in end-user pilot installations. The first processor based on the company's IA-64 architecture, Itanium will be Intel's first 64-bit processor. The company added that it now expects to begin recording revenue from Itanium in the fourth quarter of this year, not the third. In the second quarter, Intel "continued to make solid progress" with the Itanium, Otellini said. The chip maker expects companies to begin offering general availability of Itanium systems hardware, operating systems and applications over the first half of next year, he added.

Intel is due to release a 1.13GHz version of its Pentium III processor on July 31, initially in limited volume. The US chip maker is also due to take the wraps off its Pentium 4 family of processors formerly codenamed Willamette later this year. The first Pentium 4 versions are expected to run at clock-speeds of around 1.4GHz. Otellini stressed that he doesn't expect Pentium 4 will be affected by any shortages of components. "I don't see any kit limitations on the horizon for the Pentium 4 ramp," he said.

Although Intel's results were released after the market closed Tuesday, the company's shares closed at $143 down 2.3 percent on Monday's close.

Regionally, Asia-Pacific, Japan and the Americas all recorded record revenue, according to Otellini. Revenue from Europe was sequentially down, but that's the norm for that geography, he added.

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