Intel sales slide in 1Q04, rising inventory raises eyebrows

April 14, 2004 – Intel Corp., Santa Clara, CA, reported a slight dip in sales during its typically slow first quarter, but a marked improvement over a year ago demonstrates the growing strength of the chipmaking industry.

Intel posted a 1Q04 profit of $1.73 billion on revenues of $8.09 billion with 60% gross margins, up from a net income of $915 million on sales of $6.75 billion in 1Q03 and margins of 52%. Sequentially, overall revenues were down 7%; sales of microprocessors, chipsets, and motherboards were down 8%-11%, only partially offset by a 4.5% increase in flash revenues. The results include a $162 million charge as part of a $225 million settlement with Intergraph Corp. concerning patent litigation, with the remainder amortized over approximately five years.

Despite results roughly in line with estimates, analysts expressed concern about $277 million worth of inventory built up between 4Q03 and 1Q04, due to higher-than expected factory yields, according to Reuters. Mark Lipacis, analyst with Prudential Securities, said the buildup is a good move if Intel is accurately optimistic in planning for future demand — but if the company overshoots, it will have to write down inventory and take a charge in a future quarter. First Albany analyst Auguste Richard added the company might have to reduce utilization rates in order to reach its goal of 64% gross margins by the end of the year. And Chris Danely, analyst with J.P. Morgan, pointed out that the inventory level is now at 79 days, the highest level since 1995, and predicted Intel “needs above-seasonal revenue growth” in 2H04 to avoid writedowns or lowered utilization rates.

Intel, which left unchanged its projections for R&D and capital spending ($4.8 billion and $3.6-$4.0 billion), projects 2Q04 revenue of $7.6-$8.2 billion, slightly below analysts’ expectations of $7.85-$8.4 billion, with gross margins of 60% plus or minus a couple of points.


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