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Intel Takes It Up a Notch

By Spencer E. Ante Chipmaker Intel (INTC) caught Wall Street by surprise on Dec. 2 when it significantly raised fourth-quarter revenue estimates. But the news wasn't all rosy, as Intel failed to hike projections dramatically for its closely watched gross-margin figure. And excess inventory continues to weigh down the company.

Still, the news triggered a burst of buying, with the stock rising more than 7%, to $24.30, in after-hours trading, after falling almost 2% during the regular trading day. "This revenue guidance would yield a record quarter and a record year," said Andy Bryant, Intel's chief financial officer, during a post-announcement conference.

SOLID CONFIRMATION. Intel now expects fourth-quarter sales of from $9.3 billion to $9.5 billion, a range whose midpoint represents a 6% increase over the previous forecast. In October, Intel told investors that fourth-quarter revenue should come in from $8.6 billion to $9.2 billion. The new figures beat consensus expectations for fourth-quarter revenues of $8.97 billion, and they translate into 8% growth on the year-ago quarter.

Intel says gross margins are expected to fall to from 55% to 57%, vs. October's forecast of 56%. "Demand is a little bit higher than I expected," said Bryant, adding that Intel is "in good shape."

After two years of spectacular growth, analysts see the chip industry heading for a mild downturn in 2005. But Intel's update suggests the cycle's growth phase may last longer than expected. Intel said higher revenue forecasts were being driven by strong worldwide demand for its products. Consumers and businesses continue to buy notebooks and computer servers at a healthy clip.

"We've heard of strong demand from the PC and server makers," says Caris & Co. analyst Rick Whittington, who rates Intel a buy. "Now we get the affirmation of it with better Intel numbers."

Intel's Bryant said a $500 million sales increase would usually boost gross margins. But he noted that those margins are not increasing at a normal rate and blamed an inventory glut. At the end of the last quarter, Intel reported about $3.2 billion in inventory on its balance sheet. Still, Bryant said that the unexpected increase in demand would help to work off "several hundred million dollars" of inventory by quarter's end.

AMD'S CHALLENGE. With this robust update, Intel seems to be taking advantage of major competitor AMD's (AMD) chief weakness: a lack of scale and capacity. Thanks to a new line of so-called 64-bit chips, AMD has been taking market share from Intel. But with AMD's factories running full tilt, Intel can use its giant scale to meet the increased demand -- which may be above and beyond AMD's capacity to fill. While AMD won't have a next-generation chip plant capable of making 300-mm, or 12-inch, wafers until 2006, Intel boasts three such operations, with two more coming online next year.

Bryant refused to forecast gross margins, but he suggested that they could increase as inventory is sold off and Intel's chipmaking cranks up. In fact, he said utilization rates in Intel's factories "are bottoming out this quarter" and that he expects to see increases in both the 200-mm chipmaking plants and new 300-mm facilities. "Today, I have excess capacity," said Bryant. "The question is whether I can find a way to use it between now and the second quarter." Ante is Computer editor for BusinessWeek in New York

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