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Intel gears up for rebound in microchip demand

BLOOMBERG, SANTA CLARA, CALIFORNIA
Wednesday, Jan 16, 2002, Page 19

Intel Corp Chief Executive Officer Craig Barrett has stepped up spending on manufacturing capacity in the face of the biggest slump in the semiconductor industry's history.

By adding and modernizing plants now, when most rivals don't have the money, he hopes to bolster earnings at the largest chipmaker and win business from competitors when personal-computer sales rebound.

Barrett, taking advantage of Intel's heft, invested a record US$7.5 billion on new equipment and factories last year to try and avoid mistakes made in the last slowdown in 1998. When the PC market recovered the next year, Intel lost sales to Advanced Micro Devices Inc amid chip shortages and recalls.

"That's the cost of staying on top," said Jim Luke, who manages the US$210 million BB&T Large Company Growth Fund, which owns 190,000 Intel shares.

Analysts expect the Santa Clara, California-based company to report that fourth-quarter sales slid 21 percent to US$6.84 billion and earnings fell to US$0.11 a share excluding some costs, according to Thomson Financial/First Call. A year earlier, Intel had net income of US$0.32 on US$8.7 billion in sales.

Investors, anticipating that new chips will boost profits this year, have pushed the stock up 74 percent since Oct. 1. The shares reached a record high of US$75.81 in August 2000. Intel rose US$0.29 Monday to US$34.84.

Analysts say there are some signs of a recovery in the chip market after 13 months of declining demand.

Intel last month boosted fourth-quarter sales forecasts to US$6.7 billion to US$6.9 billion from earlier targets of US$6.2 billion to US$6.8 billion, saying that Pentium 4 demand outstripped expectations and that some chips were in short supply as PC sales rose.

Barrett, who has chopped Pentium 4 prices since the chip debuted in November 2000, can now slow those reductions, analysts said. The 62-year-old executive also introduced smaller, faster versions of the processor last week, a move that will lower manufacturing costs.

That doesn't come cheap. Many analysts expect Intel, whose research and capital spending budget is the industry's largest, to plow at least US$6 billion into plants and equipment this year.

Investors say such spending is key to trimming costs enough to support the price cuts that have led to losses at rival Advanced Micro.

Barrett, who succeeded Andrew Grove as CEO in May 1998, shepherded Intel's expansion into new markets. He has since scaled back some of those ventures. The company is phasing out the consumer-electronics group, which made digital cameras, toys and audio players; stopping new versions of some networking devices; and closing an Internet service for small and mid-sized businesses.

"He's making the right moves," said Brooks Gray, a Technology Business Research Inc analyst who doesn't own the stock. "It's just a question of being able to define the true businesses they need to get into over the next few years."

Barrett declined to comment, Intel spokesman Tom Beermann said.

For Barrett, that means concentrating on chips again.

His next challenge will be to press Intel's inroads in servers into higher-profit, higher-performance systems. Itanium, Intel's first chip powerful enough to handle many of the hefty business applications run on servers, was introduced in May and has just tested the waters for the next version, codenamed McKinley.

"The initial Itanium product has had mixed results," said Nathan Brookwood, a microprocessor analyst at Insight 64. "McKinley needs to be a barnburner."

Itanium's acceptance has been slow because the chip hit shelves late and still hasn't proven itself, analysts said. If Barrett can't win more sales with McKinley, they say it would be a blow to his plans to increase sales outside of PCs.

He'll have fresh competition. Advanced Micro has added low-end server chips and plans more powerful products later this year.

Barrett can't afford to fail. He was paid US$3.36 million in salary and bonus in 2000, and received options to buy stock worth US$19.5 million if the shares climb 10 percent a year over 10 years.

Those options are now worthless.

Investors are still worried that Intel is too dependent on the PC market. After increasing at an average 16.7 percent a year, PC sales fell last year for the first time in more than 15 years, and shareholders said sales may never resume that kind of growth.

"It's a pretty mature market all of the sudden," said Scott Lawson, an analyst at Banc of America Capital Management, which owns Intel shares and manages US$280 billion. "How do you keep growing when the market isn't growing that fast?"

Many investors said they aren't panicking yet. Intel is coming out of last year's doldrums in better shape than in the last slowdown, they said, a reason to stand behind Barrett.

"We own the stock through thick and thin," BB&T's Luke said. "Look at the performance over the past year, in a slow market and in a tech disaster market. They just continue to lead."
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