Wed, Oct 17, 2001 page21

• Intel struggles to survive

  SEMICONDUCTORS Though the downturn has taken a bite out of the chipmaker's earnings, it is fending off rivals by cutting prices and investing heavily in R&D

  • BLOOMBERG
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  Intel Corp Chief Executive Craig Barrett's timing couldn't be worse.

  As the biggest chipmaker unveiled its Pentium 4, the personal-computer processor that reclaimed the speed crown from Advanced Micro Devices Inc, PC demand dropped for the first time in 15 years. When his prediction of a stronger second half started to gel, terrorist attacks stalled a recovery.

  Many Intel investors say they're willing to be patient even in the face of the stock's 39 percent slide in a year. They're betting Barrett's strategy of cutting jobs, lowering prices and boosting investment in research and development gives Intel the best shot in the industry of benefiting from any rebound.

  "He's playing it right," said Charles Goodfellow, co- manager of the BNY Hamilton Large Cap Growth Fund at Bank of New York, which owns more than 400,000 Intel shares. "We went into Sept. 11 thinking we might be able to skirt a recession. That's obviously not going to happen now."

  Semiconductor sales plunged this year as an economic slowdown depressed demand for PCs and communications gear. It took months for manufacturers to use chip stockpiles built up last year. Just when orders might have started rolling in to support Barrett's bullish forecast, the attacks undermined consumer confidence.

  Intel is expected to report that third-quarter revenue dropped 27 percent and profit of about a quarter last year's level. This year may mark the company's first annual sales decline since 1986.

  North American chipmakers will post a total revenue decline of 37 percent for the September quarter, according to Merrill Lynch & Co. Without Intel, the drop would have been about 45 percent.

  "He's handling it as well as anybody can," said Tim Ghriskey, founder of Ghriskey Capital Partners LLC, who doesn't own the stock and thinks it's still too pricey. "The results relative to AMD are a testament to that."

  Intel shares fell US$0.64 to US$24.38 Monday. The stock has dropped 19 percent this year, compared with the Standard & Poor's 500 Index's 17 percent drop.

  Santa Clara, California-based Intel will have profit of US$0.10 a share on sales of US$6.4 billion, the average analyst estimates in a Thomson Financial/First Call survey. A year ago, Intel earned US$2.9 billion, or US$0.41, excluding some costs, on sales of US$8.73 billion.

  Executives said last month that sales were strong in July and August and that the chipmaker was eliminating jobs at a quicker pace than expected.

  Analysts now worry that a muted end of back-to-school shopping foreshadows a disappointing holiday season.

  "I don't think they are feeling as bullish as they did three months ago," said Eric Ross, a Thomas Weisel Partners analyst.

  Barrett has tried to thwart Advanced Micro's market share gains by cutting Pentium4 prices as much as 84 percent since the chip was introduced in November. Advanced Micro had little choice but to respond with its own reductions. Advanced Micro reports results today and is forecast to lose US$0.28 a share, according to First Call.

  Barrett, 62, hopes to stay ahead by investing more in R&D and equipment. The US$11.5 billion Intel will spend this year dwarfs Advanced Micro's US$1.5 billion.

  "The only way you come out of a recession stronger than when you went into it is with new products," Barrett said at a conference last week.

  Barrett, through a spokesman, declined to comment. "We're really on a roll," spokesman Tom Beermann said. "We said our strategy was to move the P4 to the mainstream quickly. We've done it."

  For all their patience, Intel investors probably are in for more pain in the December quarter. Worldwide chip sales will be little changed from an estimated US$25 billion in the September period, according to researcher IC Insights Inc.

  Barrett must fight harder for a piece of that shrinking pie.

  Advanced Micro has bolstered its product line, analysts said, and is winning more sales in consumer PCs and laptops. Advanced Micro held 22 percent of the market for microprocessors as of June, up from 16 percent a year earlier, with most of the gain coming at Intel's expense.

  "They're breathing a lot closer to Intel's neck than they were before," Ross said.

  Barrett got an 8 percent raise in cash compensation last year, making US$3.36 million in salary and bonus, and an options package worth US$19.5 million if the shares climb 10 percent a year over 10 years. Those options are now worthless.

  While Barrett has said PC demand will rebound before year's end, he may have to change his tune as sales waver. His efforts to broaden Intel's products for communications and other areas aren't helping; demand for telecom gear and Web hosting has sunk more than PC sales.

  And some investors say the stock, which trades at about 50 times next year's per-share earnings, still is too expensive. The average stock in the S&P 500 trades for about 23 times next year's profit.

  "Intel will probably have slower longer-term growth," Vadim Zlotnikov, an analyst with Alliance Capital Management, told Bloomberg TV. "PC markets are not going to recover -- it's going to be a slow-growing market for the next five years."
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