September 2, 2004 5:10 PM PDT

Intel lowers third-quarter expectations

Intel on Thursday reduced its revenue projection for the third quarter, citing factors such as lower-than-expected demand for products including its PC processors.

The chipmaker, in its traditional midquarter update statement, said it expects to turn in revenue of between $8.3 billion and $8.6 billion for the three-month period. In July, Intel had predicted that its third-quarter revenue would total between $8.6 billion and $9.2 billion.

The update thus moved the midpoint of Intel's revenue guidance--a figure that analysts generally use as a de facto quarterly revenue estimate for the company--to about $8.45 billion from $8.9 billion.

Andy Bryant, Intel's CFO, speaking to analysts in a conference call following the midquarter update release, said that a number of factors caused Intel to lower its guidance for the quarter. First the chipmaker likely missed seeing chip inventories building among its customers during the second quarter, allowing it to issue an overly bullish revenue projection. Then, as the quarter unfolded, demand failed to materialize even after Intel's Aug. 23 processor price cut, which reduced some chips' prices by over a third.

Thus, "What we're seeing is pretty uniformly around the world demand is less than we expected. It's that way in China, it's that way in Europe and in the Americas geography as well," Bryant said. Although, "I still believe September is going to provide a lot of information and will influence where we land for the fourth quarter."

Later he said, "Today you'd look back and say the forecast should have been lower--but a lot of data has changed between now and then."

Wall Street had been anxiously awaiting the news as a signpost for the technology market in general, following troubling financial statements in recent weeks from companies such as Cisco Systems and Hewlett-Packard. The chipmaker's relative success in the current quarter reflects on the strength of the PC market, including both the corporate and consumer segments, as well as early back-to-school PC sales and the beginnings of the holiday season.

Thursday's news from Intel shows that worldwide demand for PCs is trending below seasonal norms, said John Lau, an analyst at Banc of America Securities in New York.

"Clearly, there has been a deceleration in the worldwide demand for PCs," Lau said. "This is a much broader proxy for what's happening in the tech marketplace--not just Intel. It shows that it has significantly slowed, given some of the macro(economic) concerns we have, including the high oil prices and...corporate profitability."

Indeed, before Intel's update, many financial analysts had been expecting the chipmaker to keep the midpoint of its guidance the same or possibly reduce it a hair, to $8.8 billion--representing a growth rate of about 9 percent. A survey of 28 analysts predicted, on average, that Intel would report revenue of $8.9 billion for the quarter, according to Thompson First Call. Instead, assuming it meets the new $8.45 billion midpoint, Intel will achieve quarter over quarter growth of five percent. It has averaged seven percent in recent years, Bryant said.

Although demand for Intel's PC products has been lower than expected, Bryant appeared to be most concerned about the chipmaker's communications business. Intel communications chips, such as flash memory used to store data in devices like cellular phones, have also been selling at slower than expected rates, he said. So much so, Bryant indicated, that if sales were to slow even more, Intel would have to consider writing some of them off--something he doesn't feel will be necessary for PC chips.

However, Intel has already begun to take action to avoid building massive inventories at its warehouses. Bryant said during the conference call that Intel would reduce its wafer starts--wafers are the basic unit of chip production--and thus cut back on the numbers of chips it manufacturers during the second half of this year to adjust for the lackluster demand and to help reduce excess inventory among customers.

The changes will be reflected in Intel's gross margins, which it expects to fall to about 58 percent from about 60 percent, signaling a change in its manufacturing output. Gross margins are determined by factory utilization--how close a chipmaker's factories are running to 100 percent capacity and how many chips they are turning out.

Although Intel's midquarter update is likely to weigh heavily on the tech industry, the chipmaker isn't alone in its misery. Last month, Cisco reported a record profit in its fiscal fourth quarter but then signaled expectations for slower sales in the current quarter. Hewlett-Packard then followed a day later with lower-than-expected fiscal third-quarter earnings.

"This is not a company-specific issue," Lau said. "This is a broader issue on what's happening to the overall economy."

Another analyst, however, offered a dollop of optimism.

Even with the softer market outlook, Intel is still looking at processor unit growth of about 7 percent to 8 percent for the quarter. Meanwhile, by using the parts they hold in inventory, PC makers could still turn in good results relative to the chipmaker, said Dean McCarron, principal analyst at Mercury Research.

"Thus far, we're seeing activity that's along the lines of seasonality--maybe a little softer--but it seems like we're in line (in terms of units) or maybe a tiny bit soft at this point in the quarter," McCarron said.

Intel still has three full weeks of sales to go before its quarter closes on Sept. 25.

Intel's stock dropped in after-hours trading Thursday, falling below $20 from its close of $21.63, according to the Instinet Group's INET service.

 

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