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Intel Slashes Revenue Forecast As Computer Chip Demand Drops

Posted on: Thursday, 2 September 2004, 06:00 CDT

Sep. 3--In an ominous sign for Silicon Valley's fragile recovery, Intel Thursday slashed its revenue forecast amid falling worldwide demand for computer chips.

Even though Wall Street has anticipated a stall in the tech recovery, Intel's shares tumbled almost 8 percent in after-hours trading, triggering a rout in technology stocks after the markets closed.

Intel, the world's largest chip maker, is the second biggest company in Silicon Valley in terms of revenues. The Santa Clara company is considered a bellwether of the tech economy as it supplies more than 80 percent of the world's personal computer processors.

In another indication of slowing tech growth, the Semiconductor Industry Association reported Thursday that global chip revenues for July were up just 1 percent from June, to $17.8 billion.

Intel executives said slowing sales and rising inventories among its PC maker customers would lead to sharply lower revenues in its third fiscal quarter. Lower-than-expected sales in its flash memory business also is contributing to the shortfall.

"What we are seeing is pretty uniform around the world," Intel Chief Financial Officer Andy Bryant told analysts in a conference call Thursday. "Demand is less than expected."

When asked by analysts about recent optimistic comments about the PC market by Dell and Hewlett-Packard executives, Bryant said, "I'd love to have those guys build a bunch of motherboards and call and ask me for products. The sense we have now is fewer people are calling up asking for products."

Bryant noted that last week Intel cut prices across its product lines but did not get the reaction from customers that it expected. "It was a lackluster response," he said.

Technology stocks, especially semiconductor shares, were hit hard by Intel's news. In after hours trading, shares of Intel's Sunnyvale rival AMD fell 3.51 percent to $11.26. Other local chip makers, such as National Semiconductor in Santa Clara fell as well, with its shares declining 3.18 percent to $13.40.

Intel's announcement was echoed by similar warnings from two other Silicon Valley chip makers. Integrated Device Technology of Santa Clara warned that its second quarter revenues would come in below expectations, citing in part, higher inventories among its customers.

And Altera of San Jose said that it expects its third quarter revenues to come in slightly below its previous forecast. The company did not specify a reason for the revised estimate.

Intel said it now expects its third quarter revenues to come in between $8.3 billion and $8.6 billion, $300 million below the bottom of the range of its prior estimates. In June, the company said that it expected third quarter revenues in the range of $8.6 billion to $9.2 billion.

Bryant noted that the vast majority of the shortfall was in the consumer PC market. He added that during the second quarter economic indicators were "pointing more upwards" when Intel gave its much more bullish outlook for third quarter revenue growth.

"When you look back today, economic indicators are not as good. Second quarter was a little overstated...A lot of things have changed between now and then."

Analysts said that record oil prices are starting to impact consumer spending.

"You are seeing a bit of a retrenchment here," said Mark Edelstone, a Morgan Stanley analyst who does not own any Intel stock but whose firm does some banking business with Intel. "I think in general, PC demand is slightly below the seasonal norm. It's growing but slower that what people would have expected."

The earnings miscue marks yet more bad news for the chip maker. So far this year, the company has had to recall one chip, delayed others and canceled one major chip project.

When Intel announced its second quarter earnings last month, it said that it had to slow manufacturing as it waited for PC makers to sell off some of the inventories that were starting to accumulate.

But Intel was confident of a good second half of the year, which included the annual back-to-school spending spree on new PCs. Intel forecast that its third quarter sales would grow in a range of 6 percent to 14 percent, up from the second quarter.

"They ended up over-promising and under-delivering," Edelstone noted. "Even in a robust environment, their guidance would have been bullish."

Intel's now estimates slower growth from the second quarter, ranging from three percent to six percent.

"I knew they were being aggressive," said Charlie Glavin, an analyst with Needham & Co. who does not own any Intel stock or do any investment banking with the company. "I think the competition for Intel right now is not AMD it's apathy."

He noted that there are not many big technological advances spurring consumers to buy new PCs. He said that Intel's recent push of wireless technology for mobile computers has helped but not many companies are making money on Wi-Fi yet.

Intel said Thursday that revenues in its communications business were weaker than expected, due to lower than expected flash memory shipments. Flash memory chips are mostly used in cell phones.

The company said that it now expects its gross profit margins for the third quarter to be 58 percent of revenues, plus or minus a couple points, compared with its previous projection of profit margins of 60 percent of revenues in the third quarter.

For the year, Intel now expects slightly slower margins in the range of 58 percent to 60 percent, plus or minus a couple points, compared with its prior estimate of 60 percent.

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