Intel Sounds Warning on Sales and Earnings
Computer chip leader Intel Corp. dropped a bomb on Wall Street late Wednesday, warning of weaker-than-expected sales and earnings this quarter--an announcement likely to trigger heavy selling of technology stocks today on worries that tech-equipment demand is ebbing.
The news also marks an early and ominous start to the earnings “pre-announcement” season, the period preceding the end of the quarter, when companies that expect to disappoint investors typically issue warnings to that effect.
In a report issued after the stock market closed, Intel estimated that sales this quarter will be about 10% below the $6.5 billion of the fourth quarter. Earnings also will be less than expected, although the company wasn’t specific except to project lower profit margins.
The sales shortfall stunned analysts and institutional investors, even though there has been increasing talk in recent weeks that some personal computer makers have been struggling with high inventory levels--a potential sign of an imbalance between supply and demand.
“This [10%] is a big number,” said Kevin Landis, co-manager of the Interactive Tech Value stock mutual fund in Milpitas, Calif. Intel had originally expected sales to be flat.
Intel’s shares, which rose $1.13 to $86.44 in regular trading on Nasdaq on Wednesday, plunged to $76 in after-hours trading, although analysts cautioned that that number may not indicate the opening trade price today.
The company, which is by far the dominant global supplier of the “brain” chips for personal computers, blamed the sales shortfall on “weaker than anticipated demand, particularly in . . . orders from PC manufacturers to be shipped within the quarter.”
Following the lead of Dell Computer Corp., Compaq Computer and other PC makers have recently sought to whittle back their inventories and build machines based on actual orders rather than on broad sales projections. Excess inventory hurts PC makers because the introduction of new technology makes older machines obsolete and forces manufacturers into deep price cuts to sell them.
But slashing inventory can be tough to do. Compaq has sought to trim its inventory to a four-week supply but the level has been stuck around five or six weeks, said Alan Lowenstein, an analyst at the John Hancock Global Technology Fund in New York.
“There’s a problem in some inventory channels because everybody is in the build-to-order mode,” Lowenstein said. “They’re carrying as little inventory as possible and cutting back their suppliers.”
Pricing pressures across its product line also have hurt Intel, analysts said.
Many PC makers have been buying less-expensive chips to satisfy booming demand for lower-priced PCs, including under-$1,000 models. For example, it costs Intel about $75 to build microprocessors that it sells for prices ranging from $268 to $530, said Nathan Brookwood, an analyst at Dataquest, a technology research firm. Lately, customers have been buying more $268 chips, directly hurting Intel’s revenue, he said.
The more important issue, analysts said, is whether the inventory troubles at Compaq and other PC makers--now reflected in sharply lower orders for Intel chips--merely constitute a temporary adjustment, or may be a sign that PC sales overall are slowing.
On Tuesday, Advanced Micro Devices Inc., a major Intel rival, said it expects sales to fall and losses to widen in the first quarter.
“The question is, does this get made up later in the year, or is there a [lasting] shift” to slower sales? asked Michael Murphy, editor of California Technology Stock Letter in Half Moon Bay.
Worldwide PC unit sales grew about 16% last year and are expected to improve by the same rate this year, according to Dataquest.
PC sales, and sales of related tech equipment, have been an important element of the U.S. economy’s growth. So any sales weakness could herald a slowing economy.
Yet analysts say that there is as yet no convincing evidence that PC demand from individual consumers or corporate buyers is slowing meaningfully.
Gillian Munson, analyst at Morgan Stanley Dean Witter in New York, wrote in a Feb. 20 report that “PC demand feedback from the retail channel has been positive in recent weeks . . . and demand at the corporate level is also healthy.”
Intel spokesman Howard High said the company does not yet have “good clear data on whether this is an inventory issue, or a [problem] with sell-through” to the ultimate customers.
But he indicated that one immediate suspect--Asia--is not at fault. Intel chip sales to Asian customers are expected to be flat this quarter, which means the shortfall in orders is primarily a North American and European problem.
