Intel Growth Slows as PC Demand Slackens
Computer chip maker Intel Corp. said Tuesday that slackening demand for personal computers around the world ended a streak of robust profit growth in the third quarter.
Santa Clara, Calif.-based Intel said it earned $1.91 billion, or 30 cents a share, in the three months that ended Sept. 25, up 15% from $1.66 billion, or 25 cents a share, in the 2003 quarter. Revenue was $8.47 billion, up 8% from $7.83 billion a year ago.
In the five previous quarters, Intel’s net income had nearly doubled or more than doubled from year-earlier periods as businesses upgraded computers purchased during the Y2K era and consumers snapped up laptops, cellphones with built-in cameras and other newfangled devices.
“Growth was not as high as we originally anticipated,” said Chief Executive Craig Barrett. He cited “inventory adjustments at some of our major customers and lower-than-expected overall demand for PCs” as key factors.
Last month, Intel had warned that its earnings would fall short of initial projections for the quarter. The results were slightly better than the revised expectations of Wall Street analysts surveyed by Thomson First Call.
“We didn’t see a whole lot of surprises,” said Toby Crabtree, a portfolio manager with Leeb Capital Management in New York, which oversees about $100 million in assets and owns Intel shares.
Intel’s chips run some 80% of the world’s PCs, and, as the world’s biggest chip maker, the company is regarded as a proxy for the overall health of the technology sector.
There were some positive signs in the third quarter, including record shipments of lower-margin products such as chipsets and motherboards, and market share gains in flash memory chips, which are used to retain data in cellphones, personal digital assistants and other gadgets.
Intel shares rose as high as $21.02 in extended trading after falling 33 cents to $20.28 in regular Nasdaq trading. The stock has slumped 37% this year.
The company said tax- related items raised profit by 3.6 cents a share in the quarter. A year earlier Intel had a tax benefit worth 1.9 cents a share.
For the fourth quarter, Intel said revenue probably would be $8.6 billion to $9.2 billion. That would be “a bit below what you’d normally expect for the fourth quarter,” Chief Financial Officer Andy Bryant told analysts.
Gross margin, or percentage of sales left after production costs, a common yardstick of performance for manufacturing companies, was 55.7% in the third quarter, less than the 56% to 60% Intel had forecast.
“We were expecting 58% margins and we got 55%,” said Michael Cohen, research director for Pacific American Securities.
The gross margin should be 56%, plus or minus a couple of percentage points, in the fourth quarter, Bryant said.
Unsold inventory -- which hit $3.2 billion in the second quarter -- has been the main factor hurting margins, and competitive pressure also has kept prices down. Bryant said the effect of excess stock would be felt through the end of the year.
But Cohen thinks it will take longer than that. “The biggest problem with Intel right now is its excess inventory, which is creating lower margins, which means lower profitability,” he said. “They’re still optimistic that they’re going to burn off a lot in the fourth quarter, but I think a lot of excess inventory is going to carry over into 2005.”
The fourth quarter is typically Intel’s strongest because of holiday sales of PCs, cellphones, hand-held computers and other devices that use Intel chips. But that might be damped this year by worries about higher oil prices and other rising expenses.
“When oil creeps up above $50 a barrel, it’s fair to assume consumer spending will slow down,” Crabtree said.
