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Intel warning sounds tech sector alarm

New York, November 13, 2008

Chip giant Intel Corp cut its fourth-quarter revenue forecast by about 14 percent citing weak demand across the world and in all its products, indicating the economic crisis is set to hurt computer sales in the holiday season and beyond.

The shock warning hammered tech shares, which had already tumbled earlier on Wednesday, with Intel plunging 7 percent to a 12-year low and Microsoft Corp falling 2 percent to a 10-1/2 year low.

Intel, the biggest maker of chips for personal computers, forecast fourth-quarter revenue of $9 billion, plus or minus $300 million. That compares to its October forecast of $10.1 billion to $10.9 billion, and the average analyst estimate of $10.3 billion according to Reuters Estimates.

"For revenue to be that far down sequentially, it means consumers have basically shut down for the holidays," said Charter Equity Research analyst John Dryden. Intel's third-quarter revenue was $10.2 billion.

"It's so far below what they had expected ... The company had outlined weakness in enterprise but not the consumer yet," Dryden said.

The impact of Intel's warning was exacerbated by weak outlooks from two other chip industry heavyweights, Applied Materials Inc and National Semiconductor Corp on Wednesday.

"The last six weeks of turmoil in the financial markets is unprecedented. The weakening global economy will have significant impact on all of Applied's businesses," chief executive Mike Splinter said on a conference call.

Investors had been expecting Intel to cut its outlook since the company had scheduled a mid-quarter update on Dec 4, its first in three years.

The early warning on Wednesday was worse than many had feared, fueling worries that the slump in global technology spending was sharper than anticipated and could last longer than previously predicted.

Taunya Sell, analyst at Wells Fargo division Ragen MacKenzie, said analysts are going to have to adjust their 2009 forecasts "to reflect the new reality."    

"Obviously this has implications for Microsoft in the PC market," Sell said. "Their business tracks PC shipments as well. I think this is affecting everyone, and those that say it's not will have to come to the altar in January."

Intel said the PC industry supply chain was aggressively reducing component inventories. The company makes about 80 percent of the world's microprocessors, which power PCs.

It also sharply lowered its gross profit margin outlook to 55 percent, plus or minus a couple of percentage points, from 59 percent, plus or minus a couple of percentage points, and said it would cut spending.

Other stocks that scraped multiyear lows on Wednesday include Dell Inc, which fell 4 percent, and Hewlett-Packard Co, which fell 2 percent. Both PC makers are scheduled to report results later this month.

Shares of Cisco Systems Inc, which holds its shareholder meeting on Thursday, dropped 3 percent. John Menzies, portfolio manager at Pacific Growth Equities in San Francisco, said Intel's miss "is more evidence to the severity of the consumer slowdown."    

"You could make the point they are looking to take advantage of an oversold market to become more conservative with their guidance. But then, they've lowered the bar a lot. You're seeing futures reacting to this already," he said.

Last week, Intel warned that the credit crisis could hurt demand for its chips and lead to the insolvency of key suppliers, according to its 10-Q quarterly report to the US Securities and Exchange Commission. -Reuters




Tags: Intel | Chip | PCS | Crisis |

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