Intel Feels the Power as Midquarter Update Approaches

Intel (INTC Quote) has a chance to be the hero once again.

After the bell Thursday, the chip giant will present its first-quarter progress to a market that's dying to hear signs that the chip up-cycle has indeed returned.

Hewlett-Packard (HWP Quote) and Dell (DELL Quote) both recently provided rosy earnings reports, lending credence to the concept that January and February PC shipments might turn out to be stronger than usual.

Moreover, positive economic news has flowed into the market in the past two weeks, giving tech companies the top item on their wish list: growing confidence in the economy to wake up hibernating corporate IT purchasers. At long last it looks as though communications-equipment makers have cleared their stuffed warehouses of inventory and may be able to buy components again. If Intel's first quarter is looking good, the market likely will be unable to contain the growing enthusiasm for chip shares. Intel rose 26 cents Wednesday, to $32.96.

Critical

In the fourth quarter of 2001, Intel's midquarter guidance was a critical gauge of consumer demand for PCs during the holiday season. In a typically slow first quarter for the computer industry, Wall Street will be looking for signs that IT spending has begun to rebound, no matter how small the recovery. Intel shares are up 6% this week in the hopes that Intel will spur its chip and PC brethren with optimistic talk.

In the fourth quarter, Intel squeezed $6.98 billion in revenue out of a rejuvenated consumer market; in a typical year the company would expect that level to drop 5% to 10% in the first quarter as business slowed. But Intel somewhat optimistically primed the Street for an 8%-or-less decline in the first quarter, given that its 2001 was so weak and consumer demand was better than expected in the fourth quarter.

In fact, many analysts expect Intel to narrow its guidance to the middle or high end of its range. Consensus estimates currently call for Intel to post revenue of $6.77 billion, a mere 3% decline, and a 14-cents-a-share pro forma profit, according to Multex.com. Any strength that pushes Intel to the high end of its revenue range will be received enthusiastically; so far there hasn't been much noise coming out of the PC sector to indicate that the first quarter will surpass expectations.

ASPs! Gasp!

Average selling prices were a hot issue back in December, when investors were hearing about shortages of Intel's newer Pentium 4 chip. Throughout 2002, ASPs are forecast to increase as the Pentium 4 makes up more and more of Intel's chip sales and the company phases out the Pentium 3 chips. In the first quarter, ASPs might not show too much progress to that effect, however, because of January price cuts and slower sales. According to Robertson Stephens, Intel cut prices on Pentium 4s anywhere between 9% and 18% in January, a typical practice. Those reductions are much milder than the dramatic price-slashing Intel undertook in 2001 as PC demand continued to slow.

Finally, investors will be looking at Intel's gross margins, which it projected would be plus or minus 2% from the 50% gross margin level. In the fourth quarter, Intel managed to boost its margins from a midquarter estimate of 47% to 51.3% by quarter's end. Wall Street anticipates Intel will hit the middle to high end of its first-quarter gross margin guidance.