Intel Says It Can't Find the Upswing

Updated from 4:57 p.m. EST

If you were looking for a miracle from Intel , it's time to get realistic.

"I see no signs of an economic recovery in our business," said CFO Andy Bryant, who unwaveringly avoided talk of enhanced IT spending during Intel's midquarter update. Bryant doused hopes circulating in the PC industry that pent-up demand would cause an upswing of the three-year spending cycle in 2002. "We've seen nothing that would indicate that's happening yet," he said.

Intel let the Street in on its first-quarter 2002 performance after the closing bell Thursday, keeping steady with January's projections. Most importantly, the chipmaker honed its revenue forecasts to a range between $6.6 billion and $6.9 billion, cutting off both the high and low ends of its previous estimates.

Bryant described a quarter that so far has gone "pretty much as if it were scripted on Jan. 15," when Intel first issued guidance. Bryant expanded that to portray the last four quarters of business, as well, which he considers "almost perfectly seasonable off the new economic levels we've seen."

Consensus estimates prior to the update projected a 3% sequential decline in revenue from the fourth quarter's $6.98 billion to $6.77 billion, according to Multex.com. In a typical year, chip sales would taper off 5% to 10% in the first quarter, because of a postholiday lull and the additional slowdown attributed to decreased business activity surrounding the lunar new year.

Following an atypical slump, Intel projected a range from flat to an 8% decrease in revenue in the quarter. Following an incredibly slow 2001 market for PCs and a December quarter that showed an unexpected uptick, analysts were hopeful that Intel could hit the more optimistic end of that range. Analyst profit estimates called for 14 cents a share in earnings, compared with 15 cents a share in the fourth quarter.

The first-quarter estimates represent between a 1% drop to a 3% improvement over the opening of 2001's $6.68 billion in revenue, when Intel turned in a 16-cents-a-share profit.

Intel shares were up 0.06% in a down trading day Thursday, and closed at $32.98.

Bryant sketched out PC demand neither stronger nor weaker than Intel initially had hoped. He said that Intel's server segment is performing stronger than planned, but that the server business is not big enough to dramatically affect Intel's revenues. Instead, the company pointed to savings, particularly on the manufacturing cost side, as an element that would help it hit its margin estimates.

The chipmaker previously forecast flat to softening gross margins in the first quarter between 48% to 52%, from the fourth quarter's 51.3% level. The company confirmed that it would hit the midpoint of that range or higher. Wall Street does not expect Intel to get much help from its average selling prices in the quarter, after the chipmaker cut prices on its newer Pentium 4 chip in January around 10% to 20% as part of its traditional competitive practices.

In recent weeks, chip investors have enthusiastically bought up chipmakers on the communications side of the business on the assumption that inventories at communications-equipment makers such at Cisco (CSCO) have finally receded to a normal level. Nonetheless, Intel insisted in its midquarter update that its communications business remains "soft," cautioning investors not to expect a rapid recovery.

"Anyone who watches the telecom space knows it's still an industry that's finding its way," he said. According to Bryant, even the wireless sector is still weak, and Intel is still waiting for demand to pick up in all of its communications markets.

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