Intel Knocks Down Its Numbers

Updated from 4:53 p.m. EDT

Wall Street was expecting Intel (INTC) to guide its revenue estimates downward when it updated earlier estimates in a midquarter update today. But the chip company surprised investors by how far it pushed down the numbers.

Meanwhile, early orders for the back-to-school season appear disappointing. While it's still soon to draw conclusions, the initial level of demand suggests the third quarter isn't shaping up as a strong one.

In a release posted to its Web site, Intel said it expects second-quarter revenue of $6.2 billion to $6.5 billion. It had previously forecast revenue in the range of $6.4 billion to $7 billion.

Analysts at Goldman Sachs, Bear Stearns and Lehman Brothers recently said they expected Intel to ratchet down sales expectations, but all three said they expected sales of at least $6.5 billion. The consensus second-quarter revenue estimate was $6.7 billion, according to Thomson Financial/First Call.

The stock was down 10% to $24.25 in after-hours trading.

Intel said its lowered revenue expectations were due to softer-than-expected demand in Europe.

In a research note released earlier today, Merrill Lynch analyst Joseph Osha had underscored similar worries about demand, suggesting the last month of the quarter is shaping up to be a bust.

"With one month remaining and few signs of a near-term PC upgrade cycle, the prospects for sequential growth in the June quarter are quickly fading," noted Osha. "Closely watched Taiwanese motherboard and laptop unit shipments look to be flat sequentially in May, after a 17% decline in April."

In a press release, the company added it still expects a "seasonally stronger second half."

But comments from CFO Andy Bryant raised some questions about the extent of that strengthening.

Most of Intel's second-quarter sales typically take place in June. But Bryant noted the company hadn't yet seen a big uptick in orders for the back-to-school season, which typically would have begun a week to 10 days before now.

"We've seen healthy orders but not at the rate we would have expected if we were going to see a strong back-to-school season," he said. "The strength of the uptick we would have expected hasn't started yet, if it's going to start at all, which I doubt if it hasn't started yet."

Over the next couple of weeks, he said, the company will try to figure out "whether there's enough inventory in place already that [sales] don't need to surge."

Given the softness in revenue, Intel now forecasts a second-quarter gross margin percentage of about 49%, compared with the previous range of 53%, give or take a few points.

One shareholder counseled that it's important to distinguish between short-term and long-term trends, however. "People are making an awfully big deal about it, but that's the psychology of the market in the current state," said Chris Bonavico, manager of the (TPAGX)Transamerica Premier Aggressive Growth fund, who's owned the stock for five years.

"If you're a long-term investor, has Intel's long-term competitive position changed? No," said Bonavico. "Has their ability to invest their capital and earn a good return in new areas like flash memory changed? No. Will we need more processing power in the future? Of course. So at lower prices, the stock gets more interesting."

Earlier today, chipmakers took a hit when Merrill Lynch downgraded Intel along with a slew of its competitors, saying shares have simply gotten too pricey given the still-uncertain outlook for growth in earnings. The Philadelphia Stock Exchange Semiconductor Index closed down 3.1% before Intel issued its midquarter update.

"As the spring has progressed it is becoming apparent that the semiconductor business has been benefiting mostly from easy comparisons and low inventory," said Osha in a research note. "We believe that the early semiconductor upturn has now played itself out."

He added that his specific concerns on Intel "relate to the lack of visibility into the PC end market, particularly on the corporate side, rather than anything company specific."

Lately, there's been mounting evidence that chips will be hurt by a combination of lackluster PC demand and full inventory shelves. Tuesday Hewlett-Packard (HPQ) retracted its earlier forecast of a "muted recovery" for PC demand in the second half, saying it expected to see revenues to fall instead.

Last Friday, Robertson Stephens analyst Dan Niles said he believed retail PC inventories had surged from about one month at the end of last quarter to two months at the close of this quarter.

Yesterday, the Semiconductor Industry Association, a trade group, halved its earlier forecast for 2002, saying chip sales should increase by 3.1% instead of the 6.4% growth it forecast in November.

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