The Bread Crumbs Led to an Intel Warning

Semiconductor maker Intel (INTC) came out Thursday with the all-too-familiar news that demand for personal computers -- and those "Intel inside" chips -- is on the wane. And the result is that its fourth-quarter revenue won't meet expectations.

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This is the second consecutive quarter Intel has said its numbers won't be as good as had been hoped. And by the time the giant chipmaker's latest announcement came out Thursday, two other semiconductor companies, Motorola (MOT) and National Semiconductor (NSM), had used the day to warn of slowing demand. Then there were the recent warnings from PC makers Gateway (GTW) and Apple (AAPL).

Given the fact that there doesn't appear to be any part of the PC chain that isn't being hurt by weak demand, analysts for weeks have been talking about revenue and earnings risk.

"There was wide speculation that they would preannounce, particularly following Gateway's, Apple's, Dell's (DELL) more conservative estimates," said Jonathan Joseph, an analyst with Salomon Smith Barney. Solly's current estimate for the quarter's earnings is 39 cents, 3 cents below the consensus. (The firm hasn't done recent underwriting for Intel.)

Just Wednesday, Intel took another hit after Joseph reiterated that he thought Intel was in for a bad quarter. (Joseph was the first sell-side analyst to wake investors from their slumber in July and warn them about slowing growth.) By the time Intel announced the news Thursday, the stock had fallen 26% in the previous nine days alone. So investors were clearly primed for Thursday's announcement, and Intel was barely hurt in after-hours trading, hitting $32.21 on Island after finishing regular trading at $32.31.

Intel said that it only became apparent in the last three weeks that it had a problem. "Economies worldwide appear to be slowing more quickly than we anticipated," Chief Financial Officer Andrew Bryant said during a conference call Thursday. Bryant declined to comment specifically on the 2001 growth outlook until fourth-quarter earnings are released in mid-January. "I do believe we have to watch the macroeconomic. I think worldwide economic conditions are going to be important," he said.

Intel expects revenue to be flat, give or take a few percentage points, with last quarter's $8.7 billion. The company also said that it would knock $275 million off the $950 million it expected for interest and other income due to lower than expected gains on equity investments because of declines in equity markets. (TheStreet.com looked at this scenario recently, pointing out that the Nasdaq's sharp decline since Sept. 29 could hurt Intel's nearly $6 billion investment portfolio.)

There also were hints of the warning from other chipmakers. Altera (ALTR) and Xilinx (XLNX), both of which make logic devices customers can program themselves, have both recently talked of weaker results. But their executives, like those at Intel, seemed unwilling to say much about whether the current slowdown will last into next year.

Meanwhile, Motorola, which makes chips for a wide range of telecommunications uses including handsets and networking applications, doesn't know exactly what to expect. "We've seen some dramatic movements in the past 30 to 60 days in market forecasts and timing forecasts for the industry," Robert Growney, Motorola's president and chief operating officer, said in a conference call Thursday. "We hope for some stability as we look to the beginning of next year."

National Semiconductor's top executive said while the timing of a return to personal computer demand is less certain, demand from wireless customers has stabilized (the company makes chips for both). Still, the company expects a 10% decrease in revenue for the quarter ending in February from the November quarter. But CEO Brian Halla still expressed some optimism. "We're fairly confident that the quarter beginning in March will begin to grow again," Halla said.

Positive news? Now that would be a surprise.

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