Unlike Its Beleaguered Brethren, Intel Holds to Equipment Spending

The semiconductor industry may be dramatically cutting back on spending, but chip giant Intel (INTC) is sticking with its plan to boost new-equipment spending about 12% this year.

After Intel on Tuesday told its troops that it would cut internal spending because of the rough business climate, the company said it still plans to increase capital spending this year. It views the contraction as an opportunity for eventual growth. But Intel may well be one of the few companies left in the sector with big spending plans.

Indeed, Intel's plans were a vivid contrast to what's happening in the sector. A few hours after Intel's announcement, the chip-equipment trade group said that orders for new equipment declined in January at the sharpest rate in several years. The sharp decline has some analysts convinced that the industry cycle is nowhere near the bottom and that overall chip-equipment spending is going to decline further in coming months.

The trade group numbers confirm what individual companies have been saying for the past month. Asian chipmakers, such as Taiwan Semiconductor Manufacturing (TSM), have said they plan to cut back new-equipment spending by 20%. Other companies like Applied Materials (AMAT) also see equipment spending falling industrywide by about 20%.

The reason for this penny pinching is that the chip sector has been crushed in recent months by fat inventories, a weak personal computer market, slow telecommunications spending and falling consumer demand. All of this has left investors trying to figure out when this downturn will bottom. Once chip investors spot a bottom -- even at a distance -- they generally start buying.

This week's Intel news and the decline in new-equipment orders make last week's surge in chip-equipment stocks seem far away. Applied Materials took off after investment houses Thomas Weisel Partners and J.P. Morgan Chase said the bottom was within sight. While the latest order numbers don't negate that, some analysts say that the downward decline is so sharp that it may be more difficult to time when the cycle will turn up.

Amid all this, Intel throws out the news that it's sticking with its massive capital spending plans, which call for spending to reach $7.5 billion from $6.7 billion in 2000. It'll instead try to cope with the tougher times by trimming in-house costs through a hiring freeze, deferring salary increases and cutbacks on perks.

"Our objective in making what were short-term reductions in spending was so that we could focus on long-term growth, and so by maintaining a high level of investment in new plants and equipment as well as R&D, we believe we are able to prepare for the future and future demand," Intel spokesman Tom Beerman said.

That may be so, but some Wall Street analysts have been questioning the veracity of Intel's capital-equipment-spending number since January, when the company released it. One reason Intel may be standing by its numbers for now is that the spending -- if it occurs at all -- won't take place until the latter half of 2001, Credit Suisse First Boston analyst Charlie Glavin wrote in a note Wednesday. Intel said it doesn't break out spending by quarters. (CSFB hasn't done underwriting for Intel.)

Meanwhile, it's clear that conditions are tight for Intel. Last week, Intel Chief Financial Officer Andy Bryant said during the Goldman Sachs Technology Investment Symposium that the quarter has been both stronger and weaker than expected. "The next five or six weeks will make or break the quarter." While Intel doesn't provide earnings-per-share guidance, it has said that revenue will fall 10% to 15% this quarter from the fourth quarter.

Most signs point to a weak quarter for the industry. The Semiconductor Equipment and Materials International report clearly indicates that the semiconductor market has fallen into a fast and deep downturn, the bottom of which hasn't yet been reached. Orders fell 21% in January from December, according to SEMI.

And over the next three months, SG Cowen expects new orders to decline by another 25% to 35%, which raises questions about when Intel will ramp up its spending. The projected decline also means it's still too early to rush out and buy chip equipment stocks indiscriminately.

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