Weak demand. Falling prices. Inventory overload.

It's well established that this fearsome trio pummeled


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during its second quarter, driving earnings down an expected 80% from a year ago. Now, as the semiconductor giant prepares to report second-quarter numbers after the market closes Tuesday, the question is what will the third quarter look like?

To get an idea, watch Intel's guidance on shipments of microprocessors, the brains of personal computers. A seasonal uptick in PC demand associated with back-to-school buying and the launch of


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new operating system Windows XP is expected to drive buying this fall, propelling a long-awaited recovery in chip demand.

If Intel says shipments are meeting expectations, investors may decide that the bottom in the semiconductor cycle has arrived. If not, coming days will be ugly for tech stocks.

Falling Water

Road to Nowhere
Intel's stagnant 2001

Intel is expected to post revenue of about $6.3 billion for the second quarter, down from $6.7 billion in the previous quarter and $8.3 billion in the year-ago quarter, according to analysts surveyed by

Thomson Financial/First Call

. Earnings will fall to 10 cents a share, analysts expect, down from 16 cents a share in the first quarter and 50 cents a share a year ago. For the third quarter, analysts forecast earnings of 12 cents a share on revenue of $6.5 billion.

Because demand for flash memory and communications chips is expected to remain weak for several quarters, any chance of a rebound this year rests on microprocessors, including Intel's flagship Pentium 4. Investors are hoping that Intel, which a quarter ago said it had returned to "seasonal" buying trends from the free fall of a few previous periods, will indicate a continued uptick in chip shipments.

Intel launched the Pentium 4 processor about nine months ago and has been slowly ramping up production of this bigger, faster chip. The P4 launch was slowed by the economic slowdown and performance and pricing worries, the latter driven in part by Intel's link to


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dynamic random access memory. These issues have kept Pentium 4 sales from growing as quickly as some industry analysts were expecting. For instance, Robertson Stephens analyst Eric Rothdeutsch wrote last week that Intel sold an estimated 2.5 million units in the first half of the year, half of what he believes the company expected. Robertson hasn't done any underwriting for Intel.

In the second half of 2001, Pentium 4 shipments are expected to increase as production volumes grow and other types of compatible memory become available. The company is expected to begin shipping chipsets based on synchronous DRAM -- the competitor to the Rambus standard -- in the next few weeks.

All Is Fair

To make Pentium 4 more accessible in mainstream applications, Intel has been cutting prices sharply this year. It began with steep cuts in January and then in April lowered the bar even further by introducing its then-fastest microprocessor -- a 1.7 gigahertz Pentium 4 -- at $352, about half the price at which it normally would have launched. According to Merrill Lynch, Intel's price cuts may be working. Analyst Joe Osha said in a recent research note that Pentium 4 design activity is starting to increase. Merrill hasn't done any underwriting for Intel.

It is clear that

Advanced Micro Devices

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, which makes the




chips, has been paying for Intel's pricing cuts. Lower average selling prices created grave problems for the competitor in the second quarter: Last week, it reported

sharply reduced earnings and said prices fell some 17% during the quarter. Margins tumbled below 40%.

Intel margins aren't expected to have declined as much. In April, the company guided analysts to gross margins of about 49%. On June 7, during a business update, the company confirmed it expects to hit that range. The company also has said that it expects gross margins for the year of 50%, plus or minus a few points.

So for now, shipments are the big question. Once those pick up in earnest, it will be time to start watching pricing again.