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Checking for a PC Pulse in Intel's Earnings Report

Investors seek profits from the company as well as signs of life in the PC universe.

Intel

(INTC) - Get Report

is expected to put smiles on a lot of faces when it reports fourth-quarter earnings Tuesday after the close, but it could still break some hearts too.

Investors anxiously await the first glimpse of success byPC-related companies following the holiday season, as well as Intel'soutlook for spending and revenue in a year Wall Street hopes will showhealthy recovery for the battered chip industry. While the attitude amonganalysts is fairly optimistic, there's still room for disappointment.

On

Dec. 6 Intel gave the market reason to be excited, guiding its expected revenue to the higher end of its previous forecast, between $6.7 billion and $6.9 billion. That represents as much as a6% increase over the third quarter's $6.5 billion -- slimmer than the10%-or-greater traditional seasonal holiday uptick, but vast progress in amarket feared too harsh for any year-end cheer.

In the third quarter, Intel had $6.5 billion in sales on a profit of 10 cents a share, and is expected to improve earnings to 11 cents a share in the fourth quarter.

Analysts Cheer, Investors Wait and See

Analysts took the Dec. 6 news as cause for celebration. Consensusrevenue estimates went from $6.6 billion before the midquarter call to $6.9billion as of Monday, as gathered by Multex.com. Wall Street is prepared forIntel to hit the top of its range, and show that the Christmas season defiedthe worst of the economic slump and post-Sept. 11 spending clampdowns.

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Investors haven't been quite as generous. They spent the past four weekswiping the perspiration off their brows following a 71% run-up in Intel'sshare price from Oct. 1 to Intel's midquarter update. Since Intel'sinspirational forecast, the stock has bobbed up and down in the low-$30price range for a scant 1% gain.

For the first quarter, the Street currently predicts a post-Christmas dropoff, with revenue falling to $6.6 billion and 12 cents per share in profit, according to Multex.com. But several analysts propose that Intel might defy a first-quarter slump and instead post revenue even with the fourth quarter. Investors will anxiously await Intel's outlook for the first quarter to see if it includes such as optimistic preview.

Salomon Smith Barney's Jonathan Joseph said he believes Intel's orderpattern "supports sequentially flat, or even slightly up revenues" in thefirst quarter.

Demand and Supply

During its midquarter call, Intel warned Wall Street not to expect toomuch upward progress in the average selling prices it gets for its chips,but the Street is too excited for restraint. As an example, on Friday LehmanBrothers' Dan Niles cited ASPs in his decision to raise his revenue andearnings estimates for the chipmaker. Wall Street is hopeful that as morePentium 4s get into the product mix at Intel, phasing out the older Pentium3s, Intel will be able to reap more revenue per chip.

"Strong demand for the P4 continues. And though there were signs thatsupply was coming in line with demand just before Christmas, we have heardthat order lead times at some larger (PC makers) have moved out several daysin the past week," Joseph said.

Intel admitted that rumors of a Pentium 4 supply shortage were true backin December, however, though the company declined to estimate how much itsbusiness was affected. When Intel gets its Pentium 4 production runningsmoothly, there's the potential for serious improvement in 2002 following adifficult 2001. Intel CFO Andy Bryant forecast midquarter that Intel'sgross margin would hit the middle of the previously offered range at 47%.

Additionally, Tuesday's after-market call will set to rest the frenziedspeculation over the amount Intel is willing to spend in 2002 on capitalequipment. Several times in 2001 pundits guaranteed that Intel's 2002capital expenditure budget would be 20% to 40% lower than 2001's $7.5billion.

Intel leads the industry in the amount it spends on equipment, andits spending projections are an indicator not only of the health of PC industry demand, but the health of the chip-equipment business. Intel never wavered from a historically large $7.5 billion 2001 budget, but the percentage of reductions in its 2002 plans will reverberate throughout the chip, PC and chip-equipment markets.

Staff Reporter Rebecca Byrne contributed to this report.