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Intel Outruns a Lame PC Market

Centrino's fast ramp-up and a SARS-related inventory build might help the chipmaker past a poor PC market.



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offers its midquarter update Thursday,investors will be trying to understand an odddisconnect: The tech bellwether's sales outlook isoutrunning expectations for the broader PC market.

Intel's revenue is now on track to dip onlyabout 1% from the prior quarter, and fewanalysts expect the company to change that forecastmuch. Yet the companies that crank out motherboardsthat incorporate Intel's silicon have seen theirbusiness deteriorate over the quarter and are likelyto see sequential revenue fall in the high singledigits.

How to explain the disparity? While some Intel-watchers are betting the company will be forced to lower the midpoint of its guidance, others think it can outperform the PC market, partly because of the rapid take-off of its pricey Centrino chip package, which debuted in March.

On top of that, some analysts and investors thinkIntel could see a short-lived sales boost related toSARS, since customers seem to have built inventory toavoid potential supply disruptions. (To a lesserextent, SARS may have hurt Intel by reducing demand inthe Chinese market.)

"I'm relatively comfortable Intel can maintainguidance," sums up Vincent Colicchio, manager of theAll-American Equity Fund, which has about 1% of itsholdings in Intel.

On April 16 the chipmaker said sales are likely tofall between $6.4 billion and $7 billion, with CFOAndy Bryant noting that business seemed to be "

modestly better," aftertwo and a half discouraging years. Its outlook for a1% sequential slide in revenue is better than theusual 3% decline for the period.

Even at the low end, Intel's sales outlook isrunning ahead of last year's second-quarter sales of$6.3 billion. Analysts are looking for $6.6 billion on13 cents in EPS.

Helping stoke sales, the Centrino chip package seems to be rampingup faster than expected, and that should help inflateIntel's average selling prices. The new wireless LANmobile chip package carries a hefty price tag of around $325per unit, compared to an average price of $152 forchips in general, estimates Lehman's Dan Niles.

"We believe the Centrino momentum is enough tooffset perhaps both the seasonal decline and a modestSARS impact to make a flat overall revenue picture inQ2 for Intel," writes Robert Cihra of Fulcrum GlobalPartners, whose firm doesn't do banking. He thinksIntel could even nudge up gross margin guidance of50%, on the basis of a higher proportion of sales from laptopprocessors and cost-cutting.

Still, Cihra predicts Intel will slightly lower the midpoint of its guidance by narrowing its outlook from the range of $6.4 billion to $7 billion to a range of $6.5 billion to $6.8 billion. Likewise, in light of bearish motherboard trends, Bear Stearns expects revised guidance of $6.4 billion to $6.8 billion, implying sequential sales will fall 2%. Assuming the best-case scenario, Intel would be able to post sales slightly above the prior quarter's $6.75 billion.

A more optimistic take comes from Lehman's Niles, who expects Intel to leave the midpoint of its guidance largely unchanged. As he points out, hardware companies are believed to have stockpiled chip inventory to guard against potential supply disruptions related to SARS. "Even


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will admit to having one extra week of inventory than normal," he observes. In his model, the inventory build, combined with the debut of Centrino and Springdale (a new chipset), should be enough to offset relatively weak desktop sales. His firm has done banking for the company.

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To be sure, the mere words "inventory build"usually give investors the heebie-jeebies. While SARSmay give Intel a one-time lift this quarter, thecompany runs the risk of getting whacked by aninventory overhang next quarter. The High-TechStrategist's Fred Hickey recently

argued that an apparent chipinventory build in the first quarter -- this oneguarding against war-related supply disruptions -- wouldhurt the industry by cannibalizing future sales.

"I'm worried about

inventory, but if you believein a second-half tech recovery, we will overcome thatinventory problem," maintains Colicchio. He says he'supbeat because the economy should prosper from acombination of low interest rates, a weak dollar andmore stable geopolitics.

It's worth noting that PC companies themselvesdon't seem to be betting on an improved second half,at least at this stage. Two weeks ago,


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CEO CarlyFiorina said she saw "no short-term catalyst for animprovement in IT demand" and noted "no signs yet of alarge-scale PC refresh cycle taking hold." Both H-Pand leading computer hardware distributor


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have recently saidbusiness in Europe is showing signs of weakness.

Colicchio says he's taking those comments "with agrain of salt," brushing off both as "examples of badbusiness models." As for similarly uninspiring demandtalk from Dell, Colicchio says, "They're just beingconservative; that's in their interest." On the plusside, he points out, foundry

Taiwan Semi

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recently saidit's cautiously optimistic on the third quarter.

"My point is, don't expect a very negative update.I don't see it being very positive, but I don't thinkit will be very negative either," says Colicchio.

With the PC market still struggling along, that'sabout the best face an investor can put on Intel'ssituation.

Intel closed regular trading Wednesday up 28 cents, or 1.3%, to $21.38.