Tuesday, all eyes will be focused on


(INTC) - Get Report

as the giant chipmaker delivers its financial results for the second quarter -- and more importantly, offers its outlook for the rest of the year.

Intel controls 90% of the market for computer microprocessors, measured by revenue, according to Gartner Research. For good or ill, what it says is likely to sway sentiment toward the tech sector through the rest of the summer.

Shares of Intel have lost 29% of their value since last month, when the company chopped revenue expectations more sharply than expected in a

midquarter update . Monday, the stock gained $1.13, finishing up 6.3% at $19.12.

In what could be a major announcement, CEO Craig Barrett isexpected to address Intel employees following the call, according toSalomon Smith Barney analyst Jonathan Joseph, who speculated in a researchnote Monday that the talk could be to explain possible layoffs ormanagement changes (though it also could "simply be a pep talk in toughtimes," Joseph noted).

In September, Barrett noted the company's head count was 20,000 higher than three years prior, when revenue was about the same. The implication: If business didn't pick up in2002, layoffs could follow.

Yet the outlook for near-term growth remains weak. Given continuinghumdrum prospects for PC demand, Street estimates on Intel are still toohigh and need to be cut, maintains Lehman analyst Dan Niles.

Analysts expect Intel to post sales growth of 6% in the third quarterand nearly 9% in the fourth quarter, according to Thomson Financial/FirstCall. Lehman expects growth of just under 4% and about 7%, respectively.

One potential risk to revenue: The company's average selling prices remain soft. In its midquarter update, the chipmaker acknowledgedit was seeing weaker than expected sales of high-end processors, which putspressure on ASPs.

Indeed, one of the same factors that led boxmaker


(DELL) - Get Report

to boost itsquarterly guidance last week -- a decline in the price of processors in itscomputers -- is exactly what's hurting Intel, which supplies thosecomponents.

"That's good news for Dell; they're benefiting from theproblem's Intel's having. But it's not viewed as positive for Intel," saysNiles.

To be sure, Intel isn't the only chipmaker under the gun. Rival

Advanced Micro Devices

(AMD) - Get Report

also had said its ASPs have been weighed down byexcess inventories and weak demand. It

warned last month that revenue could come in nearly athird below its prior forecast.

Making matters worse for chipmakers, seasonal patterns may push pricesdown further in the second half of the year. "Normally, ASPs are underpressure in Q3 and Q4 because sales are more heavily skewed towardsconsumer demand" and consumers tend to buy cheaper goods than businesses,Niles explains. "So there's a very good chance ASPs keep dropping."

While Intel's unit shipments probably declined about 2 percent in thesecond quarter, microprocessor ASPs likely fell 5% to 6%, giventhe strength of demand for relatively low-cost Celeron processors vs.the more expensive Pentium 4 processors, says Bear Stearns analyst CharlesBoucher.

In light of ASP pressures, Lehman and Bear Stearns predict Intel willdrop its gross margin guidance for the year. Both expect the company toratchet down its margin forecast from a midpoint of 53%, give or take acouple of points, to around 51%.

While that wouldn't come as a big surprise at this point, investorswouldn't take to the news too kindly. On the other hand, if Intel isdestined for more rounds of estimate cuts, investors might as well prepare forcontinuing volatility.

Capex Cuts Looming?

Besides investors, Intel's suppliers will be closely tuned in to its callTuesday to see if the company plans to trim its capital spending budget. Any spending cuts could have a sharp impact on the top line of chip-equipment makers: At $5.5 billion, Intel spends nearly 60% more onequipment than its nearest rival,



Prudential's Shekhar Pramanick, a chip-equipment analyst, predictsIntel could drop announced capex to $4.8 to $5 billion from its earlierprojection for the year. Field checks suggest the company's New Mexico fabis pushing out tool deliveries worth $500 million from the fourth quarterto 2003, he points out.

But Lehman's Niles, who agrees that Intel will have to lower capex,says that's likely not to happen just yet. Last year, the company didn'tdisclose until the fourth quarter that it had spent $7.3 billion, insteadof the $7.5 billion it had forecast.