Slowdown in PC market hits Intel's fourth quarter

U.S. chip giant Intel Thursday issued its second profit warning of the calendar year, saying its fourth-quarter revenue will be below expectations. Like many other companies in the IT industry that have already issued similar warnings, Intel blamed a slowdown in demand for PCs caused by a softening in the global economy.

"Economies worldwide appear to be slowing more quickly than we had expected," Andy Bryant, Intel's senior vice president, chief financial and enterprise services officer, said in a conference call with analysts that was broadcast on the Internet. Intel is the largest supplier of microprocessors to PC manufacturers.

Profit warnings from both PC vendors and other businesses related to the PC industry have been flying fast and furious this past week - first Gateway, then 3Com, followed by Apple and, earlier Thursday, Motorola.

Bryant added that Intel has been affected across all geographies, with a downturn in demand hitting almost all of the company's products. "It's quite consistent, it's not any one customer, country or product, everything is down consistently," he said.

Recent large customer cancellations of orders for its products mean that Intel now predicts its fourth-quarter revenue will be flat or a few percentage points either above or below its third-quarter revenue of $8.7 billion. Previously, the chip giant had predicted fourth-quarter revenue would be 4% to 8% above that recorded in the third quarter.

Fourth-quarter company expenses are now also likely to be the same as the $2.3 billion incurred in the third quarter, Bryant said. Intel had expected expenses to be 6 percent to 8% up on the third quarter. Excluding in-process R&D, research and development spending should be in the order of $1 billion in the fourth quarter.

The chip maker grew concerned about demand over the past two to three weeks as order cancellations began to come in from its customers, according to Sean Maloney, an Intel senior vice president, and director of its sales and marketing group.

One bright spot is continuing "brisk sales" of consumer PCs in China and Japan, Maloney said. But there's gloom in Taiwan, where there is excess inventory of low-end chipsets, and where the expected fourth-quarter ramp-up in motherboard production hasn't happened, he said.

While both consumer and business PC sales have fallen, the server market remains "very strong," Maloney said. This is despite a slowdown in demand for servers among dot-coms. Instead, Intel is seeing traditional brick-and-mortar companies moving increasingly towards e-business, resulting in more sales of servers containing Intel chips, he said.

"We feel very optimistic about the next 12 months [for servers]," Maloney said.

Another saving grace for Intel is that sales of its high-end flash memory remain "rock solid," according to Maloney. In fact, Intel still can't meet demand, Bryant said.

Intel is expecting to release its fourth-quarter results on Jan. 16, 2001. The company released Thursday's warning after the financial markets closed. Intel's shares ended Thursday's trading at $32.31, up 1.8% on Wednesday's close.

Bryant wouldn't comment on whether Intel is likely to meet analysts' fourth-quarter earnings estimates, which call for Intel to make 42 cents per share, according to First Call/Thomson Financial.

The chip giant effectively kicked off a period of uncertainty in the stock market when in September it announced a third-quarter profit warning. The main culprit for that warning was weak demand in Europe for the company's products.

Bryant admitted that fiscal 2000 has shaped up to be a "strange" year for Intel. "We had a strong first half and a weak second half," he said. "That's not supposed to happen" based on historical trends that predict exactly the reverse situation.

Intel, based in Santa Clara, can be reached at +1-408-987-8080 or at www.intel.com/.