Intel Sets Off New Jitters

The tech sector continues to sit on unstable ground, with chipmaker and high-tech bellwether Intel Corp. giving the latest sign of trouble, lowering its third-quarter forecast due to lagging consumer demand for technology products and then watching its shares drop sharply in after-hours trading as buzz of weakness in the sector proliferated on Wall Street.

"The pronouncements by the big semiconductor company, a proxy for the health of global technology markets, surprised analysts and sent shares down nearly 8 percent in after-hours trading," the Wall Street Journal reported. "The letdown is the latest indication that the high-tech industry isn't recovering from the dot-com doldrums as robustly as many investors anticipated. Expectations of much better times helped lift many technology stocks last year, but the sector has been slumping badly in recent months as a spate of companies have missed their financial targets," the Associated Press said.
• The Wall Street Journal: Intel Lowers 3rd-Quarter Forecasts (Subscription required)
• The Associated Press via washingtonpost.com: Intel Cuts 3Q Forecast Amid Sales Slump (Registration required)

Specifically, Intel blamed "lower-than-expected demand for flash memory and PC chips," the San Francisco Chronicle reported. "The news came on the same day the Semiconductor Industry Association reported slower growth in worldwide revenues for July, perhaps signaling that chipmakers have already hit the peak since rebounding from a deep recession that began when the Internet bubble burst," the paper said.

"What we're seeing across the world is demand less than we expected," said Chief Financial Officer Andy D. Bryant in a conference call, as quoted by The Washington Post. "You don't get the sense of momentum building into September that you would usually get at this time of the year." The Financial Times said Bryant's comments "confirm fears that the 'back to school' selling season for PCs is likely to be weaker than forecast. 'Some of these issues could be specific to Intel but overall it is starting to look as if the consumer is in retreat,' said Krishna Shankar, analysts with JMP Securities in San Francisco."

More from The Post: "Bryant pointed to weaker-than-expected sales in processors and flash memory, a type of technology often used in gadgets such as cell phones and personal digital sales, for the revision. Intel cut its prices for processors used in desktop computers earlier this quarter to reduce built-up inventory. Intel's profit nearly doubled in its second quarter, compared with the second quarter a year ago. But Intel's stock has been sinking throughout the year, as analysts debate whether another tech downturn is close at hand," the paper said. "The third fiscal quarter typically represents the beginning of an annual surge in business for Intel and chipmakers in general. Intel forecast, at the onset, a three-month period that would be even stronger than typical seasonal trends. Yesterday's announcement means Intel now believes business will perform closer to what it usually does this time of year."
• The Washington Post: Intel Cuts Back Projection For 3rd-Quarter Revenue (Registration required)
• The San Francisco Chronicle: Intel Lowers Quarterly Forecast
• The Financial Times: Intel Surprised By 'Retreating' Consumers

The Los Angeles Times gave more details on Intel's announcement. "With softer demand for its computer processor and memory chips, Intel said its gross profit margin -- revenue minus the cost of goods sold, divided by sales -- would be about 58% for the quarter, off from its previous estimate of about 60%. The company offered no outlook for profit in the quarter ending Sept. 25," the paper said.

Investors didn't like Intel's news. "The report suggests an overall economic weakness that Wall Street has been dreading, says RBC Capital Markets equity analyst Apjit Walia," USA Today reported. "With recent economic indications pointing to a slowdown, the stock market had been bracing for disappointing news from the world's largest computer chip maker, but Thursday's revised outlook appeared to be gloomier than many investors anticipated," the Associated Press said, adding that investors "have become increasingly disenchanted with much of the tech sector after a flurry of disappointing second-quarter results."
• The Los Angeles Times: Intel Cuts Sales Outlook, Citing Consumers (Registration required)
• USA Today: Intel Rolls Back Outlook; Widespread Weakness Feared
• The Associated Press via the San Jose Mercury News: Intel Lowers Q3 Financial Forecast (Registration required)

The New York Times noted that this has not been a banner year for the world's largest chipmaker. "The latest bad news from Intel comes in a year in which the company has already stumbled in product development, missing deadlines. The missteps have been serious enough for Craig Barrett, Intel's chief executive, to issue a memorandum to employees in July encouraging them to work harder to prevent future problems. Intel had warned investors in July that the company was experiencing an unexpected decline in profit margins as a result of inventory and manufacturing problems," the paper said.
• The New York Times: Intel Lowers Its Forecasts; Shares Plunge After Hours (Registration required)

Things won't get easier anytime soon for the company either. "Intel, based in Santa Clara, Calif., already was struggling to rebound from miscalculations earlier in the year that led the company to build too many microprocessors. With demand weakening, Intel now faces an uphill battle in paring those inventories and managing excess production capacity that could hurt profit margins," the Wall Street Journal said. "This is the tip of the iceberg of their problems going forward," Morgan Stanley analyst Mark Edelstone told the paper. The Journal said another problem for Intel is competitor Advanced Micro Devices, which is "making inroads, particularly in China," citing remarks from another analyst, John Lau of Banc of America Securities.

Lau also spoke to CNET's News.com, giving this downbeat prognosis of the tech sector overall: "Clearly, there has been a deceleration in the worldwide demand for PCs," Lau said. "This is a much broader proxy for what's happening in the tech marketplace -- not just Intel. It shows that it has significantly slowed, given some of the macro[economic] concerns we have, including the high oil prices and ... corporate profitability."
• CNET's News.com: Intel Lowers Third-Quarter Expectations