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Intel issues profit warning
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March 4, 1998: 9:03 p.m. ET
Sluggish orders to translate into lower than expected 1Q profits, revenues
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NEW YORK (CNNfn) - Intel Corp. stunned investors Wednesday by forecasting lower first quarter profits and revenues, reflecting weaker orders from PC makers and increased competition from low-priced rivals.
The warning, delivered moments after stock markets closed in New York, triggered a sell-off among technology shares in after-hours activity as investors tried to determine if Intel's woes would spread to other companies.
In Chicago, the S&P 500 futures index traded on Globex plunged more than 12 points Wednesday night, a drop which could translate into a drop of more than 100 points for the Dow when trading resumes on Thursday
Robert Chaplinsky, semiconductor analyst at Hambrecht & Quist, said investor emotions will drive technology stocks lower out of the gate Thursday, but they will recover. (168K WAV) or (168K AIFF)
In after-hours activity Wednesday, several major technology issues were hard hit. Intel stock (INTC) tumbled nearly 10 points to 77 while high-flying Dell Computer Corp. (DELL) dropped more than 10 to 129-1/2. Microsoft Corp. (MSFT) fell more than 4 to 78 and International Business Machines Corp. (IBM) fell 3-1/16 to 99.
Chaplinsky said Intel shares could dip as low as the mid-70s, but will probably not set new lows because many mutual funds are still underweighted in technology and the company's long-term fundamentals remain strong.
(Click here to see a chart of Intel's stock)
The Santa Clara, Calif.-based semiconductor giant said revenues for the three months ended in March are expected to drop about 10 percent to $5.85 billion from $6.5 billion in the fourth quarter of last year and $6.4 billion in the year ago period. Intel also said gross margins would be sharply below earlier estimates and net income would fall short of analysts' expectations.
Intel's warning marked a significant retreat from the company's earlier guidance when Intel projected flat revenue compared with the fourth quarter.
Industry analysts attributed Intel's woes to a build up of inventories among PC makers.
"There's excess inventory of PC's in the channel that's really hurting Intel," said Megan Graham-Hackett, technology analyst at Standard & Poor's. "It's not being able to sell to the Compaqs and IBM's and HP's so it's basically they can't record those sales, so revenues are worse than expected."
As a result, Intel's gross margins -- the difference between what Intel sells its products for and its manufacturing costs -- are expected to be about 53 percent, plus or minus a few points. Previously Intel told analysts first quarter gross margins would be down only a few points from the fourth quarter's 59 percent.
With the advent of the "sub-$1,000" PC, Intel has seen its gross margins slide from as high as 61 percent during the first nine months of 1997, despite its dominant market position. The Pentium line sells for roughly $100 to $200 per unit when bought in bulk.
In the past, Intel was able to protect its profit margins by introducing faster and faster chips that quickly became the benchmark for the PC industry. However, in recent months, as demand for the sub-$1,000 PC has grown, computer makers have turned to cheaper chips.
"They're saying its broad-based. It's clearly related to Compaq ... the sub-$1,000 PC phenomenon is hurting the (average selling prices)," Chaplinsky said.
"However, we thought unit demand would remain healthy because top tier PC makers were bullish going into the quarter," he said.
Intel is already taking steps to compete in the low end of the market. Earlier Wednesday, Intel unveiled its newest chip called Celeron, which is aimed at the basic PC market. However, computers featuring the low-priced chip will not be available until mid-year.
Intel's warning marked the second time this week a technology heavyweight delivered bad news to the market. Compaq Computer Corp. earlier this week told a technology conference Tuesday the pricing environment was somewhat tougher in January, a sign that PC makers are also likely to endure thinner profit margins.
Advanced Micro Devices Inc., which makes the K6 chips, also warned Wednesday that its net loss in the first quarter would "increase significantly" over the $12 million loss of the fourth quarter.
Last month, National Semiconductor Corp. said sales and earnings for its fiscal third quarter which ended March 1 would be below analysts expectations.
Losing momentum?
Intel said it also planned to take a one-time charge of $165 million or 9 cents share in the first quarter related to the merger of Chips and Technologies Inc.
Prior to the company's announcement, analysts had expected Intel to earn 93 cents a share in the first quarter, down from the $1.10 a share recorded in the 1997 first quarter. However, in light of the news, they said profits would probably slip to around 70 cents a share for the quarter.
And because the first quarter is typically stronger for the chipmaker, some analysts expressed concern about long-term effects.
"Our expectations for the second quarter are pretty modest already. We don't think it will help not having any momentum going into it," said Daniel Scovel, analyst at Fahnestock.
Intel said expectations for its gross margin for the full year 1998 will be updated in the first quarter earnings report. The company still believes that over the long-term, the gross margin percentage will be 50 percent plus or minus a few points. Intel's long-term gross margin percentage will vary depending on product mix.
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