Intel Warns of Lower-than-Expected Revenue

UPDATED: The company says third-quarter revenues could fall below earlier forecasts. Executives were unsure on the exact cause for the slowed demand for the company's flash memory and other chips.

Intel said Thursday that it expects third-quarter revenues to be below forecasts, in an ominous indicator of the back-to-school and holiday season.

Santa Clara, Calif.-based Intel Corp. said Thursday afternoon that it expects revenue for the third quarter to be between $8.3 billion and $8.6 billion, as compared with the previous range of $8.6 billion to $9.2 billion. Intel did not comment on its expected profitability for the quarter. Still, the midpoint of the forecasted range, $8.45 billion, would be 5 percent higher than the revenue the company recorded in its second fiscal quarter and 8 percent higher than the revenue the year-ago period.

The company said worldwide demand for its Intel Architecture products—its processors and chip sets—is "trending below previous expectations, driven by lower-than-expected end demand along with customer reductions in component inventory levels."

Intels communications revenue will be weaker than expected, the company said, primarily due to lower-than-expected growth in flash memory shipments.

Intel released is mid-quarter update against a backdrop of slower chip sales. Worldwide sales of semiconductors rose slightly to $18 billion in July, an increase of 1 percent from the $17.8 billion reported in June and 37.9 percent from the $13 billion reported in July 2003, the Semiconductor Industry Assoc., of San Jose, Calif., reported on Thursday. The SIA said the slower growth rate for chip sales was not unexpected.

"The latest numbers reflect a slower growth rate for worldwide sales of semiconductors as previously projected," said SIA President George Scalise, in a statement. "A combination of factors—consumer uncertainty, inventory accumulation in key sectors, and seasonal issues in some markets—resulted in modest sequential sales growth from June."

When Intel released its third-quarter earnings in July, the companys inventory levels reached an all-time peak of $3.2 billion. Company executives said they would slow production during the remainder of the year, and analysts began worrying that the company might drastically lower prices to get rid of the unwanted inventory. In late August, Intel did just that, although the price cuts were communicated to its OEM customers several weeks before.

In fact, the opposite occurred, Chief Financial Officer Andy Bryant told financial analysts in a conference call Thursday afternoon. Informed customers are typically aware of upcoming pricing moves, and tend to postpone their purchases until the lower prices take effect.

"Thats what we didnt see," Bryant said. "There was no pent up demand on the networks."

According to Bryant, the company lowered its forecast for two reasons: a larger-than-expected level of inventory built up during the second quarter, and a weaker market than previously expected. Although this weaker demand is concentrated in two areas—microprocessors and flash memory—Bryant said the company had no clear understanding of why buyers were passing on Intels parts. There could be any number of reasons, including oil prices and overseas strife, he suggested.

For whatever the cause, demand for Intels products is now uniformly lower across the entire world, Bryant said, with the "vast majority" of the shortfall in the consumer and retail space. If demand picks up to normal levels, Intels third-quarter results should be healthy, Bryant said.

But if it doesnt, Intel will have to turn to other fiscal remedies. Bryant said that he didnt believe an inventory write-off, at least on the Pentium 4 "Prescott" processor, would be likely.

Sales of communications chips, however, have proven worrisome, partially because Intel doesnt have the mix of speeds, cache sizes, and other variables it has with its microprocessor line. If customers dont buy communications chips for shipment, "thats where it gets painful," Bryant said.

Intel said its gross margin percentage would dip by two points to 58 percent, and that the gross margin percentage for the year would be between 58 percent and 60 percent, plus or minus a couple of percentage points. Spending for the third quarter is now expected to be about $2.4 billion, below the previous expectation of about $2.5 billion.

Intels fiscal third quarter ends Sept. 25.

/zimages/6/28571.gifClick here to read about how flash memory brightened a dragging second quarter for Advanced Micro Devices Inc.

In a separate report, fellow chip maker Integrated Device Technology Inc., based in Santa Clara, Calif., also predicted lower revenues for the quarter on Thursday.

Based on recent and anticipated order rates from customers, IDT now expects revenue to be down by 1 percent to 5 percent from the immediately preceding quarters revenues of $101.3 million, the company said.

IDT had estimated that revenues for the quarter, when compared with the prior quarter, would range from remaining flat to seeing a 6 percent increase. IDT manufactures communications chips for handsets, and it was not immediately apparent that the reports from IDT and Intel were related.

Editors Note: This story was updated to include information and comments from an Intel press conference with analysts.

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