Cool to Upgrades

Buyers stall plans for newer machines; Intel profits drop.

Projecting optimism despite an 82 percent drop in the companys first-quarter profits, Intel Corp. executives last week predicted that chip sales will rebound later this year, due mainly to dramatic price cuts the company is planning for the Pentium 4. However, IT managers offer a starkly different outlook of the PCs future.

Several system managers contacted last week said theyll spend far less on PCs this year, and for a variety of reasons.

"Last year, we bought over 1,000 PCs. This year, were static, and I think were going to be static for another three years," said Bob Cancilla, director of corporate systems planning for Republic Indemnity Co. of America Inc., in Encino, Calif.

While Intel and other computer companies have blamed falling sales largely on a weak economy, Cancilla contends hardware makers arent offering anything new worth purchasing.

"We have millions of dollars invested in this equipment," he said. "Until something really revolutionary hits that brings in new and different applications from what were doing, I think that you are going to see the whole Intel-based world come to a screeching halt."

Not surprisingly, Intel said it believes the worst will soon be over for the PC industry.

"We believe that our PC-related businesses have bottomed out and are planning for a seasonally stronger second half," Paul Otellini, Intel executive vice president, said in a conference call with market analysts last week following the chip makers earnings report.

Otellinis outlook contrasted sharply with the companys dour earnings report, which revealed a staggering drop in net income.

For the first quarter, Intel reported earnings of $485 million, or 7 cents per share, an 82 percent decline from the $2.7 billion, or 39 cents per share, it recorded last year for the same period.

Considering its inability to meet earnings projections for the last three quarters, Intels forecast of a rebound should be viewed with a healthy dose of skepticism, one analyst said.

"I think youve got to take what they say with a bucket of salt," said Ashok Kumar, of U.S. Bancorp Piper Jaffray Inc., in Minneapolis. "I mean, their forecasts have been off as much as 50 percent over the last four quarters."

In a bid to ignite sluggish sales, Intel this month is slashing prices on the Pentium 4, with the 1.5GHz chip dropping from $637 two weeks ago to $255 by months end, sources said. (Prices per chip are based on 1,000-unit shipments.)

In addition, Intel this week will introduce a 1.7GHz Pentium 4 that sources said will be priced at only $350, about half of what the chip makers highest-speed chips are normally set at.

"These price cuts by Intel are unprecedented in terms of the rate at which prices are dropping on a percentage basis," said analyst Eric Rothdeutsch, of Robertson Stephens, in San Francisco.

But some IT managers said the lower prices wont spur them to buy the chips. "I wouldnt buy Pentium 4s for my agency; it just doesnt make any sense," said Sam Avera, technology manager for the state of Washingtons Aging & Adult Services, in Seattle.

Despite recent leaps in clock speeds well past 1GHz, Avera said processors that run half that fast are still sufficient. "As long as youre able to do your mission and accomplish your task," he said, "why would you go out and buy anything else?"

System managers have also become increasingly skeptical about the benefits of faster processors, one executive said. "I think were seeing a reaction to the maturization of the industry," said Marshall Fernholz, procurement manager for the American Medical Association, in Chicago, who said his organization has cut back spending on new computer equipment.

"Weve run the gamut of focusing inordinately long on processor clock speeds at the expense of some of the other things," Fernholz said.

In particular, he added, managers are learning they dont need to buy new chips to improve PC performance. They can simply add things such as memory or video cards to boost their systems.

Other managers said the current economic slump will crimp their spending. "Like a lot of other businesses, weve been focusing on cutting costs more recently," said Joel Salamone, senior director of technology at The Motley Fool Inc., in Alexandria, Va.

Despite those views, Intels promising projection isnt surprising, said Rothdeutsch of Robertson Stephens. "The second half is always better than the first half, so its not like theyre going out on a limb," he said.

One IT manager said the current economic environment doesnt bode well. "Top management is really looking to shave costs anywhere it can," said the manager of a California defense contractor, who asked not to be named. "Right now, dollars are so tight were just worried about saving peoples jobs, let alone buying new equipment."