Intel Could Cut Processor Prices After Downbeat Quarterly Report

After Intel delivers what is likely to be a downbeat fourth quarter report later this week, the chip giant could move to cut the prices of its microprocessors soon. Intel's quarterly numbers are also likely to offer guidance on how the U.S. recession is impacting both PC and server markets as well as the overall IT sector. Intel is also likely to offer guidance about how its Atom processor is performing and if the low-cost chip is actually cannibalizing its Celeron line.

Intel is slated to release its fourth-quarter financial numbers later this week and the chip giant's results could offer a significant guide to how business IT and consumer spending are weathering the U.S. recession and the global economic slowdown.

Intel, which remains the world's largest producer of microprocessors, plans to officially release its fourth-quarter numbers Jan. 15. Since Intel released its third-quarter results in October, the company has twice warned that its fourth-quarter revenues would be below expectations.

Originally, Intel called for fourth-quarter revenue of $10.1 billion to $10.9 billion. In November, Intel cuts those expectations to $9 billion and then earlier this month, the company cuts its forecast to $8.2 billion. Intel also stated that its gross margins - a key metric in determining profitability in the chip sector - would also be below previous expectations.

Right now, Wall Street analysts are expecting Intel to post earnings per share of 4 cents with revenue of $8.21 billion. A year ago, Intel posted earnings per share of 38 cents with revenue of $10.71 billion.

In statements, Intel said the market for hardware - desktops, laptops, server systems - has slowed and these vendors are ordering fewer chips and reducing inventories in their channels.

Those stark numbers from Intel seem to reflect growing problems with the tech industry and they seem to show that both businesses and consumers are spending less on PCs and other hardware.

"Intel was one of the first semiconductor companies to update guidance for the December quarter, after which there was further deterioration in market demand and the macro environment," wrote Hans Mosesmann, an analyst with Raymond James, in a Jan. 7 research note.

All this could mean that Intel will cut the prices for its microprocessors soon after announcing its quarterly results. Intel typically cuts some chip prices a few days after its quarterly results, but this time the cuts will reflect how much inventory Intel and its distribution channels have on hand.

John Spooner, an analyst with Technology Business Research, said Intel could have a lot of older, 45-nanometer Core 2 Duo processors in stock, especially if its customers begin buying more and more of the new processors based on the Nehalem microarchitecture. Then, Intel has to decide whether to build up its inventory of older chips or sell them at a discount, which could eat away at profits. The same situation happened when Intel switched from the Pentium 4 processor to the original Core 2 Duo a number of years ago.

"Intel is going to have a significantly larger amount of inventory on hand than it expected to and that's going to be a big problem going into 2009," said Spooner. "Intel is faced with a decision. Does Intel throttle back the factories and lose money that way, or does it make lots of chips and put them in inventory and lose money by having to discount them?"

At this point, Spooner believes that Intel will build its inventory but that will result in a glut of processors in the market. The upside for consumers and business buyers is that there will be good deals on Intel processors later this year, especially high-end PC chips. This glut of extra processors, however, should not stop Intel from switching to 32-nm processors later this year.

Advanced Micro Devices, which reports its own results Jan. 22, could face similar problems with processor inventory.

During its report Thursday, Intel is also likely to talk about how Atom and the emerging "netbook" or mininotebook market is performing. Some analysts have wondered whether the Intel Atom processors are cannibalizing the company's older Celeron processors, an issue that Intel denies.

Despite the problems, other analysts believe that Intel is preparing to return strong later this year.

"We remain confident in its ability to emerge from this downturn in an even better competitive position," wrote Ross Seymore, an analyst with Deutsche Bank, in a Jan. 13 research note.