Intel Lowers Sales Outlook for Third Quarter on Weak Demand for Chips
Bad news from Intel just crossed the wires. The company says that it expects sales in the third quarter ending in September to come in below its previously-issued guidance. It now says it expects sales of $13.2 billion, give or take $300 million, versus the prior expectation where the range was $13.8 billion to $14.8 billion.
It also said it expects its gross margin, one of the key indicators of the health and profitability of its business, will be about a point lower than previously expected: 62 percent, plus or minus a point, which is a reduction from 63 percent, plus or minus two points.
Intel shares fell by about 2 percent in premarket trading to $24.60, down 49 cents. Rival Advanced Micro Devices fell by three cents, or nearly 1 percent, to $3.63. Hewlett-Packard is down eight cents, or about one-half of 1 percent, to $17.51. Dell shares rose by three cents to $10.55. Time was that a report like this from Intel could weigh heavily on the Nasdaq, but as of 8:33 am ET, the exchange is still indicating up, though give it a few minutes once the market gets its head around the weaker-than expected jobs report that just hit the wires about three minutes ago.
Update: The markets are almost open. Intel shares are down by 97 cents, or nearly 4 percent, to $24.13; AMD is down eight cents, or more than 2 percent, to $3.58; HP is down 13 cents, or 0.74 percent, to $17.46; Dell is, weirdly, going up slightly by five cents, to $10.57, or about half a percentage point.
Update 2, 10:15 AM New York Time:Markets have now been open for about 45 minutes and here’s where things stand: Intel shares are down 62 cents or more than 2.5 percent. AMD shares are down 14 cents or nearly 4 percent; HP shares are down by 32 cents or more than 1.8 percent to $17.27. By comparison, Dell shares are having a bit of a rally, up 9 cents or nearly 1 percent to $10.61.
Intel says its customers are reducing their inventory, which, in English, means they’re buying fewer chips because they haven’t used up the ones they had already bought in the prior quarters. That’s because they’re not selling as many PCs or servers. Indeed, consumers who are in the market for a new PC will be holding back on their purchases until Windows 8 is released, but that market is already sputtering anyway, in no small part because Apple’s iPad continues to batter notebooks sales.
Historically, what tends to happen in the third quarter is that PC makers load up on chips in order to meet the demand they expect in the fourth quarter, when consumers line up to buy new machines for for Christmas. This is about as strong an indicator as one could have that the fourth quarter for PCs is going to be a wash.
Another thing to point to: Intel said it is seeing a weakness in the enterprise PC segment, which has generally been cited as a strong segment for some time now. The natural inclination is to wonder how much of this is because of waiting for Microsoft’s Windows 8 to get into the market. But the fact is that businesses tend to be conservative when it comes to upgrading Windows. There’s still a lot of companies who haven’t upgraded from Windows XP.
Additionally, Intel says it sees slowing demand in the emerging markets, which is interesting because Intel has for so long been rather bullish on emerging markets. Several times on earnings conference calls in recent memory, CEO Paul Otellini would argue back a bit with research firms like Gartner and IDC who would announce dire forecasts, only to be proven wrong by Intel, which continued to see strong demand in places like Brazil and Indonesia. Apparently that trend has come to an end, at least for now.
Another interesting point in the release that just caught my eye is this: Intel said it is cutting its capital expenditure plans for 2012 to below its prior range of $12.1 billion to $12.9 billion. It says its going to “accelerate re-use of existing equipment to the 14-nanometer node.” In English, that means that Intel is going to buy less new manufacturing gear as it upgrades the technology it uses to make smaller chips.
You have to remember that Intel has unparalleled expertise in manufacturing and planning for how it manages the associated costs. A top-of-the-line chip factory — or “fab,” as they’re called — can cost anywhere from $3 billion to $5 billion to build. Intel’s ability to manage costs and amortize them over time is one of its greatest strategic strengths. If it’s buying less factory gear, then it’s likely on the leading edge of a downward curve that other chip companies will follow.
That’s going to be bad news for the companies that make the machines that go inside those fabs: Here’s a hint: Shares of Applied Materials are trading down by nearly 3 percent in early trading, at $11.60, down 30 cents from yesterday’s close. ASML is down 30 cents, to $57.37, or nearly 1 percent. KLA-Tencor is down by nearly 2 percent. So is Lam Research.
I just got a quick comment from Patrick Moorhead, an analyst and head of research firm Moor Insights & Strategy. He said that most of what’s driving this cut is the macroeconomic environment. “ARM lowered its expectations and now Intel is doing the same based on PC demand. The bright spot for Intel is that the data center business is moving along quite nicely,” he said. “When the economic clouds clear, Intel will be a good position with their products to capture the demand when it does appear.”
Here’s the announcement:
Intel Lowers Third-Quarter Revenue Outlook
SANTA CLARA, Calif., Sept. 7, 2012 – Intel Corporation today announced that third-quarter revenue is expected to be below the company’s previous outlook as a result of weaker than expected demand in a challenging macroeconomic environment. The company now expects third-quarter revenue to be $13.2 billion, plus or minus $300 million, compared to the previous expectation of $13.8 billion to $14.8 billion.
Relative to the prior forecast, the company is seeing customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory; softness in the enterprise PC market segment; and slowing emerging market demand. The data center business is meeting expectations.
The company’s expectation for third-quarter gross margin is now 62 percent, plus or minus one percentage point; lower than the previous expectation of 63 percent, plus or minus a couple of percentage points.
Expectations for R&D and MG&A spending and depreciation in the third quarter remain unchanged.
Full-year capital spending is expected to be below the low-end of the company’s previous outlook of $12.1 billion to 12.9 billion, as the company accelerates the re-use of existing equipment to the 14nm node.
The outlook for the third quarter does not include the effect of any acquisitions, divestitures or similar transactions that may be completed after Sept. 7. All other quarterly and full-year expectations have been withdrawn and will be updated with the company’s third-quarter earnings report on Oct. 16.