Intel Corp. (INTC:US), the world’s largest semiconductor maker, forecast fourth-quarter profit margins that missed analysts’ estimates as a slump in demand for personal computers eroded profitability.
Gross margin, the only profit yardstick Intel forecasts, will be about 57 percent, the Santa Clara, California-based company said in a statement. That’s less than the 61.4 percent average estimate, according to data (INTC:US) compiled by Bloomberg. Revenue in the current period will be $13.1 billion to $14.1 billion, compared with an average projection of $13.7 billion.
Intel’s profit is being crimped by expenses to slow factory output and combat rising stockpiles of unsold chips. Corporate customers are showing “caution” in placing orders and consumers in developed markets are cutting back on purchases of personal computers, Chief Financial Officer Stacy Smith said in a statement. Amid an economic slump, the PC market will suffer its first annual decline in more than a decade.
“Intel’s outlook confirms fears that the PC slowdown is likely to continue,” said Bill Kreher, an analyst at Edward Jones & Co. “The gross margin is well below our view.”
Shares declined 3.4 percent in late trading, after gaining 2.9 percent to $22.35 at the close in New York. The stock has declined 7.8 percent this year.
Third-quarter net income was $2.97 billion, or 58 cents a share, compared with $3.47 billion, or 65 cents, a year earlier. Sales fell to $13.5 billion. Analysts had projected profit of 49 cents a share on sales of $13.2 billion.
Gross margin, the percentage of sales left after deducting production costs, was 63.3 percent, more than the 62 percent estimate. As customers curbed orders, inventory rose to $5.32 billion, from $4.9 billion in the previous quarter, Intel said.
“The question is how long will it take for them to burn off inventory,” said Patrick Wang, a New York-based analyst at Evercore Partners Inc. (EVR:US)
Intel’s announcement kicks off two weeks of earnings reports from the largest U.S. technology companies. Because its chips power more than 80 percent of the world’s PCs, investors (INTC:US) view Intel’s earnings as a broad indicator of demand for desktop, server and laptop computers.
The total PC market will contract by 1.2 percent to 348.7 million units this year, according to IHS iSuppli. That’s the first annual decline since 2001, the market research said earlier this month.
Consumers in China, who mainly buy laptops, have joined their counterparts in the U.S. and Western Europe in holding off on computer purchases, Intel Chief Executive Officer Paul Otellini said. That, and a corporate market that’s gone “relatively flat,” means the PC market growing at less than half its normal pace at this time of year, he said.
Intel’s data center group, whose sales of server chips to customers such as Google Inc. and Facebook Inc. had offset weakening laptop and desktop demand, ended its run of growth. The unit’s revenue fell 5.4 percent to $2.65 billion in the third quarter from the preceding three months as companies cut back on spending.
The PC industry is relying on the release this month of a new version of Microsoft Corp.’s flagship Windows operating system -- including a version that works on tablets -- to help it combat Apple Inc., maker of the iPad.
Otellini said it’s too soon to say how much of the slump is due to the economy, a pause in buying ahead of the debut of Windows 8 or consumers opting for tablets and phones rather than PCs. All three trends hurt performance last quarter, he said.
Advanced Micro Devices Inc. (AMD:US), the second-largest maker of processors for PCs, last week slashed its third-quarter sales forecast, citing weak demand across all product lines in a challenging economic environment. AMD plans to cut as much as 20 percent of its workforce, a person familiar with the matter said last week.
Even if the economy improves and demand rebounds, Intel risks being left out, because it hasn’t yet convinced phone and tablet makers that they need its chips, said Cody Acree, an analyst at Williams Financial Group in Dallas.
“The problem is in the intermediate and longer term,” Acree said. “Intel runs the risk of having so much invested in the current paradigm that they miss the next.”
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