Bloomberg News

Intel Slumps With IBM on Weak Businesses-Consumer Demand

October 17, 2012

Intel Slumps With IBM on Weak Businesses-Consumer Demand

Intel Corp. signage stands outside the company's office in Santa Clara, California. Intel’s profit is being crimped by expenses to slow factory output and combat rising inventories. Photographer: Noah Berger/Bloomberg

The global economic slowdown is prompting companies to curtail technology spending and pushing consumers to favor mobile devices like Apple Inc.’s iPhone over personal computers, eroding profitability at Intel Corp. (INL) and trimming sales for International Business Machines Corp. (IBM:US)

Intel, the largest chipmaker, forecast fourth-quarter gross margins that missed analysts’ estimates, while IBM, the biggest computer-services provider, reported third-quarter revenue that fell short of projections. Shares of both companies declined in late trading yesterday and German trading today.

IBM customers, hurt by anemic demand in home markets, put off software purchases and computer-maintenance contracts. Budget-strapped consumers are shunning PCs to buy cheaper handheld devices such as the iPhone, while businesses are shying away from servers that run networks, sapping demand for Intel chips. The reports bode ill for Microsoft Corp. (MSFT:US), the No. 1 software maker, which releases results tomorrow.

“It’s not looking good out there,” said Alex Gauna, an analyst at JMP Securities.

IBM fell 4.9 percent to $200.63 at the close in New York, the biggest decline since October 2009. Intel dropped 2.5 percent to $21.79.

Rising Inventories

ASML Holding NV (ASML), Europe’s largest semiconductor-equipment maker, slumped as much as 5.6 percent after its third-quarter order bookings fell more than analysts projected. The company also agreed to buy Cymer Inc. (CYMI:US) for 1.95 billion euros ($2.6 billion) to speed up development of chip-making technology.

Intel’s profit is being crimped by expenses to slow factory output and combat rising inventories. Corporate customers are showing “caution” in placing orders and consumers in developed markets are curtailing PC purchases, Chief Financial Officer Stacy Smith said in a statement.

Gross margin, the only profit yardstick Intel forecasts, will be about 57 percent, Intel said yesterday. That’s less than the 61.4 percent average estimate, according to data (INTC:US) compiled by Bloomberg.

“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.”

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)

Microsoft Sales

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 the numbers as a broad indicator of demand for desktop, server and laptop computers.

Microsoft, based in Redmond, Washington, is scheduled to release fiscal first quarter results tomorrow. Net income and revenue came under pressure amid PC-market weakness and as some buyers held out for the release the next version of Windows, the company’s main operating system, according to analysts.

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 researcher 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, combined with corporate demand that’s “relatively flat,” means the PC market growing at less than half its normal pace at this time of year, he said.

Server Slump

Intel’s data center group, whose sales of server chips to customers such as Google Inc. (GOOG:US) and Facebook Inc. (FB:US) 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.

IBM reported yesterday that revenue dropped 5.4 percent to $24.7 billion. That missed the $25.4 billion average analyst estimate, according to data compiled by Bloomberg.

The company cited an economic slowdown, especially in North America, that caused software deals to be pushed back and kept customers from signing up for business technology-services packages. Chief Executive Officer Ginni Rometty, in her first year on the job, is working to combat weak economic growth by expanding in emerging markets and shifting to higher-profit software and services, like data analysis and cloud computing.

Hardware Revenue

Hardware revenue fell 13 percent, while software sales declined 1 percent and services declined 4 percent from a year earlier, IBM said.

Mark Moskowitz, an analyst at JPMorgan Chase, said the results “could be a source of unease for some investors accustomed to IBM’s operating consistency.” At least two other analysts downgraded the stock, while others trimmed estimates for earnings.

The impact is “negative,” said Keith Bachman, an analyst at BMO Capital Markets who lowered his 2013 per-share earnings estimate to $16.81 from $17.04. IBM has a goal of $20 by 2015.

“IBM’s roadmap to get to $20 is much more heavily weighted to cost cuts and share buyback rather than revenue growth,” he wrote in a note to investors.

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Crayton Harrison at tharrison5@bloomberg.net


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Companies Mentioned

  • IBM
    (International Business Machines Corp)
    • $151.93 USD
    • 0.52
    • 0.34%
  • MSFT
    (Microsoft Corp)
    • $45.74 USD
    • 0.58
    • 1.27%
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