A Chill in Intel's Festive Season


This is the point in the computer-chip sales cycle that company executives live for. Demand is healthy. And while supplies are sufficient, they're tightening enough to keep prices buoyant. Of course, when moments like this come, it's important to remember that the good times rarely last.

Chip industry bellwether Intel (INTC) appeared the picture of health Dec. 8 as it released a midquarter update, narrowing a forecast for quarterly revenue. Sales will be $10.4 billion to $10.6 billion, vs. a previous range of $10.2 billion to $10.8 billion. Intel reported revenue just shy of $9.6 billion a year earlier. Intel also said its gross margin – a yardstick of profitability -- will come in at 63%, plus or minus a point, versus 56% a year ago.

DELL'S PROBLEM. But there are some troubles beneath the good news. Intel is struggling to meet demand for chipsets -- the chips that connect a PC's microprocessor with its main memory and other parts of the system. CFO Andy Bryant said the supply constraints could extend into 2006. The company's stock slipped 3%, to $24.93, in extended trading after the report was released.

Chipset supplies aside, Intel's disclosure was more or less in line with what analysts were expecting. "If it's not a rosier story, then it certainly is a more pinkish story," says analyst Tom Smith of S&P Equity Research. "It's a reflection of what's going on with PC sales."

Indeed PC sales are proving rosy in their own right. Market researcher IDC reported that overall unit sales of PC surged in the third quarter by 17%, beating prior forecasts and prompting an upward revision in its projections for the remainder of the year. Intel's biggest customer, Dell (DELL), said in November that its revenue growth was slowing as consumers embrace low-margin PCs (see BW 11/14/05, "Dell's Edge Is Getting Duller". But margins on PCs are Dell's problem. Intel is mainly concerned about how many computers are being sold.

And there are signs that demand for PCs will remain strong into 2006, says analyst Ashok Kumar of Raymond James. "We'll be exiting 2005 with double-digit growth for the third year in a row," he says. "We're likely to see a fourth in 2006."

BARRELS OF BLACK INK. Kumar says that if Microsoft's (MSFT) next version of Windows, known as Windows Vista, arrives on time – its current expected in July, 2006, -- or even if it's late, it could prove a catalyst for continued unit demand growth in 2007 (see BW Online, 11/18/05, "Microsoft's New Word: Accountability"). That would be in line with the Semiconductor Industry Assn. forecast, released in November, which called for PC unit growth of 10% in 2006.

And it's not just PCs that are in high demand these days. Intel's disclosures came on the heels of similarly healthy news from Texas Instruments (TXN) and Qualcomm (QCOM), the world's two biggest makers of mobile-phone chips. Texas Instruments on Dec. 7 raised its quarterly revenue forecast to $3.56 billion to $3.71 billion. The next day, Qualcomm raised its per-share profit forecast to 38 cents to 39 cents, from 36 cents to 38 cents. Sales will be at the high end of a range of $1.67 billion to $1.77 billion. The reason? Consumers around the world are snapping up next-generation cell phones powered by Qualcomm's chips.

Even so, shares in both companies ended lower Dec. 8. Texas Instruments said that gross margins are nearing their peak. That prompted JPMorgan analyst Chris Danely to leave his rating on Texas Instruments stock at neutral, saying, "the risks outweigh the rewards." Texas Instruments shares dropped 2.8% while Qualcomm slumped almost 2%.

HOLIDAY CHEER. And while demand for Intel's chips is strong, the company faces stiffening competition from its perennial rival Advanced Micro Devices (AMD). AMD continues to win ever more business with desktop PC and server vendors, and it's taking share from Intel in the process (see BW Online, 11/16/05, /technology/content/nov2005/tc20051116_054956.htm

"AMD: Less of an Underdog").

"We believe desktop end demand has been slightly higher than initial expectations," Danely of JPMorgan wrote in a Dec. 8 research note. "However our checks indicate Intel continues to lose some market share to AMD."

Intel's Bryant, asked during the conference call about Intel's market-share expectations, declined to forecast a specific number. But he conceded, "If AMD ships as they forecast they would this quarter, then we would lose some market share." But Intel and other chipmakers can take comfort in the yearend electronics-buying spree -- at least for a few more weeks.


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