Chipmaker Intel (INTC) had a great year, but a "difficult" December. That's how Chief Financial Officer Andy Bryant characterized fourth-quarter revenue, which fell short of Intel's earlier forecast by $200 million. Investors made their disappointment clear: Intel stock plummeted by more than $5, or 12%, in extended trading on Jan. 17, after results were released.
Bryant blamed the miss on an ongoing shortage of chipsets -- the chips that sit between a computer's main microprocessor, its memory, and other parts of the computer -- coupled with weakness in PC sales, particularly in the Americas. The chipset-supply issue, which Intel first described in its midquarter update in December, reportedly has led to lost microprocessor business among some PC makers.
"MISMANAGEMENT OF FORECASTS." Intel Chief Executive Paul Otellini had hoped to fill the gap with third-party chipsets from vendors like ATI (ATYT), Via Technologies, and SIS. But when those chipsets didn't materialize, PC makers were left holding the bag -- with an expensive stockpile of PC microprocessor chips they couldn't use.
"We have mismanagement of forecasts and of capacity allocation all coming up at once, and the results aren't pretty," says analyst Michael McConnell of Pacific Crest Securities in Portland, Ore.
PC manufacturers, including Gateway (GTW), are said to be dismayed. Gateway signaled its displeasure by putting chips from Intel rival Advanced Micro Devices (AMD) in its retail desktop lineup during the fourth quarter, according to people familiar with the matter. The entire desktop product lineup of Gateway's eMachines brand currently contains AMD microprocessors.
"STAY ON THE SIDELINES." Bryant portrayed the chipset problem as nearly solved. "We believe that we have enough now to meet everybody's needs in the first quarter," he said. "We still believe it will take a while to get all the supply lines working."
Analyst Doug Freedman of American Technology Research said Gateway's move could be followed by PC giant Dell (DELL). "I think Dell could sign on with AMD during the back end of 2006," he said. Last year, Dell fueled speculation that its Intel-only chip strategy may be wavering, when it began selling individual AMD chips on its Web site (see BW Online, 11/11/05, "Dell's Slight Change of Emphasis").
San Francisco-based Needham & Co. analyst Charlie Glavin, who first identified the chipset issue in September, says even he was surprised. "I was floored by how bad it was," Glavin says. "I don't think it's realistic to expect that this is going to work itself out by the second quarter. This is not an opportunity to buy on a weakness. This is a time to stay on the sidelines. Too many things have to go right. Intel has to reinvent itself very quickly, and you tend not to bet that a supertanker can turn on a dime."
MISSED TARGETS. The news caught other analysts by surprise as well. Earlier in the day, SG Cowen analyst Jack Romaine had called for Intel to hit the higher end of its previous sales range. JPMorgan analyst Chris Danely also expected Intel to meet the higher end of expectations. The chipmaker's dour revelations stood in contrast to the hoopla of a week earlier, when Apple (AAPL) wowed investors with new computers sporting Intel chips (see BW Online, 1/10/06, "Apple's iPod, Intel Revelations").
Intel's fourth-quarter revenue came in at $10.2 billion, missing the low end of its forecast by $200 million (see BW Online, 12/9/05, "A Chill in Intel's Festive Season"). Quarterly net profits came in at 40 cents a share, or $2.5 billion, a 16% improvement over the year-ago quarter and 23% higher than the previous period. Gross margins came in at 61.8%, missing the 63% Intel had predicted a month ago.
These forecast ranges, long a staple of Intel watchers, are now a thing of the past. Otellini said the company would cease giving midquarter updates. "We manage our business to deliver long-term results," he said. "This current process is not effective communication and only heightens attention to short-term results."
POWERFUL POSITION. Intel said it expects to boost research and development spending, as well as capital spending. R&D spending will climb to $6.5 billion this year, vs. $5.1 billion in 2005. Capital spending will hit $6.9 billion in 2006, compared with $5.8 billion last year. Both spending surges are related to Intel's plans to shift its manufacturing technology to the 45-nanometer design node sometime in 2007.
Two new manufacturing plants -- one in Arizona, the other in Israel -- are slated for construction this year, and expected to begin operation in 2008. The company is currently manufacturing its highest-end chips on 65-nanometer technology.
The moves are part of an effort to pack ever more power into what analysts and investors say is an already-powerful chip lineup. If only Intel could get the chips to its demanding PC-making customers on schedule.
Hesseldahl is a reporter for BusinessWeek Online in New York
with Cliff Edwards in Silicon Valley
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