Intel Warns of Dismal Fourth Quarter

A big reduction in the fourth-quarter sales forecast from the world's largest computer chipmaker augurs a brutal yearend for the tech industry

By Arik Hesseldahl

After the end of the third quarter, one tech titan after another bemoaned a "lack of visibility" into the yearend period. As the U.S. financial crisis worsened in September, it was apparent the rest of the year would be rough, but most companies could scarcely tell how bad things would get.

The industry is getting all too clear a picture now. The most recent indication came Nov. 12, when Intel (INTC) slashed its fourth-quarter sales forecast, citing "significantly weaker than expected demand in all geographies and market segments." Intel said it now expects sales of $8.7 billion to $9.3 billion, down from a prior forecast of $10.1 billion to $10.9 billion.

As the world's largest maker of computer chips, Intel is considered a bellwether for the wider industry. Its warning represents an uncharacteristically dour outlook for the crucial fourth quarter, when tech companies depend on consumers making yearend holiday gift purchases and companies draining annual IT budgets. "For all intents and purposes, the PC market is just dead," says Edwin Mok, an analyst at Needham & Co. in San Francisco. "We expected something like this already, but we didn't expect it to be so bad." Intel also said PC makers are reducing inventories of chips.

Stock Tumbles After-Hours

With the new forecast, Intel is on track to suffer a rare year-over-year decrease in quarterly revenue. Last year, Intel reported sales of $10.2 billion in the fourth quarter and had been on track to grow revenues this quarter, if only a little. Now it's in danger not only of reporting lower sales for the quarter, but also the full year. Depending on the final tally for the fourth quarter, Intel's full-year sales could come in below last year's $38.3 billion. The last time annual sales contracted was in 2006, when the company launched a wide-ranging restructuring and slashed thousands of jobs. Another decline occurred in 2001 after the tech bubble burst.

This time around, Intel also expects narrower gross margins, a key gauge of profitability. Intel now expects margins of 55%, compared with 59% previously. The company also expects to cut spending by $100 million, to $2.8 billion.

Intel stock dove in extended trading, falling almost 7% to 12.60, after the news was announced. Stock in rival Advanced Micro Devices (AMD) also slipped in extended trading. PC makers including Dell (DELL), Hewlett-Packard (HPQ), and Apple (AAPL) also dropped in after-hours trading, an indication tech stocks may be in for a rough ride Nov. 13. "If Intel isn't a bellwether, I don't know who is," says Ashok Kumar, an analyst at Collins Stewart. "A drop in guidance this big is an ominous sign both for the tech sector and the wider economy."

Cisco Warns on Revenue

Intel's news follows a warning from Cisco Systems (CSCO), which on Nov. 5 told investors it expected revenue in its fiscal second quarter, which ends in January, to decrease by 5% to 10% from a year earlier. Analysts had expected second-quarter revenue growth of about 6%. "The environment has changed dramatically in the last two months, with the financial crisis in September and the economic crisis becoming more apparent on a global basis in October," Cisco CEO John Chambers told analysts in a conference call.

Other warning signs have come from the likes of Apple, which according to analysts has slashed production of its popular iPhone. The company rarely talks about its manufacturing plans, but analyst Craig Berger at Friedman Billings Ramsey (FBR) said in research note on Nov. 3 that Apple's iPhone production plans could fall by as much as 40%. On Nov. 12, electronics retailer Best Buy (BBY) slashed earnings and sales forecasts, citing "rapid, seismic changes in consumer behavior [that] have created the most difficult climate" the company has ever witnessed. The warning came days after Circuit City (CC) filed for bankruptcy protection amid weak consumer spending.

When do the clouds lift? Shane Rau, an analyst at market researcher IDC, says the outlook may improve in the second half of 2009, but recovery may not come until 2010.

Hesseldahl is a reporter for BusinessWeek.com.