Tuesday, March 17, 2009

Intel's Net Plunges as Demand Dries Up

Intel Corp.'s fourth-quarter profit plunged 90% and the semiconductor giant predicted even weaker conditions ahead, the latest evidence that the recession is rocking all segments of the high-tech industry.

Intel's report, which serves as a leading indicator of consumer and business spending on technology, kicks off what investors expect to be a parade of dismal technology earnings reports.

Slumping demand and shrinking profits, which triggered layoffs last year at struggling Silicon Valley companies such as Yahoo Inc., Applied Materials Inc. and Sun Microsystems Inc., have recently spread to companies with strong positions in healthier markets.

Big tech companies, including Oracle Corp., SAP AG and Google Inc., in the past week have made rare trims to their work forces. Microsoft Corp., meanwhile, is considering significant job cuts that could be announced when it reports results next week.

[tech troubles]European Press Agency (Intel); Dell, Microsoft, Nokia

Intel said it is suffering from a rapid deceleration in computer demand and moves by PC makers to cut inventories in anticipation of a weak 2009. Intel's quarterly profit was also hurt by a $1 billion writeoff in the value of its investment in Clearwire Corp., a provider of wireless service.

Intel, which twice lowered its fourth-quarter sales forecast, reported quarterly sales fell 23% from a year earlier to $8.23 billion. Citing uncertain economic conditions, it declined to issue a revenue forecast for the current first quarter, though it disclosed a figure for internal planning purposes that is 28% lower than revenue it reported for the year-earlier period.

Paul Otellini, Intel's chief executive officer, said in a conference call that the fourth quarter marked only the second time in 20 years that Intel's revenue was lower than in the third period.

Despite the gloomy outlook, he indicated that Intel's past expense cuts should be sufficient and said it will not slow spending on research and development. "We've always believed that the best way to successfully emerge from recessions is with tomorrow's products, not by standing still with today's," he said.

Bill Kreher, an analyst at Edward Jones, said Intel's unwillingness to provide a revenue range for the current period underscores the fact that even the largest companies have a hard time forecasting in the current environment. "It's a very uncertain time right now, and visibility is extremely limited," he said.

Demand for personal computers was healthy through the third quarter of this year. But the picture changed dramatically in the typically strong fourth period, as negative economic news caused consumers and companies to slow their purchases. Research firm IDC on Wednesday said unit shipments declined 0.4%, the first year-over-year decline in shipments in six years.

Intel, which supplies roughly four-fifths of the chips that serve as calculating engines in PCs, experienced a particularly sharp reversal in its fortunes. While consumers have pulled back on computer purchases, PC makers have pulled back even more sharply on their purchases from Intel, holding off purchases for new systems they might build in early 2009.

Many tech companies had problems well before the economic slump took hold. Makers of memory chips, in particular, have seen pricing plunge because of competitive forces that led them to add too much production capacity and make too many chips. Now demand has softened, as people slow purchases of computers, cellphones and other products that use the components.

Micron Technology Inc., one of the biggest makers of chips known as dynamic random-access memory, or DRAM, last month reported a $706 million loss for its fiscal quarter ended Dec. 4. The company said average selling prices for its DRAM chips fell 24% in the period, while prices on other popular chips known as flash memory fell 34%.

"A downturn in the general economy is sufficient to cause a downturn in the semiconductor industry, but the semiconductor industry has at least as many downturns that are caused by overcapacity and excess inventory situations," said Walden Rhines, chief executive officer of Mentor Graphics Corp., which makes software used in designing chips.

The story is similar in disk drives, where a glut of the devices was already squeezing profits before demand problems began adding to the industry's woes this fall. Seagate Technology Inc., the biggest disk drive maker by sales, this week replaced its CEO, cut management salaries and said it would lay off 2,950 employees, or about 6% of its work force.

Intel said Thursday that its closely watched gross profit margin -- which it forecast in October at 59% in the fourth quarter -- hit 53.1% in the period. More surprisingly, the company said margins are likely to descend to percentages in the "low 40s," largely because of charges it takes when its factories are not full and costs associated with moving to a new production process.

One bright spot for the company in the quarter was Atom, a new chip for low-end portable PCs called netbooks. The microprocessor, and accessory chips that work with it, generated $300 million in revenue in the fourth period, up 30% from the third period, said Intel Chief Financial Officer Stacy Smith. Atom has a much lower price than other Intel chips; excluding the product, the company's average selling prices were up.

But Leslie Fiering, a research vice president at Gartner Inc., said Atom and the netbook craze are causing buyers to look for lower-priced systems. "It's putting downward pressure on all PC prices across the board," she said, a trend that tends to put pressure on Intel's prices.

Intel reported that net income for the period ended Dec. 27 declined to $234 million, or four cents a share, from $2.27 billion, or 38 cents, in the year-earlier period. The company's stock at 4 p.m. was up 21 cents on Nasdaq at $13.29, and rose to $13.51 in after-hours trading following the announcements.

No comments:

Post a Comment