Intel expects fourth-quarter revenue to drop 23 percent

This post was updated at 11:16 a.m. PST with comments from a Friedman, Billings, Ramsey & Co. analyst.

Intel warned Wednesday that its fourth-quarter revenue will fall $2 billion short of its original forecast, due to PC makers curtailing chip orders.

The announcement comes less than two months after Intel warned on November 12 that its fourth-quarter performance would fall below its original forecast.

Revenue is now expected to be about $8.2 billion, down 23 percent over the same quarter in the previous year and down 20 percent sequentially.

On November 12, Intel said it expected revenue to be between $8.7 billion and $9.3 billion. Before that, Intel had expected to generate $10.1 billion to $10.9 billion in revenue for the quarter.

The drop in revenue is a result of PC makers slicing orders and living off their existing inventory of chips, Intel said.

Intel also noted it expects to report a greater loss in its equity investment, interest, and "other" category of between $1.1 billion and $1.2 billion, versus its previous expectation of a loss of about $50 million.

The chipmaker's investment in Clearwire, for example, is expected to result in a noncash charge of about $950 million in the fourth quarter.

Intel's gross margin is now expected to fall toward the "bottom of the previous expectation of 55 percent, plus or minus a couple of points," the company said.

Research and development spending, as well as general and administrative costs, are anticipated to be $2.6 billion, lower than Intel's previous forecast of $2.8 billion.

Intel, although the largest, is by no means the only chipmaker to issue a fourth-quarter warning.

Last month, Texas Instruments and Broadcom both warned that their quarterly performance will fall short of previous forecasts. Intel archrival Advanced Micro Devices also announced that its fourth-quarter results will fall below previous expectations.

Intel shares fell as low as 6.7 percent to $14.34 in early morning trading. The company is set to report fourth-quarter earnings on January 15.

While Wall Street may have been surprised by Intel's second warning for the quarter, one analyst noted it was not a "complete shock."

Glen Yeung, an analyst with Citi Investment Research, noted in an analyst report:

We had been anticipating a shortfall, modeling 4Q08 down 17 percent below even the low end of Intel's guidance, and in this regard are not completely shocked by Intel's pre-announcement.

Recent data points from notebook original design manufacturers (ODMs) and motherboard makers have been noticeably negative, substantiating such a shortfall. The miss, however, comes after Intel had established its earnings date, and may destroy any false hope that may have arisen on the premise that the earnings date signaled they had made the quarter.

Yeung noted that Intel's November warning of a sequential revenue drop of 12 percent would have already marked its worst fourth quarter sequential decline in history. And with this latest announcement, the historic gap gets even wider.

And for Yeung, it's the revenue decline that causes more concern than a drop in gross margins. He notes that the drop is still within Intel's previously issued forecast.

Barclays Capital analyst Tim Luke, meanwhile, believes weakness in desktop computers and servers is mainly driving the revenue shortfall.

He advised investors to keep a keen ear tuned to any comments Intel may make about its assessment of system-level and finished-goods inventory when it reports its fourth quarter results next week. Luke noted that he believes inventory in the distribution channel remains moderate, while inventory on hand at its customers is likely up.

Investors may also want to take heed of comments Intel may make about its future revenue guidance, visibility into the quarter, whether future gross margins may dip lower than the expected 53 percent range, and the degree that Intel may reduce its capital expense, said Craig Berger, an analyst with Friedman, Billings, Ramsey & Co.

The rate that computer makers are shipping systems in the fourth quarter is expected to fall 3 percent sequentially for notebooks and 27 percent for desktops, Berger noted.

And in the first quarter, Berger is expecting notebook shipments to decline 23 percent sequentially and desktops by 18 percent quarter over quarter. Overall, that could result in a 21 percent sequential decline, which would mark the worst seasonal decline in the chipmaker's history, he added.

Berger noted that given the steep drop in revenue, Intel could announce a cut in its workforce during its earnings call next week.