Clouds hang over Intel's earnings report

Intel will report earnings Tuesday afternoon, and nobody seems to be in a good mood about it.

Intel falloff Stock price from October 1999 to present.

Source: Prophet Finance

The Santa Clara, Calif.-based chip giant roiled the financial world last month when it warned that revenue, and in all likelihood profits, for the third quarter would be lower than anticipated because of slowing PC sales. The announcement sparked a slide in both the company's stock and the market overall.

The company is expected to report earnings of 38 cents a share, or roughly $2.7 billion, according to lowered consensus estimates from First Call/Thomson Financial, on revenue of approximately $8.6 billion. Last year, Intel reported earnings of 28 cents a share (split-adjusted and excluding acquisition costs) on revenue of $7.3 billion.

Not including profits from outside investments or acquisition costs and adjusting for taxes, earnings will come to roughly 29 cents a share, estimated Dan Scovel, an analyst at Needham & Co. That compares with 24 cents a share on a similar basis. It's growth, but not as glorious as in the past.

As a result, the fourth quarter looms even larger than normal and will be one of the major issues when Intel executives speak with analysts in a conference call tomorrow.

"If they guide to anything less than 10 percent, that would indicate less than a seasonal pattern," Scovel said.

The cause and extent of the PC malaise has been Topic A in the industry for a month. Although Intel and some analysts said that slow demand in Europe prompted the third-quarter sluggishness, some analysts noted that demand has been unseasonably slow in a variety of markets.

With the drop in PC demand, a shortage of microprocessors has transformed into a surplus, leading to price declines on microprocessors. Interestingly, Intel rival Advanced Micro Devices last week beat earnings estimates but warned that pricing pressure would hamper its plans for the consumer and corporate markets.

Intel also pushed back the release of the Pentium 4 until late November. Meanwhile, company executives explained the chip won't be the company's "center of gravity" until 2002, a lengthy rollout that could leave Intel more vulnerable to competition on price and performance from AMD. At the same time, upgrades to the Pentium III have been pushed back, and the low-end Timna chip has been canceled.

"There is not much out there to tout for the company: Europe is weaker than expected, U.S. corporate is coming in lighter than expected, and even Asia appears to be weakening," said John Joseph, an analyst at Salomon Smith Barney. "The weakness we have begun to see at Intel should lead into other problems we expect to see at the company for the next couple of quarters."

Still, while the company is expected to address most of these issues in its conference call, the overall effect on the market is uncertain. After all, Intel's stock, like that of Dell Computer, Apple Computer and other big-name equities, has been whacked since the September surprise. Less than a month ago, the stock was trading in the $60 to $63 range. It now muddles around the $35 to $39 range.