Global woes a part of Intel's worries

Intel shares fell $3.94, or more than 11 percent, to $29.31.

The giant chipmaker said Thursday that first-quarter revenue would be off 25 percent from the fourth quarter, at about $6.5 billion. It had previously told investors that sales were expected to drop 15 percent in the quarter. The company also announced plans to cut 5,000 jobs, or about 6 percent of its workforce.

The news, coming amid a slew of warnings from other chip firms and high-tech companies, prompted analysts to reduce estimates and ratings on Intel, as well as to consider the global implications of Intel's situation. Until recently, the consensus Wall Street view held that the economic slowdown was limited to the United States.

"The short version is that we fear that Asia and Europe, which have been stronger than the U.S. to date, will soon be dragged down by a weaker U.S. economy since both rely to a large degree on exports to the U.S.," wrote Lehman Brothers analyst Dan Niles in a research note.

Niles, who cut estimates for the company earlier in the week following an interview with Chairman Andy Grove, dropped them again. He now expects earnings per share for fiscal 2001 to be 70 cents, down from 90 cents, and earnings per share for fiscal 2002 to be 80 cents, down from $1.10.

"Do not assume this is the end of the estimate reductions either," Niles wrote, noting that without the expense reductions, earnings estimates for 2001 would have been around 60 cents per share.

Collateral damage is also being assessed on PC companies. Morgan Stanley analyst Gillian Munson lowered estimates for the quarter and the year for Compaq Computer because of that company's large presence in the server market.

"While Intel isn't the only data point to look at when analyzing Compaq, it is a pretty big directional data point relative to other news in the market," she wrote in a research note.

Competitive concerns
Intel may also be losing sales to competitors, analysts noted.

"Management believes this malaise is global. Obviously the U.S. has been weak, but we believe there has been some recent softness in Asia (except the sub-$800 market in China). While Intel called Europe sales 'uninspiring' and cited a slowdown in retail recently, we also believe that Intel has been losing significant market share to AMD based on comments from Asian and other computing vendors," Credit Suisse First Boston analyst Charles Glavin said.

Analysts also expressed concern about the excess inventory that has built up in the flash memory market.

"Telecom customers have cancelled large orders, especially in flash, and there is very clearly excess inventory in flash. We believe that the flash outlook is driven by mobile phone demand, which is the largest end-equipment market for flash, and as we have noted since the early fall, we are concerned about unit growth rates in that market. Recent revision in some handset forecasts we have seen show the market growing only 10 percent in 2001 to 450 million units from 410 million in 2000," Niles wrote.

Intel also reduced margins predictions Thursday, saying they would be closer to 51 percent than the previous guidance of 58 percent.

Glavin called the cuts "shocking," and worried that Intel could see gross margins slip below 50 percent by the end of the year. He put much of the blame for the drop on the costs associated with Intel's new Pentium 4 chip.

Morgan Stanley Dean Witter analyst Mark Edelstone also noted financial problems with the transition to the Pentium 4. The Pentium 4 is currently manufactured using 0.18-micron technology, but will switch later this year to 0.13-micron technology. While the switch is taking place, however, the costs of making the Pentium 4 chips are high.

"Consequently, we believe Pentium 4 needs to enter 0.13-micron production to cost-effectively hit mainstream, high-volume price points in order to achieve the fast ramp. Thus, we believe Intel will continue to face significant gross margin risk in 2001," he wrote.

And since the Pentium III chips only reach speeds of 1GHz, competition with AMD remains strong "until the Pentium 4 reaches volume shipment," Edelstone said.

Those issues, along with the relative strength of the low-end market, could help AMD ride out the downturn, analysts noted.

"The major problem areas for Intel--servers and performance desktop/notebook PCs in the U.S.--are markets that AMD is less exposed to. In contrast, we think that AMD is much better to benefit from still-robust sales of low-end PCs in Asian markets, and European sales that have not weakened as dramatically," wrote Merrill Lynch analyst Joseph Osha.

But Osha did lower revenue estimates for AMD's flash revenue, prompting a cut in earnings estimates for 2001 from $1.84 to $1.72 per share, and revenue estimate from $5.3 billion to $4.9 billion.

General slowdown
Also troubling is general slowdown for the PC industry. Credit Suisse First Boston had dropped growth estimates for the PC market from 9 percent to 5 percent earlier this week.

Glavin cut his price target on Intel from $33 to $30. He dropped 2001 earnings per share estimates from 92 cents to 56 cents.

Edelstone lowered earnings estimates for the first quarter from 22 cents per share to 15 cents per share, and for 2001 from $1 per share to 60 cents per share.

ABN AMRO Analyst David Wu dropped 2001 earnings estimates from $1 to 70 cents per share, and maintained a "hold" rating on the stock.