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Tech Industry

Intel forecasts a gloomy fall

Pointing to chip shipments at the lower end of seasonal norms, and soft demand for communications products, the company lowers its revenue range for the quarter.

Fall is here, but the seasonal surge in PC buying is not.

In its midquarter update Thursday, Intel said sales for the third quarter are now expected to be slightly less than $6.6 billion, at the lower end of earlier forecasts.

The company also narrowed its range of estimates, saying revenue is now most likely to fall between $6.3 billion and $6.7 billion. Intel had previously projected revenue between $6.3 billion and $6.9 billion.

The company said microprocessor shipments are at the low end of what is typical for this time period, and that demand for communications products remains soft.

If sales for the third quarter come in at less than $6.6 billion, it clearly will be a dismal back-to-school season. Sales in the second quarter totalled $6.3 billion, while earnings came to 7 cents a share. An increase to $6.5 billion would only represent a 3.2 percent increase from the second to third quarter. Historically, revenue rises 10 to 12 percent from the second quarter to the third.

If there's a bright spot, it's that the market is moving back to more familiar norms, with the second half of the year recording stronger sales than the first, Intel President Paul Otellini said during a conference call. Recent price cuts have also slightly brightened projections for September.

"We've seen very strong distributor channel sales out after our price move in early September. That gives us confidence. Our (sales) backlog gives us the rest of the confidence. I feel very good about the range we've projected here materializing within the quarter," Otellini said.

Otellini said the company's product mix--the number of Pentium 4 chips versus Celeron chips it sells--is not expected to change much from the second quarter. Intel sold a greater number of Celeron chips than usual during the second quarter as PC buyers snapped up low-price PCs.

A number of analysts lowered earnings estimates in advance of Intel's Thursday conference call. On Wednesday, Merrill Lynch analyst Joe Osha trimmed yearly estimates to 51 cents, excluding charges, and lowered third-quarter estimates to 11 cents.

Prior to the call, the consensus estimates were for quarterly earnings of 13 cents a share, excluding charges, and 55 cents for the year.

Trouble ahead, trouble behind
Although PC sales slightly exceeded expectations in the first quarter and exacerbated component shortages, there's been little other good news.

Worldwide shipments of desktops remain down from 2001 totals, which were themselves down from shipments seen in 2000. Revenue from servers worldwide declined 12.8 percent in the second quarter, according to Gartner. Sales of many tech products in the United States, Europe and Japan are off, and revenue gains in growing markets such as China have even slowed a bit for some products.

Intel, which makes about 83 percent of the PC processors in the world, AMD, and a number of PC makers reported revenue and earnings lower than original expectations for the second quarter.

Intel's efforts to get into markets beyond the PC haven't much helped the company's bottom line. Both its communications and wireless groups have lost money for the past several quarters, and executives have said the outlook, especially in communications, isn't promising.

Sean Maloney, senior vice president of the Intel Communications Group, has said that evidence is mounting that the Internet will suffer brownouts next year as Web traffic outpaces the installed carrier infrastructure.

To maintain in tough times, Intel said it would trim around 4,000 jobs, about 5 percent of its total number of employees, and cut capital spending to a range of $5 billion to $5.2 billion. Earlier, the company said this year it would spend $5.5 billion on plants and equipment.

Although the bleak outlook is bad for businesses, it has benefited consumers. Prices on memory and flat-panel monitors have slid in recent months, prompting manufacturers to lower PC prices and increase rebates.

Geographically, Intel has identified some bright spots. Sales in Europe, for a long time a lagging market and one that has been blamed for earnings shortfalls in the past, are ahead of expectations. Yet sales into Asia and Japan have fallen behind predictions. Meanwhile, sales in North and Latin America are meeting expectations. News.com's John Spooner contributed to this article.