Weaker-than-expected demand from computer vendors caused Intel to revise its forecast for the first quarter.
In after-hours trading Wednesday, Intel's shares plunged by 10 points to 76-7/8. The preliminary warning came after the market closed; Intel ended the day at 86-7/16, up 1-1/8 over yesterday.
The downturn is related to softer-than-expected demand, especially in North America and Europe, said Ashok Kumar, an analyst with Piper Jaffray.
Unit sales for the quarter are 2 to 2.5 million short of projections, he said. Worse, because first quarter sales generally track second quarter sales, "the 15 percent growth rate for the year is not tenable," he said.
"This was totally unforeseen. All the analysts were not factoring in a drop in PC sales, given that the price points had come down [and were expected to spur sales]," said Brian Eisenbarth, an analyst with Collins & Company.
Intel's stock peaked around the mid-90s late last month, but has been trending down since.
The Santa Clara, California, company said it expects revenues to fall approximately 10 percent below earlier projections of $6.5 billion in revenue. This pegs first quarter revenue at $5.9 billion, a significant downturn in revenue from the fourth quarter and year-ago figures, which both came in around $6.5 billion.
Meanwhile, increases in expenses and write-offs relating to the acquisition of graphics chip firm Chips and Technologies will mean that the company's overall gross margin will drop to 53 percent. Earlier, the company projected gross margins of 55 percent, a decline from the fourth-quarter margin of 59 percent, which itself raised some concern in the financial community.
Intel expects to take a $165 million, or 9 cents a share, charge for its acquisition of Chips and Technologies. As a result, that acquisition will push its expenses up higher than earlier anticipated. Intel initially thought expenses would be 2 to 5 percent lower than the previous quarter's $1.4 billion, but expenses are now expected to be 3 percent higher than the fourth quarter.
The company will report its first quarter results on April 14. Analysts had expected the company to post profits of 93 cents a share, according to First Call.
On Wednesday, rival chipmaker Advanced Micro Devices said it would report widening losses for the first quarter. AMD's stock lost 1-1/16 on the news, to 21-3/4, down from yesterday's close of 22-13/16. (See related story)
Stephen Dube, an analyst with Wasserstein Perella Securities, asserted PC vendors' continued shift toward direct sales and the sub-$1,000 market are responsible for Intel's revised first-quarter projections.
Looking to increase direct sales to customers, PC vendors are implementing a "build to order" (BTO) manufacturing process, a scheme in which less inventory is kept on hand. Intel has confronted the problem since the second quarter of last year, Dube said, estimating it will nonetheless take until the June quarter before PC vendors get their channel inventories to a point that aligns with the direct sales strategy and BTO process.
Aggressive pricing and the sub-$1,000 PC market that competitors Advanced Micro Devices and Cyrix have tried to exploit have also contributed to a slowing of revenues, Dube added.
But Piper Jaffray's Kumar dismissed that direct sales explanation, saying this accounts for part of the shortfall at best. "It's all demand related," he said. "It is not a BTO issue."
An Intel spokesman said that inventory issues contributed to Intel's shortfall in expectations, but that inventory was not the only factor in its reevaluation of projected revenues and earnings.
Low prices on microprocessors have also hurt the company. With declining chip prices, there has been a corresponding need to sell more units. The double whammy occurs when unit sales do not come through, Piper Jaffray's Kumar said.
Intel projected lower earnings and revenues for 1998 when it reported fourth-quarter 1997 results on January 13, prompting a number of analysts to cut their 1998 earnings estimates. Soundview chip analyst Scott Randall sliced his forecast to $3.77 a share from $3.84 a share, while setting a 1999 earnings-per-share forecast of $4.40 a share. Hambrecht & Quist reduced its estimate to $3.61 a share from $3.90 to reflect a weak margins outlook and slow revenue growth. Gruntal & Company also lowered its estimate, to $4.20 per share from $4.50.
At the time, Kumar said the culprit was the company's accelerated transition to the Pentium II processor. The Pentium II comes with more expensive packaging and, as a result, is expected to depress gross margins in 1998. Kumar cut his estimate to $3.90 per share from $4.15, but said he expects gross margins to recover in 1999.
The effect of Wednesday's announcement is uncertain, but it will likely prompt further lowering of estimates, based on historical evidence.
Intel reported fourth-quarter 1997 earnings of $0.98 a share, which surpassed the Wall Street consensus; but many analysts said after excluding a $0.04 contribution for a lower tax rate, Intel's earnings remained slightly better than consensus. First Call said the consensus estimate was $0.90 a share.
Also, Intel announced it would be coming out with its first consumer chip, called Celeron, in April. (See related story)
Intel is an investor in CNET: The Computer Network.