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THE DAY AHEAD: No excuses for Intel&#039s earnings miss

To hear Intel Corp. (Nasdaq: INTC) execs tell it, investors have nothing to worry about despite the company's second consecutive earnings miss. A few manufacturing glitches here and there hurt the bottom line.

No worries though -- Intel said its fourth quarter will be stronger and its manufacturing house will be in order.

Intel: Believe in 4Q?

Not so fast. The third quarter earnings miss was strike two against the company. And despite relative bullishness from Intel, the fourth quarter will be no picnic as a series of wild cards could pop up.

Intel reported third quarter earnings of 55 cents a share on revenue of $7.3 billion. Sales were in line with estimates, but earnings missed estimates by two cents.

Three strikes and Intel could lose some credibility. You could argue that quarterly results and meeting estimates isn't that big of a deal taking a long-run view. But that argument rings hollow from Intel, a company that has played the expectations game better than most for years. Intel failed to execute and/or failed to manage Wall Street's expectations.

In this column last quarter, we told you Intel's second quarter earnings miss should be taken in stride because the company was bullish on the second half. Cut em some slack we said.

Apparently, Wall Street agreed and sent Intel shares higher (chart).

And then Intel missed estimates for the second quarter in a row and now depends on analysts to continue cheerleading for the chipmaker. The company said sales were hurt by a flaw in the high-priced Xeon chip and a delay in moving to 0.18 micron manufacturing, which shrinks and speeds up chips. Because of the manufacturing glitches its latest version of the Pentium III, dubbed Coppermine, was delayed.

The lack of high-end chips hurt profit margins, down a bit to 58.7 percent, and average selling prices. Intel said high-end chips will drive the fourth quarter.

Intel said it is expecting fourth quarter gross margins and revenue to be up from the third quarter. But the guidance was vague -- Intel didn't say by how much the fourth quarter would improve.

Should you believe Intel's outlook?

The answer this year isn't so clear-cut and Intel probably doesn't know how things will develop. Prior fourth quarter surges were a no brainer. This year is different.

Here are some of the items that could trip up Intel's fourth quarter:

  • Taiwan: Intel officials said the earthquake in Taiwan hasn't been a factor so far with orders or components. However, Intel execs also noted that it's still too early to know the full effect. Taiwan was one of the reasons Intel's fourth quarter outlook was upbeat, but vague. It's possible the earthquake in Taiwan may have thrown off orders by about two weeks, according to Scott Randall, an analyst at Soundview Financial. Randall said Intel would be able to catch up, but the fourth quarter will be back-loaded.

  • Year 2000: We know the issue seems all but dead, but the bottom line is that no one knows what will happen with spending habits.

  • Delays: Intel's fourth quarter outlook depends on its ability to deliver on its high-end chips and manufacturing process. One more high-end chipset delay courtesy of problems from Rambus' memory technology and Intel could be squeezed.

    The bottom line: "We won't know the fourth quarter effect until well into the quarter," said Randall. "We'll know in mid-December."

    Now the half-full, half-empty debate continues for Intel investors. Optimists will point to Intel's fourth quarter outlook.

    If you factor out the not-so-small fact Intel missed estimates, the quarter looked pretty good. Shipments of microprocessors, chipsets, and flash memory all grew substantially to new records during the quarter.

    The pessimists will point to falling average selling prices for chips and how Intel is in uncharted waters with its diversification into communications chips. You also can't deny that folks are gravitating to low-end Celerons and forgetting about high-end consumer chips.

    The debate continues...

    Motorola: When a hit is a miss

    In addition to Intel's earnings miss, Motorola (NYSE: MOT) only managed to meet estimates with third quarter earnings of 53 cents a share. Wall Street wanted a nice upside surprise and sent shares lower in aftermarket trading.

    But unlike Intel, it's hard to fault Motorola for its performance. Sales were in line with estimates at $7.7 billion and earnings were a drastic improvement from a year ago.

    Cellular and semiconductor sales were both strong. There's not a lot to gripe about. Shares might be weak for a day, but the long-term picture for Motorola looks good.