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Intel's earnings may portend market health

Disappointing results may be the result of poor planning at the chipmaker, or the start of a PC slowdown.

Intel's surprise departure from its own expectations for fourth-quarter earnings and revenue left executives, analysts and investors worried about the state of the PC industry heading into the new year.

The chipmaker blamed a drop in demand for desktop PCs for its disappointing fourth-quarter performance during a conference call Tuesday afternoon. Intel said fourth-quarter revenue was $10.2 billion and earnings per share were 40 cents, off from its own guidance provided in December of $10.5 billion and 43 cents.

Analysts were left wondering if Intel's results were contagious. AMD reports its fourth-quarter earnings on Wednesday, which could signal whether the problems Intel faced in the fourth quarter extend to the rest of the market. IDC and Gartner are also expected to report worldwide PC market share numbers for the fourth quarter this week.

"The biggest surprise is not that the market is seeing inventory slosh, but maybe it's Intel's lack of ability to measure this," said Cody Acree, a financial analyst with Stifel Nicolaus.

The PC market is rapidly shifting to notebook PCs at the expense of desktops, and the rate of that switchover seems to be accelerating. Desktop shipments didn't hit the targets that Intel and other analysts expected in the fourth quarter, and the company was also left holding the bag because it was unable to build enough chipsets to accommodate its desktop processors, Acree said.

This opened the door for AMD to steal market share away from Intel during the quarter, said Roger Kay, president of Endpoint Technologies Associates. Low-end desktops are an area of relative strength for AMD, and Intel estimated that AMD probably gained a percentage point of market share during the quarter, chief financial officer Andy Bryant said during a conference call after Intel's earnings release.

PC demand during the fourth quarter, one of the most important periods of the year for the PC industry, appeared at first glance to be in line with expectations set earlier in 2005, analysts said.

The average selling price of a desktop PC during the holiday season was about $700, in line with recent trends, said Stephen Baker, director of industry analysis with NPD Techworld.

"If desktop prices were weak, it must have been that they didn't see enough trading up during the end of the holiday season," Baker wrote in an e-mail interview. Dell reported the same problem, an inability to convince consumers to purchase more powerful and profitable desktop configurations, when it reported its own disappointing financial results in its second and third quarters of 2005.

Much attention is always paid to Intel's financial results as a harbinger of the overall state of the IT market. But Intel is in the midst of an image makeover this time around as it invests heavily in new consumer PC technology and prepares products for the second half of 2006, which analysts expect will help close the performance gap between Intel's chips and AMD's.

"Their hopes are clearly pinned on mobile for the future," Kay said. "As usual, they say they can turn it around. But like the Dell guys a couple of months ago, management seemed rattled."