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Intel lowers its revenue outlook

Slower-than-expected sales in Europe are to blame, the chipmaker says in its midquarter report. Also a factor: a shift toward lower-priced Celeron processors.

Intel lowered its outlook for second-quarter sales, citing slower-than-expected activity in Europe.

Intel said its processor sales have been running at the low end of a normal seasonal decline from the first quarter, lower than it originally expected.

The chipmaker blamed those lower-than-expected revenues and shipments on lackluster demand for desktop PCs in Europe.

"We are lower in Europe than we anticipated. We thought Europe would be a little stronger in the quarter," said Andy Bryant, Intel's CFO.

Meanwhile, Intel's mix of Celeron versus Pentium 4 chip sales has shifted more toward Celeron over the quarter. Because the Celeron sells for less money than the Pentium 4, an increase in Celeron units lowers Intel's revenue and profit per chip.

"We're seeing Celeron be a higher percentage than expected," Bryant said. "Whereas we were short with Celeron in the first quarter, we were able to ship more of those in the second quarter."

Intel shares were down 10 percent in after-hours trading after the announcement.

Most analysts had expected Intel to offer a relatively conservative outlook for its second quarter. But the $6.2 billion revenue figure was lower than most had predicted.

Merrill Lynch, for instance, predicted that the chipmaker would narrow estimates in its midquarter report to between $6.5 billion and $6.8 billion, owing to slower PC sales in April and May. First Call predicted earnings of 15 cents per share on revenue of $6.67 billion.

Intel said its gross margins would fall during the quarter, which it also attributed to lower revenue and the unexpected change in mix between high- and low-price chip sales. The chipmaker said its second-quarter gross margins would be 49 percent, give or take a few points, compared with its previous expectation of 53 percent.

The company said it will take a $230 million charge to cover the amortization of costs related to its acquisition of PC card maker Xircom, which was completed in March 2001. Intel had previously expected to take a $115 million charge for those costs.

Intel now expects its acquisition costs for the year to be $530 million, up from $440 million.

In April, Intel turned in a first-quarter profit of 15 cents per share, excluding charges, on revenue of $6.8 billion.

Following that performance, which beat expectations, Intel set second-quarter expectations higher. They turned out to be a little too high, Bryant said.

Bryant urged analysts to look at the first half as a whole, saying the company was still on track with its original expectations for the period.

"Our first half is above what we expected in December," Bryant said. "If you look at the first half, ASPs (average selling prices for processors) are where we expected, the mix of Pentium 4 and Celeron is where we expected."

With the first half as a whole basically in-line with expectations, Intel said it is on track to have a stronger performance in the second half, thanks to a seasonal uptick in sales.

Computer sales
But Intel faces a tough PC market, which is still teetering from the economic slowdown of 2001. Normally, PC sales trend slightly downward from the first quarter to the second. This year, however, sales seem to have dropped even more than usual.

PC sales at U.S. retailers had shown improvements between January and March, but they fell off dramatically in April, dropping 22.5 percent from April 2001, according to NPD Techworld.

So far, it seems, May's sales weren't much better. May is typically the worst month of the year for unit volumes, said Steve Baker, analyst with NPD Techworld.

While results are still rolling in for the month, "it's looking pretty soft," Baker said.

And sales are unlikely to show much growth until the back-to-school period, which begins in late July or early August. Couple the slower sales with large amounts of inventory at retail stores--some PC makers have enough inventory to meet demand for 10 weeks, whereas three weeks is considered a desirable average--and it's been a very difficult quarter so far.

Meanwhile, PC demand is picking up in some markets outside the United States. In May, sales improved in China, a region that represents about 15 percent of Intel's revenue, and that trend should continue into June, JP Morgan analyst Eric Chen wrote in a report.

Commercial PC sales to midsized and large businesses are expected to decline sequentially from the first quarter and won't be able to make up losses at retail--sales to consumers and small companies.

June will matter
Intel will have to rely on its sales in June to meet analysts' second-quarter expectations.

Analysts have at least some optimism that the company could pull up at the last minute. With a little less than a month to go in the quarter, "much is still to be determined," Joe Osha, an analyst with Merrill Lynch, wrote in a Thursday report. Typically, most second-quarter sales come in the last month of the period, Osha noted, making it tricky to predict Intel's results.

June usually marks the beginning of a surge in orders for the back-to-school PC build.

To date, "We've seen some increase (in June), but I couldn't call it a surge...which is what lead us to lower our revenue guidance," Bryant said. At the same time, "We haven't seen the enterprise space start to buy PCs yet. But we weren't counting on that. We were just counting on a little pickup across the board."

Despite lackluster sales of PCs, analysts expect Intel's flash memory revenue to improve. Flash is used to store data in handheld devices and networking equipment.

"Sales of flash memory appear to be experiencing solid improvement this quarter," Robertson Stephens analyst Eric Rothdeutsch wrote in a report Thursday. Rothdeutsch attributed the gains to "stable pricing and better unit demand driven by applications including handsets, PDAs, wireless LANs and DSL modems."

His firm expects Intel's flash revenue will be up 5 percent from the first quarter to about $480 million.

Intel has begun shipping a new chipset, the 845G, which could help it gain back some of the market share it lost to competitors in that area.

The company has also been enjoying some cost savings from the first chips produced in its new factories that can use 300-millimeter wafers. Lowering costs could help Intel to greater profitability in the quarter.

Taken together, the various factors make it a difficult quarter to call, analysts said.

As a result, Merrill Lynch downgraded Intel stock on Thursday from a "strong buy" rating to a "neutral" rating, saying Intel might not present a good short-term opportunity for investors.

But the company added that its "long-term 'buy' rating is reiterated, as our concerns here relate to the lack visibility into the PC end market, particularly on the corporate side, rather than anything company specific."