Intel Profit Weakness Jolts Market
Intel Corp. stunned Wall Street on Friday with the kind of problem most rivals would welcome: The world’s biggest seller of computer chips had done too good a job persuading people to buy its latest model.
Intel, whose chips are the “brains” in 85 percent of the world’s PCs, warned that its second-quarter results would be weaker than expected amid soft demand for some of its older chips, particularly in Europe.
The news made Wall Street flinch.
Intel’s stock tumbled by as much as 14.5 percent and pulled down other technology shares in a powerful sell-off that depressed the broader stock market.
Yet the market largely recovered by day’s end as investors sifting through the Intel forecast found the silver lining.
On one hand, the Santa Clara, Calif.-based company was hit by slack demand for computers that run on its old Pentium chips. But it couldn’t keep up with fresh demand from consumers and businesses for its new Pentium chips based on MMX technology, which boosts computers’ ability to run video, sound and pictures.
The supply imbalance ate into revenue. Intel rushed to switch over its factories to the new chips but couldn’t keep up.
“The company is in many respects a victim of its own success in convincing people they need MMX processors,” said Drew Peck, a financial analyst with Cowen & Co. in Boston.
In January, Intel introduced its new Pentium processor with MMX technology and trumpeted its ability to download fancy graphics, improve viewing of pictures and transmit sound. Early this month, Intel rolled out its Pentium II processors, with MMX technology for more powerful PCs used by businesses.
“Pentium IIs are in very tight supply. We clearly can’t supply all that are wanted at this moment,” said Intel spokesman Howard High, noting that shortages are typical when a chip is first introduced.
While analysts called the revised forecast disappointing, they said the strong demand for Intel’s MMX technology bodes well for its future.
“The bottom line is people want power. They want the latest machine. They don’t want to have an obsolescence problem,” said Daniel Niles, an analyst with Robertson Stephens & Co. in San Francisco.
Investors apparently agreed. Intel stock recovered about half its loss to close down 7.5 percent, or $12.27 at $151.50 a share. Major stock indexes also rebounded, with the Nasdaq composite index down less than 3 points after being off nearly 50 early in the day. The Dow industrials finished virtually unchanged after swinging from an 88-point loss to a 41-point gain.
Analysts had expected Intel to report flat to slightly higher revenue in the second quarter compared with first-quarter revenue of $6.4 billion. Intel said that it now expects revenue to drop 5 percent to 10 percent, or as far down as $5.76 billion. Compared with the second quarter of 1996, revenue still would be up by 30 percent.
Intel also predicted a drop on what it makes on its chips, saying gross profit margins would be down from 64 percent in the first quarter. For the full year, Intel said its margins would be about 60 percent, plus or minus a few points. And the company’s expenses are rising by as much as 9 percent above the $1.3 billion spent in the first quarter.
Peck said that Intel’s profits are starting to show the effects of price competition from rivals such as AMD and Cyrix, which have come out with advanced microprocessors.
“They are likely to put a lot of pressure on Intel for the remainder of the year,” Peck said.
Still, Intel’s performance is far from lackluster. Even with Friday’s revised results, its profit would be up by 53 percent over the year-ago quarter, by Peck’s reckoning.
Helping it stay ahead, Intel on Monday planned to introduce a new Pentium that runs computers at speeds of 233 megahertz, adding to its current lineup of 166 MHz and 200 MHz Pentium chips.