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Intel Says Lower PC Demand Hurt Q4 Revenues

Intel
Source: Reuters

Microchip maker Intel on Wednesday issued its second revenue warning on the fourth quarter, saying demand for personal computers was even worse than it feared and sparking wide concerns about tech companies.

Shares of the world's biggest maker of the CPUs at the heart of every PC dropped 6 percent, and stocks of other companies in the industry swooned as well.

Intel (NASDAQ: INTC) dropped its fourth-quarter revenue forecast to $8.2 billion from $9 billion in November. In October, the company had expected a range of $10.1 billion to $10.9 billion.

"Clearly, we are going to be in an ugly period for corporate earnings," said Tim Ghriskey, an analyst with Solaris Asset Management. "Intel being a bellwether for the industry it will take the industry down as well."

After Intel's warning on Wednesday, the index of chipmakers, the Philadelphia Stock Exchange Semiconductor Index .SOXX, dropped 4.9 percent to 223.12.

The slowing demand for PCs in a weak economy will inevitably affect the bottom lines for PC makers, chip makers and software makers, said analysts who added that consumers are moving down market to miniature computers such as netbooks.

"We've moved beyond the point where you can do this without headcount reductions," said Robert Burlson, an analyst with Canaccord Adams in San Francisco. "There are going to be a lot of layoffs this year."

Intel, which reports earnings on Jan. 15, expects its gross margin to be at the bottom of its previous expectation of 55 percent, plus or minus a couple of percentage points.

Demand was dropping and the PC supply chain is cutting inventory, it said.

Intel also took a hit from its equity investments, including a low year-end share price in Clearwire (NASDAQ: CLWR), which delivers Internet access using Intel's WiMAX technology. It predicted a net loss from equity investments and interest of between $1.1 billion and $1.2 billion, far greater than its previous expectation of about $50 million.

JoAnne Feeney of FTN Midwest said the news would have been worse without Intel's Atom, a low-powered processor that runs netbooks, which typically cost a few hundred dollars.

"Atom came at precisely the time of shifting demand to lower-cost PCs," she said. Burlson said the shift will force PC makers like Hewlett-Packard to put a new emphasis on Atom machines as strapped consumers pinch pennies.

[cob:Special_Report]Craig Berger, an analyst with FBR Capital Markets, said HP's (NYSE: HPQ) diverse businesses would insulate it, but others depending more heavily on PCs will show weakness, such as hard disk drive makers Western Digital and Seagate.

"Graphics cards can be considered a luxury item, so graphics card makers like nVidia may take a hit," he said. Microsoft is different.

Intel shares fell 6 percent to $14.44 on the NASDAQ, helping to weigh down the overall market. Advanced Micro Devices (NYSE: AMD), another key CPU maker, fell 4.3 percent to $2.66. Microsoft (NASDAQ: MSFT) dropped 6 percent to $19.51.

"If you are surprised by this news, then you've been on a desert island. We all know the economy is weak," said Walter Todd, portfolio manager at Greenwood Capital Associates.

"If you're holding Intel today ... it's because this is a leading industry player with a great balance sheet and longer-term it will really look great," he said. "But 2009 for Intel and others in technology, and outside of technology, will be a very rough earnings year."