Intel Paints Worst-Case Scenario for 2009

Intel is cautioning investors to prepare for the worst in the coming year, which may position the company to deliver better-than-expected results if economic conditions should improve. The trouble is that neither Intel nor anyone else can predict with any certainty when a turnaround is likely to begin.

Intel(Nasdaq: INTC) appears to be playing it safe with an ugly first-quarter forecast.

The chipmaker reported Thursday that profit plunged 90 percent and sales slipped 23 percent during the last three months of the year, matching analysts' subdued estimates.

Wall Street was braced for the bad news: Intel had lowered its fourth-quarter guidance twice, including once just last week, warning that weaker-than-expected PC demand was hammering down demand for its microprocessors.

So what about 2009? Intel said it doesn't know when demand will pick back up, so the Santa Clara, Calif.-based company set the bar low and offered first-quarter guidance at the low end of what analysts were expecting.

Good Place to Start

Intel said it 2009 sales will likely be around US$7 billion, which translates to a decline of more than 25 percent from the first quarter of 2008. Gross profit margin should also sink sharply, falling from more than 50 percent of sales to the low-40 percent range, it said.

Gross profit is a key measure of how well a company is controlling its costs, but falling demand, heavy investment in factory upgrades and big costs for running factories at less than full throttle will all take their toll on Intel's bottom line.

Intel said the financial crisis has made it so difficult to predict revenue that the company wouldn't offer a precise estimate. Analysts surveyed by Thomson Reuters were expecting $7.3 billion in sales, on average, but estimates ranged from $6.6 billion to as high as $9.3 billion.

The profit forecast was below many estimates, but was good enough to send Intel's shares up 3.8 percent in after-hours trading.

"I don't think they're good numbers, but they're good numbers to start from," said Cody Acree, senior semiconductor analyst with Stifen,Nicolaus & Co "We all knew they would be bad and that they'd come down, but they've set a base to work from."

Economy Hasn't Hit Bottom

Intel's Chief Financial Officer Stacy Smith said in an interview that computer makers' inventory levels fell in the fourth quarter and continued falling into the first quarter, which means they're not buying as many new chips.

He said Intel's product lineup positions the company well to take advantage when demand starts rising again, but Smith cautioned that no one knows yet when that might be.

"It's very difficult to precisely call when we'll hit the bottom," he said.

In the fourth quarter, Intel's net income was $234 million, or 4 cents per share, compared with $2.3 billion, or 38 cents per share, in the year-ago period.

Profits were squeezed by a freeze in information technology spending and a shift toward low-margin processors for a class of little laptops known as "netbooks." A big reason for the severity of the fourth-quarter drop, though, was a $1 billion writedown of the value of Intel's investment in Internet provider Clearwire.

Clearwire specializes in a new type of wireless broadband technology called "WiMax" that Intel is building into its chips, and has stumbled on fears the credit crunch will derail its ambitious network buildout plans.

Intel's sales were $8.2 billion, a 23 percent shortfall from last year.

For all of 2008, Intel earned $5.3 billion, 24 percent lower than a year ago, on sales of $37.6 billion, a 2 percent decline.

45nm Advantage

PC demand is sinking fast, which takes its toll on Intel because Intel owns 80 percent of the market for microprocessors, the brains of personal computers. Market research firmsIDCand Gartner(NYSE: IT) reported this week that PC sales growth in the fourth quarter was the worst it's been in six years, with the slump expected to drag out until possibly 2010.

Bobby Burleson, managing director of equity research for Canaccord Adams , called Intel's profit forecast disappointing, but said it likely indicates that Intel has "come clean with what sounds like a worst-case scenario for this year."

One area where Intel shines is controlling its manufacturing costs, where it enjoys a big advantage over smaller rival Advace Micro Devices (NYSE: AMD) . Intel's quicker transition than AMD to 45-nanometer manufacturing technology, which shrinks the size of the chips' circuitry, has made each chip cheaper to produce. That has helped cushion the blow of falling sales.

AMD -- which has lost billions of dollars over the past two years, recently changed CEOs, and is spinning off its factories to save money -- warned that its fourth-quarter sales will likely come in 33 percent lower than last year. AMD reports quarterly results Jan. 22.

During the regular trading session before the earnings report, Intel stock rose 21 cents, 1.6 percent, to close at $13.29. The shares hit $13.85 in after-hours trading.