Intel Down on
Revenue Warning

March 5, 1998

Alexandria, VA, Mar. 5, 1998 (FoolWire) -- Intel (Nasdaq: INTC) warned of below plan first quarter results after the bell last night. That sent shares of the maker of CPUs and other semiconductor and networking components down as much as $11 7/16 to $75 in trading this morning. Intel customer Dell Computer (Nasdaq: DELL) traded down as much as $9 1/16 to $130 on the news. Intel said it expects to report Q1 revenue of approximately $5.85 billion, down 10% sequentially from Q4 1997 and the first fiscal quarter last year.

Intel said its turns business from OEM (original equipment manufacturer) customers has been weaker than expected. The '"turns business" mean orders that are shipped immediately upon receipt from OEM customers. This indicates that inventory may be a little more full than the industry expected, but meshes well with what Compaq (NYSE: CPQ) has told analysts in the last couple of days. At a Merrill Lynch conference this week, Compaq said that pricing in North America has been looking weak, indicating that it has had to price competitively to move inventory through the channel.

Last week, Salomon Smith Barney downgraded Compaq to "neutral" from "outperform" on concerns that customers had too much inventory on their hands. In the busy fourth quarter, Compaq's inventory turns (cost of goods sold divided by average inventory) slowed slightly from 12.4 turns (annualized) in Q4 1996 to 11.9 turns last quarter. Given the change in the company's business mix with the Tandem acquisition, Q4 gross margin increased 318 basis points (1 basis point = 1/100 of a percentage point), or 3.18 percentage points. Any slowdown in inventory turnover could have been masked by the transition in the business model.

With a decrease in price protection that Compaq and other OEMs are offering their distribution partners (an OEM gives distribution partners credit if there is a change in pricing power between the time the distributor buys the inventory from the OEM and sells it to the end-user), the PC market is going through an inventory cleansing in all quarters. Intel made the point that this is an inventory problem and not an end market problem. That emphasis hit the PC distributors this morning, too. Ingram Micro (NYSE: IM) lost $1 5/8 to $36 3/8, Tech Data Corp. (Nasdaq: TECD) flopped $3 7/8 to $43 1/4, CDW Computer Centers (Nasdaq: CDWC) slid $4 to $61 5/8, and PC retailer CompUSA (NYSE: CPU) shed $2 1/2 to $30 1/8.

The PC end market can still grow in the middle of the 15-20% yearly range experienced in recent years, while the suppliers to that market might experience periodic backups in matching production with that growth in demand. A final part of the equation has to do with PC industry capital management strategy (typified by Dell), which has companies pushing back inventory on suppliers. In terms of percentage of cost of goods sold, Intel is the largest supplier to the PC industry.

Related links:
Intel Message Board
Compaq Message Board
Dell Message Board
Evening News

For more on Intel, check back at 12:30 p.m. for the Lunchtime News.