How Intel Might Not Put Up Revenue Growth This Year

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That didn't take long.

Just last week, a handful of analysts pondered, "Is Intel (Nasdaq: INTC  ) about to cut its guidance?" Davenport & Co.'s Drake Johnstone thought next quarter would be soft, Citigroup's Glen Yeung said the PC supply chain is deteriorating, JPM Securities' Alex Gauna doesn't think Microsoft (Nasdaq: MSFT  ) Windows 8 will help much, and Sterne Agee's Vijay Rakesh quietly nodded his head in agreement.

Called it!
Well, Chip King Kong has now done just that: slashing its third-quarter sales outlook. The company cited relatively generic factors, such as "weaker-than-expected demand in a challenging macroeconomic environment," for why revenue won't stack up to its previous outlook.

Q3 Metric

Previous Outlook

Current Outlook

Revenue $13.8 billion to $14.8 billion $12.9 billion to $13.5 billion
Gross margin 61% to 65% 61% to 63%

Source: press release.

The difference between the high end of prior guidance and the low end of current guidance is a whopping $1.9 billion. However, full-year capital spending is now predicted to be below the low end of the prior outlook of $12.1 billion to $12.9 billion, as Intel repurposes existing equipment for its 14-nanometer node. That should at least spare the bottom line a little bit.

Furthermore, Intel is even taking back all other quarterly and full-year expectations for the time being, saying its estimates will be updated and shared with the world when it officially reports earnings on Oct. 16. In July, Intel had said it expected 2012 sales to grow modestly by 3% to 5% from 2011.

Yeah, about that ...
The chip giant posted 2011 sales of $54 billion, so its prior guidance would have implied 2012 sales between $55.6 billion and $56.7 billion. In the first two quarters of the year, it's already pocketed $26.4 billion. Using the midpoint of the updated guidance would put the company at $39.6 billion in sales through the third quarter, meaning it would need to clear $16 billion in revenue in the fourth quarter to even reach the low end of that prior 3% growth estimate.

For context, that's more revenue than Intel has ever posted. Its current quarterly sales record is $14.2 billion, set in Q3 2011. So yeah, that full-year growth outlook is going straight out the window. In fact, Intel would need to do $14.4 billion in fourth-quarter sales just to be flat with 2011 sales, which would also need to break the prior record. If not, investors may even have a full-year revenue -- gasp -- decline on their hands.

That seems rather likely when you consider the sorry state of the overall PC market, and if Windows 8 fails to reinvigorate PC sales, which I think it will after test-driving the operating system myself, then the odds of a record-breaking fourth quarter seem remote.

Brace yourself
Intel says its customers are drawing down supply-chain inventory, while the enterprise PC market and emerging markets are both showing particular weakness. Meanwhile, the data-center segment is "meeting expectations."

The problem with that equation is that enterprise PCs and emerging markets are grouped within Intel's core PC client group, which dominates the top line at 64% of sales last quarter. The data-center business is the second biggest contributor but puts up just 21% of revenue. "Meeting expectations" in the latter doesn't even begin to compensate for weakness in the former.

The cut isn't particularly surprising since there was plenty of foreshadowing that PC sales aren't so hot. Hewlett-Packard (NYSE: HPQ  ) reported total PC units were down 10%; Dell's (Nasdaq: DELL  ) mobility units (primarily laptops) dropped 20% and desktop PC units were flat. Fellow chipmaker NVIDIA (Nasdaq: NVDA  ) also sold off on the news, down 6% at the low, since its GPU fortunes are so intricately linked to Intel's CPU prospects.

Even if Intel sees smashing successes in mobile devices like smartphones in tablets, where it currently has no meaningful presence, growth in its "other architecture" group (8% of sales) couldn't make up for prolonged weakness in PCs.

Intel shareholders need to brace themselves for the very real possibility that full-year sales might not top 2011.

The Motley Fool has just released a comprehensive report on Intel, and while the company remains the top processor dog, it has risks that investors need to brief themselves on -- risks that are coming to the forefront in light of today's guidance cut. Sign up today and get regular updates included at no additional cost!

Fool contributor Evan Niu holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Microsoft, Citigroup, Apple, and Intel. Motley Fool newsletter services have recommended buying shares of NVIDIA, Microsoft, Apple, and Intel, creating a synthetic covered call position in Microsoft, writing puts on NVIDIA, and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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