Intel hiccups cause ripples in industry

Such is microprocessor giant Intel's overwhelming importance to the technology industry that if the chipmaker sneezes, the rest…

Such is microprocessor giant Intel's overwhelming importance to the technology industry that if the chipmaker sneezes, the rest of the tech world gathers worriedly at the bedside. Intel hasn't been feeling well lately, which has everyone from computer makers to Wall Street on edge.

But Intel is a robust company in one of the healthiest industries the world has known. One quarter's dampened results, and the warning of a second flat quarter, do not a catastrophe make. Still, there are, as the Americans like to say, issues.

First, what actually happened this week? Intel's profits for the quarter dipped well below last quarter's and the same quarter a year ago. Intel's warning that this would be the case last month sent technology stocks tumbling and pundits babbling for about a week. Money flowed out of PC and semiconductor stocks and went around the corner, into Internet shares. And then, more money went right back into PC and semiconductor stocks, enabling the sector to recover speedily. Hardly the sign of a lacklustre industry.

This week, the same doom and gloom stories appeared even though Intel actually posted better results than it had predicted a 7.8 per cent rather than a 10 per cent dip in revenue. Earnings, at $1.3 billion or 72 cents a share, were down 36 per cent from the same quarter a year ago and 27 per cent on the previous quarter. But that still represents margins of a stunning 54 per cent. Says technology analyst, Mr Tomas Jones, of Davys Stockbrokers: "You look at Irish stocks and think, show me one where you get that sort of margin."

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Then why the volatility in technology stocks which seem to be in good shape generally? "Because the industry moves so fast, there tends to be a lot of focus on quarterly performance," he says. "There's a tendency to over-adjust." Thus, a drop of a few cents on share earnings results in a $5 drop in share price, he says. He remains bullish on the tech sector, believing there's still "a huge upside left in it". As for Intel? "It's a superb company. I'd be holding Intel stock."

If the medium to long term seems more positive, Intel's situation still points to an uneven year ahead and some general market uncertainties. Intel has said it intends to shed some 3,000 workers, about 5 per cent of its total of 65,000 and its first significant reduction in 12 years. It said most of those numbers would come through attrition (a recent hiring freeze will gradually lower numbers). But the company also said it intended to start hiring again later this year and will probably bring numbers back up to late 1997 levels.

Current market volatility must be a continuing worry to Intel, though. In a statement issued with the poor results, Intel's chairman, Mr Andrew Grove, admitted: "This was a disappointing quarter. The PC industry seems to have gotten ahead of itself, building more product than customers purchase."

If computers don't move, chips don't move. Several PC makers, most notably Compaq, have been hit by sluggish sales and pinched margins as buyers either hold off on purchases or go for the lowend sub-$1000 PCs which turn little profit for manufacturers. Some analysts this week were predicting a slowdown in worldwide PC sales from the heated 15 per cent growth the sector has seen over the past few years to about 10 per cent. and the gloomy crowd tended to get the most press this week.

But semiconductor analyst Mr Nathan Brookwood, of San Jose-based analysts Dataquest, says they are sticking by 15 to 16 per cent growth in the computer market worldwide this year and next. "Prices will come down, margins will get squeezed but market demand is there," he says. He thinks Intel will do fine - despite the thrashing PC magazine reviewers have given its new lowend Celeron chip, designed for the sub$1000 market. Mr Brookwood says Intel will produce a fitter version of the Celeron in six months. Still, he predicts that in the next six months, the company will face tough competition from rivals AMD and Cyrix.

Unfortunately for chipmakers, the low-end is also the low-profit end. Fortunately for Intel, Mr Brookwood sees growing demand for Intel's high-end chips which sell for thousands of dollars and offer huge margins.

Outside the immediate world of chip production, profit and loss, Intel has some bigger concerns. Like Microsoft, the chipmaker is being examined for possible violations of US anti-trust regulations. The government has not yet approved Intel's purchase of smaller chip manufacturer Chips and Technologies.

News this week that an Alabama federal court judge has found Intel violated US anti-trust law in a case between manufacturer Intergraph and Intel may have set a worrying precedent too. But Mr Brookwood notes Intel "has tried to be very meticulous about keeping itself clean as far as anti-trust allegations go".

So, the chipmaker may be groaning a bit in the sickbed but don't write it off yet. Nonetheless, the company has some longer-term worries that will prevent a clean bill of health for some time.

Karlin Lillington can be reached at klillington@irish-time.ie

Karlin Lillington

Karlin Lillington

Karlin Lillington, a contributor to The Irish Times, writes about technology