Intel may be putting blame for poor revenues in the wrong place

Intel's warning that third-quarter revenues would be significantly lower than expected has raised additional questions about growth in the global personal computer market.

The dominant supplier of chips to PC makers warned late last week that revenue growth for the quarter would be in the range of 3-5 per cent. This is sharply lower than the 9-10 per cent growth expected in what is traditionally a good quarter for the company, as PC makers ramp up production for Christmas, their busiest season.

Intel blamed weakness in European markets for much of the slowing in revenue growth. Europe represents about 22 per cent of its revenues.

But some analysts are suspicious that the real story is much broader and points to problems in global PC sales. SG Cowen, for example, published a research note yesterday in which it warned that the weakness in the PC market was global.

Over recent weeks, analysts have been warning that PC sales during the second half of the year will probably be lower than expected. But market researchers said their data continued to indicate relatively strong growth for global PC markets in the 18 per cent range for the year.

Intel has been downgraded by many financial analysts, who expect the shortfall in third-quarter revenues to be in the range of $200 million to $300 million (€227 million to €340 million). Estimates of earnings per share have been trimmed by about two to four cents a share.

This is relatively small compared with Intel's expected revenues for the quarter of about $8.9 billion and about 42 cents a share in earnings.

Although Intel blamed European demand, PC makers are telling a different story.

Compaq Computer, the world's largest PC maker, said it did not expect any third-quarter problems in Europe. Our worldwide momentum is clearly continuing and European demand is currently tracking within our expectations, the company said.

Dell Computer, the second largest PC maker said that European sales were recovering from lower second-quarter sales. Hewlett-Packard also said European sales appeared to be on target.

The problem appears to be in the second-tier European PC makers and the white box manufacturers. These smaller local companies that piece together PCs have had problems for much of the year in obtaining Intel microprocessors.

The large PC makers have had an easier time obtaining chip supplies because of their size and their ability to lock in component supplies with Intel and chip suppliers. They have consequently managed to increase their market share in Europe.

This means that small European PC makers have lost market share and are now having problems increasing their PC sales, leading to lower demand for Intel microprocessors.

Mr Thomas Reuner, analyst at Dataquest, a leading PC market research company, said that although there had been a slowdown in the rate of growth of PC demand in Europe, this had been expected since the start of the year.

Dataquest forecasts that PC sales in Europe will increase by around 11 or 12 per cent this year and sales are likely to pick up in the fourth quarter.

"I don't see any reason why Intel should see a significant weakening of demand in Europe. But it is easier for Intel to put the blame on the market than to look inside its own organisation," said Mr Reuner.

There is also another issue at work, one that is common to the chip industry. During times of shortage, double ordering is a problem. This artificially inflates demand and causes problems for chip companies in forecasting quarterly revenues.

While Intel's surprise revenue warning had a large effect on chip and PC makers share prices, the world's largest chipmaker is not slowing its massive investments in chip production facilities.

It said it would not reduce its $6 billion capital expenditure budget for this year, which is double that of last year. This has cheered analysts, who have taken it as a bullish sign.