Intel Warns of Dismal Fourth Quarter

After the end of the third quarter, one tech tycoon after another lamented a "lack of visibility" into the last quarter of the year. As the U.S. financial crisis deepened in September, it was clear the rest of the year would be rough, but most companies could hardly tell how bad things would get.

The industry is getting a clearer picture now. The most recent sign came Nov. 12, when Intel cut its fourth-quarter sales forecast, saying "significantly weaker than expected demand in all geographies and market segments." Intel said it now expects sales of $8.7 billion to $9.3 billion, down from a prior forecast of $10.1 billion to $10.9 billion.

As the world's biggest maker of computer chips, Intel is considered a bellwether for the wider industry. Its warning represents an uncharacteristically gloomy outlook for the vital fourth quarter, when tech companies depend on consumers making yearend holiday gift purchases and companies draining annual IT budgets.

"For all intents and purposes, the PC market is just dead," says Edwin Mok, an analyst at Needham & Co. in San Francisco. "We expected something like this already, but we didn't expect it to be so bad." Intel also said PC makers are decreasing inventories of chips.

Stock falls After-Hours

With the new forecast, Intel is on the way of suffering an unusual year-over-year decrease in quarterly revenue. Last year, Intel reported sales of $10.2 billion in the fourth quarter and had been on track to grow revenues this quarter. Now it's at risk not only of reporting lower sales for the quarter, but also the full year. Depending on the final tally for the fourth quarter, Intel's full-year sales could come in below last year's $38.3 billion. The last time annual sales made was in 2006, when the company launched a wide-ranging restructuring and cut thousands of jobs. Another fall occurred in 2001 after the tech bubble burst.

This time around, Intel also expects narrower gross margins, a key measure of profitability. Intel now expects margins of 55%, compared with 59% previously. The company also expects to cut spending by $100 million, to $2.8 billion.

Intel stock plunged in extended trading, falling almost 7% to 12.60, after the news was reported. Stock in rival Advanced Micro Devices also slipped in extended trading. PC makers including Dell, Hewlett-Packard, and Apple also plummeted in after-hours trading, an indication tech stocks may be in for a rough ride Nov. 13. "If Intel isn't a bellwether, I don't know who is," says Ashok Kumar, an analyst at Collins Stewart. "A drop in guidance this big is an ominous sign both for the tech sector and the wider economy."