Intel shaved more than a billion dollars off its expected revenue in the third quarter, sending shockwaves through the PC industry. The shortfall may be based on simple buying logic. Consumers may be waiting for Microsoft to launch its touchscreen-friendly Windows 8 operating system on Oct. 26.
But the toll could be severe throughout the large personal computer ecosystem, where all sorts of dynamics are affecting the big picture. Every computer microprocessor that Intel doesn’t sell impacts the makers of motherboards, peripheral makers, and PCs. So Intel’s status is a bellwether for the industry means that maybe $5 billion in industry sales could be absent during the third quarter.
“When Intel doesn’t sell an extra $1 billion in chips, that’s a big multiplier effect on distribution, contract manufacturers, PC brands, motherboards, and other suppliers,” said Roger Kay, an analyst at Endpoint Technologies.
That could take a toll on the stock prices of not just Intel and Microsoft, but the likes of Hewlett-Packard, Lenovo, Seagate, Foxconn, Toshiba, and Dell. Intel’s stock is currently down 3.73 percent at $24.16 a share. That means that Intel is now worth a fifth of Apple, whose tablet computers (which use Apple-Samsung chips) are selling so briskly that they’re stunting demand for PCs.
Intel lowered its third-quarter sales outlook to $13.2 billion in sales, down from its previous range of $13.8 billion to $14.8 billion. It also shaved its gross profit margin estimate from 63 percent to 62 percent. That means the September quarter revenues will now be below the second quarter revenue of $13.5 billion. Intel blamed the problem on computer makers reducing their inventory ahead of Windows 8, weaker PC demand, and slower growth in the emerging markets of Brazil, Russia, India, and China.
Vijay Rakesh, an analyst for Sterne Agree, said that Intel has multiple challenges in the PC market. Ultrabook sales are slower than expected, as are commercial market sales. Ultrabooks are the thin and powerful laptops that resemble Apple’s MacBook Air. Next week at the Intel Developer Forum, Intel will talk about its real solution for that space, code-named Haswell, a new Atom microprocessor that will ship with Windows 8 software sometime next year.
In the meantime, Intel’s Clover Trail processor is the brains of low-power ultrabooks, and Intel is spending heavily to promote the products. Rakesh said believes Intel might need to ratchet down its spending, and Intel said that its capital spending will likely be below the $12.1 billion to $12.9 billion
Rakesh said that rival chip makers Advanced Micro Devices and Nvidia will likely face headwinds as well. But he hasn’t changed any estimates yet. Nvidia has been pivoting to smartphone and tablet chips in a big way, so it could avoid some of the PC ecosystem slowdown.
One of the big questions is what will happen with Microsoft’s own earnings, as the two industry giants are often referred to as “Wintel.” Microsoft is trying to diversify into tablets with Windows 8 and its own upcoming Windows Surface tablets.
“The fact that they signaled weakness in the commercial segment suggest that this is not just about consumers waiting ahead of Windows 8,” said Kay. “Windows 8 will likely have a gradual pickup over time. The weakness in corporate PCs and the weakness in emerging countries are disturbing.”
In China, for instance, the economy has slowed down and that has hurt PC demand.
“The economy there is inexplicably drying up,” Kay said. “China has been most of what has been sold in the BRIC countries. India and Russia aren’t that great right now.”
Patrick Moorhead, an analyst at Moor Insights & Strategy, said, “Both ARM and now Intel have lowered overall expectations in the marketplace for phones and now PCs. The good news, if any, is that the new phones, tablets and PCs are compelling in that when the macroeconomic picture improves, demand will get back to normal.”
Kevin Krewell, a senior analyst at the Linley Group, said, “The slow economy in the U.S. and abroad is affecting the ability of businesses and consumers to buy new PCs. Then there are tablets and smartphones competing for consumer spending. While Intel has positioned Ultrabooks as a way to re-invent and re-invigorate the PC business, it’s still too expensive for the majority of the market. Also, Haswell will offer even lower power and better battery life – but won’t ship until 2013. Of course, there is Windows 8 coming later this year, which could attract consumers to the stores, but the best user experience for Windows 8 will be with a touch display and that will come with a higher system cost.”
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