Intel Drops Most in Nine Months After Predicting Weaker Sales

  • Lackluster outlook shows PC chip inventory is building up
  • Company backs off forecast for profitable data center unit

Intel Corp. dropped the most in nine months after it gave a disappointing fourth-quarter sales forecast, signaling lackluster year-end demand for personal computers, servers and the chips that run them.

Intel shares fell as much as 5.9 percent to $35.51 in New York, the second-worst performer Wednesday on the Standard & Poor’s 500 Index. The stock had gained 9.6 percent this year through Tuesday when Chief Executive Officer Brian Krzanich sent the stock tumbling in late trading after he said Intel’s data center unit, the company’s most profitable business, isn’t going to reach an earlier target for growth this year.

Overall company revenue will be $15.7 billion, plus or minus $500 million, the company predicted. Analysts had projected $15.9 billion, the average of estimates compiled by Bloomberg.

Intel’s third-quarter sales reached a record, lifted by processor orders from PC makers that decided to shore up their chip supplies ahead of the holiday shopping season. So far, demand hasn’t come surging back, meaning that customers will again pare orders as they work through those stockpiles of chips. The world’s largest semiconductor maker also backed off an annual forecast for double-digit revenue growth in server chips for data centers and corporate networks, its most profitable business.

“We’re not going to raise the flag and say everything’s good again,” Krzanich said on a conference call.

Third-Quarter Pickup

Third-quarter net income rose to $3.38 billion, or 69 cents a share, compared with $3.11 billion, or 64 cents, in the same period a year earlier. Revenue rose 9.1 percent to $15.8 billion. Analysts, on average, had predicted a profit of 67 cents a share on sales of $15.6 billion. Adjusted gross margin, or the percentage of sales left after subtracting production costs, widened to 65 percent from 64 percent, Intel said.

The company’s client computing group, which sells PC chips, posted third-quarter sales of $8.89 billion, a gain of 4.5 percent from a year earlier. Demand for PCs will increase in the fourth quarter from the prior three months, in line with normal seasonal gains, the company said.

“It’s my concern that we just have an inventory build that could carry on into the first quarter,” said Kevin Cassidy, an analyst at Stifel Nicolaus & Co. “The market might have thought that PCs would be better into the fourth quarter.”

On Sept. 16, Intel raised its forecasts for the third quarter, citing “replenishment of PC supply chain inventory.” The Santa Clara, California-based company increased its revenue projection at the time to about $15.6 billion from about $14.9 billion.

While the PC market isn’t getting worse, it’s still shrinking. Worldwide shipments fell 3.9 percent in the third quarter, market researcher IDC said earlier this month, a smaller drop than the decline of 4.1 percent in the second quarter. Unit sales in the U.S. rose 1.7 percent, a second consecutive quarterly gain.

Data Center

Intel’s data-center group, which provides chips used in corporate networks and the large cloud-computing systems run by companies such as Google and Inc., had revenue of $4.54 billion, up 9.7 percent from a year earlier. The company had set an annual target of double-digit percentage growth for that unit -- a prediction it missed in the first half of the year. On Tuesday, Krzanich said the unit will only achieve “high single-digit” percentage sales growth for 2016.

Large customers who build their own servers have returned to ordering, with sales in the third quarter from cloud customers up 32 percent from a year earlier, Intel said. That strength and solid demand from networking and storage systems customers was offset by the continuing stagnation of the market for servers used by corporations, the company said.

“There’s some disappointment there,” said Stifel Nicolaus’s Cassidy.

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