Intel profit warning: WiMAX doomed?

In Thursday's IT Blogwatch, Richi Jennings watches bloggers say "bellwether" a lot, as they watch Intel warn of a weak Q4. Not to mention a groan-worthy sailing pun...

Previously in IT Blogwatch: The sky is falling: recession warning sounded

Jeremy Kirk sounds worried:

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Intel Corp. expects fourth-quarter revenue for fiscal 2008 to fall 23% compared to the same quarter in 2007 because of weaker demand for computer processors, the company said Wednesday.

The chip maker expects fourth-quarter revenue of $8.2 billion, down 20% compared to the previous quarter. Intel revised its fourth-quarter expectations ahead of its scheduled earnings announcement on Jan. 15.

Overall, Intel expects to lose between $1.1 billion and $1.2 billion on equity investments rather than the $50 million it previously expected to lose ... [and] expects to have spent about $2.6 billion on research and development rather than $2.8 billion.
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Timothy Prickett-Morgan adds:

The company also said that it was writing off a chunk of its investment in WiMax service provider Clearwire, which will also whack its books for last year.

The drop off in sales in Q4 is not unexpected ... Corporations and consumers alike are cutting back on spending, and being the dominant supplier of processors for PCs and servers in the world means Intel gets hit hard when the economy goes off a cliff ... With new "Nehalem" server processors around the corner ... it is likely that server makers were also curtailing the acquisition of older Xeons.

...

In a statement, Intel said that its sales fell because of "further weakness in end demand and inventory reductions by its customers in the global PC supply chain".
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Paul Hales gets picky about Intel's copy-editing:

We can't say we've noticed a drop in demand for ends around these parts but the chip-making monolith says it'll also make less profit that it previously said it would, so shareholders will be grumbling.

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The firm also said it  "will impair the value of its investment" in Clearwire, resulting in a non-cash charge to fourth-quarter earnings of approximately $950 million. This means it'll make between $1.1 billion and $1.2 billion loss in its investments compared with a previous expectation of a loss of approximately $50 million.

The firm has cut R&D spending a bit it said, but things are still looking a bit sticky. Imagine if it had some proper competition.
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John Murrell recalls:

In Q3, Intel posted revenue of $10.2 billion, and at the time, the company predicted the Q4 number would come in between $10.1 billion and $10.9 billion. In mid-November, it knocked that estimate down to between $8.7 billion to $9.3 billion. Today, it said the earnings report it will file next week will show revenue of $8.2 billion for the quarter, a sequential drop of almost 20 percent and a 23 percent decrease year-over-year. Further, Intel said Q4’s gross margin would finish on the low end of its previous estimate of 55 percent.

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Given Intel’s standing as a bellwether for the broader chip industry, this does not bode well for any region with “Silicon” in its name.
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Michael Fowlkes weathers the bell: [You're fired -Ed.]

[This] is a clear sign of the troubles that the semiconductor industry is dealing with at this time. Typically, the fourth quarter is the strongest quarter, and as recently as October, Intel had forecast that its fourth quarter sales would actually be higher than its third quarter numbers by around 3%. How quickly things can change.

Intel blamed the weak quarter on two different problems that it is dealing with. The first is a weakening of end user demand. This is the demand from consumers as well as companies that buy computers that feature Intel chips. This should not be much a surprise as everyone, individuals and companies alike, have been tightening spending where ever possible over the past few months. The second area of weakness for Intel comes from computer makers that are slowing down production in order to ease growing computer inventories..
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Anthony Ha runs with the Clearwire angle:

Most of that ... $1.1 to $1.2 billion ... loss comes from Intel’s investment in Clearwire, which created a joint venture with Sprint to build a national mobile network using Intel’s WiMax technology. Clearwire’s stock has dropped more than 70 percent since the deal was announced in May, resulting in a $950 million “impairment charge” for Intel.

That comes less than a month after Intel Capital’s Arvind Sodhani told us he was excited, rather than worried, to have sunk so much of Intel’s portfolio into Clearwire. Of course, it must have been obvious even then that the investment would end the year as a big loss. (Fellow Clearwire investor Time Warner faces a similar loss.) While the Clearwire effort, which Intel hopes will boost sales of its chips, is off to a bad start, it’s too early to give up on it. After all, the deal was only approved in November, and Clearwire just announced super-cheap mobile wireless plans in Portland.
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Uh, "impairment charge"? Stacey Higginbotham 'splains:

Under current accounting rules, a company has to test for “impairment,” or whether or not an intangible asset such as an equity investment has gone down, every year. And in the U.S., once an asset is impaired, it can’t get added back onto the books, even if the value does eventually rise.

With the 30 percent declines in the stock market over the last year, many companies will see the value of assets they bought following the market’s downward trend. Time Warner also reported a $25 billion impairment charge today. The U.S. accounting rules may be changing in response to the stock market decline leading to such large write downs, but in the meantime, Intel’s investment in Clearwire looks like a financial failure.
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And finally...

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Richi Jennings is an independent analyst/adviser/consultant, specializing in blogging, email, and spam. A 23 year, cross-functional IT veteran, he is also an analyst at Ferris Research. You can follow him on Twitter, pretend to be Richi's friend on Facebook, or just use boring old email: blogwatch@richi.co.uk.

Previously in IT Blogwatch:

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