Rough holiday season ahead for PCs

October 14, 2008: 9:45 PM ET

It's going to be a frightful holiday season for PC sales, no matter what.

That was the hidden message Intel (INTC) executives delivered in an earnings conference call with analysts Tuesday afternoon after reporting better-than-expected quarterly profits but disappointing sales. They also said Intel is better off than competitors because of its streamlined workforce, world-class manufacturing operation, popular new Atom chip and rebounding profit margins. But tucked into that happier talk was the harsh reality that it's getting ugly out there.

How ugly? That's the $800 million question.

Looking ahead to the typically jubilant holiday quarter, Intel expects sales somewhere between $10.1 billion and $10.9 billion. In other words, Intel's worst case imagines fourth quarter sales that are actually lower than third quarter sales – a "Grinch steals Christmas" scenario. And the best case? That has sales up less than 2 percent from last year – a "coal in the stocking" scenario that Intel said is "at the lower end of seasonal patterns." Neither possibility spreads a lot of cheer.

The reason for the bad tidings, of course, is the global credit crisis. Not only has the turmoil sapped the spending power from the financial services industry, but it has spread to the broader business and consumer markets, too.

Why? If companies have trouble borrowing money, they'll be less likely to buy PCs and servers that use Intel chips. And if consumers can't tap into their home equity and are afraid of losing their jobs, they'll think twice before shelling out hundreds (or thousands) of dollars for a new laptop.

Intel CEO Paul Otellini said the credit headaches didn't have much impact on the third quarter. Intel reported net income of $2 billion, or 35 cents a share, on sales of $10.2 billion. Sales were lower than analysts expected, but earnings per share were higher, thanks to a tax break from overseas losses. (Intel had expected an effective tax rate of 33%, which would have brought EPS down a penny; instead, it got 28.9%.) Intel shares gained more than 4% after hours to $16.66.

The current quarter is a different story. Business so far has been good -- executives are confident that profit margins will hold steady at 59% plus or minus a couple of points -- but Intel is getting mixed signals from its contacts on what will happen next. "Some customers and channels are seeing little to no impact, and some are worried," Otellini said. "As we add it all up, we don't know how much of that worry will manifest itself into reality."

Don't expect the PC makers who buy from Intel to clear things up anytime soon. Hewlett-Packard (HPQ) and Dell (DELL) aren't scheduled to give updates to Wall Street until the second half of November. And Apple (AAPL), the fast-growing computer maker, sounded optimistic when it unveiled new laptops Tuesday -- but CEO Steve Jobs also announced that he'll start buying some key components from Nvidia (NVDA), which will mean less money in Intel's coffers at a time when every dollar counts.

Even so, Otellini had some encouraging words about Silicon Valley's prospects. This downturn, he predicted, won't be as bad as the dot-com crash.

"One of the things I recall vividly in that one was that people stopped buying computers, principally because there were so many available on eBay (EBAY) from companies that melted down. That skewed demand in '99, '00, and '01 as a result," he said. Intel isn't seeing the same fire sales -- at least not yet -- and growing markets like China are still important, according to Otellini. "Right now, I'm of the opinion that technology will do well during a downturn, because of the simple fact that we sell tools of productivity."

We won't have to wait long to see whether that optimism sticks: In an unusual move for Intel, executives said Tuesday they will update investors a week after Thanksgiving. By then, they should have a better sense of whether investors should expect the Grinch, or the coal in the stocking.

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