Intel's dire warning

November 12, 2008: 6:54 PM ET

In a surprise announcement, Intel (INTC) said Wednesday that its gloomy fourth quarter forecast wasn't nearly gloomy enough. Instead of pulling in between $10.1 billion and $10.9 billion in sales, the chip giant expects closer to a dreadful $9 billion. The stock tumbled more than 7 percent after hours.

It's hard to articulate just how bad this news is.

When Intel CEO Paul Otellini gave Intel's now obsolete forecast a month ago, it was the fuzziest range the company had ever offered. The global economic crisis, he said, left things so uncertain that he couldn't be more specific than a ballpark estimate. The low end of Intel's old range – the $10.1 billion – would have seen sales during the normally bustling holiday quarter actually shrink compared to the ho-hum quarter before. That's pretty much unheard of.

Well, things just got much worse than that worst-case scenario.

Intel slashed its predicted profit margin by four points. Its prediction of revenue between $8.7 billion and $9.3 billion in the fourth quarter means chip buying has fallen off a cliff, as PC and server makers around the world – folks like Hewlett-Packard (HPQ), Dell (DELL), IBM (IBM) and Apple (AAPL) – scramble to adjust to dramatic slowdowns in business. Intel's warning also bodes ill for folks like Microsoft (MSFT), Cisco (CSCO), Advanced Micro Devices (AMD), Nvidia (NVDA) and Sun Microsystems (JAVA), whose products end up in the hands of many of the same customers.

Perhaps most depressing, things are bad enough that Intel rushed to report the news. Executives had already planned to take the unusual step of giving investors a business update the week after Thanksgiving. By canceling that update and offering this one, Intel is saying things are so obviously grim there's no point in sitting on the news to be sure things won't improve. Christmas isn't coming for the PC and server business this year. Instead of being the best quarter of 2008, Q4 will likely look like a mediocre quarter – from 2007.

The only thing scarier than these terrible numbers? The implications for next year. Sales typically drop from the fourth quarter to the first, as consumers slow down from their yuletide buying binge. But if things are already bad now, what's to say they won't be even worse in January?

All of this puts last week's relatively optimistic comments from Intel senior VP Sean Maloney in a new light. Sure, Intel has plenty of cash – enough to weather even a deep recession. But if the sales outlook continues to look this bad, it won't be long at all before Intel faces enormous pressure to cut costs and salvage earnings per share.

Actually, with numbers this bad from a tech bellwether, it might not be long before everyone in the industry is slashing costs. Merry Christmas.

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