J & Intel Investors - Intel stands Behind its Guidance Statements - and REFUTES Kurlak's predictions.
"Not all analysts are so gloomy about the market. For one thing, falling chip prices don't necessarily translate into lower profit margins, because semiconductor makers can often lower costs even more quickly through advances in manufacturing technology. In addition, Intel is simultaneously announcing
lucrative highend chips that help to balance out reduced profits on new low-end products.
"The impact of these low-priced PCs is completely overblown," said Mr. Kumar of Piper Jaffray.
Intel had no direct comment on Mr. Kurlak's conclusions, and declined to provide specifics about the new Celeron chips in advance of the Monday announcement. But a spokesman noted that the company hasn't changed its guidance to analysts about its profitability.
The entire article is reprinted below.
Paul
{================================}
The NewsRoom
Dow Jones News Symbol
08/21 12:09A (DJ) Intel Mounts Credible Response To Sub-$1,000 PC Pressure
Story 0008 (INTC-D, INTC, I/SEM, N/WEI, M/TEC, P/DCO, P/DCZ, P/DEX, P/DHS...)
By Don Clark and Dean Takahashi, Staff Reporters of The Wall Street Journal
Intel Corp. is finally mounting a credible response to sub-$1,000 personal
computers, but the prospect of even cheaper PCs is raising new fears about
prospects for the semiconductor market.
The Santa Clara, Calif., company on Monday will announce a line of
microprocessor chips that represent Intel's best hope for taking back market
share in the fast-growing sub-$1,000 PC segment. Rivals Advanced Micro Devices
Inc., National Semiconductor Corp.'s Cyrix unit and Integrated Device
Technology Inc. exploited Intel's late entry into the budget-priced PC market,
and a low-end chip called Celeron that received poor reviews. An improved
version of that chip, codenamed Mendocino, is expected to cost PC makers $139
to $179, said Ashok Kumar, an analyst at Piper Jaffray Inc.
That's quite a comedown for a company that usually starts new chip pricing
well above $500, and one whose profit margins have been under pressure lately.
Some analysts now think the pressure will only get worse.
Thomas Kurlak, who follows chip stocks for Merrill Lynch, yesterday lowered
his long-term rating on Intel to "neutral" from "accumulate," predicting that
Intel's average selling prices will decline 33% over the next five years. Mr.
Kurlak wrote in a research report that PC prices could sink as low as $200,
suggesting prices as low as $30 for Intel chips.
The prospect of even more drastic price cutting followed on the heels of
negative earnings news Tuesday from National Semiconductor Corp., LSI Logic
Inc. and Analog Devices Inc., driven in part by continued weakness in Asian
chip markets. Taken together, the developments cast additional doubt about the
timing of any recovery for the struggling industry.
Intel shares yesterday sank $3.5625 to $86 in Nasdaq Stock Market trading.
Texas Instruments Inc., also downgraded by Mr. Kurlak, fell $1.625 to $58.875
in New York Stock Exchange composite trading. Also on the Big Board, National
Semiconductor declined $2.0625 to $11.5625, Analog Devices closed down $1.75
at $19.75 and LSI Logic closed at $15.125, off 68.75 cents.
Not all analysts are so gloomy about the market. For one thing, falling
chip prices don't necessarily translate into lower profit margins, because
semiconductor makers can often lower costs even more quickly through advances
in manufacturing technology. In addition, Intel is simultaneously announcing
lucrative highend chips that help to balance out reduced profits on new
low-end products.
"The impact of these low-priced PCs is completely overblown," said Mr.
Kumar of Piper Jaffray.
Intel had no direct comment on Mr. Kurlak's conclusions, and declined to
provide specifics about the new Celeron chips in advance of the Monday
announcement. But a spokesman noted that the company hasn't changed its
guidance to analysts about its profitability. Intel's gross profit margins
slid from 54% in the first quarter to 49% in the second quarter, but the
company still expects the year to finish at an average of 52%. "Over the long
term, it will be 50% plus or minus a few (percentage) points," the spokesman
said.
Still, rock-bottom PC pricing is undeniably changing customers' buying
patterns, and affecting strategies throughout the industry's food chain. The
new Intel Celeron chips, targeted at chips costing around $900, still aren't
suited for newer machines, pushing prices much lower.
Micro Center, a chain of computer stores, has been selling a $500 computer
with a Cyrix chip since November. Sun TV & Appliances Inc. and Fry's
Electronics, both with dozens of stores, followed suit in March with a $499
machine built by Millenium Electronics in Irvine Calif. PrecisionTec LLC, a
manufacturer in Costa Mesa, Calif., yesterday announced a machine for $399
that uses a chip from Integrated Device Technology and which it expects to
sell over the Internet through companies that include Egghead.com Inc. (The
lowest-price PCs typically don't include monitors.)
"It's like the VCR," says Troy Barnes, chief executive officer of
Millenium, which sells its $499 machines under the NetRam label. "It's
inevitable that technology is going to come down into the right price range
for all consumers. I'm betting that more retailers are going to come in line
just to keep the other guys from getting all the sales."
Mr. Kurlak, in a research report, estimates that budget-priced PCs now
account for about 27% of the market, and may swell to 60% of the market in
five years. If Intel retains 80% of that business, he calculates, its gross
profit margins are likely to fall to 45%. The company's rivals, meanwhile,
expect to make money at low price points that Intel will be slow to embrace.
"There is going to be room under Intel's prices," said W.J. "Jerry" Sanders
III, AMD's chief executive officer. "If it's a fully functional PC, AMD wants
that business."
Intel, which is also introducing a high-end version of its Pentium II line
Monday, won't specify how low it is willing to go in pricing, but says it is
determined to follow the market. "At some point, the reality is you can't make
money -- the business isn't sustainable," said Karen Alter, an Intel marketing
manager. "That said, we will not walk way from a market segment."
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