Intel says credit crisis could hurt business

SAN FRANCISCO (Reuters) - Intel Corp (INTC.O) warned on Friday the credit crisis could hurt demand for its chips, and lead to the insolvency of key suppliers which could result in product delays.

The news initially drove its shares down 3 percent, but the stock recovered as Wall Street appeared to dismiss the comments as standard risk warnings in Intel's 10-Q quarterly report filed with the U.S. Securities and Exchange Commission.

The world's largest chip maker, which makes 80 percent of microprocessors that power personal computers, gave no new financial forecasts. It will issue a mid-quarter update on December 4, its first mid-quarter update in three years, a spokesman said.

"Current uncertainty in global economic conditions poses a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news, which could negatively affect product demand and other related matters," Intel said in the third-quarter filing. These comments were not in its second-quarter filing.

"There could be a number of follow-on effects from the credit crisis on Intel's business, including insolvency of key suppliers resulting in product delays," it said.

Stifel Nicolaus analyst Cody Acree said some of Intel's materials and equipment suppliers in China may be at risk for insolvency, but the companies are "very small players" that Intel could simply acquire to ensure continuity.

"Intel has $12 billion on the balance sheet so there's quite a bit of room for them to step in and make sure the supply chain is not disrupted."

UBS analyst Uche Orji also found little cause for worry in Intel's new disclosure, calling it a "standard risk comment."

"If Intel was going to give a profit warning, it would be specific," he said.

Orji did lower his fourth-quarter, 2009 and 2008 forecasts for Intel, but he said the move was made independently of the filing. He still rates Intel a "buy."

"My view is, let's take a hatchet and create a recession scenario, which is now what UBS is calling for in 2009. We think that you will see a combination of both unit decline in PCs, margin decline for Intel, leading EPS to fall dramatically," Orji said.

Intel spokesman Chuck Mulloy said the filing is consistent with the "dynamic" environment in which the company is operating.

"Business fundamentals are good for Intel. However, the macro-economic climate is something we don't have as much visibility into."

Other risks cited by Intel in its 10-Q include the inability of customers to obtain credit to finance purchases of Intel products, as well as the company possibly facing its own difficulties in obtaining short-term financing from the issuance of commercial paper.

When Intel reported third-quarter results in mid-October, it provided investors with wider-than-usual forecast ranges for the fourth quarter due to uncertainties about the global economy.

The company had forecast fourth-quarter revenue between $10.1 billion and $10.9 billion, which it said was weaker than typically seen in the period running up to the year-end holiday season.

Intel typically does not issue mid-quarter guidance, and Acree said investors will be watching carefully for new signs of economic weakness. "That will give us at least a firm picture of visibility by that point," he said.

Intel said on Friday that while its inventory levels are currently appropriate, economic uncertainty may result in lower-than-expected demand and force the company to write off excess inventories, thereby hurting its gross margin.

It noted that some customers are building inventory, but "with the current macroeconomic environment, it is hard to discern what demand will be for the fourth quarter of 2008."

Shares of Intel fell as low as $15.62 before recovering to trade up 16 cents at $16.33 on the Nasdaq. Shares of smaller rival Advanced Micro Devices Inc (AMD.N) were up 11 cents at $3.67 on the New York Stock Exchange.

(Additional reporting by Tiffany Wu and Franklin Paul in New York and Ajay Kamalakaran in Bangalore, editing by Matthew Lewis)