"I have a pretty good idea of what we will have in the warehouse when we finish this quarter and quiet frankly it is as much as I would want," said Andy D. Bryant, executive vice president and chief financial officer of Intel. The CFO would not release inventory estimates during a conference call with analysts on Thursday, but he said Intel's supply of processors was at the top range of acceptable levels.

The conference call came after Intel sent new shock waves through the semiconductor industry and the high-tech stock sector by downgrading its outlook for first quarter revenues and earnings. Intel said it now anticipates Q1 revenues dropping 25% from $8.7 billion in the fourth quarter of 2000 (see March 8 story).

The announcement, made after the U.S. stock markets closed on Thursday, caused the Nasdaq Composite Index to plunge 97.70 points, or 4.5%, to 2,071 in midday trading today (March 9), and the Dow Jones Industrial Average to drop 158 point, or 1.5%, to 10,701. Intel's stock was 11% lower in midday trading at $29.625, off $3.625 from Thursday's close.

Intel executives said channel inventories of microprocessors and PC chip sets were generally in good shape with exceptions of a few locations and overall weakness in Taiwan--a huge market. But the Santa Clara chip giant is expecting to enter the second quarter with more processors in its warehouse than it would like.

"You can imagine what a shortfall of 10% in revenue will create a fair amount of product," Bryant told financial analysts.

But Intel isn't backing off the addition of production capacity, even though the company is not certain when the current market slump will end. Intel is sticking with its plans to invest a record $7.5 billion in capital expenditures. Some competitors and analyst see the strategy as Intel spending its way out of the 2001 recession. Intel maintains that it is spending its way into the next upturn to distance itself from everyone else.

"Demand for newer products, including our Pentium 4 processor, is at or ahead of historical levels," said Sean Maloney, executive vice president and director of Intel's marketing group. "We still expect to ramp the Pentium 4 processor faster than any previous new microarchitecture," he told analysts on Thursday.

Intel's record capital spending is focused on new process technology and the buildup of 300-mm wafer processing capacity. In lowering its estimates for Q1 revenues, Intel said it was stepping up cost-cutting moves and will reduce its workforce by 5,000 jobs in nine months primarily through attrition.

The new production capacity being added by Intel is aimed at the upturn and mostly next year. "We are going to build inventory this quarter, and it is a quarter that I have more than enough capacity to meet the demands of my customers," said Bryant in the conference call.

"As we look to the future and we ramp the Pentium 4, which is a larger die, and we need space to do the transition to 0.13 micron and try to regain market segment share in chip sets," he said. "Those factors all tell me I need more capacity and better technologies in the second half of this year and next year than I currently have. We will continue to invest in $7.5 billion not for production of today's parts but to meet the future in demand."

The company is seeing a sharper drop in non-Intel Architecture products--flash and communications ICs--than in the Intel Architecture products, such as Pentium processors and chip sets, according to executives. "Reserves for some of our products--primarily older generation flash memory chips and some networking chips--are higher than normal," reported Bryant.

While Intel sticks to its $7.5 billion capital spending plans, a growing number of analysts are wondering how long the company can keep the course. Some observers have begun to predict Intel will cut capital spending in the second quarter.

Intel executives did not help to calm concerns on Thursday, when they hedged comments about the possibility of a "seasonal upturn" in the second half of 2001. Generally, Intel is looking for business conditions to improve in the third and fourth quarters of this year, but it all depends on economic conditions improving and how bad things get in Q2.

We are seeing the impact of economic issues on end-user demand," Maloney said. "Yes, there is some optimism to be found in the fact that inventory levels in the market channels have come down a bit, but still the end-user demand, whether it is in PCs or cell phones or networking equipment or server infrastructure--across the board--isn't where we want it to be.

"That is the message here," he said. "Inventory levels are low and when market inventory levels are low, it tends to favor people with new technology and guess what we have--some every new technology. So we are well positioned for it but at the moment we couldn't give you any indication that we are seeing a sign of an uptick," said the Intel vice president.

One of the biggest concerns at Intel is the drop off of server demand and the potential for Europe's PC business to fall further into the tank if a recession spreads to the region.

"We are hoping that Europe avoids the recession but we are seeing cancellations coming in from customers in every geography, including Europe," said Maloney. Intel is waiting for new numbers from Europe to arrive in the next several week, which it hopes will increase its visibility into the market conditions.

But aren't there any signs of an upturn yet? asked one analyst.

"No," said chief financial officer Bryant. "It is a real tough economy to look at and make a guess right now. We have a pretty disappointing first quarter. We expected it to pick up in the second half of the quarter and haven't seen it.

"There are days you can come in and find two positive signs, and the next day you come in and find three negative signs," he lamented. "Right now, I cannot look at the worldwide or Intel economy and give you a lot of hope."