Intel profit warning hits weak UK markets

A profit warning from Intel Thursday night hit UK high-tech shares hard Friday, but it was just the latest bad news for British tech and telecoms companies, which have watched their shares slump over the last few weeks.

Profitability worries, concern over oil prices and the plummeting euro have all helped drive shares down recently, according to analysts.

Intel's warning, which the company blamed on sluggish growth in Europe and disappointing sales of Microsoft's Windows 2000 operating system, came as a surprise to industry observers. PC maker Dell had just assured analysts it is headed for stronger sales in the second half of the year, and semiconductor equipment makers said August was their biggest month ever for equipment orders.

The FTSE 100 index took an immediate hit Friday morning, initially dropping more than 120 points. By 11.48am GMT it had staggered off its lows, but was still down 56 points at 6,141.

Technology shares, which were helping put the market on course for a 13th drop in 14 sessions, dominated the top ten FTSE 100 percentage losers. UK chip designer ARM Holdings (quote: ARM) headed the list, down 8.1 percent, while fibre optics firm Bookham Technology dropped seven percent.

Computacenter (quote: CCC), the PC hardware and services provider, was also hard hit by the tech sector slide. The company, which last month posted halved pre-tax profits in its first six months and warned of sustained pressure on margins, was one of the biggest losers in early trading, down 11 percent or 43p at 347p by 8.20am GMT, having picked up from an earlier low of 337p.

Telecoms shares were again a major drag, unable to shake off earnings worries and concerns about debt levels. Vodafone Group (quote: VOD) weighed in with a fall of 2.3 percent, while Colt Telecom Group (quote: CTM) was the sector's biggest loser, down 6.3 percent.

At its worst, almost £30bn had been wiped off the FTSE 100. "The timing of the Intel profits warning couldn't have been worse, there are already very fragile nerves," said one senior equity salesman.

The blow came as other factors, especially the weak euro, threaten to make the high-tech business climate worse in coming quarters, experts said.

Like many global companies already feeling the effect of the weak euro and high oil prices, Intel could see demand soften further if these trends persist and further squeeze consumer spending. "There are some underlying macroeconomic issues in Europe," said Wit SoundView analyst Mark Specker. "The euro falls in comparison to the dollar, and Europeans do notice the difference. For them the world has gotten a lot more expensive."

Behind the free-fall of European tech and telecom shares are fears the double whammy of cheap currency and expensive oil could derail corporate profit growth, observers said.

"If you extrapolate what is going on now through next quarter, when you see the heating season start, you'll probably see a lot of resources diverted to oil away from other things," said JP Morgan Securities analyst Daniel Kunstler. "If it costs $100 in Europe to fill up your car, that PC you were going to buy is not going to happen. Or, if you are a trucking company with huge fuel expenses, you will eventually have to cut back spending in other areas."

Ironically, analysts said other indicators have suggested stronger European PC growth toward the end of the year. Bear Stearns analyst Andrew Neff said early checks with computer makers suggested that they did not see trouble in Europe.

"Most of those I spoke with seemed genuinely surprised," Neff wrote in a note to clients. "Separately, some have speculated that Intel's may be a situation of... overordering -- which was certainly going on in view of shortages in the first quarter and second quarter."

Dell Computer, the world's number two personal computer maker, was off more than 10 percent, or $4-1/4 at $33-11/16 in after hours trading, according to Instinet. The stock was the second most actively traded issue on Island ECN, after Intel. That share price drop was despite comments earlier in the day by Dell vice chairman Kevin Rollins who said there was a recovery in sight in European corporate demand for its computers.

IBM and Compaq shares were also hard-hit in after-hours trading.

Research firm IDC recently predicted the European PC sales slump is drawing to a close, and the semiconductor industry has continued to show strong growth.

On Thursday, a semiconductor equipment industry association said the industry saw average monthly orders top $3bn in August, marking the first time orders have reached that level in on month.

Reuters contributed to this report.

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