News

Intel Slashes Spending Plans as Income Falls 38 Percent

• By The Associated Press
• April 20, 2006

The world's biggest chipmaker, coping with fierce competition, slowing PC demand and rising inventories, took more than $1 billion out of planned spending for the next nine months. Even spending on new factory equipment, considered sacred among Intel executives, wasn't safe, being slashed by about $300 million.

"They're feeling very pressured about the amount of cash they have," said ThinkEquity Partners analyst Eric Ross. "They're hunkering down."

Intel shares rose 26 cents, or 1.3 percent, to $19.82 in early trading on the Nasdaq on Thursday after a lowered revenue forecast for 2006 wasn't as extreme as some analysts had expected.

The spending forecast came as Intel reported a 38 percent decline in first-quarter profit after financial markets closed Wednesday as PC sales slowed and the world's largest chip maker continued to face stiff competition from its smaller rival, Advanced Micro Devices Inc.

For the three months ended April 1, Santa Clara-based Intel reported net income of $1.35 billion, or 23 cents a share, compared with $2.18 billion, or 35 cents, in same period last year. Sales fell 5 percent to $8.94 billion from $9.43 billion.

Analysts were expecting a profit of 23 cents per share on sales of $8.91 billion, according to a Thomson Financial survey.

Last month, Intel cited a "slight" loss of market share and weaker sales of microprocessors as it lowered its revenue forecast to between $8.7 billion and $9.1 billion, down from a previous estimate of $9.1 billion to $9.7 billion.

On Wednesday, Intel said revenue for the current quarter is expected to be in the range of $8 billion to $8.6 billion, well below Wall Street's consensus estimate of $8.85 billion. The company went on to say full-year sales would be about $37.6 billion, less than the $41.1 billion to $42.3 billion range Intel provided in January.

But the annual revenue forecast was roughly in line with the $38 billion consensus estimate, and some analysts said it was unrealistic, given the inventory problems and slowing PC growth trends Intel executives outlined.

"They certainly don't give me any confidence," said ThinkEquity Partners analyst Eric Ross. "Their assumption for the back half of the year assumes a lot of things that certainly haven't happened over the last two quarters."

The results were released after financial markets ended regular trading. Shares rose 21 cents, or 1.3 percent, to $19.77 in extended-session trading.

Intel's slumping profit came as gross margin, or the percentage of sales left after manufacturing costs, shrunk to 55.1 percent, lower than the 57 percent to 61 percent the company forecast in January. The reduction was the result of lower demand, inventory write downs and a decline in the average selling price of its products.

Intel said gross margin would fall to a range of 47 percent to 51 percent as it sells a higher proportion of lower-margin products, copes with higher costs for new factories and sees average selling prices continue to fall.

Intel, in addition to cutting planned spending on factory equipment, also took about $400 million out of research and development and $600 million out of marketing and administrative costs. AMD, when it reported earnings results last week, said it would boost equipment spending by about $300 million, to $1.7 billion.

"What you're seeing is a little bit of an economic stall, maybe in the fourth quarter and the first quarter," Intel Chief Financial Officer Andy Bryant said in an interview.

Demand was weaker than expected particularly in Western Europe and the Asia Pacific region. Bryant, however, said the economies appeared to be returning to normal.

Over the past few years, Intel has been racing to catch up with AMD.

In 2003, the smaller chip company, which was once best known as an Intel imitator, introduced its 64-bit Opteron processors for servers. It could address much larger blocks of memory, yet remained fully compatible with software designed for more common 32-bit chips.

It took Intel a year to match the chip, and by then Opteron and a follow-on 64 bit processor for desktop computers were already enjoying brisk sales.

Intel also ran into a shortage delay for chipsets, which connect a microprocessor to a PC's other core parts, as well as excesses for other types of inventory.

Last month, Intel unveiled details about a new chip design that's aimed at stemming the performance edge of AMD microprocessors. The new blueprint, dubbed the "Core" microarchitecture, will start shipping in the third quarter in a desktop chip code-named "Conroe" and a server chip called "Woodcrest." It will be included in chips for mobile PCs in the fourth quarter.

Intel has had better luck carving out a large chunk of the notebook market with its Centrino "platform" -- a package of chips designed for mobile computers.

Borrowing on Centrino's platform model, Intel in January introduced the Viiv platform designed to make it easier for home entertainment computers to connect to TVs and networks.

Intel in January also introduced the Core Duo, the next-generation microprocessor for Centrino systems and desktop computers. It has two computing engines on a single chip.

During the first quarter Apple Computer Inc. started selling its first Macintosh machines to use an Intel chip. While Apple remains one of Intel's smaller customers, the win provides an important psychological and marketing boost to Intel, analysts have said.