Intel Second-Quarter Profit, Shares Fall

By DAN GOODIN

SAN FRANCISCO – Intel Corp.’s second-quarter profit plunged 57 percent as stiff competition and a shift in demand toward less expensive products depressed the prices the world’s biggest chip maker was able to charge for its products.

The company on Wednesday gave little indication conditions would improve in the second half of the year despite the arrival of a trio of new products analysts say will help it regain the performance lead over Advanced Micro Devices Inc., its biggest competitor in the market for microprocessors.

The Santa Clara-based company’s shares fell 1.6 percent after forecasting revenue in the current quarter of $8.3 billion to $8.9 billion – less than the $9.04 billion expected by Wall Street analysts. Chief Financial Officer Andy Bryant warned that annual sales will probably not meet a forecast he gave in April of about $37.6 billion.

Net income for the three months ended July 1 was $885 million, or 15 cents a share, compared with $2.04 billion, or 33 cents, in the same period last year.

Revenue fell 13.2 percent to $8 billion, at the low end of a forecast Intel delivered in April. The Santa Clara-based company reported sales of $9.23 billion in the second quarter of 2005.

Analysts had been expecting a second-quarter profit of 13 cents a share on sales of $8.26 billion, according to a survey by Thomson Financial.

Shipments for most of Intel’s products are stagnating or declining as a fleet of higher-performing processors from AMD have allowed it to take market share over the past year. Compounding the problem is the erosion of average selling prices brought on by the resulting price war between the two companies and budget-conscious buyers choosing lower-end PCs.

“Products that don’t carry a technical advantage can no longer carry a premium price,” said Doug Freedman, an analyst with American Technology Research. He said Intel’s attempts to stoke PC demand by slashing prices didn’t appear to work.

Intel’s revenue decline was steepest in Europe, where sales fell 24 percent, followed by the Asia-Pacific were sales were down 14 percent. Revenue rose 3 percent in Japan, which has proved a lucrative region for Intel over the past few years.

Even in the market for mobile PCs, one of Intel’s strong suits, showed signs of stress, as sales shifted to consumer models that tend to cost less and carry lower margins than those for businesses, Chief Executive Paul Otellini said.

Otellini said the company began shipping two new processors during the quarter, about a month ahead of schedule. The products, one for desktop PC and the other for mobile machines, are based on a new blueprint that was designed to help Intel regain the performance lead over AMD products.

The early arrival of those chips, which sell for higher prices than most other Intel products, helped the company boost its gross margin, or the percentage of sales left after manufacturing costs, to 52.1 percent, higher than the 47 percent to 51 percent range the company forecast in April.

Otellini said Intel planned to begin shipping a new chip with four computing engines in the fourth quarter, instead of the first quarter of 2007 as originally planned.

News that Intel’s new products were ahead of schedule wasn’t enough to ease concerns among some analysts. Among their concerns were inventory levels which ballooned to $4.33 billion, from $3.57 billion last year.

“In this demand environment, and with average selling prices falling as fast as they are, building inventory by 21 percent quarter over quarter doesn’t seem to be the soundest financial policy,” ThinkEquity analyst Eric Ross said.

The results were released after financial markets ended regular trading. Earlier, shares closed at $18.49, up 28 cents, on the Nasdaq Stock Market. Afterward, shares fell 11 cents in extended-session trading.

For the first six months of the year, Intel’s net income fell 46.8 percent, to $2.24 billion, from $4.22 billion. Revenue declined 9.2 percent to $16.95 billion, from $18.67 billion.

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