By
Antone Gonsalves
18 July 2007 03:55PM
Tags:
intel | profits | feeling | pressure | falling | chip | prices
A price war with AMD cut profits, but cost-cutting delivered results, Intel said.
Intel said profits rose by 44 percent year over year in the second quarter, but gross margins were at the low end of expectations, a result of price cuts stemming from the chipmaker's long-running battle with rival Advanced Micro Devices. Intel's net income for the quarter ended June 30 was US$1.28 billion, or US22 cents a share, compared with US$885 million, or US15 cents a share, for the same period a year ago. Revenues rose by 8 percent to US$8.7 billion from US$8 billion a year ago.
The second-quarter gross margin was 46.9 percent, lower than the midpoint of expectations, the company said. Intel had projected a gross margin of 48 percent, plus or minus a couple of percentage points. Microprocessor margins were as expected, with higher unit shipments offset by lower average selling prices.
Intel for more than a year has been in a price battle with AMD. In addition, one percentage point was shaved from the quarter's gross margin because of lower-than-expected sales of NOR flash products. Intel plans to spin off the group this year, combining it with ST Microelectronics's NOR operations. The disappointing gross margin apparently had an affect on investors. Intel stock fell US$1.20, or 4.56 percent, to US$25.13 in after-hours trading. Nevertheless, the company forecast an improvement in gross margins to 52 percent, plus or minus a couple of percentage points, in the third quarter; and a gross margin of 51 percent for all of 2007. Intel predicted third quarter revenue between US$9 billion and US$9.6 billion.
During a conference call with financial analysts, Intel executives said pricing pressures were greatest at the low end of the PC market, including desktops and notebooks. To offset those lower margins, the company was focused on having a wide variety of high-end chips for servers, workstations, gaming computers, and expensive notebooks. Intel, for example, has expanded its quad-core line-up to 14 different processors.
While margins were higher at the high end of the market, Intel planned to continue serving the low-end as aggressively as ever. "You've seen us walk the line, and we'll continue to walk the line," Paul Otellini, chief executive for Intel, said. "We have no intention of walking away from anything in the computer market." Intel's strategy for increasing profits is steady: High-volume sales coupled with lowering costs. The company reduced its projection for 2007 capital spending to US$4.9 billion, plus or minus US$200 million, from a prior target of US$5.5 billion.
The savings came from manufacturing efficiencies. During the analysts call, Andy Bryant, Intel chief financial officer, said he didn't expect to shave another US$600 million in manufacturing costs next year, but there would be further reductions in 2008 in overall expenditures. Intel has reduced its workforce by 12 percent, or 12,000 employees, since last year.
John Spooner, analyst for Technology Business Research, said in an e-mail that Intel's second quarter results showed that the company had gained market share against AMD. "We also believe that Intel showed improved profitability during the second quarter due to the benefits of its broad restructuring and efficiency plan, enacted at this time last year," he said.
Otellini said the company shipped 1 million Xeon quad-core microprocessors for servers since launching the product in November. For new products, Intel plans to start shipping in the fourth quarter a Xeon processor built using 45-nanometer processor technology. Code-named Penryn, the new processor line is expected to eventually cross product lines, from desktop to server, workstation and mobile.
The line will include dual-core and quad-core chips. The 45nm process builds a smaller chip with less power leakage than the 65nm and 90nm predecessors. The new process is widely seen as the next great advancement in the semiconductor industry. AMD isn't expected to have chips built with the same manufacturing process until 2009.