Intel's AMD Troubles Continue

Pressure from the chipmaker's small rival took a toll in the third quarter, and CEO Paul Otellini is responding by cutting costs and staff

by Arik Hesseldahl

No matter how you slice them, Intel's financial results reflect a recurring theme: Advanced Micro Devices is gaining share in the hotly contested computer chip market, and Intel is cutting prices to cope. That's translating to a sales slump.

Revenue in the current quarter will be $9.1 billion to $9.7 billion, Intel said on Oct. 17, when it released results for the third quarter. While that's in keeping with analysts' expectations for sales of $9.46 billion, it's down from $10.2 billion a year earlier. Profitability is also under pressure. Gross margins will come in at 50% in the fourth quarter, vs. 61% a year earlier.

Intel (INTC), the world's largest chipmaker, is locked in a battle with rival AMD (AMD), which has been gaining share in the desktop and workstation business at Intel's expense. Intel's latest share of the market was 72.9%, down from 82.2% a year ago, according to Mercury Research, a research firm in Cave Creek, Ariz.

CUTTING HEADCOUNT

In response, Intel has been slashing costs and headcount. Chief Executive Paul Otellini told analysts on a conference call that the company is on track to reduce annual costs by $2 billion in 2007 and $3 billion by 2008. He also said the company is expected to finish the year with a headcount of 95,000 and that by the end of next year, the number would fall to 92,000.

While the efforts may buoy profit in coming quarters, pressure from AMD was the name of the game in the September quarter, when earnings declined 35%. Profit fell to $1.3 billion, or 22 cents a share, from $2 billion, or 32 cents, in the year-ago quarter. The profit included a 1.5-cent gain from one-time items. Sales were down 12%, to $8.7 billion, from $9.96 billion a year ago. Intel's gross margin was 49.1% vs. 59.1% a year ago. Revenue came in only slightly above the consensus estimate of $8.62 billion, while per-share profits came in 4 cents above consensus estimates of 18 cents.

Intel blamed the drop in profit on lower average selling prices and said sales of microprocessors were higher than the previous quarter on a volume basis. Sales in the Americas region were above seasonal patterns, while sales in Japan, Europe, the Middle East, and Africa were below seasonal patterns.

GROWING CONFIDENCE

Price pressure is among the concerns listed by JPMorgan (JPM) analyst Chris Danely. "Although we recently raised estimates on Intel, we remain neutral on the stock due to our belief that gross margins should remain in the high 40s range through the first half of 2007 due to record inventory, aggressive pricing, and higher depreciation," he wrote in a research note issued Oct. 16.

Despite the signs of weakness, some analysts are growing confident in Intel's ability to withstand competition. Ashok Kumar, an analyst at Raymond James & Associates, says Intel should probably hit the higher end of its fourth-quarter sales target. Kumar was encouraged by recent remarks by Kirk Skaugen, vice-president of Intel's digital enterprise group. Skaugen said at a conference in Taiwan that demand for Intel chips and other components is strong from contract manufacturers such as Quanta Computer and Compal Electronics, which make notebook PCs for some of the world's biggest PC vendors, including Dell (DELL), Hewlett-Packard (HPQ), Gateway (GTW), and Apple Computer (AAPL).