Intel Net Sinks, Weak Outlook
Reflects Challenges

Profit Margin Shows Strain;
Qualcomm Earnings Rise
Ahead of Positive Forecast

By DON CLARK
April 20, 2006; Page A3

Intel Corp. reported a 38% drop in first-quarter profit and predicted continued weak demand for its computer chips in the current period.

The semiconductor giant's gloomy outlook wasn't much of a surprise, and Intel's stock rose slightly in after-hours trading. But analysts remain divided on whether the company will mount a meaningful comeback in the second half.

Another bellwether chip maker, Qualcomm Inc., reported an 11% increase in profit and a 34% jump in revenue for its fiscal second quarter. The company, which sells chips and licenses patents for making cellphones, projected further growth in the current period.

Intel, based in Santa Clara, Calif., is by far the biggest provider of chips that serve as the brains of personal computers. But the company has run into a series of problems, including stiffer competition from rival Advanced Micro Devices Inc.

For the period ended April 1, Intel reported net income of $1.35 billion, or 23 cents a share, including four cents a share in stock-option expenses. In the year-earlier period, which didn't include those expenses, Intel's profit came to $2.18 billion, or 35 cents a share. Revenue declined 5% to $8.94 billion from $9.43 billion.

In the current quarter, Intel forecast revenue of $8 billion to $8.8 billion, a lower range than would be expected under the company's normal seasonal patterns and below analysts' average estimate of $8.85 billion, as reported by Thomson Financial.

More striking is the lowering of the company's closely watched gross profit margin expected for the current quarter. That figure stood at 55.1% -- below its prediction in January of 59% -- and Intel said the number could sink to 49% in the current period.

Andy Bryant, Intel's chief financial officer, said the company maintained its market share compared with AMD in the first quarter as measured by units, though he acknowledged that AMD may have taken a large share of chip revenue. A bigger issue for Intel, he said, is that demand for PCs has moderated for several quarters.

Facing excess chip inventory -- and waiting for attractive new chips Intel has promised later in the year -- Mr. Bryant said he expects PC makers to slow purchases, and Intel to reduce output.

But the company said it expects the second half will bring better news. "This is a year for resolute determination," Mr. Bryant said in a conference call with analysts.

Intel's stock was up 17 cents to $19.56 in 4 p.m. composite trading on the Nasdaq Stock Market. Following the announcement, the stock edged up in after-hours trading to $19.84, according to Inet ATS Inc.

John Lau, an analyst at Jefferies & Co., said the numbers were not as bad as some people had feared and pointed to a rebound later in the year. "We believe that investors will look beyond Q2 now," he said.

But Adam Parker, who tracks the company for Sanford Bernstein, predicted that analysts will reduce their earnings estimates further when they sift through Intel's remarks in detail. "I'm reasonably confident this is not the last of the bad news," Mr. Parker said.

CONFERENCE CALL

See a transcript of Intel's conference call, provided by Thomson StreetEvents (www.streetevents.com). (Adobe Acrobat Required.)

Intel, which in January predicted that revenue would grow 6% to 9% in 2006, now expects a decline of about 3%. Paul Otellini, the company's chief executive officer, told analysts it will cut about $1 billion from 2006 spending, and begin a "comprehensive analysis" of operations to improve efficiency in 2007 and beyond.

But several analysts were skeptical about Intel's annual revenue target, and its claims to have held market share against AMD. "I would have hoped they would have been a bit more realistic," said Apjit Walia, an analyst with RBC Capital markets, who called the quarter "a disaster."

Qualcomm, meanwhile, reported that net income for the fiscal period ended March 26 rose to $593 million, or 34 cents a share, from $532 million, or 31 cents a share, a year ago. Revenue rose to $1.83 billion from $1.37 billion.

The San Diego company predicted revenue for the fiscal year ending in September of $7.1 to 7.4 billion, up from its prior prediction of $6.7 billion to $7.1 billion. The company also boosted its prediction for cellphone handset sales in calendar 2006 by 8%.

Paul Jacobs, Qualcomm's chief executive officer, said he was pleased that Europe has now become the company's second-largest market for advanced cellphone chips and patent royalties, surpassing Japan.

Qualcomm's shares traded at 4 p.m. at $52 a share, up 47 cents, on the Nasdaq. In after-hours trading, the stock was unchanged, according to Inet ATS.