Intel profits drop by a third

Intel’s profits fell by a third in its first quarter, and gross margins are expected to drop below 50 per cent in its second, as the world’s biggest semiconductor maker struggles in the face of slowing PC growth.

Intel’s earnings report, its worst since the bursting of the technology bubble, contrasted sharply with those of Qualcomm and Freescale on Wednesday and that of Texas Instruments a day earlier. The trio of chipmakers is focused on a booming mobile phone market, and reported rising profits.

Paul Otellini, chief executive, said Intel believed PC growth rates had “moderated over the course of the past few quarters, leading to slower chip-level inventory reductions at our customers and affecting our revenue in the first half of the year.”

He announced revenues of $8.94bn and earnings per share of 23 cents – in line with analyst estimates that had been revised down after Intel issued a revenue warning in March. This compared to sales of $9.43bn a year earlier and profits of 35 cents a share. Intel reported first-quarter gross margins of 55.1 per cent, compared with its expectations in January of 59 per cent. It blamed lower microprocessor revenues and higher inventory write-downs.

The company has suffered from its customers not requiring chips they had earlier ordered as demand for personal computers slowed – leading to inventory build-up. It has also been losing market share to its main rival, Advanced Micro Devices.

There is worse to come in the current quarter – Intel said revenues were expected to be between $8bn and $8.6bn, below normal seasonal patterns. Gross margins would fall to about 49 per cent as it sold more of its cheaper processors and suffered higher costs. Intel is introducing more powerful and efficient chips based on a new micro-architecture in the coming months. Mr Otellini said the new processors would set the stage for a “strong second half”.

However, this will not make up for the poor first-half performance – 2006 revenues are expected to be 3 per cent down on 2005 after a three-year run of double-digit sales growth. Intel shares were nearly 1 per cent higher in after-hours trading at $19.75.

Qualcomm reported a 34 per cent rise in revenues year-on-year and an 11 per cent rise in profits.

Freescale also reported higher sales and profits, while Texas Instruments had experienced a 42 per cent increase in profits in its first quarter.

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