Intel Income Dips On Price War

Intel reported net income of $1.3 billion, or 22 cents per share, a 35 percent drop over the third quarter of 2005. Revenue was $8.7 billion, a 12 percent dip over Q3 2005.

The company did launch new Core 2 Duo processors and saw higher unit volume in processors, chipsets, motherboards and wireless, but those positives were offset by lower prices for microprocessors and lower unit volume in Flash memory.

Overall, CEO Paul Otellini declared on the conference call discussing the numbers that it had been a “very good quarter.”

There was, in fact, good news in Intel’s results. The new Xeon 5100 processors are a huge hit among server vendors. Intel  sold more than one million in the first 90 days of availability, most of them going into multiprocessor machines.

Intel has begun initial revenue shipments of the world’s first quad-core microprocessors for PCs and servers. The Core 2 Quad processor plugs into existing Core 2 Duo systems and provides integer performance gains of up to 50 percent in servers and up to nearly 70 percent in desktops and workstations.

Competitor AMD has shown its quad-core technology, but doesn’t expect to ship until next year. Without citing AMD by name, Intel said competition had impacted its gross margins.

The past quarter was a record one for Intel’s controversial Itanium chip, driven by the new Montecito line of dual core processors. Otellini said it continues to make market share gains against Sun Microsystems’  Sparc and IBM’s  Power processors.

Operating income of $1.7 billion was boosted through a combination of approximately $100 million from the sale of a portion of an investment in Micron Technology, gains from divestitures of approximately $130 million and a restructuring charge of $98 million.

Intel’s headcount was reduced by 2,600 in the previous quarter and the company is on track to be at 95,000 total personnel by the end of the year and down to 92,000 by mid-2007.

Intel CFO Andy Bryant said the firm made “good progress toward our goals for a strong second half. The server business was an important bright spot, with double-digit sequential and year-to-year growth.”

Bryant said business in the third quarter was strongest in Europe, which is typically the case. Europe was up 17 percent over the same quarter in 2005, while Asia-Pacific was slightly lower.

For the following quarter, Bryant projected Intel revenues at between $9.1 and $9.7 billion, an 8 percent increase over the same quarter last year and consistent with seasonal patterns.

Intel expects gross margins next quarter of 50 percent, plus or minus a couple of points, with expenses between $2.7 and $2.8 billion and restructuring charges of approximately $125 million.

Otellini said that Intel had not moved new products into the channel as quickly as he would have liked, but that lateness was offset by competitive pricing, which is bringing customers back.

At the recent Intel Developer Forum show, Otellini said he met with customers who had not been with Intel in the last few years who are returning strongly for Web 2.0 applications and rack-mounted systems, he said.

Concerning Vista, which will ship to corporate customers this quarter, Otellini made this prediction:

“I think Vista is not something people are going to be waiting for. I do think, on the other hand, you will see it instantaneously adopted in the consumer market because it will go in with new machines. It will be like Windows XP, where consumers and small and medium businesses move quickly and large business move more slowly.”

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