Pricing pressure slashes Intel profit 39 percent

Pricing pressure slashes Intel profit 39 percent

Still reeling from the effects of a corporate reorganization that included heavy layoffs, Intel reported a profit of US$1.5 billion for the fourth quarter, down 39 percent compared to that period last year.

The company posted quarterly revenue of $9.7 billion. That revenue was down 5 percent from the same quarter last year, but came in just above Wall Street estimates of $9.44 billion revenue, according to analysts polled by Thomson First Call. However, Intel said its earnings were slightly inflated because of one-time actions in its reorganization, such as the sale of its communications and application processor unit to Marvell Technology Group and the layoffs of 10,500 workers.

Intel had lost significant market share to rival Advanced Micro Devices (AMD) over the year, but many observers felt the company had rebounded in recent months with the launch of many new chips, including the Core 2 Duo and quad-core Xeon chips.

Intel said its sales of microprocessor units reached a record high, led by flash memory units. But that success was offset by soft sales of chipset and motherboard units, Intel said in a release. Overall, the company said it had a poor performance because it was unable to reduce its fixed costs or forecast product demand, while its competitors launched new products and exerted price pressure.

As expected, the company's profit also slumped when comparing the 2006 fiscal year to 2005. Intel reported an annual profit of $5 billion, which was 42 percent below its number last year.

For fiscal year 2006, Intel posted revenue of $35.4 billion -- 9 percent less than fiscal 2005 -- and earnings of $0.86 per share -- 39 percent less than 2005. The figures were slightly higher than analysts' expectations of $35.13 billion annual revenue and $0.84 earnings per share, according to Thomson.

The annual numbers fell short of Intel Chief Executive Paul Otellini's own estimate, however. When he announced his plan to restructure the company in April, Otellini had predicted the company's operating income would tumble from $12.1 billion in 2005 to $9.3 billion in 2006. In fact, it reached only $5.7 billion.

Intel survived "a challenging year" in 2006, Otellini said during a conference call with investors on Tuesday. Even one of its bright spots -- strong sales of its new Core 2 Duo processor -- was offset by a greater market trend from desktop PCs to notebooks.

The company will produce better results in 2007, he promised. The reorganization plan has already cut Intel's employee headcount from 102,500 in the middle of 2006 to 94,100 at the end of the year. Once the company is no longer paying the cost of those extra workers, it will reap greater profits from new technology launches, Otellini said.

Intel's most profitable events in 2007 will include the completion of its transition from 90-nanometer to 65-nanometer process geometry for manufacturing chips, the spread of quad-core processors through more of its product line, and the launch of its "Santa Rosa" notebook platform, Otellini said. Santa Rosa is an update to Intel's Centrino bundle that offers improved graphics, the "Robson" design of supplementing hard drives with NAND flash, and a form of IEEE 802.11n wireless LAN capability.

Experts agreed that Otellini's strategy could make a difference.

"Going forward, TBR expects the company to see strong profitability improvements during the second half of 2007, when the company’s results are no longer dampened by restructuring charges," said Martin Kariithi, an analyst with Technology Business Research Inc., in a commentary. "The speed and ruthless efficiency of Intel’s cost-cutting program, coupled by the rapid new product introductions witnessed during the second half of 2006, are evidence of the company’s aggressive management style that was lacking during the chipmaker’s struggles in 2005."

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