October 17, 2006 2:11 PM PDT

Intel earnings better than expected, worse than 2005

Intel finally provided some decent news for investors in 2006, beating lowered expectations for its third quarter despite coming in way short of last year's figures.

During the third quarter, or the period ended Sept. 30, the world's largest chipmaker recorded revenue of $8.7 billion and net income of $1.3 billion, it announced after the close of the stock market Tuesday. The numbers slightly exceed analyst expectations and Intel's own guidance for the third quarter. Analysts polled by Thomson First Call had expected the company to record $8.6 billion in revenue and earnings per share of 18 cents. But Intel's actual earnings per share were 22 cents, aided by divestitures and hindered by restructuring costs.

Still, times have changed at Intel, which has lost market share (to Advanced Micro Devices) and employees this year after slashing prices on outdated products and cutting costs through layoffs. The company has sold several peripheral business units, such as its communications chip business, and announced plans to cut 10,500 jobs during the next year mostly from sales and marketing. Intel had around 99,900 employees at the end of the third quarter compared with 102,500 employees at the end of the second quarter, it said.

The company is on track to reduce its headcount to 95,000 by the end of this year, and to 92,000 by the middle of 2007, said Intel President and CEO Paul Otellini, on a conference call following Intel's announcement. This will make Intel "a more nimble and efficient competitor," he said.

The higher-than-expected revenue and profit numbers are still far away from the numbers Intel posted during 2005. Revenue was down 12 percent compared with the third quarter of 2005, and net income was down 35 percent. The company drastically cut costs on older microprocessors during this year to make way for its new Core microarchitecture chips, reducing the average selling prices of its products. The decrease in average selling prices continued into the third quarter, even though unit sales were higher. This was most prominent in Intel's Digital Enterprise Group, where microprocessor revenue was off $1.4 billion compared with last year's third quarter, and operating income was off $1.3 billion.

On the conference call, Otellini called the price cuts "perhaps the largest we've ever made." The moves were designed to get the company's older Pentium and Celeron products down into the low-end "brown banana" segments of the PC market, Otellini said, paving the way for the new Core chips.

Intel started to get new products into the marketplace during the third quarter. It launched new Xeon server processors in June and rolled out new Core 2 Duo desktop processors in July, addressing two Digital Enterprise Group categories in which rival Advanced Micro Devices had enjoyed a solid performance advantage for several years.

Intel was pleased with how quickly the new Xeon chips and the new Core 2 Duo notebook chips arrived on the scene, but early shipments of the desktop version of the Core 2 Duo were a little "looser," according to Otellini. Intel was unable to ship its Broadwater chipset with integrated graphics until September, which prevented PC makers from using the Core 2 Duo in anything other than expensive systems with discrete graphics chips and slowed the adoption rate of the new chip. All the major PC makers have that chipset as of now, he said.

As a result, the pricing pressure on Intel has eased as the new processors get into the market, said Andy Bryant, Intel's chief financial officer. "We'll always be in an environment where price is competitive. But Q2 was worse than Q3, which I think will be worse than Q4," he said.

Intel executives will host a conference call later on Tuesday to discuss the results. Looking forward to the fourth quarter, Intel expects to record revenue between $9.1 billion and $9.7 billion. Analysts were looking for fourth-quarter revenue of $9.5 billion.

The fourth quarter is always the strongest period of the year for Intel and the PC industry, as holiday shoppers cross new systems off their lists. At the moment, Intel expects a normal seasonal uptick in processor shipments going from the third quarter to the fourth, but it doesn't appear the company will be able to make up the shortfall compared to last year. Intel recorded $10.2 billion in revenue during last year's fourth-quarter.

See more CNET content tagged:
Paul Otellini, net income, microprocessor, Intel Xeon, Intel Core 2 Duo

 

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