January 17, 2006 1:40 PM PST

Weak demand, low prices ding Intel earnings

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Lower prices and lower-than-expected processor shipments dented Intel's earnings and revenue for the fourth quarter. The company also forecast slower growth in 2006.

The company said fourth-quarter revenue came to $10.2 billion, less than the Wall Street expectation of $10.56 billion, while earnings per share came to 40 cents, not the 43 cents analysts anticipated. Net income was $2.5 billion.

Revenue was also lower than Intel's own forecast. The Santa Clara, Calif.-based chip giant said in December 2005 that fourth-quarter revenue would be between $10.4 billion and $10.6 billion. In October, Intel had forecast revenue for the period to between $10.2 billion and $10.8 billion.

In both cases, the midpoint was $10.5 billion. But the December statement made Wall Street skittish, because investors were expecting Intel to raise the midpoint of its guidance.

Next year looks as though it will be slower than the recent past. Intel said revenue would likely rise by 6 to 9 percent over the 2005 revenue total. That compares with the past three years, in which Intel has experienced double-digit growth. The company's gross margin, which is revenue minus the cost of sales, is expected to come in at around 57 percent in 2006. Historically, that's high, but it is still slightly lower than the 58 percent margin achieved in 2004. Gross margin will be affected by a change in compensation from stock options to employee stock grants.

The fourth-quarter shortfall can be attributed in part to a shortage of desktop chipsets, CEO Paul Otellini said in a conference call. The shortage, which began in the third quarter, prevented PC makers from building as many Intel-based PCs as they might have, he said.

The effects of the shortage will linger in the first quarter, because now PC makers have excess supplies of some chips. This will likely dampen Intel's revenue in the current three months. The company underestimated demand and tried to get third-party makers like SiS to fill in the demand.

"We overestimated the ability of third parties to provide chipsets," Otellini said. Demand for low-end desktops also shrank during the quarter, he added.

In all, Intel may have lost market share to rival Advanced Micro Devices, said Andy Bryant, Intel's chief financial officer.

"2005 was a great year, punctuated by a difficult December," Bryant said. "We believe we lost up to a point of market share to AMD because of the shortage."

The chipmaker said it will eliminate its midquarter updates and start to provide revenue projections at the beginning of the year and in the middle of the year. The midquarter updates, which only started in the past few years, provide more distractions than benefits, Otellini said.

Some of the weakness in demand during the fourth quarter came from the Americas. Revenue from chip shipments there dropped 10 percent to $1.8 billion, compared with the fourth quarter of 2004. Dell is the largest customer for Intel chips in the U.S., but Gateway and a few smaller manufacturers make PCs there as well.

Revenue from chip shipments to Asia climbed to $5.1 billion, a 16 percent increase from the fourth quarter a year ago. Many of the chips shipped to Asia are incorporated into PCs that eventually are sold in the U.S. and Europe under brand names like Hewlett-Packard. (Dell gets notebooks from Asia but makes desktops in the U.S. for U.S. customers.)

Sales in Europe were flat at $2.3 billion, while revenue from chip shipments to Japan climbed 11 percent from a year ago to $945 million.

2005 proved to be an uneven year financially for Intel. Although it beat initial estimates in the first half, the company turned in earnings and revenue that were slightly lower than expectations for the third quarter.

Still, for the year, Intel achieved revenue of $38.8 billion, a 13.5 percent increase over 2004 revenue of $34.2 billion. Its net income was $8.7 billion, a 19 percent boost over net income of $7.5 billion in 2004. Earnings per share for 2005 came to $1.40, a 21 percent increase over 2004 earnings per share of $1.16.

Notebooks were a significant driver of revenues and profits for the company in the fourth quarter. Notebook sales have been growing rapidly. Competitor AMD has also put more emphasis on competing with Intel in servers and desktops in the past two years.

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