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Intel profit plunges 39% amid price war

The chip giant absorbs the cost of a massive restructuring as its fight with AMD intensifies.

January 17, 2007|Michelle Quinn | Times Staff Writer

Intel Corp. is still paying for its price war with Advanced Micro Devices Inc.: The chip giant Tuesday posted a 39% drop in fourth-quarter profit as it absorbed the cost of a massive restructuring to be more nimble.

Intel earned $1.5 billion, or 26 cents a share, compared with $2.45 billion, or 40 cents, last year. Excluding one-time items, profit was 30 cents a share. Revenue fell 5% to $9.7 billion.

The results narrowly beat analysts' expectations, but Intel shares sank 4% in late trading on fears that profit margins would erode further in 2007.

"Things look bleak," said analyst Martin Kariithi at Technology Business Research. "Now the chip market is a two-horse race. As long as AMD is there, I don't see Intel getting to the level it once was."

Santa Clara, Calif.-based Intel has faced furious competition in recent years from its Silicon Valley neighbor. The rivals have been engaged in an aggressive price war that has hurt both firms' profits.

Last year, computer maker Dell Inc., which had had an exclusive relationship with Intel, agreed to use AMD processors in some of its products. And with its introduction of a dual-core chip, which helps users run multiple programs simultaneously, AMD chipped away at Intel's near-lock on the business market.

The price war has been good for buyers. Notebook computer prices have dropped 15% from an average of $971 in April to $822 in December, according to Current Analysis, a research firm in La Jolla.

In addition to depressing profit margins, the competitive climate has eroded Intel's market position. Through December, Intel garnered a 68% share of the U.S. retail market, compared with 32% for AMD, Current Analysis said. Intel has 75% to 85% of the overall market, analysts say, down from nearly 90% a few years ago.

"The thing to look beneath those numbers, their average selling price is going down," said Stephen Baker, vice president of industry analysis for NPD Group. "They had lots of units ship but not as much revenue."

The price war hasn't been easy for AMD either. The company warned analysts last week that its latest quarter was softer than expected.

In response to the competitive challenges, Intel has slashed costs. It announced in September that it would cut 10,000 jobs from its worldwide staff, which then numbered 102,500 and now totals 94,100 employees.

In July, AMD bought graphics chip maker ATI Technologies Inc., putting pressure on Intel to devote more energy to that sector. For its part, Intel launched a whole line of products, including Core 2 Duo chips for notebooks.

"Intel had been the top dog for so long it got comfortable," said Sam Bhavnani at Current Analysis. "That gave AMD an opportunity to attack. Now if you look at Intel, they have stepped on the gas a little bit. 2006 has been about righting the ship."

Intel shares, which closed at $22.30, up 17 cents, in regular trading, fell 97 cents to $21.33 after hours. AMD closed at $18.13, down 13 cents, then dropped to $17.88 after hours.

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michelle.quinn@latimes.com

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