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Intel shares fall on earnings report

Chipmaker roughly meets expectations for the second quarter, but its outlook has slightly dimmed.

Intel roughly met expectations for the second quarter, but the company's outlook for the next three-month period has slightly dimmed.

The Santa Clara, Calif.-based chipmaker on Tuesday reported revenue of $8.05 billion for the second quarter and net income of $1.8 billion, or 27 cents a share. The figures were essentially flat from the first quarter but up from the same period the year before. Two tax issues pushed earnings down 1.7 cents per share, the company added.

A consensus of analysts expected Intel to achieve $8.1 billion in revenue and 27 cents in per-share earnings, according to Thomson First Call. In its traditional midquarter update in June, Intel said it expected revenue of between $8 billion and $8.2 billion for the quarter.

In after-hours trading, Intel shares fell about 5 percent to $24.88 after closing at $26.14 in regular trading.

The company, however, tempered its outlook for the future. Intel said revenue for the third quarter will likely amount to between $8.6 billion and $9.2 billion, which puts the midpoint at $8.9 billion.

That's more than the consensus estimate of $8.7 billion before the earnings release, but the company warned that lower selling prices of processors and stronger sales of less expensive parts will push gross margins down for the year--from an expected 62 percent to 60 percent. In other words, Intel will see revenue increase faster than normal, but profits could lag.

Wall Street waited for Intel's numbers for the second quarter and its outlook with more anticipation than usual. In the past few weeks, suspicion began to grow among some analysts that the tech market might be flattening out. Several software makers issued warnings last week while hardware sales, according to some analysts, had begun to slow.

"There has been a bit of a dip in the past two months," Anil Vasudeva, an analyst at Imex Research, said last week.

Monday, Merrill Lynch downgraded the entire chip sector, including Intel, stating that demand may have temporarily peaked for chips.

"Intel came into the second quarter with high inventory by historic standards, and may face pressure to bring inventory levels down in Q3," Merrill stated.

Inventory levels grew by approximately $427 million during the quarter, with approximately half of the increase coming from microprocessors, the company stated. To get the inventory level down, Intel CFO Andy Bryant said that the company has slowed the number of wafer starts to reduce production.

Microprocessor sales declined slightly from the first quarter, and the average selling price of these chips slightly declined. But flash memory sales, which had taken declined in 2003, were up significantly. The price declines anticipated for the current quarter comes as a result of greater desktop sales.

"Emerging markets are pretty hot and they tend to be desktop centric," said Paul Otellini, Intel president. Despite some of the inventory and pricing issues, Otellini and Bryant pointed out that sales were much stronger than the year before. Year to year, Intel is seeing the best revenue growth it has experienced since 1997 and there is higher than expected demand for server chips.

In its traditional midquarter update statement in June, the company said it would turn in revenue of between $8 billion and $8.2 billion for the quarter, a statement of growing optimism. During April, Intel predicted that its second-quarter revenue would total between $7.6 billion and $8.2 billion.

The latest quarter also saw the debut of a new chipset, formerly code-named Grantsdale, that will allow PCs to be used to record TV shows and as Wi-Fi base stations. Subsequently, the company had to recall some of the chipsets.

Intel spent about $38 million on the recall, the company said Tuesday. It also saw $39 million in gains from equity investments and interest, below the anticipated $60 million.

Geographically, Asia accounted for $3.7 billion in Intel's sales, or 45 percent of the total, up from 41 percent for the same time last year. In North America, by contrast, sales reached $1.95 billion from 28 percent of sales to 24 percent, while Europe and Japan stayed the same at 21 percent of sales ($1.7 billion) and 10 percent ($767 million), respectively. Many of the chips sold in Asia, however, get exported back to the United States and Europe in finished PCs and notebooks from Taiwanese, Korean and Chinese contract manufacturers.

Microprocessors still make up the vast majority of Intel's business. The Intel Architecture Group, which makes chips and boards for PCs and servers, accounted for $6.8 billion in sales, or 85 percent of all sales, and $2.8 billion in operating income.

By contrast, the Intel Communication Group accounted for $1.3 billion in sales and a $126 million operating loss. This group sells flash memory and chips for phones and networking equipment.