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Update: Lower chip prices push Intel below estimates again in 3Q

Falling prices for processors again took their toll as Intel Corp. (Nasdaq: INTC) missed Wall Street's earnings estimates for the second straight quarter.

In third quarter results results after market close Tuesday, Intel reported net income of $1.9 billion, or 55 cents per share, not counting acquisition costs. First Call's survey of 23 analysts predicted a profit of 57 cents per share for the September quarter.

The company also missed analyst forecasts in the second quarter.

Third quarter revenue rose 9 percent year-over-year and sequentially, to $7.3 billion, within range of analyst expectations and slightly higher than the company's own expectations. Excluding revenue from acquired companies, Intel's sales increased 7 percent.

Intel expected gross margin to rise slightly in the third quarter, but falling chip prices caused margins to fall instead, company executives said during a conference call with analysts. Average selling prices for chips have been falling since last year, although the decline slowed "considerably" in the third quarter, said Paul Otellini, general manager of the Intel Architecture Business Group.

The company also underestimated the impact of delaying the introduction of faster chips based on smaller 0.18 micron line widths. Intel also saw increased costs for new fabs based on 0.18 micron.

Those delays, executives said, will benefit Intel in the December quarter because because 0.18 micron chips turned out to have per-unit manufacturing costs than expected. "We think we have a better cost story and a better product story going into the fourth quarter than going into the third quarter," Intel CFO Andy Bryant said.

Recent setbacks with new chipsets will not hurt shipments of 0.18 micron chips, because Intel already has compatible chipsets for those processors, Otellini said.

Gross margin will be a couple of points higher in the fourth quarter, Bryant said. The chipmaker predicted "seasonally strong" fourth quarter sales. Revenue will be higher sequentially in the fourth, Intel said.

Although executives said the full effects of Taiwan's recent earthquake aren't known yet, customers haven't asked Intel to do anything differently because of the quake, Otellini said. "At this point, we believe our supply of materials from Taiwan-based manufacturers has not been impacted," he said.

Intel saw market share gains in the third quarter, executives said. Pentium III chips are now the highest shipping processors for PCs, they added.

Fourth quarter expenses will be 9 to 12 percent higher than the third, because of increased advertising and marketing during the holiday season, Intel said. Research and development costs are expected to be about $3.1 billion, a slight increase from previous indications of $3 billion because of R&D spending at recently acquired companies. At $3.3 billion, capital spending will also be higher than previously forecast, Intel said, because of the acquisitions and the earlier-than-expected ramp of the Intel Online Services web-hosting business.

Intel recorded acquisition-related expenses of $333 million in the third quarter for writing off in-process R&D and $121 million to for writing down goodwill and other intangibles. Including those costs related to recently purchased companies such as Level One, Dialogic, Intel's profit shrank to $1.5 billion, down 6 percent year-over-year and down 17 percent from the second quarter. Previously, Intel recorded goodwill amortization in cost of sales.

Intel spent $911 million to buy back 12.8 million shares during the third quarter.