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Intel earnings on track, AMD decline expected

The processor price war that's been raging all year is taking its toll on Intel and AMD.

The processor price war that's been raging all year is taking its toll on chipmakers.

Intel, which will report its second-quarter results after the market closes today, is expected to report earnings of 53 cents a share on revenue of between $6.6 billion and $6.9 billion, according to a consensus poll taken by First Call. That represents a slight downturn from last quarter, but improves upon results from one year ago, when Intel had to contend with a worldwide oversupply of computers.

Tomorrow, AMD is expected to report a loss of around $200 million, or $1.26 a share.

The staggering loss largely results from price competition with Intel in the consumer PC processor segment, according to AMD executives. AMD's average selling price for PC processors has dropped to the low $60 range, according to AMD and others.

Most of these observers say Intel's average price has also dropped, but still sits firmly around $200 because the company sells chips into a variety of market segments.

While AMD's shortfall has been expected, and a second-quarter decline is typical for processor manufacturers, pricing pressure has sparked debate about Intel's prospects in the coming quarters. With shipments and prices slightly off from the year's opening three months, a key ingredient in the company's profit picture this quarter will come from cost-cutting initiatives, such as lower cost packages for its Celeron chips and more efficient manufacturing.

The question for the future is whether cost cutting, traditionally strong second-half demand, yet-to-be-seen products, and other circumstances will offset the drag of declining prices.

"The second half looks fairly strong," said Ashok Kumar, an analyst with USBancorp Piper Jaffray. But in the next breath, Kumar adds that "They need to come up with the equivalent of the Beetle?something to catch the user's eye."

Kumar predicts earnings of 54 cents a share.

Dan Niles, an analyst at BancBoston Robertson Stephens, thinks Intel will report a rise in gross margins from 59 percent to 60 percent in the second quarter, the result of better yields and cheaper chip packages. Chip prices have declined, however, a trend that will get worse with the rise of the so-called free PC.

As a result, Niles predicts earnings of 51 cents a share and recently lowered his estimates for 1999 and 2000.

Charlie Glavin, semiconductor analyst for Credit Suisse First Boston, added that Intel is currently suffering through product ennui. Killer applications that would naturally prompt upgrades have not materialized while more advanced products, such as the Coppermine Pentium III, the Geyserville notebook chipsets that will conserve battery power, and the Camino chipsets have been delayed.

"We view this summer as a bit of a void from Intel's perspective?Where are the big drivers? The big driver would be if they had Windows 2000," he said.

Nonetheless, Glavin remains bullish on the company. "Intel has done a great job with its market segmentation and cost cutting," he said.

PC demand is expected to pick up in the second half while pricing pressures are expected to abate. Notebook sales will also likely track upward next year when Japanese manufacturers will be able to catch up with demand on LCD screens, he said.

The company will also over time begin to see results from its networking investments. "People will look back at this era as a historical inflection point," Glavin said.