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Intel scrapes by in first quarter

Intel hits its number but PC sales are slowing and chip inventories are up.

Intel was stung by excess chip inventories and slowing PC sales in the first quarter and it won't get better soon.

The company reported revenue of $8.9 billion for the first quarter, which was the midpoint between an already lowered March estimate of between $8.7 billion and $9.1 billion. Net income came to $1.3 billion, or 23 cents a share. (Excluding expenses associated with stock-based compensation, net income was $1.6 billion or 27 cents a share.)

"We believe PC growth rates have moderated over the course of the past few quarters, leading to slower chip-level inventory reductions at our customers and affecting our revenue in the first half of the year," said Intel President and CEO Paul Otellini in a prepared statement.

The slowdown will continue in the second quarter, the company warned. Intel said revenue for the second quarter will be between $8.0 billion and $8.6 billion, marking a first-to-second quarter decline that's larger than the normal seasonal pattern.

Although business will pick up in the second half, the mediocre results in the first half will mean that revenue for the year will likely be about 3 percent lower than the $38.8 billion of sales racked up in 2005. It will also cut R&D for the year by $500 million.

Intel will also begin a systematic review of its operations to see if it can cut costs elsewhere. Otellini said it was premature to discuss layoffs, but added that it would be a thorough review.

?This (will be) a wholesale look at the company over the next couple of months,? he said.

Gross margins, or the amount of money left after cost of goods sold, and a key indicator of profitability, will be about 49 percent in the second quarter. That's less than the 55.1 percent that Intel hit in the first quarter, which itself was lower than the earlier expectations of around 59 percent.

The deceleration can be partly seen in the size of the seasonal slow down between the fourth quarter and the first quarter. Last year, first-quarter revenue shrank about 5 percent from the fourth quarter, a little less than usual. This year, revenue contracted 12 percent from the fourth quarter to the first, which was higher than normal.

The primary problem, according to the company, is that the PC market isn?t as growing as fast as it was, Otellini said. Technically, PC shipments grew by 13 percent in the quarter, according to Gartner, but that growth has begun to slow. Many of the new PCs shipped in the first quarter also contained chips made by Intel in earlier quarters. That inventory overhang still needs to be worked out.

Contributing, but less serious factors, were a decline in average selling prices, as well as market share losses to AMD. Intel claimed that market share losses have actually slowed since the end of last year.

Sources close to the company have said that the company has scheduled conference calls for today with large numbers of employees.

The last two-and-a-half years have not been great times for the Santa Clara, Calif.-based chipmaker. In 2004, it endured a number of product cancellations and product recalls, and since then it has been steadily losing market share to rival Advanced Micro Devices.

AMD has also managed to increase the average price of its processors and sell more chips into expensive, high-end computers, while gaining share.

AMD, however, has also warned of its own flat to slightly lower sales.

Otellini and other Intel execs have stated that Intel will start to regain some of the lost deals with a slew of new notebook, desktop and server chips coming in the second half.

In January, Intel stated that it expected first-quarter revenue to be between $9. 1 and $9.7 billion, with a midpoint of $9.4 billion. For 2006 as a whole, Intel said that revenue would come in at $38.8 billion.