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Intel Q3 profits tumble 77 %

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CIOL Bureau
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Duncan Martell

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SAN FRANCISCO: Intel Corp. on Tuesday reported third-quarter profits that
tumbled 77 per cent as it struggled with slowing economies and weak personal
computer sales, prompting it to forecast sluggish sales in the fourth quarter,
typically the industry's strongest.

Intel, the No. 1 chipmaker, said that net income before acquisition-related
costs fell to $655 million, or 10 cents a share, from $2.89 billion, or 41
cents, a year ago, before 5 cents a share in acquisition-related costs. Sales
fell 25 per cent to $6.55 billion from $8.73 billion.

The Santa Clara, California-based company had been forecast to report a
per-share profit, excluding the costs, of 10 cents a share, within a range of 8
cents to 11 cents, according to Thomson Financial/First Call. Sales were
forecast on average at $6.38 billion.

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Intel, which has been buffeted this year by weak demand and competitive
pressure from rival Advanced Micro Devices Inc. (AMD), said that it expects
fourth-quarter sales of $6.2 billion to $6.8 billion, the same range it has
given for the past two quarters. Analysts, on average, had forecast
fourth-quarter sales of $6.8 billion, suggesting those estimates will need to
come down in light of Intel's guidance.

"The good news is that Intel basically made the numbers everyone was
expecting, so no disaster there," said analyst Drew Peck at SG Cowen.
"The bad news is that the guidance for the fourth quarter suggests that
things are still deteriorating."

Intel shares rose 58 cents to close at $24.96 on Nasdaq on Tuesday. The stock
has declined 20 percent this year, while the stock price of main rival AMD has
tumbled 23 percent amid the worst-ever slump in the semiconductor industry.
Intel shares climbed to $25.67 after the earnings release.

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Guidance prompts some confusion

But Intel's guidance for the fourth quarter prompted some confusion among
analysts. Executives said on a conference call, for example, they hadn't seen
any real change in business following the attacks on Sept. 11. "There was
really no discernible difference before or after the 11th," said Paul
Otellini, who runs Intel's PC-related business.

"It's hard for that to match up with all the other data points you're
getting on the worldwide economy," said Lehman Brothers analyst Dan Niles.
"You've got declining GDP, layoffs everywhere and the retails numbers look
horrible."

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Including the acquisition costs and in accordance with generally accepted
accounting principles, Intel's net income plunged 95 per cent to $106 million,
or 2 cents a share, from $2.51 billion, or 36 cents. "It would be
irresponsible if not dishonest for any semiconductor company to be bullish right
now," said analyst Doug Lee at Banc of America Securities. "For most
of this year we've been operating with very little visibility."

A bit of good news for Intel were gains it marked against AMD, which has
increased its share of the microprocessor market for much of the year at Intel's
expense. "There's absolutely no doubt that we gained market segment share
in the third quarter, probably two to three points," said Intel's chief
financial officer Andy Bryant in an interview.

According to Mercury Research, preliminary estimates show Intel's market
share in the third quarter at 77.5 per cent, up from a revised 76.7 per cent in
the second quarter. AMD's share slipped to a preliminary 21.5 per cent from 22.2
per cent in the second period, and Mercury attributed Intel's gains to its
aggressive price cutting on the Pentium 4. Analysts now expect further
reductions on Oct. 28.

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AMD on Oct. 5, warning of weaker-than-expected results, said third-quarter
sales tumbled 22 per cent, more than the 15 per cent it had earlier forecast and
warned of a large loss, blaming a price war with Intel.

'A little more cautious’

"If I were forecasting based on a traditional, historical basis, I would
have forecasted a seasonally stronger fourth quarter," Bryant told Reuters.
"When you look at the drop in consumer confidence, the weakness in the
worldwide economy, it prompts us to be a little more cautious."

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Otellini said on the conference call that sales rose from the second quarter
in all geographic regions with the exception of Japan, where revenue sank to
levels of two years ago. Shipments of PC chips, motherboards, chipsets, flash
memory and network processing chips all rose from the second quarter.

The ramp-up to Pentium 4 is also going extremely well, he said, noting that
Intel shipped four times as many Pentium 4 processors than it did in the prior
quarter. Otellini and Bryant said that Intel is perfectly positioned when the
economy bounces back and consumer confidence strengthens.

"There's this thing out there that nobody knows and that is, are people
going to continue to buy given the current environment," Bryant said.

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Intel said that it expects its gross margin percentage, or the percentage of
revenue left after subtracting product costs, to be 47 per cent in the fourth
quarter, "plus or minus a couple of points," versus 46 per cent in the
third quarter. "It looks like they hit the absolute bottom in gross
margins," said US Bancorp Piper Jaffray analyst Ashok Kumar.

Flat quarter

Its spending on research and development will be about $3.9 billion, $100
million less than its previous expectations, due to cuts in discretionary
spending in ongoing programs, Intel said.

Also, for the first time, Intel broke out sales from its communications and
wireless businesses, where it is spending aggressively to broaden its revenue
base. Revenue from wireless products, which include flash memory, fell to $509
million from $667 million a year ago, while sales from communications chips fell
to $580 million from $948 million.

Intel Architecture Group, which makes PC chips, motherboards and chipsets,
saw its sales fall to $5.39 billion from $7.04 billion a year ago, and accounted
for 82 percent of sales, executives said on the call.

"Their guidance suggests the best they can do is a flat quarter,"
Peck said. "It's just not happening for them, or, for that matter, for the
entire PC business this year."

(C)Reuters Limited.

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