Intel's flash hike backfires: Analysts

SAN FRANCISCO: Chipmaker Intel Corp. may have to back down and cut prices for flash memory used in cell phones and other portable devices after a recent price hike backfired, dragging down sales and prompting a slide in its share price, analysts said on Friday.

Intel's stock dropped more than 4 percent in heavy Nasdaq trading to close at $16.01 on Friday, a day after the Santa Clara, California company said its first-quarter revenue would be flat to down slightly and cited disappointing flash memory sales.

Although Intel Chief Financial Officer Andy Bryant said the world's largest maker of microchips would "stay the course" on its costly flash memory price hikes, analysts called that a high-stakes gambit.

Intel raised flash prices by 20 percent to 40 percent in January.

With Intel losing business to rivals such as Advanced Micro Devices Inc., several analysts said they expected Intel to climb down, essentially admitting it had misjudged the flash memory market, which accounts for just under 10 percent of its sales.

FLASH MEMORY SALES A SURPRISE

"The extent to which flash revenues have declined surprised us," said Merrill Lynch microchip industry analyst Joe Osha in a report titled, "So much for the flash price hike."

Osha said Intel's strategy of increasing prices for flash memory -- a type of computer memory popular in cell phones and other electronics -- may have sent business to rivals and hurt its market share in its older flash memory products.

Other analysts said Intel's decision to try to ride out the unpopular price hikes could be a mistake given indications that competitors like AMD and STMicroelectronics were grabbing market share.

"If management has overestimated demand and/or underestimated the ability of its competitors to provide product, then current weakness may persist, and it will need to rescind its price increase to recover lost business. Frankly, we believe this to be the case," Dan Scovel of Needham & Co. wrote in a research note.

"We believe Intel will need to restore prices to previous levels sometime over the next few weeks, and it will take at least a couple of quarters to recover lost market share," Scovel predicted.

Jonathan Joseph, semiconductor analyst at Salomon Smith Barney unit, said part of the problem was that Intel's flash memory production lines have been running at low levels relative to capacity.

"The smart thing to do would be to cut prices and try to fill up their fabs," said Joseph, who added that he expects Intel to hold prices through the second quarter and possibly cut them later in the year.

REVENUE FLAT TO DOWN SLIGHTLY

Intel on Thursday narrowed its expected revenue range to $6.6 billion to $6.8 billion from a previous forecast of $6.5 billion to $7.0 billion. A year earlier, revenue was $6.8 billion.

Analysts, on average, had forecast revenue of $6.75 billion, in a range of $6.6 billion to $6.85 billion, and earnings per share of 12 cents, according to tracking service Thomson First Call.

Intel also said first-quarter gross margins would be slightly below the midpoint range of 50 percent, plus or minus a couple of percentage points, due to higher-than-expected flash inventory reserves.

"Intel is playing a game of chicken with its customers, seeing if they can hold the price increase they sent through. If they are successful, it signals positive things for the entire sector," Jon Najarian, chief market strategist with PTI Securities, an options and equity futures brokerage firm.

"However, the wild card is Samsung , as they have gone from the No. 9 flash memory producer to No. 2 faster than anyone predicted," he said, referring to Korea's Samsung Electronics Co. Ltd.

Najarian said he expected Intel's shares to trade with less volatility as the market comes to grips with the implications of its mid-quarter update.

"The unknown is always what Wall Street fears, and once something can be quantified, the volatility must drop and in Intel's case, that is precisely what I'm watching today," he said. (Additional reporting by Dan Sorid in New York and Doris Frankel in Chicago.)