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Price War Comes Back to Haunt Intel

TIMES STAFF WRITER

Intel Corp. on Tuesday reported a second-quarter profit of $1.7 billion, or 51 cents a share, up from $1.2 billion a year ago but falling short of the 53 cents a share expected by Wall Street.

The slight shortfall was a sign of the semiconductor giant’s bruising price war with rival Advanced Micro Devices Inc., which has been rolling out chips that compete with Intel’s for speed and power but undercut them in price. Intel responded by ruthlessly slashing its own prices.

Intel’s revenue compared favorably with that of the second quarter of last year, when the company faced a worldwide PC glut--$6.7 billion compared with $5.9 billion. Per-share earnings were 33 cents a year ago.

The announcement came after the close of Tuesday’s stock trading. Intel shares eased 6 cents to $65.38 in regular Nasdaq trading. They fell to $63.13 in after-hours trading, following the earnings announcement, but later rose again above $65.

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“Intel said getting into the year that they would regain all the market share they lost to AMD, and it’s a zero sum game,” meaning that they had to drop prices to do so, said Ashok Kumar of U.S. Bancorp Piper Jaffray in Minneapolis.

According to San Diego-based market researcher Infobeads, Intel took back the lead in supplying microprocessors to the U.S. retail computer market in May, and is close to overtaking AMD in the sub-$1,000 PC market.

In the past, Intel’s results have been a guidepost for high-tech investors seeking hints of the sector’s near-term prospects. But Kumar cautioned against reading too much into the company’s failure to meet analyst estimates.

Personal-computer demand remains strong, he noted, and Intel’s gross profit margins--expected to rise slightly to 60% for the entire year--have been helped by an increasingly efficient manufacturing operation. Those factors suggest that the company will weather the price wars, he said.

“People should see the marginal weakness as a buying opportunity,” Kumar said.

Paul S. Otellini, Intel executive vice president, predicted a strong second half, and discounted any suggestion of a slowdown due to buyers’ concerns about the year 2000 computer bug.

However, Intel does face some formidable challenges.

In particular, the company had planned a September release for faster versions of its flagship Pentium III processor, designed for the most powerful PCs and for workstation computers. It was forced to delay that introduction until November due to technical problems--a rare stumble for the premier chip maker.

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The two-month lapse--considered a huge window in the fast-churning industry--gives AMD a rare opportunity to capture a sizable share of the lucrative high-end of the PC market with its forthcoming Athlon processor, widely considered by industry experts to be more powerful than the current Pentium III, which is Intel’s flagship. The Athlon should become available in PCs later this summer.

AMD, which will report earnings today, announced last month that it would lose a record $200 million in the quarter. Analysts consider the Athlon, formerly code-named K7, to be the long-troubled chip maker’s last chance to compete successfully against Intel. To do so, AMD must smoothly accelerate production--a long-standing weakness--to meet anticipated demand.

And it might be a matter of life or death for the company.

“If AMD can’t get a good return on the K7, good profitability, they probably won’t be able to fund their business,” said Mark Edelstone, a San Francisco-based analyst with the investment banker Morgan Stanley Dean Witter.

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But even modest success for the Athlon will pressure Intel to drop prices for the current Pentium III.

Pricing pressure on its costliest PC microprocessors could hurt Santa Clara, Calif.-based Intel in an era in which the free PC--that is, a machine “given away” to customers who sign long-term Internet service contracts--has become an increasingly popular phenomenon.

“In general, [the free PC] is not impacting our balance sheet,” said Otellini, because subsidies that make giveaways possible come from Internet service providers rather than Intel.

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Taking a Breather?

Intel Corp. shares, among the best performers of the 1990s, have mostly bounced between $50 and $65 since January--reflecting investors’ concerns about near-term earnings growth. Weekly closes and latest on Nasdaq:

Tuesday: $65.38

Source: Bridge Information Systems

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