Intel said Tuesday that second-quarter profits plunged 94 percent from the same quarter a year earlier while sales stumbled 24 percent to $6.3 billion. Wall Street had anticipated the declines, and the company's financial results met analysts' revenue expectations and beat their earnings target.
But what the financial community didn't expect was the Silicon Valley company's razor-sharp focus on continuing its price war with cross-town rival Advanced Micro Devices. Investors pushed Intel's stock down modestly in after-hours trading on news that the company's gross margin would fall to 47 percent or lower in the third quarter.
Intel's outlook for the pace of PC sales was generally in keeping with what the company has been saying for several months. Personal-computer sales in the second half of the year should show a seasonal uptick as consumers increase purchases in the back-to-school and Christmas seasons. That would represent a welcome boost from the first half of the year, when a slowing economy took the steam out of business and consumer buying.
The company expects the market to "return to normal seasonal patterns and show strength in the second half" of the year, CFO Andy Bryant said on a conference call with analysts and investors. That should lead to revenue of $6.2 billion to $6.8 billion.
But Intel vowed to continue lowering microprocessor prices as it puts its top-of-the-line Pentium 4 products into inexpensive computers selling at about $800. This low-end of the market is where AMD has been strongest with its high-performance, low-cost Athlon chip. Intel said it expected to gain market share against AMD this year.
It is clear Intel's "No. 1 priority is to win market share at any cost," said Drew Peck, an analyst at S.G. Cowen. Only last weekend, the company cut prices on some chips by 37 percent, its second price cut this month. This aggressive approach led to a second-quarter gross margin of 48 percent, below the company's expectation of 49 percent. The gross margin will fall to 47 percent in the third quarter. Intel will "stop at nothing to win back market share from AMD," Peck said.
Beyond computer microprocessors, Intel said second-quarter results showed continued weakness in sales of flash-memory chips – semiconductors that store data even when they are turned off and which are used in cell phones and computers – and in processors for network equipment. A weak telecommunications market is stalling the network processor market, the company said. The weakness is expected to continue in the third quarter.
For the second quarter, net income at the company was $196 million, including one-time acquisitions charges. Without the charges, profits were $854 million (12 cents a share). Analysts had projected 10 cents. In after-hours trading, Intel shares fell 1.5 percent to $29.45 after climbing 2.6 percent in the regular session.
