Intel Memory Chips Prices Drop

The price erosion is almost twice what the company expected, CEO Paul Otellini says.

SANTA CLARA, California (Reuters) - Intel Corp Chief Executive Paul Otellini said on Wednesday the company has seen price erosion for certain memory chips in the first quarter that is nearly twice what it had predicted.

Otellini said Intel's forecast for price erosion from the fourth quarter to the first quarter in NAND flash memory chips was 27 percent. The actual figure it observed is 53 percent.

The result of that pricing erosion was a "substantially lower product margin" and higher inventory write-downs.

Intel late on Monday cut its gross margin forecast for the current first quarter, citing weaker pricing on certain memory chips known as NAND flash memory, used in cell phones and digital music players.

That portion of the chip industry has been hit by over-capacity, some slowing demand among consumers, and intense price competition among Intel, its joint-venture partner Micron Technology Inc and Asian chipmakers.

Intel said on Monday it now expected a first-quarter gross margin of 54 percent, plus or minus a point, versus a previous forecast for 56 percent, plus or minus a couple of points.

Otellini also reaffirmed the chipmaker's plans for what he called an aggressive plan to move into what it sees as a rapidly growing market for PCs -- both desktop and notebook -- costing as little as $250.

"While we've gotten more efficient in the core business, we've put more investments in where we think the growth of the company is going to come from," Otellini said.

The company on Sunday announced it had picked "Atom" as the name for a new class of microprocessors aimed at the market it has dubbed netbook PCs, as well as emerging consumer devices.

Intel aims to have Intel chips spanning the digital market from so-called mobile Internet devices all the way to high-end computer servers that form the backbone of corporate networks.

Otellini also said at the company's headquarters in Santa Clara, California, that he expected Intel to start shipping more chips using 45-nanometer chip-making technology in the third quarter than those using the previous 65-nanometer chip-making technology.

"It's as aggressive as we said a year ago and on track," Otellini said.

Sean Maloney, head of worldwide sales and marketing for Intel, said at the meeting that inventories of chips, chipsets and other components that Intel tracks are in line.

"There isn't really any significant build-up of inventory," Maloney said.

Stacy Smith, Intel's chief financial officer, said he has been pleased with the progress Intel made in the last two years in restructuring Intel and ensuring that its operating profit margin would grow at a faster rate than revenue growth.

"The goal is to continue that," Smith said. "I think we're very well positioned for growth."

He also said that he expects Intel's dozen or so chipmaking plants around the world to be running at about 90 percent of capacity in 2008 and 2009, a figure he called ideal because it leaves Intel some flexibility to crank out more chips if demand is stronger than expected.

(Editing by Gary Hill and Braden Reddall)

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