Earnings Be Damned, Chip Makers Say

Despite a poor quarter, Intel and AMD determined to slash prices further in fight for market share

Even with the recent spate of awful financial reports coming from chip makers, IT administrators can expect to see prices for microprocessors, and hence PCs and servers, continue to drop.

Intel Corp., despite reporting last week that profits for the second quarter plunged 94 percent, indicated it was determined to continue slashing processor prices in hopes of accelerating Pentium 4s move into the mainstream.

Intels announcement came a week after rival Advanced Micro Devices Inc., suffering with a 92 percent drop in profits, vowed to remain competitive on pricing.

But while higher-volume sales could offset Intels slumping profit margins, such a pickup in sales appears unlikely given the weak U.S. economy.

"I think that for companies that didnt do upgrades in the past two years and want to do them now, they are going to find some attractive pricing," said Joel Salamone, MIS director of The Motley Fool Inc., in Alexandria, Va. "But for companies that have stayed current and have updated their infrastructures in the last couple years, theyre not going to be buying."

In tallying the results of a dour quarter in which net income plummeted 94 percent from a year ago, Intel executives said that while processor shipments were up from the first quarter, the companys gross profit margins fell to 48 percent, well below the 60 percent margins of a year ago. The company predicted the margins will dip even further in the third quarter.

Intel Executive Vice President Paul Otellini said in a conference call last week that the price cuts are part of the companys "single-minded drive" to replace the Pentium III with the Pentium 4 in PC systems priced at $800 and above by years end. By moving the Pentium 4 into the "sweet spot" of the market, Intel hopes to eliminate the traditional low-price advantage enjoyed by AMD, of Sunnyvale, Calif.

"Intel is basically going to sacrifice the rest of this year to move [further] ahead of AMD," said Dan Niles, an analyst with Lehman Brothers Holdings Inc., in San Francisco.

According to Mercury Research, of Scottsdale, Ariz., AMDs share of the PC processor market edged up 1 percentage point from the previous quarter, to 22.2 percent, with Intel falling just more than 1 percentage point, to 76.2 percent.

Intels pricing moves in April highlighted the companys unusually aggressive push this year. That month, the Santa Clara, Calif., chip maker slashed the price on its 1.5GHz Pentium 4 nearly 60 percent.

For the second quarter, Intel posted a net profit of $196 million, or 3 cents per share, down sharply from $3.14 billion, or 45 cents per share, in the year-ago quarter. Revenue fell 24 percent from a year ago, coming in at $6.3 billion.

Otellini also said Intel is on track to release later this month its new Pentium III mobile chips, code-named Tualatin. In the desktop space, Intel will release a 2GHz Pentium 4 this quarter and a Pentium 4 that is faster than 2GHz by the end of the year.