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Intel tops Q2 profit collapse with pessimistic forecast

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Intel today dealt shareholders a shocking blow when it revealed second quarter results. The chip maker suffered a 60 per cent profit slide, while revenue dropped 13 per cent. The financial figures confirmed the gains AMD has made against its rival.

For the second quarter, Intel reported revenue of $8bn and a profit of $885m. Those numbers compare to revenue of $9.2bn and a profit of $2bn reported in the same period last year. All together, Intel handed in its worst performance in two years.

Making matters worse, Intel didn't offer investors optimistic guidance. It's looking for third quarter revenue to come in between $8.3bn and $8.9bn. Analysts, on average, pegged Intel to pull in $9bn during the third quarter.

Intel is in the process of reworking its business to deal with a strong threat from AMD. The company sold off its XScale chip business to Marvell and fired 1,000 managers this month. CEO Paul Otellini has pledged to make more cuts where necessary.

Beyond the financial machinations, Intel has just overhauled its server processor lineup. The company last month released a new version of the Xeon chip to customers that beats AMD's Opteron chip on numerous benchmarks. Intel also freshened up its Itanic chip line yesterday by shipping the dual-core "Montecito" processor.

The new version of Xeon will be key to Intel's turnaround story, if there is one. AMD has been eating away at Intel's server processor market share.

Rather than focus on Intel's mistakes, Otellini pointed to Intel's new found competence.

"In 2006 we are delivering the strongest product lineup in the industry, with many of these new products shipping ahead of schedule," he said.

The financial analysts seemed to ignore the rest of Otellini's reassurances, which were made during a conference call held after the second quarter results were released. Otellini and CFO Andy Bryant noted a large inventory build up at Intel, as they expect healthy fourth quarter holiday sales and solid interest in new notebook and server chips. Some of the analysts hammered away at Intel over this build up, positing that an unimpressive global economy coupled with tough competition from AMD could leave Intel with a glut of chips, as happened back in 2004.

Bryant countered that Intel was adjusting inventory levels to meet "seasonal" patterns and urged that only a significant, unexpected market shift would be cause for concern.

"If you tell me that the worldwide economy is going into a recession, I will have inventory problems," he said.

Looking back at the second quarter, Intel saw sales fall by double-digits in all regions except Asia-Pacific where sales still fell 6 per cent.

The enterprise processor group watched as sales plummeted from $6bn in last year's second quarter to $4.6bn this time around. Sales of mobile processor products were healthier, reaching $2.69bn - a slight year-on-year rise. Intel's flash memory unit posted slightly higher revenue but reported a larger loss in this second quarter. It dropped $149m versus $80m last year.

Otellini made an odd comment during the analyst conference call saying his "one mistake in the last two years" was not managing chipset inventory correctly in 2004 and 2005. Such a remark seems out of place given Intel's lousy overall performance on the desktop and server.

Shares of Intel dropped more than 1 per cent in after-hours trading, at the time of this report.®

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