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Intel makes income disappear in Q4

Copperfieldian quarter

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Intel performed a disappearing act during its fourth quarter, hiding revenue and income from investors. The chip giant saw Q4 revenue drop five per cent to $9.7bn. More stunning, however, was Intel's 39 per cent net income slide to $1.5bn (EPS of 26 cents). These results capped off a difficult year for the company, as it tried to reorganize products and staff to deal with a stronger AMD.

In a canned quotation, Intel's CEO Paul Otellini ducked the obvious.

"Intel's product and technology leadership yielded a strong fourth quarter with higher selling prices and record unit shipments in the fastest growing segments of the market," he said.

Investors were not quite as moved by the quarter even though Intel beat modest analyst expectations. They sent Intel shares down close to four per cent - at the time of this report - in the after-hours market.

Analysts had been looking for $9.45bn in sales and EPS of 25 cents.

For the full year, Intel's revenue dropped almost 10 per cent to $35.4bn. Its net income tumbled 42 per cent to $5bn.

Intel revamped its entire mainstream processor line during the second half of 2006, hoping to regain a performance lead over AMD. The company also decided to let go of more than 10,000 workers to lower costs.

The competitive pressure from AMD has punished Intel's gross margins. Intel expects a gross margin of 49 per cent, plus or minus a couple of points, in the first quarter, and 50 per cent gross margin, plus or minus a few points, for all of 2007. That's down from 55 per cent to 60 per cent ranges pre AMD's release of x86-64-bit chips.

Despite the gross margin pressure, Intel cheered record server, mobile and flash memory product sales. Intel in fact cheered the fourth quarter sales so often that one analyst quipped, "You said 'record' a record number of times during your (earnings call) preamble" before he grilled Intel on the gross margin ugliness.

Intel also cheered its nerd fleet by announcing that samples of its 45nm "Penryn" chips - due out in the second half of next year - have arrived and already powered up four operating systems - Windows Vista, XP, Linux and Mac OS X.

This mix of news prompted Intel's CFO Andy Bryant to conclude that "the fourth quarter was a strong ending to a difficult year."

In the first quarter of 2007, Intel expects revenue to come in between $8.7bn and $9.3bn. And, for all of 2007, it's looking to save about $2bn via various cutbacks, including the layoffs.

Intel executives remain bullish that the company's new product line combined with its manufacturing process lead over rivals will produce a stronger 2007. They claim that strong server and PC chip sales in the fourth quarter back up such confidence.

Still, AMD's relative strength means that Intel will need to keep prices lower if it hopes to counter sweeping market share losses. That means 2007 should be a decent year for consumers. ®

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