Intel misses Q3 profit target, revenue flat

Intel Corp. reported third-quarter earnings Tuesday that fell short of Wall Street expectations, although revenue held approximately steady from a year earlier at US$6.5 billion.

Net income for the three months ended Sept. 28 came in at US$768 million, up 17 per cent from the third quarter last year, while earnings per share were US$0.11, up 10 per cent, Intel said in a statement.

Financial analysts had been expecting a third-quarter profit of US$0.13 per share, according to research company First Call/Thomson Financial.

The figures exclude acquisition-related costs that totaled approximately US$108 million. Including those costs, net income for the quarter was US$686 million, or US$0.10 per share, Intel said. Revenue was US$6.5 billion, down slightly from US$6.55 billion in the third quarter last year.

Intel sold more microprocessors during the quarter than in the previous three months, but the average selling price of those processors was slightly lower. That’s because Intel gained share in the low-cost PC market, which shifted Intel’s “product mix” toward lower priced chips, said Paul Otellini, Intel’s president and chief operating officer, in a conference call to discuss the results.

Revenue from its microprocessor group remained more or less flat compared to a year earlier, at US$5.4 billion, the company said. Although it shipped more desktop chips during the quarter, volumes were down for both notebook and server processors, due to continued weak corporate spending and a sluggish back-to-school season, Otellini said.

Intel also saw growth in its wireless group, where revenue increased to US$586 million, from US$509 million a year earlier. Sales of flash memory chips increased, driven partly by the emergence of feature-rich phones that have color screens and built-in digital cameras, Otellini said.

However, the gains from its wireless group were offset by slow sales from its communications group, where slack demand from carriers and for networking equipment reduced revenue to US$482 million, from US$580 million a year earlier, the company said.

Both the wireless and communications groups reported operating losses for the quarter; only the Intel Architecture Group, responsible primarily for Intel’s microprocessors, was profitable, according to the statement.

Intel is on track to release a faster, 3GHz Pentium 4 processor next month, which will bring its hyperthreading technology to desktop PCs. Hyperthreading allows specially tuned software programs to run as if a PC has two processors, which can boost performance by as much as 25 per cent, according to Otellini.

Also by the end of the year, Intel will release its first server chip for multiprocessor systems based on its 0.13-micron manufacturing process. Code-named Gallatin, the chip will have a large on-die cache and run at a faster clock speed than its current chips for multiprocessor systems, Otellini said.

Intel continues to reduce its workforce, ending the quarter with about 82,000 employees worldwide, down about 1,500 from the end of the June quarter, officials said.

Its gross margin percentage came in at 49 per cent, at the low end if its estimates, thanks largely to lower than expected savings from manufacturing, and higher than expected charges for excess capacity, Intel said.

While the industry is going through “one of its worst downturns ever,” Intel continues to innovate and introduced 18 new processors during the quarter, said Craig Barrett, Intel’s chief executive officer, in the statement. Intel’s share of the microprocessor market – which for a time was under siege from rival Advanced Micro Devices Inc. – is at its highest level in four years, he added.

As it tries to keep costs down, Intel will continue to invest in technologies that are important to its core chip-making businesses and cut back on investments in other areas, Otellini said. In June the company shuttered its Web hosting business, and before that it cut back its consumer electronics products.

Intel expects fourth-quarter revenue to fall between US$6.5 billion and US$6.9 billion, the company said, although it noted that the uncertain economy makes predicting future results particularly hard.

“We see the possibility of modest growth in the fourth quarter as the pace of economic recovery continues to define our outlook,” Andy Bryant, Intel’s chief financial and services officer, said during the call.

By geography, the Americas generated 32 per cent of Intel’s revenue for the quarter, down from 37 per cent a year ago, while Asia-Pacific – excluding Japan – increased its share to 38 per cent, from 31 per cent a year ago. Europe and Japan stayed fairly flat, accounting for 23 per cent and 7 per cent of Intel’s revenue, respectively, the company said.

“Latin America had a poor quarter as the currencies in Brazil and Argentina continue to be under pressure,” Otellini said.

Intel performed well in China, meanwhile, where revenue grew 39 per cent year over year, Otellini said. Asia as a whole has become more important for Intel, he noted, as vendors outsource the manufacturing of products to that region, which in turn boosts local demand for Intel’s chips.