Intel Profit Reflects Bruising Price War

SAN FRANCISCO -- Intel Corp. on Tuesday reported second-quarter profits of $1.7 billion or 51 cents a share, up from $1.2 billion a year ago but falling short of the 53 cents per share expected by Wall Street.

The slight shortfall was a sign of the semiconductor giant's bruising price war with rival Advanced Micro Devices, which has been rolling out chips that compete with Intel's for speed and power but undercut them in price. Intel responded by ruthlessly slashing its own prices.

Intel revenues compared favorably to those in the second quarter of last year, when the company faced a worldwide PC glut - $6.7 billion compared with $5.9 billion. Per share earnings were 33 cents a year ago.

The announcement came after the close of Tuesday's stock trading. Intel shares eased 6 cents to $65.38 in regular Nasdaq trading. It fell to $63.13 in after-hours trading, following the earnings announcement, but later rose again above $65.

"Intel said getting into the year that they would regain all the market share they lost to AMD, and it's a zero sum game,'' meaning that they had to drop prices to do so, said Ashok Kumar of U.S. Bancorp Piper Jaffrey in Minneapolis.

San Diego-based market researcher Infobeads said Intel took back the lead in supplying microprocessors to the U.S. retail computer market in May, and is close to overtaking AMD in the sub-$1,000 PC market.

In the past, Intel's results have been a guidepost for high-tech investors seeking hints of the sector's near-term prospects. But Kumar cautioned against reading too much into the company's failure to meet analyst estimates.

Personal computer demand remains strong, Kumar noted, and Intel's gross profit margins - expected to rise slightly to 60 percent for the entire year - have been helped by an increasingly efficient manufacturing operation.

Those factors suggest that the company will weather the price wars, he said.

"People should see the marginal weakness as a buying opportunity,'' Kumar said.

Paul Otellini, Intel executive vice president, predicted a strong second half, and discounted any suggestion of a slowdown resulting from buyers' concerns about the year 2000 computer bug.

However, Intel does face some formidable challenges.

In particular, the company had planned a September release for faster versions of its flagship Pentium III processor, designed for the most powerful PCs and for workstation computers.

It was forced to delay that introduction until November due to technical problems - a rare stumble for the premier chip maker.

The two-month lapse - considered a huge window in the fast-churning industry - gives AMD a rare opportunity to capture a sizable share of the lucrative high end of the PC market with its forthcoming Athlon processor.

That processor is widely considered by industry experts to be more powerful than the current Pentium III. The Athlon should become available in PCs later this summer.

AMD announced last month that it would lose a record $200 million in the second quarter.

Analysts consider the Athlon, formerly code-named K7, to be the long-troubled chip maker's last chance to compete successfully against Intel.

To do so AMD must smoothly accelerate production - a longstanding weakness - to meet anticipated demand.

And its production weakness may be a matter of life and death for the company.

"If AMD can't get a good return on the K7, good profitability, they probably won't be able to fund their business,'' said Mark Edelstone, a San Francisco-based analyst with the investment banker Morgan Stanley Dean Witter.

But even modest success for the Athlon will pressure Intel to drop prices for current Pentium IIIs.