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Wed, Aug 08, 2001 - Page 21 News List

Intel plans to unleash a `price bomb'

SEMICONDUCTORS The biggest manufacturer of chips for PCs is set to slash prices by more than half as it confronts growing competition from Advanced Micro Devices

BLOOMBERG , NEW YORK

Intel Corp plans to cut prices on some of its personal-computer chips by as much as 54 percent as the biggest semiconductor maker works to recoup sales lost to rival Advanced Micro Devices Inc, analysts said.

"Intel is planning to detonate a price bomb" on Advanced Micro by slicing the cost of Pentium 4 processors, Lehman Brothers analyst Dan Niles wrote in a note to clients. He didn't cite sources.

With Advanced Micro boosting its market share even as PC sales drop industrywide, Intel is chopping prices to spur consumer and corporate demand for machines running on Pentium 4, its newest chip. Intel wants to be selling more Pentium 4s than Pentium IIIs for desktops by year's end, and has said it wants PCs with the new chip to sell for as little as US$799.

The company may reduce the cost of its top 1.8GHz Pentium 4 to US$260 from US$562 this month, Niles wrote. The price for a 1.7GHz Pentium 4 will fall 45 percent, with low-end models dropping 30 percent to US$135, he said. Pentium 4, introduced in November, will move up to 2GHz in the fourth quarter, he said.

Salomon Smith Barney analyst Jonathan Joseph trimmed his sales and profit estimates on Intel this morning. Last month, he predicted the company would cut prices an average of 39 percent.

Intel plans to lower chip prices Aug. 26 and may reduce them more in October if this initial round doesn't work, Niles wrote.

Joseph said the reductions would come Aug. 26 and Oct. 28. Advanced Micro spokesman Drew Prairie and Intel spokesman Tom Beermann declined to comment.

Advanced Micro now holds 22 percent of the PC-processor market, compared with 16 percent a year ago, according to Mercury Research. Intel's share has slipped to 77 percent from 83 percent.

That shift came as PC sales growth has slumped, with unit shipments dropping in the second quarter for the first time in 15 years.

"For those who thought the price war was already aggressive, you haven't seen anything yet," Niles wrote.

Falling shipments and prices have hurt Intel's gross margin, or the percentage of sales left after subtracting manufacturing costs. That margin narrowed to 48 percent during the June period from 63 percent in the fourth quarter, and Intel has said it will be about 47 percent this quarter.

Advanced Micro last month said it may report an operating loss this quarter, partly because it's had to slash prices to compete with Intel.

Several analysts today lowered their sales targets for Santa Clara, California-based Intel, saying the September quarter is coming in weaker than expected and the traditional bounce from back-to-school sales may not be as big as they'd hoped.

Salomon's Joseph lowered his third-quarter profit forecast to US$0.08 a share from US$0.11 and reduced his sales estimate to US$6.24 billion from US$6.64 billion.

"Expectations for a meaningful back-to-school selling season are rapidly fading," said Joseph, who rates the stock a "buy." Joseph, who correctly bucked the bullish consensus last July by telling investors to sell semiconductor stocks, has been at Salomon since April 1999. He said in April that the rebound was coming soon and last week predicted industry sales would bottom out this month or next.

Niles, a 34-year-old former Digital Equipment Corp engineer, was ranked by money managers as the No. 2 semiconductor analyst and the No. 2 PC analyst in Institutional Investor magazine's annual survey. The Sri Lanka native holds a degree in electrical engineering from Stanford University.

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