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Intel reports 15 percent profit growth

The Intel Corp, the world's largest semiconductor maker, reported on Tuesday that its profit for the third quarter rose 15 percent from a year earlier, though it continued to struggle with an inventory glut that has reduced its profit margins.

Intel executives said on Tuesday that they were making progress toward eliminating the inventory problem that caused the company to reduce its sales forecast in early September. The weakness, the company said at the time, was a result of lower-than-expected demand for both its microprocessor and flash memory products.

"Inventories are still higher than we would like and we will continue to improve them during the fourth quarter," said Andy Bryant, Intel's chief financial officer, in a conference call on Tuesday with financial analysts. Bryant said the company cut its inventories by US$43 million during the quarter.

Bryant told analysts that demand for chips for notebook computers and servers was strong, but that demand for flash memory used in cell phones and digital cameras was flat.

Net income for the quarter was US$1.9 billion, or US$0.30 a share, compared with US$1.66 billion, or US$0.25 a share, for the quarter a year ago. Revenue reached US$8.5 billion for the quarter, compared with US$7.8 billion in the quarter last year. A consensus of analysts polled by Thomson Financial forecast a profit of US$0.27 a share and sales of US$8.45 billion for the quarter, which ended Sept. 25.

But the company's per-share earnings included a tax benefit of US$0.036 a share during the quarter, including a small gain that the company had reported last month. Without that write-down, the company earned only US$0.26 a share for the quarter, slightly lower than analysts' forecasts.

"Growth was not as high as we originally anticipated due to inventory adjustments at some of our major customers and lower than expected overall demand for PCs," Intel's chief executive Craig Barrett said.

But Intel's gross margins continued to decline during the quarter, and they show no sign of improving next quarter. Gross margins dropped to 55.7 percent, compared with the company's earlier revised forecast of 58 percent.

In addition to the inventory glut, Bryant attributed the margin drop to a shift in demand away from higher-margin products like microprocessors used in personal computers to less expensive products like motherboards and chipsets. He added that he expected margins to remain at roughly 56 percent through the fourth quarter.

Intel forecast that fourth-quarter revenue would be US$8.6 billion to US$9.2 billion.

Analysts said the company still had a long way to go in reducing its reserves and improving profit margins, though the company was taking the right steps, overall.

"It confirms our view that the PC market is growing but at somewhat less than the seasonal norm," said Mark Edelstone, semiconductor analyst at Morgan Stanley. "But there are also a number of things they have to address. They still have to work on inventories, and to better align their manufacturing with the market."

Intel's report comes as the company is trying to recover from a series of missteps. In addition to misjudging demand, the company has stumbled in getting new products out on time, most notably its chips for desktop computers. In the meantime, AMD, Intel's chief rival, has had strong sales in its competing products.

The company's problems became so pronounced that Barrett issued a memo to employees in July encouraging them to work harder to prevent problems in the future.

But Bryant denied that the inventory problem caused it to lose market share to competitors during the quarter.

"We think shares were the same between Intel and its competitors," he said.
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