Intel tumbles on lower earnings

Chipmaker's earnings beat the Street by a penny, but stock tumbles as earnings fall 39 percent from a year ago.

By Rob Kelley, staff writer

NEW YORK ( -- Chipmaker Intel announced fourth-quarter earnings a penny higher than Wall Street projections after the market's close Tuesday, but shares tumbled more than 4 percent in after-hours trade.

The company earned 26 cents per share for the period ending December 30, 2006, while analysts were expecting earnings of 25 cents per share, according to Thomson Financial.

Intel's earnings fell 35 percent compared to the 40 cents per share the company earned in the same period a year ago.

The company also reported sales of $9.7 billion, which beat analyst expectations of $9.4 billion. But revenues fell 5 percent from the $10.2 billion the company reported in the fourth quarter of 2005.

Intel said that it expects first-quarter '07 revenue between $8.7 billion and $9.3 billion, with a gross margin around 49 percent. For fiscal year 2007, it projects gross margins of 50 percent, plus or minus a few points.

"The stock is getting hurt because investors are disappointed by these gross margins," Doug Freedman, an analyst with American Technology Research, told CNNMoney. "They offered gross margin guidance well below where people were modeling, but I think they're just being cautious. They're in the early innings of restructuring and stabilization, and want to be sure they don't miss any numbers going forward."

The company has been locked in an intense chip-pricing battle with rival AMD (Charts), which last week issued a profit warning for the fourth quarter, sending its shares down nearly 10 percent while Intel's shares gained 1 percent that day.

The company's crucial gross margin reading dropped from 61.8 percent in fourth-quarter 2005 to 49.6 percent in the same quarter this year.

"Our gross margin is 11 points lower this year compared to the fourth quarter last year, primarily because of a lower average selling price for chips," Intel's CEO Paul Otellini told analysts on a webcast. "We continue to bring spending down as a percentage of revenue and are on target to generate savings of $2 billion in 2007."

He said the numerous price changes that Intel made in 2006 were more a result of new production introductions than pressure from competition.

"On the earnings call, (CEO Paul) Otellini broke down the average selling prices by market and said they're seeing increases everywhere except in desktop chips," said Freedman. "The fact that the average selling prices are up is a really good sign - it suggests people are buying high-performance processors."

Another analyst said that the results showed Intel looking strong in the competition with AMD.

"When AMD pre-announced, the fear was that the price war was going to hurt both companies this quarter," said Raj Sharma, an analyst with Polestar Investment Research. "But we can see that Intel's gross margins have hung in. This quarter report tells me that its new products are working fine, and helping maintain margins. There is a price war, but AMD is losing, and it's Intel that's causing the pain."

He said that margin declines had been a big concern earlier in the year, but that was partly because Intel was selling its older chips cheaply in order to clear out inventory.

"Clearly management is executing. The big growth driver in 2007 is going to be new products, and I think the company looks great on that front," he said. "I wouldn't be surprised if stock prices reached the high 20s by the end of the year."

Intel's stock was last at $30 in February of 2004.

Stock-option expenses also contributed to Intel's weaker earnings result this quarter.

This year saw Intel reducing the prices of its older chips and introducing powerful new lines. Management also decided in September to eliminate more than 10,000 jobs.

Shares of Intel (Charts) rose 0.8 percent during Nasdaq trade Tuesday, but fell 4.1 percent in after-hours trading after the earnings release.

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