Intel Beats Expectations, Warns of Sagging Margins

Driven by demand for flash memory chips used in cell phones, Intel Corp.'s (INTC) third-quarter profits rose 15 percent as the chip-making giant struggled to overcome lackluster PC sales, growing inventory, product missteps and stiff competition.

For the three months ended Sept. 25, Intel earned $1.9 billion, or 30 cents per share, on sales of $8.5 billion. In the same period last year, the company earned $1.7 billion, or 25 cents per share, on sales of $7.8 billion.

Analysts were expecting Intel to post a profit of 27 cents per share on sales of $8.4 billion, according to a survey by Thomson First Call.

Last month, the Santa Clara-based company lowered its revenue forecast for the period, citing lackluster demand by both businesses and consumers. At the time, it estimated sales would range from $8.3 billion to $8.6 billion, down from the original estimate of up to $9.2 billion.

Intel also warned that its gross margins are sagging, and it continues to suffer from a buildup of inventory.

"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," said CEO Craig R. Barrett.

Intel also is facing renewed competition from Advanced Micro Devices Inc. (AMD).The Sunnyvale company in recent months has had some success with its high-end microprocessors that leapfrogged Intel's Pentium 4 and Xeon offerings for desktops and servers, respectively.

In its earnings report last week, AMD reported strong sales of its Athlon processors for desktops and Opteron chips for servers. Executives claimed to be gaining some market share from Intel, though they declined to offer specific numbers.

Intel has countered with new Pentium 4 (search) processors for desktops, though they have been criticized for running hot and not offering much of a performance boost over previous generations. It's also updated its Xeon chips (search) for servers so that they can address more memory — a key benefit of AMD's technology.

Intel also has been plagued by a number of missteps, including a minor recall, a product cancellation and numerous delays in plans for new chips. In July, CEO Craig Barrett sent an e-mail to employees urging them to do a better job.

The results were announced after the financial markets closed. Shares of Intel ended at $20.28, down 33 cents, in Tuesday trading on the Nasdaq Stock Market. In the extended session, the gained 66 cents. For the year, Intel shares are down about 36 percent.