Intel finds chip flaw, cuts revenue forecast

Although the company said on Monday it is fixing the problem, it stopped shipments of the chip, which is used in PCs with its most advanced Sandy Bridge line of processors.

INTEL (INTC.NQ)cut its first-quarter revenue forecast by $300 million and said it expects the total cost to repair and replace the chip to be about $700 million. Full-year revenues are seen unaffected.

The company said the defect was discovered after it shipped over 100,000 of the chips to computer manufacturers getting ready to sell new PC models with the Sandy Bridge processor.

Had the problem gone undiscovered, about 5 percent of PCs using the new chipsets could have failed over a three-year period, Stephen Smith, vice president and director of PC Client Operations at Intel, said on a conference call.

"It would be a low and continuing failure rate over the life of the systems," he said.

Intel's shares were down about 1.4 percent at $21.17 in early afternoon trading on Nasdaq.

For Intel, the world's largest chipmaker, the design flaw is another distraction at a time when it faces sluggish personal computer sales and a major challenge from the exploding popularity of mobile devices, a market dominated by Britain's ARM Holdings.

While Intel's processors are the brains in 80 percent of the world's PCs, the company has yet to make its mark in mobile gadgets that are increasingly used surf the Web, manage email and perform other tasks once exclusively the province of PCs.

Some worries about Intel were eased earlier this month when it reported better-than expected revenue and margins for the fourth quarter and gave a rosy outlook for early 2011.

The company does not expect the problem with its so-called Cougar Point chipsets, which let the central processor interact with the memory, hard disk drives and other parts of the computer, to hurt its full-year revenue. It will deliver an updated version of the chip in late February.

But since the flaw affected some of the chips shipped in the fourth quarter, Intel plans to take a charge that will reduce its gross margin by roughly 4 percentage points for that period.

It will also take a first-quarter charge that will cut its gross margin by 2 percentage points.

"This is a minor negative and not as big an issue as it seems," said Miller Tabak analyst Brendan Furlong. "It's obviously an embarrassment, rather than a major problem for the company."

Hewlett-Packard, the world's largest PC maker, did not respond to a request for comment. Dell, ranked No. 2, did not have an immediate comment.

Kevin Cassidy, an analyst at Stifel Nicolaus, added, "It's obviously a negative and a surprise. We think they can recover from this very quickly. This product was just being introduced and there's not many in the field."

He said investors should buy shares of Intel if the stock appears under pressure from the Cougar Point problem.

The chip issue, along with its recently completed acquisition of German chipmaker Infineon Technologies AG's wireless unit and the purchase of security software firm McAfee, expected to close in this quarter, prompted Intel to revise its overall outlook.

Helped by the deals, it expects first-quarter revenue of $11.7 billion, give or take $400 million, compared with its previous expectation of $11.5 billion, give or take $400 million.

"As a long-term investor in the stock I won't be changing my perspective on the shares, but in the short term this is a surprise," said Ralph Shive, manager of the $1.7 billion Wasatch-1ST Source Income Equity Fund. The fund owns shares of Intel.

(Reporting by Paul Thomasch, Editing by Lisa Von Ahn, Derek Caney and Tim Dobbyn)

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