Chipset Design Errors to Hit Intel Margins (INTC)

Intel Corporation (NASDAQ: INTC) has been trying to recover and things seemed to be going well for its core business.  A new issue has come up in a chipset design flaw, as it discovered a design issue in a recently released support chip in the Intel 6 Series that has the code-name Cougar Point.  This will be addressed, but the issue is going to slightly alter some of Intel’s guidance.

Intel said that it expects to begin delivering the updated version of the chipset to customers in late-February and expects full volume recovery in April.  This is not a longstanding event and may have only a minimal impact.  Intel went on to note that the systems with the affected support chips have only been shipping since January 9th and believes that relatively few consumers are impacted by this issue.

Intel said on the design flaw, “In some cases, the Serial-ATA ports within the chipsets may degrade over time, potentially impacting the performance or functionality of SATA-linked devices such as hard disk drives and DVD-drives. The chipset is utilized in PCs with Intel’s latest Second Generation Intel Core processors, code-named Sandy Bridge. Intel has stopped shipment of the affected support chip from its factories. Intel has corrected the design issue, and has begun manufacturing a new version of the support chip which will resolve the issue. The Sandy Bridge microprocessor is unaffected and no other products are affected by this issue.”

Overall, the item is going to hit Intel’s results.  For the first quarter alone the company expects to reduce revenue by approximately $300 million and 2011 full-year revenue is not expected to be materially affected by the issue.

The expected total repair cost and replacement costs of affected materials and systems in the market is estimated to be $700 million.  Intel will also take a charge against cost of goods sold, which will cut fourth quarter gross margin by approximately 4 points from the previously reported 67.5%; and Intel will also take a charge in the first quarter of 2011 that will trim gross margin by 2% and the full-year gross margin percentage by 1%.

Intel has now completed the acquisition of the Infineon Technologies AG Wireless Solutions business and expects to complete the McAfee deal by the end of the first quarter.  The new guidance reflects the integrations and is meant to steer analysts in their new estimates for the combined operations.  The company now sees first quarter revenue of $11.7 billion, plus or minus $400 million.  The prior target was $11.5 billion, plus or minus $400 million. Gross margin percentage is now expected to be 61%, plus or minus a couple percentage points, versus the base case of 64%. Spending in R&D is revised $200 million higher against the previous expectation of approximately $3.4 billion.  The full-year revenue growth is now expected to be in the mid-to-high teens in percentages versus a prior 10% expected; Gross gross margin in 2011 is now expected to be 63%, plus or minus a few percentage points, versus a prior base case of 65%.

Intel shares were indicated in positive territory but now shares are down 1.7% at $21.09 on the day.

JON C. OGG