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Intel Says Design Error Will Reduce Sales, Margins

Intel Corp., the world’s largest maker of semiconductors, said it will incur $1 billion in missed sales and higher cost to fix a design flaw in one of its chips.

The error will cut first-quarter revenue by $300 million and gross-profit margin by 2 percentage points, Intel said in a statement today. The company will spend $700 million to replace potentially faulty chips and systems. Intel shares fell and rival Advanced Micro Devices Inc. climbed.

The design fault is in a support chip, or chipset, for Intel’s latest processor model called Sandy Bridge, unveiled this month as part of a bid to improve PC graphics and ward off a challenge by AMD. Santa Clara, California-based Intel said it has corrected the flaw and begun manufacturing a new version of the chip that will resolve the issue.

“Is it going to be a near-term distraction and something for investors and customers to gripe about? Absolutely,” said Craig Berger, an analyst at FBR Capital Markets in New York. “But the stuff is relatively new. There are probably not many of them out. That’s helping them mitigate losses.”

Intel closed unchanged at $21.46 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has gained 2 percent this year. Sunnyvale, California-based AMD, Intel’s biggest rival in PC processors, rose 34 cents, or 4.5 percent, to $7.83 on the New York Stock Exchange. It has dropped 4.3 percent this year.

Late February

Chipsets support processors, the main semiconductor component in personal computers, by linking them with other parts of the machine and performing secondary functions. A chip can take months to go through the manufacturing process.

Intel said it expects to begin delivering the updated version of the chipset to customers in late February and be at full production again in April. The company has shipped about 8 million of the Cougar Point chips to customers which will have to be replaced, Chief Financial Officer Stacy Smith said on a conference call.

“We can recover on this pretty quickly,” Smith said. Intel may be able to return to full production in March, he said.

Sandy Bridge, Intel’s latest processor design, doesn’t work without the new chipset and therefore the availability of computers built on that product will be held up, Smith said.

That delay reduces the lead that Intel was expected to have over AMD in the introduction of their latest designs and increases the incentive for computer makers to look at AMD’s forthcoming Llano chips, said Gus Richard, an analyst at Piper Jaffray & Co.

Stress Test

No consumers have reported problems with the few machines that have been sold since Jan. 9, when computers with the potentially faulty chips first went on sale, Smith said. The flaw came to light in so-called stress tests which indicated that one function on about 5 percent of the chips would cease to work before the end of the expected lifetime of a computer.

Intel also said the completion of acquisitions of Infineon Technologies AG’s wireless unit and McAfee Inc., announced last year, led it to boost its sales forecasts.

First-quarter revenue will be about $11.7 billion, up from a previous forecast of $11.5 billion. Gross margin will be about 61 percent, down from a previous forecast of about 64 percent, the company said.

Full-year sales will grow “in the mid-to high teens,” compared with a prior estimate of about 10 percent. Gross margin this year will be 63 percent, as opposed to 65 percent.

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Alex Sherman in New York at asherman6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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