Faulty Chip Error Doesn't Stop Intel from Raising its Revenue Outlook

By Laura Stotler January 31, 2011

A design flaw in the recently released Intel 6 Series support chip from Intel Corp., has caused a forecast revenue shortfall of $300 million in the first quarter. However, the company has raised its overall revenue outlook from $11.5 billion to $11.7 billion, based on the company's recent acquisitions.

Intel will discontinue production of the faulty chip, code-named Cougar Point. The chipset is used in the latest Second Generation Intel Core Processors, code-named Sandy Bridge. The company has subsequently lowered its gross profit margin forecast. Intel shares dropped 33 cents to $21.13 this morning on news of the shortfall.

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

Intel said that in some cases, the Serial-ATA (SATA) ports within the chipsets could degrade over time, which would impact performance and functionality of SATA-linked devices like hard disk drives and DVD-drives. The company has corrected the design issue with a silicon fix, and has begun manufacturing a new version of the support chip to resolve the issue. Neither the Sandy Bridge microprocessor nor any other Intel products are affected by the issue.

Systems containing the faulty chip have been shipping since Jan. 9, so not many consumers will likely be affected by the problem, according to Intel. Second-generation Core i5 and Core i7 quad-core based systems are the only ones affected by the chip that have been sold to consumers.

Intel estimates the total cost to repair and replace the materials and the affected systems will be around $700 million. It expects to begin delivering an updated version of the chip to customers by late February, with full volume recovery in April. The company's first-quarter gross margin is expected to be 61 percent, down from 64 percent, plus or minus a couple of percentage points. Full year gross margins are down to 63 percent (plus or minus a few percentage points) from the previous forecast of 65 percent.

The company does expect its revenue to grow in the mid- to high teens in 2011, while it previously expected about 10 percent growth. The jump is based on recent acquisitions including the record-breaking acquisition of security software company McAfee, scheduled to close in the first quarter.

Competitor Advanced Micro Devices' shares jumped 38 cents to $7.87 after the faulty chip was announced.

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Edited by Tammy Wolf

TechZone360 Contributing Editor

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