Intel Faces Falling Demand

Intel's management ascribed the margin decline to lower revenue from microprocessors, a change in product mix and higher costs as it steps up production of its next-generation chips.

Many analysts believe that Intel is waging a price war in an effort to undercut AMD.

Otellini said that average selling prices dropped "only slightly" in the first quarter, with the most aggressive cuts "toward the bottom of the market, particularly desktops."

As Intel releases its new microprocessors later this year, CFO Andy Bryant said that competitive pricing will still be necessary to regain lost share.

Intel management acknowledged it had lost more market share than it had originally thought in the end of 2005.

And Otellini said the company now views overall 2006 PC industry growth in the high-single-digit range, instead of the 11% or 12% range the company was operating on earlier in the year.

As a result of Intel's lower revenue expectations, the company trimmed its spending projections for the rest of the year, cutting $300 million from capital expenses and $400 million from R&D.

Bryant said the capital spending cuts would not significantly alter production levels or the transition to advanced manufacturing equipment. Rather he described them as "cuts around the edges."

He acknowledged that to meet the new spending goals, there would have to be some staff reductions. But he said those reductions would come from "hiring discipline" rather than layoffs.

Intel pegged its 2006 gross margin at 53%, compared with its previous expectation of 57%.

Intel is conducting an internal review designed to improve the company's competitive position in 2007 and beyond.

Otellini said the "wholesale" evaluation will look at every aspect of the business, from capital efficiency to underperforming businesses.