Intel Faces Falling Demand

Updated from April 19

Intel(INTC Quote) met analysts' dampened first-quarter expectations Wednesday but offered a weak outlook for 2006.

The company said that overall sales in 2006 would be down roughly 3% from last year's $38.8 billion in revenue. Earlier this year, Intel had forecast that 2006 sales would increase by 6% to 9%, year over year.

The company cut more than $1 billion from its spending plan for the year and said it was undertaking its most thorough review of internal operations since the mid-1980s.

While Intel, the world's No.1 chipmaker, claimed it managed to stem its market-share loss to rival Advanced Micro Devices(AMD Quote) in the first quarter, it said that slowing PC demand and rising inventory levels are pressuring sales in the short term.

"We believe PC growth rates have moderated over the course of the past few quarters, leading to slower chip-level inventory reductions at our customers and affecting our revenue in the first half of the year," CEO Paul Otellini said in a statement accompanying the results.

The company reported that its customers were holding several million excess chips in inventory, equal to about one to two weeks of consumption.

But Intel's management expressed confidence that things would change in the second half of the year, when the company introduces a trio of new processors that feature a new microarchitecture.

Speaking to analysts in a conference call following the release of the results, Otellini described the upcoming "Conroe" desktop processor as Intel's most significant performance upgrade since the company introduced the original Pentium chip 13 years ago.

"We're preparing to roll out our most competitive and compelling product line in years," said Otellini.

Investors bid up shares of Intel 16 cents, or 0.8%, to at $19.72 in early trading Thursday.