Only a couple of years back, Intel regularly notched gross margins in the low-60% range. Increasing competition from rival Advanced Micro Devices ( AMD) has changed the rules of the game, though, forcing both companies to pick up the pace of product development and to cut prices of their microprocessors. In 2006, Intel began a
major restructuring to adapt to the new environment, eliminating 10% of its workforce. AMD, meanwhile, has been bogged down by dwindling cash flow and a massive debt load incurred to acquired graphics chipmaker ATI. During Tuesday's post-earnings conference call, Intel management painted an improving picture of profit margins going forward. The investments to ramp up a new manufacturing process will taper off in the second half of the year, helping lift gross margins. Intel's improving mix of higher-end chips and bigger production output will also provide a boost. And Intel's forecast for a 52% margin in the current quarter suggests that the company is confident about its prospects -- the chipmaker has not guided margins above 50% in the last five quarters. Indeed, some Intel investors interpreted the weakness in the second quarter as a sign of strength for the months ahead. "At this point, you ask yourself, even though the quarter wasn't everything we wanted it to be, do I lower my expectations? And the answer is no. If anything, they go up a bit," says Bill Gorman, VP of equity research at PNC Wealth Management, which owns Intel shares.