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Altera Cuts Margin Targets

The company also reduces capital spending plans in 2006.

Altera

(ALTR) - Get Report

kept its third-quarter sales target steady but reduced gross margin targets through 2006 because of a "permanent" cut in sales of certain low-volume, high-margin semiconductors.

Shares dropped 5.8% to $20.53 on Island ECN after ending the regular session up 1.5% to $21.80.

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Altera said it still expects sales between $288.4 million and $294 million, for a sequential growth rate of 1% to 3%, for the current quarter, which ends in September.

The company's new margin target for the third quarter is 66% to 67% vs. an earlier target range of 68% to 69%. Altera also reduced capital spending plans to $48 million from a targeted $52 million, because of fewer wafer purchases and equipment buys.

Analysts had expected sales of $292 million and earnings of 20 cents a share, on average, according to Thomson First Call.

For the fourth quarter and beyond, Altera said margins should be between 65% and 67%. Altera wasn't specific about which products caused its margin problems, but a company statement indicated the issue was in "multiple end markets."

Altera does not provide financial targets for its bottom line, but company CFO Nate Sarkisian will host a presentation for investors on Wednesday as part of the Citigroup Global Technology Conference.

San Jose, Calif.-based Altera makes programmable microchips used in communications, networking, computing and data storage applications.

The company's largest competitor,

Xilinx

(XLNX) - Get Report

, is scheduled to provide a midquarter update after Wednesday's closing bell. Altera's prognosis caused investors to bail out of Xilinx shares, knocking them down 2.1% to $27.70.

Analysts predicted Xilinx would post sales of $415 million and earn 22 cents a share for the current quarter.