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Charge Cuts Into Intel's Cheer

The midpoint of its revenue guidance goes up, but a writedown weighs on the shares.

Updated from Dec. 4

Semiconductor giant

Intel

(INTC) - Get Intel Corporation Report

raised the midpoint of its fourth-quarter revenue guidance Thursday, predicting that sales would range from $8.5 billion to $8.7 billion and said gross margins would soar to about 62%.

Previously, the company told investors to expect revenue of $8.1 billion to $8.7 billion and gross margins of about 60%.

Intel does not provide EPS guidance. Analysts polled by Thomson First Call have been predicting a profit of 29 cents per share during the company's strongest quarter, on sales of $8.53 billion.

However, Intel also delivered a downside surprise in its midquarter update, saying it will likely take a $600 million goodwill impairment charge in the quarter related to chipsets for cell phones and other devices. "The long-term growth expectations for this business are no longer projected to be as high as previously expected," the company said.

The unexpected charge is related to the company's wireless communications and computing group and reflects part of the cost of Intel's $1.6 billion acquisition of DSP Communications in 1999, CFO Andy Bryant said during a conference call with analysts and investors.

About 30 minutes into the trading day Friday, Intel shares were down $1.05, or 3.1%, to $32.49, confirming the action in the stock after the close Thursday. Although the market was

expecting a solid update, Intel was down most of Thursday's regular session, until finally climbing at the end of the session along with the broader market, ending up 19 cents, or less than 1%, to $33.54.

The unexpected charge probably hurt the stock after hours, but Graham Tanaka of Tanaka Capital, who is long Intel, said investors would do better to focus on the projected gross margin. "Increasing by two

percentage points is huge," he said.

Similarly, analyst Dan Niles of Lehman Brothers said "everyone knew that part of the business wasn't doing well." Moreover, because the $600 million is a noncash charge, it won't affect the company's cash flow, he said. It could, however, reduce earnings by 6 cents a share on a generally accepted accounting principles basis. (Lehman Brothers has done investment banking for Intel.)

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Intel's strong results this year have been largely driven by strong demand for personal computers, particularly notebooks equipped with wireless networking cards. Bryant said the overall uptick in demand "is being seen in all geographies and across all parts of the business."

Although Intel's financial results have been solid, some investors think its price has gotten ahead of its upside potential. "We're paring back" in Intel, Richard Steinberg of Steinberg Global Asset Management said in a Thursday morning interview on

CNBC

. "Tech stocks are being boosted by greed," he said.

Intel has enjoyed a year-long rally, appreciating 114% since January, well ahead of the Philadelphia Semiconductor index and the

Nasdaq Composite

, which have gained 80% and 47%, respectively, this year.

Similarly,

National Semiconductor

(NSM)

, which

handily beat expectations and provided better-than-expected guidance Thursday, was nevertheless off $1.70, or 3.9%, to $41.80 in heavy trading. National Semi shares are up more than 190% this year.

Intel and National Semi are widely held by mutual funds and "it's the time of year when managers want to lock in their gains," said David Wu, a longtime industry watcher who covers Intel for Wedbush Morgan Securities. "I'd bet they'll be buying them back after Jan. 1."

Wedbush Morgan has not done investment banking for Intel.