Intel Chip Flaw Disclosed

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Intel has discovered a defect in its most advanced line of PC processors causing the company to cut its first revenue forecast by $300 million.

NEW YORK, Jan 31 (Reuters) - Intel Corp (NASDAQ:INTC) found a defect in one of its chips, hurting its credibility at a time when demand for microprocessors in personal computers is being threatened.

Although the company said on Monday it is fixing the problem, it stopped shipments of the chip, which is used in PCs with its most advanced Sandy Bridge line of chips.

Intel cut its first-revenue forecast by $300 million. It expects the total cost to repair and replace the chip to be about $700 million.

"It was the result of a series of stress tests conducted on the chipset. It didn't show up under normal testing," Intel spokesman Chuck Mulloy told Reuters. "The problem wouldn't happen immediately but after two to four years."

Shares were down about 1.1 percent in midmorning trade.

For Intel, the world's largest chipmaker, the design flaw is another distraction at a time when it faces sluggish personal computer sales and a major challenge from the exploding popularity of mobile devices, a market dominated by Britain's ARM Holdings (NASDAQ:ARMH).

While Intel's processors are the brains in 80 percent of the world's PCs, the company has yet to make its mark in mobile gadgets used surf the Web and update their social networking profiles.

Some worries about Intel were eased earlier this month when it reported better-than expected revenue and margins for the fourth quarter and gave a rosy outlook for early 2011.

The company does not expect the problem with its so-called Cougar Point chip to hurt its full-year revenue. It will deliver an updated version of the chip in late February.

But since the flaw affected some of the chips shipped in the fourth quarter, Intel plans to take a charge that will reduce its gross margin by roughly 4 percentage points for that period.

It will also take a first-quarter charge that will cut its gross margin by 2 percentage points.

"This is a minor negative and not as big an issue as it seems," said Miller Tabak analyst Brendan Furlong. "It's obviously an embarrassment, rather than a major problem for the company."

Kevin Cassidy, an analyst at Stifel Nicolaus, added, "It's obviously a negative and a surprise. We think they can recover from this very quickly. This product was just being introduced and there's not many in the field."

He said investors should buy shares of Intel if the stock appears under pressure from the Cougar Point problem.

The chip issue, along with the two pending acquisitions, including the purchase of security software firm McAfee (NYSE:MFE), prompted Intel to revise its overall outlook.

Helped by the deals, it expects first-quarter revenue of $11.7 billion, give or take $400 million, compared with its previous expectation of $11.5 billion, give or take $400 million.

"As a long-term investor in the stock I won't be changing my perspective on the shares, but in the short term this is a surprise," said Ralph Shive, manager of the $1.7 billion Wasatch-1ST Source Income Equity Fund. The fund owns shares of Intel.

Shares of Intel were down 23 cents at $21.23 on Nasdaq. (Reporting by Paul Thomasch, Editing by Lisa Von Ahn and Derek Caney)