Will The Chip War Be Lost In The Margins?

Sometimes it pays to just miss living down to the analysts' worst expectations, and it can cost to fall just short of fulfilling their rosiest ones. In the week following the second-quarter earnings reports from chip rivals Advanced Micro Devices and Intel, the market has seen fit to mildly punish Intel despite impressive net income, while giving AMD a slight bump despite an operating loss of $457 million. How could this be?

The answer, analysts say, is in the margins. Intel reported 2Q gross margin of 46.9 percent, more than a point lower than the chip giant's projected figure and three points lower than the 50 percent rate that the market seems to consider a crucial jumping off point. Meanwhile, even as AMD's gross margin came in at an unimpressive 33 percent, that figure was a marked increase over the first quarter's 28 percent -- even if it was a far cry from the heady days of 2006, when the vendor reported 57 percent margins in the second quarter.

Going forward, one has to think that hitting the mark on margins has to be a major concern for Intel and AMD as the chip rivals head into the second half of the year. In last week's earnings call, Intel projected 52 percent gross margin, plus or minus a couple of points, for the third quarter. With a much steeper path to the magic 50 percent figure, AMD nevertheless targeted that number for some point in 2008 during its call.

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News source: CRN

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