Intel discovers chip flaw in midst of major launch

•  Intel finds flaw in chip, halts shipments
• Problem will cut

first-quarter revenue by $300 mln

SAN FRANCISCO (Reuters) - Intel Corp found a defect in one of its chips, hurting its credibility during a major product launch and at a time when demand for microprocessors in PCs is being threatened.

The company said it stopped shipments of the chip used in personal computers with its most advanced Sandy Bridge line of processors and has already started production of a new version.

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.

“Does it change the perception of Intel’s quality? Yes, probably. You’ve got real product out there that’s been qualified and tested and green-lighted, and then you come back to say there’s a problem and you have to recall,” said Wedbush analyst Patrick Wang.

Intel has a good history of semiconductor manufacturing but it was criticised in the 1990s after it corrected but did not disclose a flaw in one of its Pentium processors.

Intel cut its first-quarter revenue forecast by $300 million and expects the total cost to repair and replace the chip to be about $700 million. Full-year revenues are seen unaffected.

The Santa Clara, California, company said the defect was discovered after it shipped more than 100,000 of the chips to computer manufacturers getting ready to sell new PC models with the Sandy Bridge processor, which Intel touts as its biggest-ever leap in processing power.

Had the problem gone undiscovered, about 5 percent of PCs using the new chipsets could have failed over a three-year period, Stephen Smith, vice president and director of PC Client Operations at Intel, said on a conference call.

“It would be a low and continuing failure rate over the life of the systems,” he said.

AMD this year is launching its own new lineup of processors, code-named Fusion, which will compete with Intel’s Sandy Bridge chips for PC design wins.

PCs using the chips started shipping on 9 January, and Intel said a “relatively small” number of them are likely to have been bought so far by consumers. It had sent a bit fewer than 8 million of the faulty chips to manufacturers.

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 that are increasingly used to surf the Web, manage email and perform other tasks once exclusively the province of PCs.

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.

Despite lukewarm growth in PC sales last year, the Semiconductor Industry Association said on Monday worldwide chip sales for 2010 rose 32 percent to a record $298.3 billion. But it warned that this year it expected only “moderate single-digit growth” for the industry as a whole, as the faltering economy continues to suppress growth in demand.

Intel does not expect the problem with its so-called Cougar Point chipsets, which let the central processor interact with the memory, hard disk drives and other parts of the computer, 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 gross margin by roughly 4 percentage points for that period.

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

Intel said its engineers zeroed in on the newest defect last week after manufacturers stress-tested the chips with high voltage and temperatures. The flaw could have stopped computers from being able to communicate with their hard disk drives or DVD drives.

“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,” said Kevin Cassidy, an analyst at Stifel Nicolaus.

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

The chip flaw, along with its recently completed acquisition of German chipmaker Infineon Technologies AG’s (IFXGn.DE) wireless unit and the purchase of security software firm McAfee (MFE.N), expected to close in this quarter, 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.

HP to offer refund for PCs with flawed Intel chip

Reuters: Hewlett-Packard Co will offer a refund to customers who bought personal computers that use Intel Corp’s flawed chips, though the company said only a “small fraction” of its PCs were affected.

HP, the world’s largest PC vendor, said customers can return their PC and either “choose a comparable product” or receive a refund.

Intel said Monday it had found a defect in chips used with its new Sandy Bridge line of processors. The company said the defect was discovered after it shipped more than 100,000 of the chips to computer makers.

In a statement on Wednesday, HP said the chip flaw affects only a small fraction of PCs sold or ordered since 9 January, when the Intel technology became available commercially.

HP said certain consumer desktops and laptops were affected, along with one commercial desktop PC model sold to small-business customers in the Europe-Middle East-Africa market.

HP said it stopped making PCs with the flawed Intel chips on Monday, and put a hold on product shipments.

Dell Inc, the No. 2 PC maker, said on Tuesday that four Dell products on the market were affected: XPS 8300, the Vostro 460, the Alienware M17x R.3 and the Alienware Aurora R.3.

“We’re committed to addressing this with customers who have already purchased one of the four products,” the company said in a statement, without providing further details.