Intel announces $1 billion setback from chip flaw - San Francisco Chronicle

Intel Corp., the world's largest maker of semiconductors, said a design error in one of its chips will cost it $1 billion in missed sales and expenses.

The error will cut first-quarter revenue by $300 million and gross profit margin by 2 percentage points, Intel said in a statement Monday. The company will spend $700 million to replace potentially faulty chips and systems.

The design fault is in a support chip, or chipset, for Intel's latest processor model, called Sandy Bridge, introduced this month as part of a bid to improve PC graphics and ward off a challenge by AMD. Santa Clara's Intel said it has corrected the flaw and begun manufacturing a new version of the chip that will resolve the issue.

"Is it going to be a near-term distraction and something for investors and customers to gripe about? Absolutely," said Craig Berger, an analyst at FBR Capital Markets in New York. "But the stuff is relatively new. There are probably not many of them out. That's helping them mitigate losses."

Chipsets support processors, the main semiconductor component in personal computers, by linking them with other parts of the machine and performing secondary functions. A chip can take months to go through the manufacturing process.

Intel said it expects to begin delivering the updated version of the chipset to customers in late February. The company has shipped about 8 million of the Cougar Point chips that will have to be replaced, Chief Financial Officer Stacy Smith said in a conference call.

"We can recover on this pretty quickly," Smith said. Intel may be able to return to full production in March, he said.

Sandy Bridge doesn't work without the new chipset, and therefore the availability of computers built on that product will be held up, Smith said.

That delay reduces the lead that Intel was expected to have over AMD in the introduction of its latest designs and increases the incentive for computer makers to look at AMD's forthcoming Llano chips, said Gus Richard, an analyst at Piper Jaffray & Co.

No consumers have reported problems with the few machines that have been sold since Jan. 9, when computers with the potentially faulty chips first went on sale, Smith said. The flaw came to light in so-called stress tests that indicated that one function on about 5 percent of the chips would cease to work before the end of the expected lifetime of a computer.

This article appeared on page D - 6 of the San Francisco Chronicle