Intel discovers chip flaw in midst of major launch

SANTA CLARA (AP) – Intel Corp. said it has found a design flaw in a recently released chip, and is working with laptop makers to replace affected computers.

Sales lost while the company rushes out a replacement chip, and the cost of replacing computers with the flawed chip, will cost the company $1 billion, it said.

Intel said it’s shipped eight million of the defective chips, but complete PCs with those chips have only been on sale since Jan. 9, so “relatively few” of them have reached consumers. The main processing chips in these computers are branded “Core i5” and “Core i7.”

The affected chips aren’t the main processors, which are based on the so-called “Sandy Bridge” technology that Intel announced in January, but a support chip. The flaw means it may degrade with use over a period of months or years, slowing down the transfer of data to and from the computer’s hard drives and DVD drives.

Intel said consumers can “continue to use their systems with confidence, while working with their computer manufacturer for a permanent solution.”

The company said it has already started making a new version of the support chip, and hopes to start delivering it to PC makers in late February. While they wait for the new chip, production of computers using Intel’s “Sandy Bridge” chips will be on hold.

The delay will reduce revenue by about $300 million in the first quarter, Intel said. It put the repair and replacement cost at $700 million.

Despite the setback, Intel raised its overall revenue outlook for the first quarter because of the recent acquisition of the phone-chip business of Infineon Technologies AG. It also expects to complete the acquisition of McAfee by the end of the first quarter.

Intel now expects $11.7 billion in revenue in the first quarter, plus or minus $400 million. Its prior outlook was for $11.5 billion, plus or minus $400 million.

Intel also said it expects revenue to grow by a mid to high teens percentage in 2011. It previously expected a growth of about 10 percent.

The company said its gross margin – the profit made on each sale, expressed as a percentage of overall revenue – will be lower than its previous outlook as it will be taking a charge related to the chip flaw.

Intel now expects its first-quarter gross margin to be 61 percent. Its earlier outlook was for 64 percent.

For the full year, gross margin is now expected to be 63 percent, compared to the previous expectation of 65 percent.

Shares of rival Advanced Micro Devices Inc. jumped 36 cents, or 4.8 percent, to $7.86 on the news. The stock has traded in the 52-week range of $5.53 and $10.24.