By Brian Caulfield

Sacrificing profits for sales in its brawl with rival AMD for market share, PC processor giant Intel Tuesday reported disappointing fourth-quarter gross profit margins even as its sales edged ahead of analyst expectations.

Excluding one-time charges, the Santa Clara, California-based company posted earnings of $1.7 billion, or $0.30 per share, down 29 percent from the same period a year ago. Intel reported sales of $9.7 billion, down 5 percent from the fourth quarter of 2006, beating a survey of analyst estimates from Thomson Financial for sales of $9.4 billion. Net income fell 39 percent to $1.5 billion.

Intel shares have rebounded more than 20 percent over the past year after Intel hustled to revamp its line of processors to fight off a surging AMD. Yet Intel faces a bigger challenge as consumers worldwide continue to snap up mobile phones, music players, and set-top boxes—many of which don’t rely on Intel’s specialty in PC processors. That reliance on PCs made Intel especially vulnerable as Microsoft repeatedly delayed the launch of Vista, its next-generation PC operating system.

Most telling, Intel’s gross profit margin fell to 49.6 percent of sales from 61.8 percent a year ago. The company forecast gross margins of 49 percent in the first quarter of 2007 and roughly 50 percent for the full year—well below Intel’s long-term average. That helped send Intel shares down $0.85, or 3.81 percent, to $21.45 in after-hours trading Tuesday.

There could still be more bad news to come. “We believe that the consumer-oriented Vista launch and the second-quarter introduction of Santa Rosa could ultimately lead to a revenue shortfall,” Morgan Stanley Dean Witter analyst Mark Edelstone wrote in a report to investors.

The analyst wrote that Santa Rosa, which uses higher-performance Intel chipsets, will be the preferred choice for machines running Vista. Also, Intel expects Santa Rosa to be a part of 40 percent of notebook sales.“However, we learned from numerous sources that Intel has recently decided to push out the launch of Santa Rosa from April to May,” Mr. Edelstone wrote.

Such a delay could reduce the positive impact of Intel’s ongoing cost cuts. In September, the company announced cutbacks that have helped reduce its work force to 94,100 from 102,500 in the second quarter of 2006. Tuesday, the company reported that it is “on track” to slash costs, excluding restructuring charges, by $2 billion in 2007.

The cuts come as Intel remains left out of the boom in demand for everything from flat-panel televisions to cell phones. While the Semiconductor Industry Association reports that overall semiconductor sales are expected to grow 9.4 percent in 2006, much of that growth comes from booming sales of cell phones, digital music players, and digital televisions. Not one of these markets relies on Intel’s products to the degree that the PC industry does.