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updated 3/6/2008 11:14:06 AM ET 2008-03-06T16:14:06

Chip-maker Intel Corp.'s CEO, Paul Otellini, vowed Wednesday to shore up the company's defenses against steep drops in memory chip prices that forced it to lower its profit forecast for the current quarter.

Price erosion for NAND flash memory has been much steeper in the first quarter than Intel expected, Otellini said.

Otellini, speaking at an investor conference at the company's Santa Clara headquarters, said the company plans to move aggressively this year into new markets to better insulate itself against plunging prices for a type of memory called NAND flash. One new market for NAND flash memory is solid-state computer drives, which store data on memory chips instead of spinning disks.

Despite the memory-market woes, Otellini says Intel's core computing business is firing on all cylinders. Otellini said Intel is making rapid progress in shipping chips based on a new chip-making process.

The company is also re-evaluating how quickly it wants to increase its investment in NAND flash, Otellini said. Intel started making NAND flash in 2006 under a joint venture with Micron Technology Inc.

"This business will not be a drag on Intel Corporation," Otellini said. "We're going to fix it, or we're going to make sure it's profitable, one way or another."

Intel's primary business is making microprocessing chips, the brains of personal computers. But its memory chips are widely used in portable electronics like digital cameras and MP3 players.

Prices for computer memory have been under intense pressure because of oversupply and fierce competition. Intel had forecast a 27 percent price drop for NAND flash in the first quarter, but prices have fallen 53 percent, leading Intel to revise its profit forecast this week.

"Pricing has moved very rapidly, much more so than we thought," Otellini said.

Intel now expects a gross profit margin of 54 percent of revenues, plus or minus a percentage point, in the first quarter, which ends in March. That's down from its previous forecast of 56 percent, plus or minus a couple percentage points.

Gross margin is an important measure of profitability. It shows how much money a company made on each dollar of revenue, once manufacturing costs are stripped out.

Intel has sold 4 million processors built on equipment that shrinks the average width of their circuitry to 45 nanometers, or 45 billionths of a meter. The smaller a chip's circuitry, the more transistors can be squeezed onto it and the better it can perform.

Intel began selling these new, more efficient chips in November, jumping to a big lead over its smaller rival in the microprocessor market, Sunnyvale-based Advanced Micro Devices Inc.

But AMD announced this week that it's on track with its own 45-nanometer technology and plans to ship similar chips to manufacturers this year.

AMD this week also announced a new chipset — a type of chip that sends data from the microprocessor to the rest of the computer — that promises to improve the ability of personal computers to play high-definition videos and play graphics-intensive games without expensive add-on cards.

The chipset is part of AMD's push to challenge Intel on the graphics capabilities of its chips, an area where AMD has made an expensive bet in the form of its $5.6 billion acquisition of graphics chip maker ATI Technologies Inc.

Shares of Intel gained 20 cents to $20.20 during regular-session trading Wednesday. They fell a penny in after-hours trading.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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