Intel Says Sandy Bridge Support Chip Has "Design Errors"

Shares of Intel are taking a bit of a drubbing today as the company announced it had discovered a design error in a chip supporting its Sandy Bridge generation of microprocessors. The chip is called Cougar Point, and it’s involved with the data connection to other devices within or outside the computer–hard drives or internal optical drives–using SATA connections. Intel says the performance of these connections could degrade over time. The systems affected have Core i5 and Core i7 quad-core chips.

The company has already stopped making the chip with the problem, but as is always the case with the incredibly complex process of semiconductor manufacturing, doing so is a costly process. Intel said it will reduce its revenue forecast for the first quarter by $300 million as it ends production of the old chip and gets volume of the new one ramped up. Total cost to repair and replace affected materials and computers already sold with the problem chip will be $700 million.

Those with long memories will recall Intel’s Pentium bug in the mid-1990s, which caused a big crisis of confidence in Intel chips, jokes from late-night TV hosts and a drop in the company’s stock price. This error is nothing like that. The company says the processor itself is unaffected.

Analysts are telling investors not to overreact. “Assuming pent-up demand for Sandy Bridge and mild competition, we think impact of this problem will be relatively small,” Standard & Poor’s analyst Clyde Montevirgen told clients in a note today. Mark Moskowitz of J.P. Morgan said it is likely that only a small number of end consumers are affected.

Meanwhile, Intel closed its $1.4 billion deal to acquire the wireless chip division of the German chipmaker Infineon, and said it expects to finally close its $7.7 billion acquisition of McAfee by the end of the quarter.

The combination of those two deals plus the chip trouble caused Intel to issue new guidance for the first quarter. It now expects first-quarter sales in the range of $11.3 billion to $12.1 billion, which is slightly higher than previous guidance. However it shaved three points off its gross margin forecast: The mid-point of the range is now 61 percent, down from 64 percent.

Intel shares are down more than one percent at the moment, while shares of rival Advanced Micro Devices are surging by more than five percent.