Intelas Recall Will Cost a Mere $253 Million

Electronic News, June 26, 2000 by Heidi Elliott

Intel Corp. last week said it expects to take a $200 million hit this quarter in costs related to last month's recall of one million bad motherboards, an amount that will have only a relatively small effect on the chip giant's profits.

In total, the company estimates that the cost of the recall will come in at $253 million, according to Intel spokesman Tom Beermann. The company re-adjusted its first quarter financials, taking a $53 million hit to income figures associated with recall costs. On May 10, Intel announced it found defects in a chip called the memory translator hub (MTH) that routes signals from Intel's 820 chipset to the SDRAM in Pentium III systems. The company discovered that noise in the MTH could cause the PC to reset, reboot or freeze and in some cases cause data corruption.

Instead of fixing the defective motherboards, Intel offered to replace them with new motherboards fitted with Rambus memory. At the time of the recall, Intel estimated about one million units had been shipped to end-users since November 1999. Initial analysts' forecasts put the recall's cost at $300 million to $400 million. Because of the rate of return, Beermann said, the actual cost figure is lower, however he declined to release rate of return figures for the motherboards.

Dean McCarron, principal at Mercury Research, said the estimate is probably on target. Given the number of motherboards at issue, the cost to replace them is $100 million, and the cost of the Rambus memory to fill the new motherboards should be another $100 million, plus labor costs. The $253 million price tag "seems right in the ballpark," said McCarron.

Intel's woes started last year when it threw its support behind Rambus memory (RDRAM) for its next generation of PCs. The company started designing its 820 chipset, code-named Camino, for Rambus, which is more expensive than other kinds of RAM. However, Intel faced design flaws and production delays that caused it to push back the 820 chipset's release date from September to November. Intel's situation was worsened by the shortage of Rambus memory, which continues to be an issue. Intel was forced to change its chipset design so it could use SDRAM instead of Rambus products. For that purpose, the company added the MTH, which allows the 820 chipset to work with SRAM.

The recall could be less costly than Intel estimates if PC owners don't turn in their motherboards. "Historically what we've seen is the number of people who take advantage of the recall doesn't come close to the number of people actually affected," McCarron said. He cited consumers' general lethargy, the feeling that if the computer isn't broken, there's no need to fix it; or misplaced blame for a computer problem as reasons why consumers don't turn in the products. "When the Pentium bug hit (in 1997), very few people took advantage of it - only 10 percent of the estimated (eligible) people took advantage of that."

And while this latest problem is a black eye in terms of public relations, McCarron described it as minor in the overall scheme of things. "They ship 30 million units per quarter and this is one million (defective) units max - this doesn't even register," said McCarron. Beerman agreed that this issue is not a great one for the company, but added that Intel reacted very quickly to the situation. "Clearly Intel is doing the right thing here," said Beermann. Intel may have learned from the storm of criticism it experienced during the Pentium math bug problem, when the company cavalierly dismissed many users' concerns.

Also last week, Intel revised its net stock earnings estimate upward. Intel's Beermann said net stock earnings for the quarter would be $2.3 billion, not the previously projected $725 million. The increase is despite the recall, and is mostly attributed to the sale of shares in Micron Technologies. Intel is scheduled to release its quarterly results on July 18.