Hit by staff cuts and competition from AMD, Intel's profits have fallen by 39 percent.

Intel had lost significant market share to rival AMD over the year, in what chief Executive Paul Otellini described as "a challenging year", The company is now rebounding thanks to the arrival of Core 2 Duo and quad-core Xeon chips, and microprocessor sales are at a record high, led by flash memory units, said Intel.

The weak spot is sales of chipset and motherboard units, Intel said in a release, and profits are down overall because Intel was unable to reduce its fixed costs or forecast product demand, while its competitors launched new products and exerted price pressure.

The silicon giant reported a profit of $1.5 billion for the fourth quarter, down 39 percent compared to that period last year. Its total revenue, $9.7 billion, was down 5 percent from the same quarter last year.

As expected, the company's annual profit also slumped. The 2006 profit of $5 billion was 42 percent below its number last year. Its annual revenue dropped too, by nine percent, to $35.4. This was worse than Otellini had predicted in April, when he announced his plan to restructure the company. Otellini had predicted the company's operating income would tumble from $12.1 billion in 2005 to $9.3 billion in 2006. In fact, it sank to $5.7 billion.

Even Intel's bright spot - strong sales of its new Core 2 Duo processor - was offset by a greater market trend from desktop PCs to notebooks.

The company will produce better results in 2007, promised Otellini. The reorganisation plan has already cut Intel's employee headcount from 102,500 in the middle of 2006 to 94,100 at the end of the year. Once the company is no longer paying the cost of those extra workers, it will reap greater profits from new technology launches, Otellini said.

Intel's most profitable events in 2007 will include the completion of its transition from 90-nanometer to 65-nanometer process geometry for manufacturing chips, the spread of quad-core processors through more of its product line, and the launch of its "Santa Rosa" notebook platform, Otellini said. Santa Rosa is an update to Intel's Centrino bundle that offers improved graphics, the "Robson" design of supplementing hard drives with NAND flash, and a form of IEEE 802.11n wireless LAN capability.

Experts agreed that Otellini's strategy could make a difference.

"Going forward, TBR expects the company to see strong profitability improvements during the second half of 2007, when the company’s results are no longer dampened by restructuring charges," said Martin Kariithi, an analyst with Technology Business Research. "The speed and ruthless efficiency of Intel’s cost-cutting program, coupled by the rapid new product introductions witnessed during the second half of 2006, are evidence of the company’s aggressive management style that was lacking during the chipmaker’s struggles in 2005."

Another factor boosting Intel's income this year was the sale of its communications and application processor unit to Marvell.