In­tel's weak out­look, spend­ing hikes un­nerve Wall Street

The Financial Daily - - INTERNATIONAL -

SAN FRANCSCO: In­tel Corp fore­cast quar­terly rev­enue that dis­ap­pointed Wall Street and a sharp in­crease in cap­i­tal spend­ing it plans for 2013 un­nerved in­vestors al­ready con­cerned about slow de­mand for per­sonal com­put­ers

Shares of the world's lead­ing chip­maker slid more than 5 per­cent in af­ter-hours trade af­ter it pro­jected this year's cap­i­tal spend­ing at $13 bil­lion, plus or mi­nus $500 mil­lion, ex­ceed­ing many an­a­lysts' es­ti­mates for about $10 bil­lion.

In­tel said $2 bil­lion of its in­creased ex­pen­di­tures would go to­ward ex­pand­ing a fa­cil­ity for re­search­ing fu­ture man­u­fac­tur­ing tech­nol­ogy. Some an­a­lysts wor­ried that with PC sales al­ready slow, ex­pand­ing too quickly may cre­ate ex­cess ca­pac­ity that could hurt the bot­tom line.

"Peo­ple are start­ing to freak out about the capex," said Sanford C. Bern­stein an­a­lyst Stacy Ras­gon. "The con­cern is that if I spend a lot of money and I build up my fac­to­ries, I don't have enough de­mand to fill them. They have very high fixed costs, and it pulls your mar­gins down."

Out­go­ing Chief Ex­ec­u­tive Paul Otellini, who plans to re­tire in May af­ter a suc­ces­sor is iden­ti­fied, said the in­vest­ment in man­u­fac­tur­ing would lower costs in the long run. "The lead­ing edge ca­pac­ity is the low­est cost for us on a per unit ba­sis," Otellini told an­a­lysts on a con­fer­ence call.

"Re­gard­less of what you think the size of the mar­ket is, the lead­ing edge fabs are the sin­gle great­est as­set that we have." Otellini said the higher capex is not in­tended to bankroll a foundry or con­tract chip­mak­ing busi­ness, but he did not rule out man­u­fac­tur­ing semi­con­duc­tors for other chip com­pa­nies as long as that did not em­power a ri­val.

In­tel has agreed to man­u­fac­ture cus­tom chips on be­half of net­work­ing equip­ment com­pany Cisco Sys­tems Inc, Bloomberg re­ported. An In­tel spokesman de­clined to com­ment. In the fourth quar­ter, In­tel's rev­enue was $13.5 bil­lion, com­pared with $13.9 bil­lion a year ear­lier. An­a­lysts had ex­pected $13.53 bil­lion.

It es­ti­mated first-quar­ter rev­enue of $12.7 bil­lion, plus or mi­nus $500 mil­lion. An­a­lysts ex­pected $12.91 bil­lion. In­tel is used to be­ing king of the per­sonal com­puter mar­ket, par­tic­u­larly through its his­toric Win­tel al­liance with Mi­crosoft Corp, which has led to breath­tak­ingly high profit mar­gins and an 80 per­cent mar­ket share.

But it has strug­gled to adapt its tech­nol­ogy for smart­phones and tablets, a mar­ket dom­i­nated by Qual­comm Inc, Sam­sung Elec­tron­ics Co Ltd and Nvidia Corp. PC mak­ers are strug­gling to stop a de­cline in sales as con­sumers hold off on buy­ing new lap­tops in fa­vor of more nim­ble mo­bile gad­gets.

Mi­crosoft's long-awaited launch of Win­dows 8 in Oc­to­ber brought touch­screen fea­tures to lap­tops but failed to spark a resur­gence in sales that In­tel and many PC man­u­fac­tur­ers had hoped for.

In­tel's hefty in­vest­ment plans re­flect its con­fi­dence in the fu­ture, even as Wall Street wor­ries about the chip­maker's strug­gle to gain trac­tion in the mo­bile mar­ket. "Our core ad­van­tage re­ally is our man­u­fac­tur­ing lead­er­ship," Chief Fi­nan­cial Of­fi­cer Stacy Smith said. "450 will give us a sig­nif­i­cant cost ad­van­tage rel­a­tive to oth­ers."

In­tel is ex­pand­ing its re­search fab in Hills­boro, Ore­gon, to de­velop tech­nol­ogy for man­u­fac­tur­ing chips on 450 mm sil­i­con wafers, a com­pli­cated step up from the cur­rent 300 mm wafer stan­dard.

Larger wafers can trans­late into big sav­ings be­cause more chips can be etched onto each of them. But build­ing 450 mm plants is ex­pected to be so ex­pen­sive that only a few in­dus­try lead­ers, in­clud­ing In­tel, Sam­sung Elec­tron­ics and TSMC, are ex­pected to have the nec­es­sary scale.

Some Wall Street an­a­lysts gave In­tel high marks for ex­pected op­er­at­ing ef­fi­ciency this year. "The rev­enue isn't go­ing to be there, but the mar­gin and ex­pense con­trol is go­ing to sta­bi­lize the bot­tom line," said Cody Acree, an an­a­lyst at Wil­liams Fi­nan­cial. "I think it's prob­a­bly a suc­cess if you can be flat in an in­dus­try that most peo­ple ex­pect to be flat to down."

In­tel fore­sees first-quar­ter gross mar­gins of 58 per­cent, plus or mi­nus two per­cent­age points. An­a­lysts on av­er­age ex­pected gross mar­gins of about 56 per­cent for the cur­rent quar­ter. It es­ti­mated a 2013 gross mar­gin of 60 per­cent, plus or mi­nus a few per­cent­age points. An­a­lysts on av­er­age had ex­pected 59 per­cent.

Net earn­ings in the De­cem­ber quar­ter were $2.5 bil­lion, or 48 cents a share, com­pared with $3.4 bil­lion, or 64 cents a share, year-ago pe­riod. An­a­lysts had ex­pected 45 cents, and said the sur­pris­ingly strong per­for­mance was partly due to a lower ef­fec­tive tax rate of 23 per­cent. This was be­low In­tel's fore­cast of about 27 per­cent.

Still, shares of In­tel fell 5.6 per­cent in af­ter-hours trade to $21.43, af­ter clos­ing up 2.58 per­cent at $22.68 on the Nas­daq. "This is a com­pany that is con­tin­u­ing to spend money to par­tic­i­pate in the mar­ket. That may con­cern some in­vestors," said Doug Freed­man, an an­a­lyst at RBC Cap­i­tal. -DNA

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