Intel Girds for Third Quarterly Sales Decline on PCs Slump: Tech

http://www.bloomberg.com/news/2013-01-17/intel-fourth-quarter-profit-tops-estimates-on-slower-production.html

Intel Corp. is girding for a third straight quarter of falling sales, highlighting the chipmaker’s struggle to adapt in a world swiftly embracing mobile devices and leaving behind the personal-computer industry it dominates.

Sales in the current period may decline, Intel said yesterday, after reporting a 3 percent drop last quarter. That followed a 5 percent slide in the September quarter. The shares fell the most since May 2010.
Intel plans to spend about $13 billion on new plants and equipment in 2013, more than analysts had projected, to help it cater to growing demand for handsets and tablets. The effort won’t quickly help the Santa Clara, California-based company compensate for diminishing demand for PCs.
“They are definitely coming from behind and their market is moving away from them,” said Patrick Wang, an analyst at Evercore Partners. “They are trying to breathe some life into the PC market.”
Intel, whose microprocessors run more than 80 percent of the world’s PCs, is struggling as that market faces a second straight year of lower sales, according to analysts at JPMorgan Chase & Co. In mobile chips, Intel is playing catch-up to Qualcomm Inc.
Intel yesterday reported sales of $13.5 billion last quarter, matching the average prediction of analysts, according to data compiled by Bloomberg. Net income fell to $2.47 billion, or 48 cents a share, compared with 45 cents projected by analysts.
“I don’t think things get better in PCs,” said Cody Acree, an analyst at Williams Financial Group in Dallas. For growth in the PC market this year, “you’re talking zero to how badly are you down.”

2013 Projections

Intel fell 6.3 percent to $21.25 at the close in New York, the steepest decline since January 2009. The stock dropped 15 percent last year, compared with a 13 percent gain in the Standard & Poor’s 500 Information Technology Index. Advanced Micro Devices Inc., Intel’s main competitor in PC processors, declined 10 percent to $2.46.
Intel’s sales this year -- the last for Chief Executive Officer Paul Otellini -- will barely budge. First-quarter revenue will be $12.7 billion, plus or minus $500 million, the company said. That compares with an average analyst projection of $12.9 billion. Gross margin will be about 58 percent. A year earlier, sales were $12.9 billion, while gross margin was 64 percent.
For 2013, Intel said revenue will increase by a “low single-digit percentage.” Analysts had predicted that sales would rise about 2 percent to $54.4 billion this year.
Otellini plans to retire in May, and the company is searching for his successor.

‘Gigantic Number’

To help it meet demand for chips, Intel said it will spend $13 billion, plus or minus $500 million, on new equipment and new plants -- also known as fabs -- in 2013.
That number, which compares with an average analyst estimate of $9.99 billion, raises questions about how the chipmaker will be able to fund such an expansion while maintaining dividend and share buybacks from the cash it generates, said Daniel Berenbaum, a New York-based analyst at MKM Partners.
“It’s a gigantic number,” said Berenbaum. “It’s not like their fabs are full now.”
About $2 billion of the increase in spending this year will go to building a research facility for a forthcoming type of plant that processes 450-millimeter silicon wafers. When that goes into production, it will help increase the number of chips the company can get from each production run.

Data Center

Under Otellini, Intel has been able to compensate for part of the PC malaise by catering to buyers of servers, which outfit data centers. Revenue in Intel’s data center group rose 4 percent to $2.8 billion in the recent period, compared with a 6 percent decline in its main PC-chip business.
Intel expects demand from companies to drive a return to low-double-digit percentage growth for the data-center business, Chief Financial Officer Stacy Smith said.
Intel has “modest” expectations for growth in the PC industry, and is betting new chips going into tablets and slimline laptops it calls Ultrabooks will catch the attention of consumers.
That will translate into reinvigorated demand in the second half of the year, Smith said in an interview.
“We expect some unit growth in the back half of the year and into 2014,” he said. “We’re putting in the factory capacity to support that.”

Margin Compression

While Intel has won some orders from phone makers for its chips, that business won’t “move the needle” for the whole company until next year, when its customers bring handsets featuring so-called long-term evolution high-speed data links to market, Smith said.
PC shipments fell 4 percent in 2012 and will slide a further 1.5 percent this year, JPMorgan analysts estimate. Tablet unit sales, by contrast, rose 72 percent last year and will surge 54 percent this year, they project.
Fourth-quarter gross margin, the percentage of sales left after subtracting production costs, was 58 percent, compared with an average analyst estimate of 57 percent. A year earlier, gross margin was 65 percent.
Intel’s results kick off two weeks of earnings reports from the largest U.S. technology companies. Because its chips power the majority of the world’s PCs, investors watch Intel’s earnings for a broad indication of demand for desktop, server and laptop computers.
The company’s biggest customers are PC makers Hewlett- Packard Co. and Dell Inc., which together contribute more than 30 percent of revenue, according to a Bloomberg supply-chain analysis.