Bloomberg News

Intel Sales May Exceed Estimates on Demand for Server Chips

April 17, 2013

Intel Corp. (INTC:US), the world’s largest semiconductor maker, forecast second-quarter sales that may exceed some analysts’ estimates as strong demand for server chips helps make up for a slump in the personal-computer market.

Revenue in the current period will be as much as $13.4 billion, the Santa Clara, California-based company said yesterday in a statement. Analysts on average had predicted sales of $12.8 billion, according to data compiled by Bloomberg.

Improving demand for powerful chips at the heart of corporate networks will blunt the impact of falling PC sales and help Intel boost revenue for the year, Chief Financial Officer Stacy Smith said. While a consumer shift to smartphones and tablets from PCs contributed to Intel’s third straight decline in quarterly revenue (INTC:US), its server-chip sales have benefited from the increased Internet traffic these mobile devices bring.

“PCs and notebooks are being replaced by tablets and smartphones,” said Cody Acree, an analyst at Williams Financial Group Inc. who has a hold rating on Intel shares. “That is impacting the consumer side, but it’s not impacting servers and is actually driving heavier server traffic.”

Intel shares (INTC:US) rose less than 1 percent to $21.93 at the close in New York, even as the Philadelphia Semiconductor Index declined 3.3 percent. The stock has gained 6.4 percent this year, while the chip-industry index has gained 8.7 percent in 2013.

Annual Forecast

Intel is sticking to its projection for 2013 revenue growth at a “low single-digit” percentage, Smith said. Most of that increase will be provided by a double-digit improvement in server-chip sales, he said.

“A big chunk of that comes from the data center,” Smith said in a telephone interview. “That alone gets us into the low single digits.”

Intel controlled 96 percent of the market for servers that run on PC processors in the fourth quarter, according to Cave Creek, Arizona-based Mercury Research Inc. Advanced Micro Devices Inc. (AMD:US), Intel’s only rival in that market, had 4.3 percent.

Smith said Intel agrees with market researchers that have forecast lower demand for traditional laptops and desktop computers this year. Intel won’t feel the brunt of that because its new, lower-power chips will start being used in tablets and convertible devices, he said. Some touch-screen-enabled laptops will go on sale for as little as $300, he predicted.

The company aims to complete the search for a replacement for Chief Executive Officer Paul Otellini by the May shareholders’ meeting, when he will retire, Mark Henninger, a spokesman, said on a conference call yesterday. Intel won’t comment further on the process, he said.

First Quarter

Intel’s first-quarter net income fell 25 percent to $2.05 billion, or 40 cents a share, from $2.74 billion, or 53 cents, in the same quarter a year earlier. Sales fell 2.5 percent to $12.6 billion, Intel said in the statement. Analysts on average had estimated earnings of 41 cents a share on sales of $12.6 billion.

The company’s PC business had $7.99 billion in sales in the first quarter, down 6 percent from a year earlier. Its data- center group recorded revenue of $2.59 billion, up 7.5 percent from the same quarter in 2012.

Sales in the current period will be $12.9 billion, plus or minus $500 million, the company said. The midpoint of that range would be an increase of about 3 percent from the first three months of the year, which is “slightly higher than the average seasonal increase,” Intel said in a separate statement.

“It wasn’t as bad as feared,” said Doug Freedman, an analyst at RBC Capital Markets who has a sector perform rating on Intel shares, the equivalent of a hold recommendation. “The top-line guidance for the second quarter is pretty good. There was some concern that number would come down.”

PC Slump

PC shipments fell 14 percent in the three months that ended in March -- the steepest quarterly drop on record -- as Microsoft Corp.’s newest operating system failed to ignite demand, IDC said last week. That was worse than the 7.7 percent decrease the researcher had forecast.

The chipmaker, which gets about 85 percent (INTC:US) of revenue from PC sales, has failed to translate that success into a foothold in the mobile-phone market, where Qualcomm Inc. (QCOM:US)’s chips dominate. Intel has been trying to sell Atom, a scaled-down version of its PC processor, to phone makers, and it has announced some progress with orders from Google Inc. unit Motorola Mobility and other companies.

Still, Intel has far to go to catch its mobile-chip competitors. It ended 2012 with market share of less than 1 percent in phone-application processors. Smartphone shipments grew an estimated 44 percent last year, according to IDC, while PC shipments dropped 3.7 percent for the first annual decline in more than a decade.

Capital Spending

Gross margin (INTC:US), the percentage of sales left after subtracting production costs, was 56 percent in the first quarter. That measure of profit will be about 58 percent in the current period, Intel said, matching analysts’ predictions.

The company reduced its 2013 budget for spending on new plants and equipment to $12 billion, plus or minus $500 million. That was $1 billion less than a January prediction.

Intel’s results come at the start of two weeks of earnings reports from the largest U.S. technology companies. Because its chips power the majority of the world’s PCs, investors (INTC:US) watch Intel’s earnings for an indication of broader demand for desktop, server and laptop computers.

The company’s biggest customers are PC makers Hewlett- Packard Co. and Dell Inc. (DELL:US), which together contribute more than 30 percent of revenue, according to a Bloomberg supply-chain analysis (INTC:US).

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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