Bloomberg News

Intel Production Slip Dents Trust in Krzanich’s Mobile Push (1)

October 16, 2013

Intel Corp. Office In Santa Clara

Intel Corp. signage stands outside the company's office in Santa Clara, California. Photographer: Noah Berger/Bloomberg

Intel Corp. (INTC:US) said manufacturing snags will delay a new line of processors, denting confidence in its ability to roll out advanced technology that can win orders in the fast-growing market for tablets and smartphones.

The new Broadwell design for chips will begin production in the first quarter of 2014, about three months later than planned, Chief Executive Officer Brian Krzanich said yesterday. The stock slipped on the news, erasing an initial gain in extended trading after Intel reported third-quarter earnings that topped estimates.

Intel’s processors, which dominate the personal-computer market, have failed to attract interest from tablet and smartphone makers, leaving the company on the sidelines of a growing business. While Broadwell is designed for PCs, any perceived weakness in the company’s manufacturing may fuel investor concerns about whether Krzanich can win orders in mobile and lessen Intel’s dependence on computer sales.

“Every delay or slight disappointment is going to get magnified because of the crossroads they’re at,” said Pat Becker Jr., a fund manager at Becker Capital Management in Portland, Oregon, which owns Intel stock. “Any push-back gets dissected by the Street and rightly so. There’s no proof that they’ve been able to execute in mobile in the past.”

Broadwell, which will be made using 14-nanometer manufacturing technology, will go into production in the first quarter of next year, Krzanich said on a conference call.

“We have our arms around what the issues were,” Chief Financial Officer Stacy Smith said in an interview. The first products will be shipped to customers in the second half of next year, he said.

Revenue Forecast

Intel declined 1.2 percent to the equivalent of $23.11 in German trading at 10:21 a.m. Frankfurt time. The shares fell 2 percent in extended U.S. trading yesterday after the company announced the production delay, after closing at $23.39 in New York. The stock is up 13 percent this year, less than half of the gains in the Philadelphia Semiconductor Index.

The company also said fourth-quarter revenue will be $13.2 billion to $14.2 billion. That compared with the average analysts’ projection of $14 billion, according to data compiled by Bloomberg. Gross margin (INTC:US), or the percentage of sales remaining after deducting production costs, will be about 61 percent, Intel said in a statement, in line with estimates.

Krzanich’s Focus

Krzanich, who took over the top job at the world’s largest chipmaker in May, has said the company needs to speed up the delivery of new products for mobile devices. Intel, which has struggled to cut into Qualcomm Inc. (QCOM:US)’s lead in the mobile-chip market, is scaling down its PC processor designs to make them capable of running on the limited battery life available in phones and tablets. To do that, the company plans to build them using more advanced production techniques.

Intel shrinks the size of the circuit lines that give processors their function with new manufacturing techniques to improve the performance and lower the cost. That is key to fielding products that the company says will help it win orders in mobile devices. Krzanich said the company has already corrected the problem with Broadwell.

“This is a small blip,” he said on the call.

Mobile-phone shipments are projected to increase by 7.3 percent this year, fueled by demand for smartphones, while tablet unit sales will grow an estimated 59 percent, according to researcher IDC. Meantime, PC shipments are forecast to drop 9.7 percent worldwide, IDC said in August.

Division Sales

Third-quarter net income fell to $2.95 billion, or 58 cents a share, from $2.97 billion, or 58 cents, a year earlier, the Santa Clara, California-based company said. Sales were little changed at $13.5 billion. That compared with average analysts’ estimates (INTC:US) for earnings of 54 cents on $13.5 billion of revenue.

Worldwide PC shipments fell 8.6 percent in the third quarter. The decline, the sixth consecutive drop, was tempered by growth in the U.S., where shipments climbed 3.5 percent, market researcher Gartner Inc. said last week.

Intel’s PC-chip group, its largest division, had sales of $8.4 billion, down 3.5 percent from a year earlier. Its server-chip unit, which also sells processors for storage and networking equipment, had revenue of $2.9 billion, a gain of 12 percent.

Though Intel hasn’t gained much ground in the market for smartphones and tablets, it still benefits from their popularity because it supplies the main component in 9 out of 10 of the server machines that dish out data to handheld devices. Demand for servers is being driven by companies such as Facebook Inc. (FB:US), Google Inc. and Amazon.com Inc., which are building data centers to meet growing demand for mobile online services.

‘Not Terrible’

“Even though PCs and laptops are weak, they’re not terrible,” said Michael Shinnick, a fund manager at Salt Lake City-based Wasatch Advisors Inc. “Server sales continue to be strong.”

Intel took 92 percent of revenue in the market for PC processors in the second quarter, compared with a 3.2 percent slice of the market for tablet processors, according to IDC.

Gross margin in the third quarter was 62.4 percent, Intel said, compared with an average analysts’ estimate of 61 percent.

Shinnick said Intel’s ability to maintain high profit margins, even as its main market declines, shows that the company has a dominant position that won’t be easily eroded.

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

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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