Bloomberg News

Intel Rises as Sales Forecast Fuels PC-Market Optimism

July 16, 2014

Intel Chief Financial Officer Stacy Smith

Intel Chief Financial Officer Stacy Smith said yesterday in a telephone interview, “What we saw was a continuation of strength in the corporate segment, both in the client and the data center.” Photographer: David Paul Morris/Bloomberg

Intel Corp. (INTC:US) shares rose to a 12-year high after the chipmaker forecast third-quarter sales that topped analysts’ projections, fueling optimism that the personal-computer market is emerging from a two-year slump.

The shares (INTC:US) of the world’s largest semiconductor maker climbed 9.3 percent to $34.65 at the close in New York, its highest price since February 2002. The stock has gained 34 percent this year. Intel also raised its annual revenue forecast and added $20 billion to its stock-repurchase plan.

The PC market has shown signs of improvement this year as corporate spending picked up and U.S. shipments returned to growth. Intel’s outlook indicates demand is starting to recover among consumers, who may be buying laptops and desktops again after years of opting for smartphones and tablets instead.

“It finally looks like the worst of it is over, especially in the more mature markets,” said Angelo Zino, an analyst at S&P Capital IQ. “You’re starting to see the stabilization of the consumer but I don’t think you’re ever going to get back to where a consumer has two or three PCs.”

Revenue in the current period will be $14.4 billion, plus or minus $500 million, the company said yesterday in a statement. Analysts on average estimated (INTC:US) sales of $14.1 billion, according to data compiled by Bloomberg.

The Santa Clara, California-based company said it intends to buy back about $4 billion of stock in the current quarter, and expects sales growth of about 5 percent for the year, higher than previously projected. Gross margin, the only measure of profit Intel forecasts, will be about 66 percent in the third quarter, the company said. Analysts predicted a margin of 62.7 percent.

Second Quarter

Net income (INTC:US) in the second quarter rose 40 percent to $2.8 billion, or 55 cents a share, from $2 billion, or 39 cents, a year earlier. Sales rose 8 percent to $13.8 billion. Analysts had predicted earnings of 52 cents on sales of $13.7 billion.

Gross margin, or the percentage of sales remaining after deducting the cost of production, was 64.5 percent.

Intel’s improving profitability, even while the PC market continues to shrink, shows the strength of its manufacturing and the lack of competitors, said Michael Shinnick, a fund manager at Wasatch Advisors Inc. in South Bend, Indiana.

“It’s stunning,” Shinnick said. Wasatch has $19 billion under management including Intel shares. “But I don’t want to get too euphoric. They still have this issue on mobile, which I am more concerned about than PCs.”

PC Improvement

On June 12, Intel raised its second-quarter sales forecast, saying demand was better than it had originally projected.

“What we saw was a continuation of strength in the corporate segment, both in the client and the data center,” Intel Chief Financial Officer Stacy Smith said yesterday in a telephone interview. “Mature markets are relatively strong compared to the emerging markets.”

Last week, researcher IDC said second-quarter worldwide PC unit sales fell 1.7 percent, the smallest quarterly drop in two years, as demand in the U.S., Europe and Canada helped make up for declines in Asia. IDC had predicted a decline of 7.1 percent.

Shipments have improved in the U.S., where unit sales rose 6.9 percent, and other developed markets as companies replaced aging machinery running Microsoft Corp.’s Windows XP operating system, which the software maker no longer supports, IDC said.

Tablets, PCs

Second-quarter sales in Intel’s PC processor unit rose 6.2 percent from a year earlier to $8.67 billion, while revenue in the data-center group, which supplies server chips, jumped 19 percent to $3.51 billion.

Intel has struggled to replicate its dominance in PC processors, where it has about 80 percent market share, in the market for phone and tablet chips, where it’s up against companies such as Qualcomm Inc. (QCOM:US) The older chipmaker has successfully held off competition in server computers, which supply mobile devices with data. Intel has more than 90 percent of the market for servers that use PC processors, and its only rival, Advanced Micro Devices Inc. (AMD:US), has lost orders.

“We’re benefiting at the other end of the spectrum from the build-out of the cloud and all of these devices,” Smith said yesterday. “We saw great growth in the data center.”

ASML Holding NV (ASML), Europe’s largest semiconductor-equipment supplier, today predicted full-year sales that would trail analysts’ estimates as makers of chips that process device functions reconsider how fast to increase capacity and deliveries of its newest product are postponed.

Mobile Business

Sales in Intel’s mobile and communications division fell 83 percent to $51 million in the second quarter, and the unit’s operating loss widened to $1.12 billion. That followed an operating loss of $929 million in the first quarter.

The unit will continue to be a drain on Intel’s finances through next year, Smith said. The company is providing subsidies to persuade customers to use its chips in tablets, where it’s aiming for 40 million units shipped this year. Intel shipped 10 million units in the second quarter, double from the first three months of the year.

Intel will persevere in mobile, even though it’s losing money, because modems -- the chips that connect devices to mobile networks -- are going to become increasingly important parts of all types of computers, Smith said.

The company’s long-term evolution, or LTE, modems have taken longer than predicted to become qualified on cellular networks, Intel said.

“The market just needs to see them make some early strides,” said Suji De Silva, an analyst at Topeka Capital Markets, who recommends buying Intel shares.

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

To contact the editors responsible for this story: Reed Stevenson at rstevenson15@bloomberg.net Virginia Van Natta


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