Intel Cash Machine May Print $12 Billion on PC Demand

Intel Corp. increased its cash pile by $2 billion last quarter selling the fingernail-sized chips that run the world’s personal computers, underscoring the technology industry’s ability to wring profit at an unprecedented pace.

The biggest chipmaker boosted its earnings forecast for the year to a record yesterday, calling for the gross margin to widen to 66 percent. That means Intel’s free cash flow may reach $12 billion in 2010 and $13.5 billion next year, according to Patrick Wang at Wedbush Securities in New York.

“Intel’s a cash machine,” Wang said in an interview. “Not only are they a nice defensive name in the market today, but it’s amazing how they generate cash.”

Intel shares rose 35 cents, or 1.7 percent, to $21.36 at 4 p.m. New York time on the Nasdaq Stock Market, fueling gains in technology stocks. Microsoft Corp., the world’s largest software maker, and computer maker Dell Inc. also advanced. ASML Holding NV, which posted profit that beat analysts’ predictions, increased 3 percent in Amsterdam.

Gains at Santa Clara, California-based Intel stem from its ability to run factories more efficiently, so as demand from companies buying new computers picked up, Intel got bigger benefits. Gross margin, or the percentage of sales remaining after deducting production costs, widened to 67 percent from 51 percent a year earlier.

Profitability

Other technology companies are boosting profit or cash to records, helping them build war chests that make it easier to expand operations, make acquisitions and begin hiring workers after reductions in recent years.

In the first three months of the year, Google Inc.’s cash and short-term investments increased by $2 billion to $26.5 billion, its highest ever. Oracle Corp., the world’s second- biggest software maker, reported record fourth-quarter operating income in June.

Planned job cuts in the technology industry fell 70 percent in the first half of 2010, with companies announcing the elimination of 35,375 workers, down from 118,108 a year earlier, according to Challenger, Gray & Christmas Inc.

The cash Intel generates will allow it to make acquisitions and expand in faster-growth areas, Wang said. The company may also reward shareholders with a higher dividend, he said.

Intel Plans

Intel’s executives have said they’re considering using some of the cash on deals that would help get them into new markets, such mobile-phone chips.

Chief Financial Officer Stacy Smith said he’s opposed to buying companies for their revenue alone. The purchase of Wind River Systems Inc. for $884 million last year is a template for the size and type of deal Intel wants to make, he said.

In the latest quarter, the company boosted cash and short- term investments by about $2 billion to $18.3 billion. Wang, who rates the stock “outperform” and owns it himself, estimated 2009 free cash flow at about $11 billion.

Intel raised its forecast for 2010 gross margin from a previous prediction of 64 percent. For the current period, Intel projected a margin of 67 percent.

The company also is predicting wider profit margins for the longer run. Intel’s Smith has said he expects the gross margin to range between 55 percent and 65 percent in coming years. That compares with 50 percent to 60 percent over the past decade.

IBM, Google

Intel kicked off three weeks of earnings reports by the largest U.S. technology companies, including International Business Machines Corp., Google Inc. and Microsoft. Intel’s dominance of the market for microprocessors, the main component in computers, makes it a barometer of industry demand.

While consumers led the initial recovery from the recession, businesses are now spending more too, Intel Chief Executive Officer Paul Otellini said yesterday. That may allay the risk of renewed slowdown.

“All of a sudden, you start questioning the double-dip,” said Pat Becker Jr., a fund manager at Becker Capital in Portland, Oregon, which owns 1.5 million Intel shares as part of $2.2 billion under management. “It clearly makes some of the doubts that had crept into the tech sector vanish.”

Intel predicted that third-quarter sales will rise to $11.6 billion, plus or minus $400 million. Analysts had estimated $10.9 billion on average, according to a Bloomberg survey.

Inventory Concerns Ebb

Before Intel’s earnings report, investors were concerned that the industry had built up excess stockpiles of computer chips. Otellini said yesterday that demand is strong enough to ward off a glut.

“We are very comfortable with the level of inventory,” he said.

Corporate customers are replacing their old desktop and notebook machines, spurring demand for chips, Intel said. At the same time, Internet businesses, such as Google and Facebook Inc., are ordering more servers for their data centers.

That bodes well for other technology companies, said Michael Shinnick, who helps manage $7.5 billion at Wasatch Advisors Inc. in South Bend, Indiana.

“There is a powerful upgrade cycle that is going on within the PC and server space, and we’d expect to hear similar things from Microsoft and PC manufacturers,” said Shinnick, whose firm owns 1.7 million Intel shares. “Technology demand is stronger than the overall pace of the recovery.”

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net; Katie Hoffmann in New York at khoffmann4@bloomberg.net

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