Intel’s Server Demand Outweighs Tablet Shortcoming

Intel Corp. forecast sales that may exceed analysts’ predictions, a sign that rising demand for server chips is compensating for the company’s delayed entry into the market for tablet computers.

The company said yesterday that it expects sales growth of 10 percent this year from a record in 2010. The largest maker of computer chips also plans to boost production spending by as much as 79 percent this year, reflecting confidence in its growth prospects, Chief Executive Officer Paul Otellini said.

Sales of chips used in so-called cloud-computing centers, which provide computing over the Web, helped boost fourth- quarter sales and profit even as consumer demand for notebooks remained sluggish, Intel said. If it delivers 2011 sales of $48 billion, as its forecast indicates, Intel would exceed the average of analysts’ estimates by about 6 percent.

“So many people are focused on the front end, on the consumer -- the phone and tablet -- and missing the fact that there are these massive arrays of servers, largely populated by Intel chips,” said Michael Shinnick, a fund manager for South Bend, Indiana-based Wasatch Advisors Inc., which has $10 billion under management and owns 2.24 million Intel shares.

Intel, based in Santa Clara, California, fell 21 cents to $21.08 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares climbed 3.1 percent last year.

Beating Estimates

Results this quarter may also beat estimates, according to Intel’s projection. Revenue will be $11.1 billion to $11.9 billion. That compares with the $10.7 billion average of analysts’ projections compiled by Bloomberg.

Intel is relying on demand from business customers to offset sluggish buying by consumers. The company hasn’t been quick enough to offer chips suitable for tablet-style computers that can vie with Apple Inc.’s iPad, released last year.

“Clearly on the consumer side, tablets are already having a noticeable impact,” said David Dillon, a fund manager for Highmark Capital Management Inc. in San Francisco, which owns some Intel stock as part of the $17 billion it manages. “They have a lot to lose with tablet cannibalization. They will likely have some success here, but well below their dominant position in PCs.”

Apple’s iPad tablet works on a mobile-phone processor based on technology from ARM Holdings Plc. Some makers of rival tablets have opted for less power-hungry chip designs than Intel currently offers. ARM-based chips also dominate the smartphone market, a market Intel will enter this year, Otellini said.

Intel’s Atom chip will appear in a “wide array” of tablet computers being released this year, Otellini said.

Sales, Margins, Spending

Fourth-quarter net income jumped 48 percent to $3.39 billion, or 59 cents a share, from $2.28 billion, or 40 cents, a year earlier. Analysts had estimated profit of 53 cents a share. Sales increased 8.4 percent to $11.5 billion, compared with an average prediction of $11.4 billion.

The company plans to spend $8.7 billion to $9.3 billion on plants and equipment, compared with $5.2 billion in 2010. The added spending is aimed at helping it meet rising demand.

Applied Materials Inc. and other chip-equipment makers rallied because they may benefit from Intel’s increased budget. Santa Clara-based Applied, the world’s largest maker of chip- making machinery, rose $1.08, or 7.6 percent, to $15.32 in Nasdaq trading. Novellus Systems Inc. climbed 12 percent, KLA- Tencor Corp increased 5.9 percent and Lam Research Corp. rose 4.5 percent.

Gross margin, the only profitability indicator that Intel forecasts, will be about 64 percent this quarter, the company said. The margin, the percentage of sales left after deducting production costs, was 67.5 percent in the fourth period.

Intel said gross margin for the full year will be 65 percent, plus or minus a few percentage points. That compares with the 64.2 percent average of analysts’ predictions.

Intel, whose chips run more than 80 percent of the world’s PCs, kicked off three weeks of earnings reports by the largest U.S. technology companies, including International Business Machines Corp., Google Inc. and Microsoft Corp.

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

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

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