Intel Counters Cisco, Says Corporate Demand Is Unchanged

Intel Corp. Chief Executive Officer Paul Otellini said demand from large corporations is in line with the company’s expectations, including in Europe, countering comments yesterday from Cisco Systems Inc. (CSCO)

“We haven’t seen any change in enterprise in Europe,” Otellini said today at a meeting for investors at the company’s headquarters in Santa Clara, California. “The year is playing out just as we expected. Enterprise is good. It’s not fantastic.” Intel, the world’s largest chipmaker, also reaffirmed its forecasts for the second quarter.

Cisco, the biggest maker of computer-networking gear, yesterday forecast quarterly sales and profit that missed analysts’ estimates. Cisco CEO John Chambers said big companies were hesitant to spend, and that the company was concerned about demand in Europe. Because of the two companies’ size and worldwide reach, investors watch Intel’s and Cisco’s earnings performance to gauge demand in the broader global economy.

Otellini said Chambers’s comments may reflect competitive issues rather than the weakness in Europe that Cisco cited.

“I don’t see what he’s seeing,” Otellini said.

John Earnhardt, a spokesman for Cisco, declined to comment.

Intel shares gained less than 1 percent to $27.24 at the close in New York. The stock has increased 12 percent this year. Cisco dropped 10 percent to $16.81 today, following the company’s disappointing forecast late yesterday.

Mobile

Intel’s chief executive also said the company’s effort to get more chips into mobile phones is just getting under way and it plans to announce more customer wins in the wireless market.

“We intend to be a leader in this business,” Otellini said in the presentation. “We’re just getting started here. You’ll see more announcements coming.”

Intel’s processors run more than 80 percent of the world’s personal computers. The company has struggled for more than 10 years to make headway in the mobile-phone market, which is led by Qualcomm Inc.

Otellini, 61, also said the cost of building factories that are capable of producing the most advanced chips is going up and the process itself is becoming more difficult. A current state- of-the-art plant costs more than $5 billion, he said, and that will rise to more than $10 billion within this decade as the industry shifts to using 450-millimeter disks of silicon from 300 millimeter.

“Much of the industry will move towards increased consolidation,” said Otellini. “The ability to operate on the leading edge will get harder and harder.”

Rising Costs

Otellini predicted that only “one or two” other chip companies will be able to match Intel (INTC) in building such production facilities.

Intel’s costs are rising as it overhauls older plants and builds new ones in a shift to more advanced production. The company expects to recoup that investment when the factories reach full output, and Intel is sticking to its gross margin forecast of 64 percent for the year, Chief Financial Officer Stacy Smith said in April. At the time, Intel forecast second- quarter gross margin that was lower than some analysts predicted.

Gross margin, or the percentage of sales remaining after deducting costs of production, will be about 62 percent in the second quarter, the company said last month. Analysts had projected gross margin of 63.5 percent for the period, the average estimate compiled by Bloomberg. Intel also said sales in the current period would be $13.6 billion, plus or minus $500 million.

At the meeting today, Tom Kilroy, Intel’s head of sales, said the company is comfortable with its second-quarter predictions. While the consumer market remains “somewhat sluggish,” emerging market and corporate demand is strong, he said.

Gross margin is the only measure of profitability that Intel predicts. The margin reached almost 65 percent last year, boosted by rising average prices for Intel’s chips amid a lack of competition.

For 2013, Intel expects gross margin will stay at the high end of its historical range, Smith said. Gross margin in the past 10 years has ranged from about 50 percent in 2002 to 63 percent last year, according to data compiled by Bloomberg. It reached a record 65 percent in 2010.

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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