Intel Expanding Use of Factories for Other Chipmakers

Intel Corp. (INTC) is providing increased access to its manufacturing plants for other chipmakers, taking advantage of advanced production capabilities and seeking to boost its revenue sources as it faces greater competition.

The world’s largest maker of semiconductors, which has traditionally only made its own chips, is expanding its foundry business, or manufacturing chips to order for other companies, Chief Executive Officer Brian Krzanich said yesterday at an investor meeting in Santa Clara, California.

Intel, which said at the meeting that sales next year will be little changed from 2013 levels, will focus more on providing what customers want rather than trying to push its own designs, said Krzanich, who became the company’s sixth CEO in May when he succeeded Paul Otellini. Krzanich, 53, is a former factory manager who ran part of a network of plants that Intel says are the most advanced in the semiconductor industry.

“We’d become insular,” Krzanich said. “We’d become focused on what was our best product rather than where the market was moving.”

Otellini had said Intel’s plants were closed to competitors. Earlier this year, Krzanich said he would consider changing that stance, and yesterday he confirmed the company’s willingness to make chips for companies that are beating Intel in mobile phones.

“We’re needing some kind of signal or sign that mobile is happening and they’re getting some kind of presence there,” said Betsy Van Hees, an analyst at Wedbush Securities in San Francisco. She has the equivalent of a hold rating on the stock. “The mobile business is an ugly business. It’s very tough.”

Financial Outlook

Intel said revenue will be approximately the same in 2014. Analysts were projecting on average sales of $53.7 billion next year, up from $52.6 billion in 2013, according to estimates compiled by Bloomberg. Gross margin, the percentage of sales remaining after deducting the production costs, will be in the middle of its target range of between 55 percent and 65 percent, in line with analysts’ estimates, Chief Financial Officer Stacy Smith said.

Intel predicts the PC market, measured by units, to be down in the ‘low single-digit’ percent, Smith said. While spending on new plants and equipment in 2014 will be little changed from 2013 at around $11 billion, investments aimed at enabling customers to convert to Intel chips in tablets will hurt total profitability, he said.

‘Ultra Fast’

Intel Vice President Hermann Eul, who heads the company’s mobile division, said Intel will focus on developing parts for a smaller number of phonemakers with large sales volumes. The company isn’t giving up on mobile, he said.

“Of course, we would like to do better,” Eul said at the meeting. “This market is going ultra fast, and the competition is not standing still while we catch up.”

The smartphone market will pass 1 billion units this year, growing 40 percent from 2012, according to researcher IDC. Personal-computer shipments are projected to drop 9.7 percent worldwide this year, IDC said in August.

Intel, based in Santa Clara, has yet to garner 1 percent of the handset processor market. Krzanich has said the company needs to speed up the delivery of new products for mobile devices. He addressed the tablet market and said the company plans to have chips in sub-$100 devices next year and ship more than 40 million tablet chips.

The PC decline has led some analysts to question Intel’s plan to spend $10.8 billion on new plants and equipment this year, calling for a reduction in next year’s budget.

The semiconductor maker expects the rate of decline in PC shipments to slow as demand improves at corporations and in some developed markets, said Kirk Skaugen, the general manager of Intel’s PC business.

Intel shares rose 2.7 percent to $25.23 at yesterday’s close in New York, leaving them up 22 percent this year.

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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