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Intel Forecasts Gross Margin That May Miss Some Estimates

Intel
A silicon wafer at the Intel Corp. booth at the International Consumer Electronics Show (CES) in Las Vegas. Photographer: David Paul Morris/Bloomberg

April 17 (Bloomberg) -- Intel Corp., the world’s largest semiconductor maker, forecast second-quarter gross margin that was lower than some analysts predicted as spending on a new production technique erodes profitability.

Gross margin, or the percentage of sales remaining after deducting costs of production, will be about 62 percent in the second quarter, Intel said in a statement today. Analysts had projected gross margin of 63.5 percent for the period, the average estimate compiled by Bloomberg.

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 an interview on Bloomberg Television.

“The whole story of Intel in the past two years has basically been margins,” said Daniel Amir, an analyst at Lazard Capital Markets LLC in San Francisco. “For the first time they’re kind of missing the margin target by more than a percent.”

Intel shares slipped to $27.70 in extended trading following the report. Earlier, the stock gained less than 1 percent to $28.47 at the close in New York. That left the shares up 17 percent this year.

‘Cost Curve’

Smith said demand from corporations and emerging markets remains relatively strong, and costs are rising because the company is preparing three factories to run on the new 22-nanometer production process.

“As we start the ramp of those products, the first units that come out are relatively expensive,” Smith said. “Then they come rapidly down the cost curve over the course of this year.”

Sales in the current period will be $13.6 billion, plus or minus $500 million, Santa Clara, California-based Intel said. Analysts had estimated revenue of $13.43 billion, the average projection according to data compiled by Bloomberg. Sales were $13.03 billion a year earlier.

“The revenue guidance is actually not bad -- it reflects a PC market recovery,” said Amir. “I think people expected it to be a little bit better.”

Industry Indicator

Investors see Intel’s earnings as a broad indicator of demand for desktop, server and laptop computers. Advanced Micro Devices Inc., Intel’s main competitor in PC microprocessors, is scheduled to report first-quarter results later this week.

For the first quarter, Intel said net income was $2.74 billion, or 53 cents a share, compared with $3.16 billion, or 56 cents, a year earlier. Sales rose 0.5 percent to $12.9 billion. Analysts had predicted profit of 51 cents a share on sales of $12.85 billion. In January, Intel predicted sales of $12.8 billion, plus or minus $500 million.

For 2012, the chipmaker had projected it would spend $10.1 billion on research and development and about $12.5 billion on new plants and machinery.

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.

“Gross margin is the one that people focus on,” said Doug Freedman, an analyst at RBC Capital Markets in San Francisco. “People are trying to figure out why the numbers aren’t a little stronger.”

Worldwide PC shipments will increase 4.4 percent this year to 368 million units, according to researcher Gartner Inc.

“We are very upbeat about the back half of the year,” said Betsy Van Hees, a San Francisco-based analyst at Wedbush Securities. “We’re definitely going to see more PCs shipped. There are going to be a lot of Ultrabook models out there.”

Intel’s biggest customers are PC makers Hewlett-Packard Co., Dell Inc. and Quanta Computer Inc., according to a Bloomberg supply-chain analysis.

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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