January 16, 2009 / 3:11 AM / 11 years ago

Intel expects margins in "healthy range" by second half

SAN FRANCISCO (Reuters) - Intel (INTC.O) expects margins to bounce back to “healthy” levels by the second half, but held back on giving detailed quarterly forecasts when it issued earnings on Thursday, citing economic uncertainty.

Signs at the Intel booth refer to the recently released Core i7 chip at the annual Consumer Electronics Show (CES) in Las Vegas, Nevada, January 9, 2009. REUTERS/Rick Wilking

Shares of Intel, a bellwether for the global technology sector, rose 4 percent in a relief rally following the report. The world’s largest chip maker had issued two revenue warnings in the past three months and sent shivers through the technology sector.

Despite the stock gain, the global economy continues to cast a pall over the tech sector, which is struggling through one of its toughest periods as layoffs continue to rock the industry as consumers and businesses dial back on spending.

Intel Chief Executive Paul Otellini acknowledged the fourth quarter was a difficult one. Revenue fell 23 percent from the year-ago period and profit tumbled 90 percent.

“Putting our results into perspective, this is only the second time in 20 years that our fourth-quarter revenues were below the third quarter,” he said on a conference call.

But he vowed to continue the pace of investment in research and development, while at the same time remaining focussed on fiscal discipline. Intel also said it had no plans to reduce or eliminate its dividend.

Investors had feared that Intel would slash revenue expectations for the first quarter. Instead, it said it was not providing an outlook but “for internal purposes, the company is currently planning for revenue in the vicinity of $7 billion (4.7 billion pounds)”.

That was towards the low end, but did not miss entirely a range of analysts’ forecasts of $6.56 billion to $7.8 billion for first quarter revenue. The average estimate was $7.2 billion, according to Reuters Estimates.

“People were expecting very, very ugly numbers. Intel delivered mixed numbers, slightly better than the bears expected,” said Patrick Yang, an analyst with Wedbush Morgan.

HOPE FOR MARGIN IMPROVEMENT

Intel warned that gross margins, closely watched by investors, will slip from 53 percent in the fourth quarter to the low 40s in the first quarter because of start-up costs and as it used less manufacturing capacity. But it held up hope for improvement.

“I think my gross margin will go up a bit and I think it’s back into what I would call a healthy range by the second half,” Chief Financial Officer Stacy Smith said on the call. “Without anticipating a big snapback in demand, I would anticipate that Q1 is the trough.”

Shares of Intel, a component of the Dow Jones industrial average, rose to $13.85 from their close on the Nasdaq of $13.29. The stock had lost about 10 percent of its value since it warned on January 7 that fourth quarter revenue would miss expectations.

Some analysts feared the rally will be short lived with chip sales sliding as PC makers and other technology manufacturers trim inventory and cut back on purchases amid a slowing global economy. Intel is the world’s largest maker of microprocessors, the brains of personal computers.

“They were playing it cautious by not officially providing guidance,” said Edwin Mok, analyst at Needham. “The big surprise was gross margins, which they guided for the low 40s. I’m concerned that the company is not letting up on its start-up investments in the face of the economic slowdown.”

In November, the Semiconductor Industry Association forecast a 5.6 percent decline in global chip sales in 2009.

Intel rival Advanced Micro Devices Inc AMD.N said last week it expected to post additional restructuring charges for fiscal 2008 and 2009.

Intel’s fourth-quarter net profit was $234 million, or 4 cents a share, while revenue was $8.2 billion. That matched Wall Street’s expectations, which were lowered after the revenue warning last week. The results included a $1 billion writedown related to investments in Clearwire CLWR.O.

Microprocessor and chipset units were “significantly” lower than the third quarter, Intel said, although revenue from its Atom chip, used in many low-cost netbook computers, jumped 50 percent to $300 million.

The overall microprocessor average selling price was flat, or slightly higher excluding Atom, Intel said.

Additional reporting by Sue Zeidler, Robert MacMillan and David Lawsky; Writing by Edwin Chan; editing by Richard Chang, Tiffany Wu and Carol Bishopric

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