Intel says EU fine won't lead to dividend cut

LONDON Wed May 27, 2009 3:53pm EDT

An Intel Inside sticker is shown next to a Windows XP sticker on an Acer Netbook in Encinitas, California April 13, 2009. REUTERS/Mike Blake

An Intel Inside sticker is shown next to a Windows XP sticker on an Acer Netbook in Encinitas, California April 13, 2009.

Credit: Reuters/Mike Blake

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LONDON (Reuters) - Intel Corp, the world's largest chipmaker, said the record 1.06 billion euro ($1.5 billion) fine imposed by EU regulators for antitrust violations would not cause it to cut investment or slash its dividend.

"There's still plenty of cash flow from operations to invest in our business, pay the fine and pay the dividend," Chief Financial Officer Stacy Smith said at an analyst event in London on Wednesday.

"As we've said in the Q1 earnings call, we are not having any conversations about cutting the dividend."

Smith showed analysts a slide indicating the company would spin off more than $10 billion in cash in 2009, flat or slightly down on 2008.

Intel addressed analyst fears that growing sales of its lower cost "Atom" processor, which is used in netbooks, would cannibalize sales of its PC chip range and put downward pressure on its former lofty 50-60 percent margins.

"There's great concern about the potential of the Atom mix because it's a lower selling price product, but it's also a lower cost product," Smith said.

"And that cost really enables us to ramp it without having an adverse effect on the overall product margin of the business."

Cannibalization of laptop computer sales by lower-priced netbooks was currently about 20 percent, "less than speculation," the company's European sales chief Christian Morales told Reuters on the fringes of the event.

Twenty percent cannibalization would mean that 20 percent of netbooks sold would otherwise have been sales of full notebooks.

Morales said netbook sales were about 16 percent of all notebook sales globally, and a little higher in western Europe. In Britain and Italy they may account for as much as a quarter of all notebook sales.

Intel has for now cornered the fast-growing market for inexpensive netbooks, made for simple functions such as surfing the Web, with its Atom processors. Many fear that that fast market growth may be at the expense of higher-priced laptops.

"We have seen some cannibalization of Celeron by Atom," Morales said, referring to Intel's processors for budget notebooks.

But he said Intel's profit margins for Atom were higher than those for the much older Celeron processors.

"The mix becomes important in understanding the overall cost," Smith said.

"We see nice growth in the high-end side of the business (its Quad processors), nice growth in the more cost-produced segment of the business and a bit of a reduction in single core, which is primarily Celeron today."

An Atom was a quarter of the cost of an Quad core, he said, but most important thing was the right price and the right cost to generate good product margins in each segment.

SAME OLD CYCLE

Smith said the current economic downturn was following the pattern of previous slowdowns, with the exception that Intel reacted swiftly to cut capacity as sales slowed and inventory rose in the fourth quarter.

"We brought down the loadings in our factories dramatically to below 40 percent," he said. "Pretty much in one quarter we were able to get inventory back to a healthy level.

"The inventory levels overall through the worldwide supply chain now are at a healthy, even a little bit lean, level."

Smith reiterated comments made two weeks ago at an investor meeting in Silicon Valley, that gross margins would return to "normal" levels in the second half.

"I think we will get gross margin back into the normal range, which I'll define as 50 to 60 pct, when we get in the second half of this year," he said.

"That's as a result of the abatement of start-up costs, but more importantly the fact that we are reloading factory network and the excess capacity charges should be less."

Intel's gross margin slid to 45.6 percent in the first quarter from 53.1 percent in the fourth quarter.

(Editing by Rupert Winchester)

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