Intel CEO plays down concerns about tech spending

SANTA CLARA, California Thu May 10, 2012 7:42pm EDT

A video wall displays Intel's logos at the unveiling of its second generation Intel Core processor family during a news conference at the Consumer Electronics Show (CES) in Las Vegas January 5, 2011. REUTERS/Rick Wilking

A video wall displays Intel's logos at the unveiling of its second generation Intel Core processor family during a news conference at the Consumer Electronics Show (CES) in Las Vegas January 5, 2011.

Credit: Reuters/Rick Wilking

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SANTA CLARA, California (Reuters) - Intel Corp Chief Executive Paul Otellini said that he was not seeing unexpected weakness in enterprise technology spending that Cisco Systems Inc CEO John Chambers cited when he forecast quarterly earnings below estimates.

"This quarter is playing out as we thought. The enterprise is good, it's not fantastic, so we don't see a change in that," Otellini said in answer to a question at Intel's annual investor day on Thursday.

Shares of Cisco, which relies on government and corporate spending on Internet gear, dropped more than 10 percent on Thursday, a day after the company released its financial results.

"I think John's comments were focused on Europe in particular. We haven't seen any change in Europe demand on the enterprise side," Otellini said.

Much of the presentations by Otellini and other Intel executives showcased the chipmaker's long-awaited push into smartphones as well as ultra-thin laptops. Intel offered little new hope to investors concerned about languid PC sales.

Otellini also forecast that Intel, with its deep pockets, would survive as one of a handful of leading-edge chip manufacturers as the sector moves toward larger and costlier factories.

With the industry preparing to increase the size of the silicon wafers it uses, letting manufacturers fit more chips on each, future leading-edge factories will cost more than $10 billion each to build, compared with about $5 billion now, Otellini said.

Intel, Samsung Electronics and contract manufacturer TSMC will be among the few companies able to build those larger factories and keep them working full time, experts have said.

Reflecting higher costs in cutting-edge chip manufacturing, Intel is boosting its capital spending this year to $12.5 billion from about $10.8 billion in 2011.

"When you see a capex of ten or twelve billion you say, 'Oh my god.' But you forget that our (annual) revenue is approaching $60 billion," Otellini told an analyst who questioned Intel's higher spending.

Chief Financial Officer Stacy Smith said he expects gross margins next year to remain at the high end of Intel's recent historical range of 60 percent to 65 percent.

SMARTPHONE PUSH

With worldwide PC shipments barely growing, Intel has been racing to establish a foothold in smartphone and tablet markets, where processors based on ARM Holdings' power-efficient chip designs are widely used.

Last month in India, Lava International launched the first smartphone using Intel's new Medfield processor, and the device has received respectable reviews from benchmark testers.

"We're getting awfully good reviews for our first phones," Otellini told investors at an annual Intel event. "We have ambitions; you'll see more announcements over time and very cool capabilities built into phones."

Before declaring that Intel is a serious player in the mobile market, many investors are waiting to see how successful the new handsets become with consumers. Growing expectations that Intel will be able to compete have fueled gains in its shares in recent months.

SKINNY LAPTOPS

Intel is heavily promoting a PC category it has dubbed ultrabooks, similar to Apple Inc's Macbook Air and offering some of the technological chic of the iPad and other tablets.

Major manufacturers like Asus and Hewlett Packard are launching ultrabooks, but some investors are concerned that the expensive components used in them, such as solid-state drives, make them too pricey for many consumers.

Intel Vice President Kirk Skaugen, in charge of the ultrabook push, said the laptops are aimed at prices starting at $700. He said consumers would be willing to spend more than normal on PCs delivering premium features.

Demonstrations of future gadgets, including an ultrabook with a touchscreen display, won polite applause. But analysts said they heard little to reduce concerns that Intel may sacrifice profit margins on sales of its processors to make ultrabooks affordable and help drive sales.

"We're on track to meet our goal of 40 percent of consumer notebooks this holiday season being ultrabooks," Otellini said.

Last month, Intel posted quarterly earnings that failed to inspire gains in its recently high-flying stock and also said costs associated with ramping up new production lines for its new Ivy Bridge chips would hurt gross margins more than expected.

Global PC shipments in the first quarter grew a tepid 1.9 percent from the year-ago period, according to research firm Gartner.

Helped by emerging markets, the Ivy Bridge processor and ultrabooks, Intel expects PC shipments this year to grow by a "high-single digits" percentage.

Otellini said manufacturers are working on 20 tablets using Intel processors and Microsoft's long-awaited Windows 8 platform, expected later this year.

(Editing by Andre Grenon, Gary Hill and Steve Orlofsky)

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