Intel firm on margin target for year, shares jump

By Duncan Martell

SAN FRANCISCO (Reuters) - Intel Corp (INTC.O) on Tuesday affirmed its profit-margin target for 2008, reassuring investors concerned about falling memory chip prices and the impact of a weak U.S. economy, sending its stock up 8 percent.

The world's largest maker of semiconductors reported a fall in first-quarter net income to $1.44 billion, or 25 cents per share, from $1.64 billion, or 28 cents a share, a year ago. Revenue rose to $9.67 billion from $8.85 billion, slightly better than Wall Street expectations.

With both Intel and smaller rival Advanced Micro Devices Inc (AMD.N) issuing results warnings in the first quarter, fears had been mounting about PC sales with the U.S. economy possibly in a recession. Intel's report on Tuesday went a long way toward easing those worries.

The earnings per share met Wall Street's average target, according to Reuters Estimates, but it was the profit margin outlook and revenue growth that boosted the stock.

"Revenue and gross margin guidance is more important than ever with Intel," said Justin McNichols, a portfolio manager at Osborne Partners Capital Management in San Francisco who owns Intel stock.

Full-year gross margin guidance of 57 percent, plus or minus a few points, caught the eyes of many Intel watchers.

"The concern was that the memory business was dragging down the gross margins, which would drag down earnings," said Doug Freedman, an analyst at American Technology Research. "The general consensus was that it would be more like 56 percent."

Intel had set the same margin target in January, then in March scaled back first-quarter margin expectations to 54 percent, plus or minus a point, citing flash memory chip prices. The first-quarter margin ended up being 53.8 percent.

"There was concern we were having a structural breakdown in demand -- that finally the weakness in the economy was starting to hurt PC consumption -- and this argues against that," said Cody Acree, an analyst at Stifel Nicolaus.

"More important than anything, it's simply that Intel is not giving an indication that the wheels are coming off."

TECH BELLWETHER

The company, one of the big bellwethers for technology, said it expected second-quarter revenue in a range of $9.0 billion to $9.6 billion and a gross margin of 56 percent, give or take a couple points.

Analysts' current expectations for the second quarter are for a profit of 28 cents per share, on average, on revenue of $9.26 billion, according to Reuters Estimates. The midpoint of Intel's revenue forecast -- $9.3 billion -- is slightly above consensus estimates.

But no relief is in sight for prices of NAND flash memory chip, which have been under pressure for more than a year now.

"As expected we saw weak pricing," Chief Financial Officer Stacy Smith said in a phone interview. "We do expect to see continued oversupply throughout the rest of the year. That's what we have baked into our forecast."