Intel Boosts Capex, Beats Tempered Expectations

(Reuters) - Intel Corp sharply increased its capital expenditure budget for 2012 in a bid to catch up in tablets and smartphones and to extend its lead in corporate data centers.

The chipmaker's fourth-quarter earnings beat scaled-back expectations on Thursday as it faces a tough PC market hit by a weak economy and shortage of hard drives.

Rushing to speed up its development of competitive chips for smartphones and tablets, Intel said it is boosting capital spending in 2012 to $12.5 billion, plus or minus $400 million. Last year its capital expenditures were $10.7 billion.

Analysts on a call with Chief Executive Paul Otellini and other executives questioned whether increased spending by Intel could become permanent and hurt profit margins.

Chief Financial Officer Stacy Smith told them it would pay off in the long run to make more investments now in cutting-edge facilities to develop and make chips for smartphones and a new category of super-thin laptops dubbed Ultrabooks.

We'll come down from here, but this is an investment year for us in some areas where I think we'll get long-term shareholder return, Smith said.

Intel warned last month that the damage wrought by flooding in Thailand - the world's largest producer of computer drives - would curtail December-quarter earnings in a PC market already hit by a weak economy.

With PC sales suffering, Intel has failed to find a foothold in smartphones and tablets, where processors based on ARM Holdings' power efficient chip designs are widely used.

Lenovo and Motorola Mobility have agreed to use Intel's new Medfield chip in upcoming smartphones, but investors are waiting to see how those phones do with consumers.

HAZY OUTLOOK

Intel's bold increase in spending comes a day after Taiwanese contract chipmaker TSMC said it was cutting its capex by over $1 billion due to slower industry growth and jitters about the world economy.

The biggest surprise is the capex for the new year, said Evercore Partners analyst Patrick Wang. They're investing to catch up and not only be at parity but exceed where the handset incumbents are.

Intel's main PC client group raised its revenue 17 percent in the December quarter to $9 billion. Its revenues from selling server chips for data centers rose 8 percent.

After flooding in Thailand ruined factories and sensitive machinery, shortages of the components are expected to persist through the first half of 2012 and disrupt PC production.

Last quarter they underestimated the flood impact. I am wondering if they are still underestimating the Thailand flood impact, and the market's ability to ramp back up to get to these numbers, said RBC analyst Doug Freedman.

Upbeat earnings forecasts by Linear Technology and Xilinx this week have made investors cautiously optimistic that a drawdown of inventories in the broader chip industry, including semiconductores used in automobiles, communications and factories, may be ending, clearing the way for higher sales.

SKINNY LAPTOPS

Hoping to safeguard its position in PCs, Intel this year will be rolling out Ultrabooks with its largest marketing campaign since 2003. It hopes the instant-on super-thin laptops can stand up to the likes of Apple's Macbook Air, with some of the technological chic the iPad and other tablets epitomize.

Smith said Intel would also increase investments in chips for servers and storage and network devices, and would increase production capacity at the chipmaker's most cutting-edge plants.

Process technology leadership allows us to do devices that are less costly, more power efficient, with more features and more performance. We think that benefits our phone line as it does our server line and PC line, Smith told Reuters in an interview.

Fears of falling PC sales hurt the shares of Microsoft, Dell Inc and Intel for much of 2011. Intel's stock has recovered over the past three months, partly due to the chipmaker's relatively high 3.3 percent dividend yield.

Still trading at a modest 10.8 times expected earnings, the shares recently hit a 52-week high.

Intel said revenue in the current quarter would be $12.8 billion, plus or minus $500 million. Analysts on average had expected current-quarter revenue of $12.770 billion, according to Thomson Reuters I/B/E/S.

The world's leading chipmaker said revenue in the fourth quarter was $13.9 billion, up 21 percent and slightly higher than the $13.718 billion expected.

GAAP net income in the fourth quarter was $3.4 billion, up 6 percent. GAAP earnings per share were 64 cents. Analysts had expected 61 cents.

Intel had a gross margin of 64 percent in the fourth quarter, with a non-GAAP gross margin of 65 percent. Analysts on average expected 64.6 percent.

Shares of Intel were up 0.70 after its earnings report from a close of $25.63, up 0.95 percent on Nasdaq.