May 27, 2009

Intel: EU Antitrust Fines Won’t Affect Dividends, Investments

Intel Corp. said Wednesday that the record-setting $1.5 billion antitrust fine imposed by the European Union would not affect the company's dividends or investments.

"There's still plenty of cash flow from operations to invest in our business, pay the fine and pay the dividend," said Intel CFO Stacy Smith during an analyst event in London.

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

Smith's presentation included a slide indicating that the company would generate more than $10 billion in cash this year, flat or slightly down from last year's results.

Smith addressed concerns that increasing sales of its lower-priced "Atom" processor would take away from sales of its PC chip range and potentially damage its attractive 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," said Smith.

"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 sales by netbooks was currently about 20 percent, a figure that was "less than speculation," European sales chief Christian Morales told Reuters on the sidelines of the conference.

The figure means that 20 percent of netbooks sold would otherwise have been sales of full notebook computers.

Morales said netbook sales comprised roughly 16 percent of all notebook sales worldwide, but were slightly higher in western Europe. In Italy and Britain, netbook sales may account for as much as 25% of all notebook sales.

Intel now dominates the rapidly growing market for low-cost netbooks, made for simple functions such as e-mail and Web surfing, with its Atom processors.  But many worry that that accelerating market growth may be at the expense of higher-priced laptop computers.

"We have seen some cannibalization of Celeron by Atom," Morales said, in reference to Intel's processors for low-cost notebooks.

However, Intel's profit margins for Atom were higher than those for the much older Celeron chips, he added.

"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."

Although an Atom processor is just 25 percent the cost of a Quad core, the most important priority is in creating the right price and costs to generate healthy product margins in each segment, Morales explained.

Smith said the current economic recession was following the pattern of prior slowdowns.  However, this time Intel reacted rapidly to reduce capacity amid slowing sales and a rise in inventory during 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 echoed comments made two weeks ago at an investor conference in California, namely that gross margins would return to "normal" levels during the second half of the year.

Intel's gross margin dropped to 45.6 percent in the first quarter from 53.1 percent the previous quarter.

"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."


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