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UPDATE 3-Intel eyes sales pickup, investors cautious

* Q1 GAAP EPS 53 cents vs 50 cents street view

* Q1 revenue $12.9 bln vs $12.85 bln street view

* Sees Q2 revenue at $13.6 bln vs $13.45 bln street view

* Sees sales rising in H2 on back of new processor

* Stock down 2.8 pct in after-hours trading

(Rewrites, adds details from analyst call)

April 17 (Reuters) – Top chipmaker Intel Corp (NasdaqGS: INTCnews)
posted earnings confirming the PC industry is alive — but not
kicking — and said sales would accelerate in the second half of
the year with a powerful new PC processor.

In a first-quarter earnings report that did not inspire
investors to push Intel’s recently high-flying stock further,
the company also said costs associated with ramping up new
production lines would hurt gross margins more than expected.

“It’s not that they disappointed, they just didn’t give us
the bull case. In previous quarters they blew the numbers out of
the water,” said Patrick Wang, an analyst at Evercore Partners (NYSE: EVRnews) .

The long-time technology bellwether is ramping up production
of its newest PC processor, codenamed Ivy Bridge, which is
expected to drive sales later this year and power a new crop of
super-thin laptops dubbed “ultrabooks.”

But the costs of upgrading the factories where the chips
are being made is temporarily hurting margins, Chief Financial
Officer Stacy Smith told a conference call.

That was bad news to Wall Street, which has pushed shares of
Intel 17 percent higher so far this year.

“They had strong execution for the most part, and in-line
expectations for the PC market. But from a investor standpoint
you have a multi-year high stock price, very much priced for
perfection. That gross margin guidance, while understandable,
was not perfection,” said Cody Acree, an analyst at Williams
Financial Group.

Intel said non-GAAP gross margins in the second quarter
would be 62 percent, plus or minus 2 percentage points, down
from 64 percent in the first quarter. Intel’s full-year gross
margin forecast of 64 percent was unchanged.

BANKING ON ULTRABOOKS

Shaky economies in Europe (Chicago Options: ^REURUSDnews) and the United States, a growing
consumer preference for tablets, and a recent shortage of hard
drives due to flooding in Thailand last year have taken a toll
on the PC industry.

Demand in China and other emerging economies has helped
sustain growth, and CFO Smith said business would pick up more
as the industry recovers further from the hard-drive shortage
and PC manufacturers replenish low component inventories.

“As we ramp Ivy Bridge and people gear up for these really
capable ultrabook sales in the last half of the year, you’ll
start to see them refilling their pipelines with new products in
the back half of this year,” Smith told Reuters.

Intel is heavily promoting ultrabooks, which it hopes can
stand up to the likes of Apple Inc (NasdaqGS: AAPLnews) ‘s Macbook Air, with
some of the technological chic the iPad and other tablets
epitomize.

Some investors are concerned that expensive components used
in them, like solid-state drives, make them too pricey for many
consumers. Wang and other analysts speculate Intel may have to
sacrifice profit margins on sales of its processors to help make
ultrabooks affordable.

Intel says manufacturers are finding ways to bring down
costs of ultrabooks, and CEO Paul Otellini told analysts on the
call he was confident of the chipmaker’s previous prediction the
new light-weight PCs would account for 40 percent of all
notebook sales by the end of the year.

“I’m still very confident we can do that. All the signs are
tracking there. Everything we’ve looked at since we first gave
that number has gotten more positive, more designs, better price
points,” Otellini said.

TARGETING SMARTPHONES

Despite weakness in the United States, global PC shipments
in the first quarter grew 1.9 percent from the year-ago period,
research firm Gartner (NYSE: ITnews) said last week. That was better than the
firm’s previous forecast of a 1.2 percent decline.

With worldwide PC sales barely growing, Intel has been
racing to find a foothold in smartphones and tablets, where
processors based on ARM Holdings (LSE: ARM.Lnews) ‘ power-efficient chip
designs are widely used.

It has recently shown some encouraging signs with
announcements that its newest processors would be used in a
handful of upcoming smartphones.

Many investors are waiting to see how successful the new
handsets become with consumers before declaring the chipmaker a
serious player in the mobile market. Growing expectations that
Intel will be able to compete in mobile have fueled some of the
gain in its shares in recent months.

Microsoft (NasdaqGS: MSFTnews) ‘s long-awaited launch of Windows 8
expected later this year is also likely to cause a jump in PC
sales, but the operating system will be Microsoft’s first
version of Windows that is compatible with chips designed by
rival ARM.

Intel could face new competition in low-end PCs from
companies like Nvidia Corp and Qualcomm (Xetra: 883121news) .

Intel said revenue in the current quarter would be $13.6
billion, plus or minus $500 million. Analysts on average had
expected $13.45 billion, according to Thomson Reuters I/B/E/S.

The world’s leading chipmaker said revenue in the first
quarter was $12.9 billion, up from $12.85 billion in the
year-ago period and a bit higher than the $12.85 billion
expected.

GAAP net income in the first quarter was $2.74 billion, down
from $3.16 billion in the year-ago period.

GAAP earnings per share were 53 cents, better than the 50
cents expected.

Shares of Intel fell 2.81 percent in extended trade after
closing up 0.23 percent at $28.47 on Nasdaq (Nasdaq: ^NDXnews) .

(Editing by Richard Chang and Muralikumar Anantharaman)

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