Intel results surge past expectations

Resilient demand for PCs and servers helped Intel’s margin and revenue forecasts blast past Wall Street expectations, allaying fears of a technology spending slowdown and sending its shares up nearly 8 per cent.

The world’s top chipmaker expects a record gross margin of 67 per cent for the third quarter, give or take a couple percentage points. It foresees revenue of $11.2bn to $12bn, surpassing analysts’ target of $10.9bn.

Intel posted net income of $2.9bn, or 51 cents a share, versus a net loss of $398m, or 7 cents a share, in the second quarter of 2009, when Intel's results included a $1.4bn fine by the European Commission. Analysts had expected earnings of 43 cents per share in the second quarter.

Revenue in the quarter ended June 26 was $10.8bn, above the $10.25bn expected, according to Thomson Reuters I/B/E/S. And its gross profit margin in the second quarter was 67 percent, exceeding the 64 per cent expected by analysts.

“Demand was stronger than many people anticipated. The Street was concerned corporate spending would be restrained with what’s happened in Europe, and that wasn’t the case,” said John Massey, portfolio manager at SunAmerica Asset Management.

“The real thing that got the Street going was the gross margin guidance, which they raised. It shows a lot of confidence that the company has for the back half of the year. If the company was at all concerned about demand, you wouldn’t have expected them to raise that number.”

Some investors worry that Europe’s woes, coupled with the likelihood of decelerating growth in Asian markets such as China, will crimp IT spending just as companies begin to spend again after a two-year drought. But Intel executives said there are clear signs of renewed spending by corporations.

“Now that corporations have some breathing room in the economy and their budgets, you’re starting to see those machines that were four or five years-old get refreshed,” Intel CEO Paul Otellini said in a conference call with analysts.

Otellini added channel inventory remained “lean”, and the company is comfortable with rising internal inventories.

Gleacher & Co analyst Doug Freedman said new products in Intel’s data center group, which makes chips for servers used by corporations, provided a big lift to Intel’s top line.

“I’d expect that the enterprise market continues to be strong into the third quarter,” said CFO Stacy Smith.

Some analysts focused on the company’s rising inventories, typically a warning sign of slowing demand in the chip sector. Pacific Crest Securities’ Michael McConnell said Intel’s 86 days of internal inventory was close to the 89 days the company held at the peak of its last business cycle. Given the strong second-quarter demand Intel experienced, McConnell was not worried about elevated inventory levels. But he warned business conditions could shift rapidly.

“This really isn’t a month-to-month market, it’s a week-to-week market right now with all that’s going on in the world,” McConnell said.

The company has high hopes for the launch of its Sandy Bridge processor later this year. Smith said Intel expects to move up more of its capital expenditures into this year from 2011, to prepare for that ramp-up.

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