Update: Intel cites economic 'momentum,' posts strong Q3

Intel on Tuesday reported strong third-quarter earnings that beat analyst expectations and were buoyed by what the company called "momentum" in the economy.

The chip maker reported third-quarter revenue of $9.39 billion for the quarter that ended Sept. 26, beating the $9.04 billion estimated by analysts polled by Thomson Reuters. Revenue was up by $1.4 billion compared to this fiscal year's second quarter, though it was lower than the $10.2 billion Intel reported in the third quarter last year.

For the most recent quarter, Intel reported net income of $1.9 billion and diluted earnings per share of 33 cents, beating analyst expectations of earnings per share of 28 cents. Net income, however, fell from the $2.01 billion it reported in the same period last year. The company took $63 million in restructuring and asset charges for this fiscal third quarter.

A number of Intel business units -- including the mobility and digital enterprise groups -- saw revenue grow sequentially. Revenue generated from the Atom microprocessor also increased sequentially.

The strong quarterly results "underscore that computing is essential to people's lives, proving the importance of technology innovation in leading an economic recovery," said Paul Otellini, Intel president and CEO, in a statement.

The company is confident about its business prospects, he said. Intel projected fourth-quarter revenue of $10.1 billion "plus or minus $400 million." Analysts are projecting Intel's revenue to be $9.5 billion in the fourth quarter.

Intel is set to ship new laptop and desktop chips based on the advanced 32-nanometer manufacturing process starting in the fourth quarter. It will also bring new server and netbook chips in the first half of next year. The company currently manufactures chips using the 45-nm process.

Chip shipments are stabilizing as PC shipments start to rise, Otellini said during a keynote speech at the Intel Developer Forum trade show last month in San Francisco. Intel is benefitting from signs that the PC industry is coming out of what Otellini described as the most damaging recession in close to 70 years.

"What we've seen is that the notebook market is alive and well," Otellini said during a conference call to discuss the financial results. He said the PC market would record either flat sales or year-over-year growth in the fourth calendar quarter.

Intel's chip and chipset shipments recorded their largest sequential increase in more than 30 years during the quarter just ended, Stacy Smith, Intel's CFO, said during the call. Consumer demand for PCs stabilized and laptop demand was especially strong. Intel's mobility group, responsible for mobile chips, saw a 19% sequential increase in revenue, Smith said.

According to iSuppli's preliminary estimates Tuesday, global PC shipments totaled 73.8 million units in the third quarter, up 9.8% from 67.2 million in the second quarter this year. However, shipments declined by 6.7% compared to the same quarter last year. Intel chips go into the majority of those consumer PCs.

Enterprise spending was weak, Otellini said on the call, with companies shutting down spending on client hardware. Businesses haven't refreshed their PCs in four to five years now and older PCs cost more to maintain, according to Otellini. A refresh cycle could come next year, he said.

Microsoft's upcoming Windows 7 OS could also be a reason to buy new PCs, though that could take time, Otellini said. Corporations need a qualification period to adopt the new OS in their environment. The evaluation could happen this year with system purchases beginning in 2010, Otellini said.

Spending on servers fared better, with companies looking to swap out older servers for better-performing systems. Shipments of Nehalem-based chips were strong in data centers as companies looked to consolidate servers and cut energy costs, Otellini said. Nehalem chips could be a profit driver for Intel as companies open up their wallets to upgrade hardware, Otellini said. Revenue for the digital enterprise group -- responsible for server and desktop chips -- grew by about 14% sequentially.

The company's next major server chip, the eight-core Nehalem-EX, will ship by the end of this year, Otellini said. The chip could help Intel encroach on the fault-tolerant server market, against chips including its own Itanium, Sun Sparc and IBM Power. Margins in this area are good but the "bad part" is that volumes tend to be lower, Otellini said.


Copyright © 2009 IDG Communications, Inc.

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