Technology

Intel's Happy Earnings Surprise


Record orders for Intel's PC chips raised hopes of solid second-quarter earnings news from Google, IBM, and Microsoft

The sky over the tech landscape isn't falling after all. Amid growing concerns that the global economic malaise is worsening, a surprisingly upbeat second-quarter earnings report from Intel (INTC) reflects a better-than-expected outlook for tech spending.

Intel, the biggest maker of computer chips, said on July 15 that net income for the three-month period ended June 28 soared 25%, to $1.6 billion, or 28¢ a share, as sales rose 9.1% and profit margins widened. Thanks to record orders for notebook PC chips and higher microprocessor shipments than could be expected this time of year, "we see continued healthy demand for our products" in coming quarters, Chief Executive Officer Paul Otellini said in a statement.

His remarks were a welcome respite from the barrage of headlines indicating a deepening mortgage crisis, rising fuel prices, increasing joblessness, and a drop in consumer sentiment to its lowest level in almost three decades.

Intel's stock had been under pressure in the runup to its quarterly report, since some investors feared the report would show consumers and corporations curtailing PC purchases. "Everybody should be relatively happy with where the numbers are," says Avi Cohen, head of research at Avian Securities. "They show the world is not coming to an end—at least not yet." Intel shares rose 1.2%, to 20.89, in extended trading after the figures were released.

Big Week Ahead

Despite Intel's optimistic outlook, investors will scour earnings reports from other tech companies in coming days for signs of whether the slowdown is wending its way into other pockets of the industry. Hard-drive maker Seagate Technology (STX) on July 15 said resilient demand for PCs and consumer electronics helped boost its sales 5.6%, to $2.89 billion, and fueled a double-digit percentage jump in shipments in the most recent quarter. Yet net income tumbled 70%, to $160 million, after the company suffered "execution issues," CEO Bill Watkins told investors.

On July 17, IBM (IBM), Google (GOOG), and Microsoft (MSFT) are due to release financial figures for the period ending in June.

Even Intel's news wasn't all good. The Santa Clara (Calif.) company acknowledged that memory-chip sales remain weak. Intel also suggested that consumers may be getting more frugal with their purchases. Gross margins rose to 55.4% from 53.8% but were below the midpoint of Intel's projected range, as people opted for lower-priced notebooks.

With its outsized share of the chip market—the company commands close to 80%—Intel may be better insulated against macroeconomic woes than other tech companies, analysts say. "We have highlighted Intel as a more resilient pick" as the earnings-reporting season kicks off, Lehman Brothers (LEH) chip analyst Tim Luke wrote in a July 14 report to clients.

Help from Higher-Priced Notebooks

Tech-sector stocks have slumped this year as onetime darlings, including VMware (VMW), Sun Microsystems (JAVA), and Advanced Micro Devices (AMD) have all signaled that demand for their products is weakening.

Otellini said Intel has been carefully watching global economic conditions and monitoring PC makers' inventories for signs of a slowdown, but has not seen any indication of one.

Intel executives believe the picture should improve this year. The chipmaker signaled that it expects margins to improve nearly three percentage points, to 58%, on revenue of about $10.3 billion in the third quarter as new, higher-priced notebooks based on Intel's recently introduced Centrino 2 processors hit store shelves (BusinessWeek.com, 7/14/08).

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.

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