Technology

Intel Aided by Consumer PC Buying


Results from the world's largest computer chipmaker vindicate CEO Paul Otellini's remarks three months ago that the PC market had bottomed out

Even as companies remain on the tech sidelines, consumers are once again comfortable buying computers. The contrasting appetites worked out well for PC chipmaker Intel, which on July 14 reported solid second-quarter results.

The numbers ratified remarks three months earlier by Intel (INTC) CEO Paul Otellini, who at the time said the PC market had hit a bottom. After reporting second-quarter sales of $8 billion, which beat analysts' forecasts for $7.28 billion, Intel said current-quarter sales would come in at about $8.5 billion, plus or minus $400 million. Analysts had forecast $7.8 billion in revenue. Intel also said it expects gross margins, an indicator of profitability, to be 53%, plus or minus two points. Second-quarter gross margin was 50.8%.

During a conference call with financial analysts, Otellini credited much of the good news to a surprisingly healthy environment for PC sales to consumers in both the U.S. and Asia. Sales in China, he said, were especially strong, owing in part to government stimulus efforts in that country. "From a consumption standpoint, consumer purchases led the way with a strong rebound in mobile processor shipments," he said.

Dell Hurt by Weak Demand

At the same time, PC sales to corporate customers remained weak, he said. Companies are holding off on computer purchases in part due to the recession. They're also waiting for an upgrade to Microsoft's (MSFT) flagship operating system, Windows, due in October, says Ashok Kumar, an analyst at Collins Stewart (CLST.L).

Intel's results came a day after Dell (DELL) told analysts its results were hurt in part by lackluster corporate demand. Dell Chief Financial Officer Brian Gladden told financial analysts that while orders are stabilizing, they remain significantly below year-ago levels. Large and small companies are refraining from placing orders. And while consumers are spending, pricing pressures are hurting margins.

Intel stock soared by more than 7% in extended trading after having closed at 16.83, up 34¢, or more than 2% during the regular trading session. Analysts were cheered by Intel's results and the positive tone of its guidance. "Consumers are buying PCs," says Doug Freedman of Broadpoint Research. "That's one strong takeaway."

Excess Inventory Gone

It wasn't just PC sales that helped Intel. Sales of chips for servers were "better than expected" following Intel's launch of its latest generation of server chips, code-named Nehalem earlier this year, Otellini said. The new chip accounted for one-third of sales of servers that use two or more processors, and is expected to account for more than half of that business by August.

Intel also cleared up concerns over increased stockpiles of unsold chips that had dragged down results in past quarters. "The supply chain has cleaned out all the excess inventory," Freedman says. Otellini told analysts that the number of chips sold via third-party distributors to smaller PC makers has started to "refill to normal levels" after falling substantially in the fourth quarter. "The general view of our customers is to build up inventory in anticipation of a stronger second half of the year," Otellini said.

Intel had blamed an aggressive reduction in the amount of chips that PC makers maintain on hand for the dismal results it reported in January for its fourth quarter of 2008.

Legal Troubles Not Over

Good results aside, the report reflected a $1.45 billion charge stemming from the largest-ever antitrust fine levied by the European Commission after a nine-year investigation. The company reported a $398 million net loss, or 7¢ per share. Excluding the fine, Intel reported a net income of $1 billion, or 18¢ a share. It was Intel's first quarterly loss in more than two decades.

In the wake of the EC fine, which stemmed from Intel's alleged behavior toward rival Advanced Micro Devices (AMD), the mood in Washington is clearly hardening against allegedly anticompetitive practices in the technology industry. The Federal Trade Commission is already investigating Intel. While Intel's $11.6 billion cash hoard is sufficient to withstand another billion-plus fine, it doesn't want more fines to sap quarterly profit. Freedman notes, "I don't think Intel's legal troubles are over."

Hesseldahl is a reporter for BusinessWeek.com.

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