Resilient demand for PCs and servers helped Intel Corp's margin and revenue forecasts blast past Wall Street expectations, allaying fears of a technology spending slowdown and sending its shares surging nearly 8 percent. Intel set an upbeat tone for the industry's earnings season, boosting sector stocks from Microsoft to Cisco and Standard & Poor's 500 stock index futures, suggesting a strong open for Wall Street on Wednesday. The world's top chip maker expects a record gross margin of 67 percent for the third quarter, give or take a couple percentage points. It foresees revenue of $11.2 billion to $12 billion, surpassing analysts' target of $10.9 billion. [Intel earnings graphic: link.reuters.com/gyz37m] "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 Chief Financial Officer Stacy Smith held out hope for sustained gains in spending to upgrade and replace aging hardware. Chief Executive Officer Paul Otellini added on a conference call with analysts that inventory remained "lean". Gleacher & Co analyst Doug Freedman said that 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," Smith told Reuters. Shares in Intel rose 8 percent to $22.62 in extended trading. Fellow bellwethers Microsoft and Cisco rose more than 2 percent after-hours. Intel's arch-foe, Advanced Micro Devices Inc, climbed 5 percent. And Texas Instruments climbed 2.3 percent.
"This is really the first quarter we've seen the corporate buyer come in and participate," said money manager Patrick Becker Jr, principal with Becker Capital Management Inc. "It lends some credence to the theory that maybe companies aren't hiring, but they are spending money on product enhancement through systems and software," said Becker, whose company manages $2.2 billion in assets and holds 1.5 million shares of Intel.
PILING BACK IN
Some analysts said the tech rebound was driven in part by over-selling, as investors reacted to second-half uncertainty. Shares of Intel, whose chips are used in the majority of the world's personal computers, have slid alongside those of other chipmakers in recent months, as investors fret about a potential build-up in inventories industrywide as well as concerns about the effect of the European debt crisis. Ahead of the earnings release, analysts had estimated Intel was trading at around 10-11 times 2010 earnings, below the historical average of the past few years. "It's reminding the market that basically stocks are too cheap. The market was trading Intel at a pretty compressed multiple," said Nick Kalivas, vice president of financial research at MF Global. "The fact that they are raising capital spending is confirming this idea that capacity is tight and there's some pretty good momentum," he added. "It's going to be a data point that causes people to flip from probably extreme pessimism to extreme optimism." Intel posted net income of $2.9 billion, or 51 cents a share, versus a net loss of $398 million, or 7 cents a share, in the second quarter of 2009, when Intel's results included a $1.4 billion fine by the European Commission.
Analysts had expected earnings of 43 cents per share in the second quarter. Revenue in the three months ended June 26 totaled $10.8 billion, up from $8 billion in the year-earlier period and above the $10.25 billion expected by analysts polled by Thomson Reuters I/B/E/S. And its gross profit margin in the second quarter was 67 percent, exceeding the 64 percent expected by analysts. "In a quarter where people expected relatively strong performance, they beat that pretty handily and set a good forecast," said Charter Equity Research analyst Edward Snyder. "They seem unaffected by the negativity that's impacting equities,
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