Intel Keeps Hope Alive

The chipmaker beats Wall Street estimates and says demand remains strong worldwide. The stock holds steady after hours. Frank Curzio recaps the market in The Real Story (above).
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Updated from 5:04 p.m. EDT

SAN FRANCISCO --

Intel

(INTC) - Get Report

beat Wall Street's sales expectations in the second quarter, thanks to above-seasonal microprocessor shipments, and delivered a strong outlook for the current quarter.

Intel's results once again flew in the face of concerns that global demand for the PCs is stalling.

But some of the report's small print about Intel's business, including the quality of Intel's EPS and a hint of weakness in the company's gross margin, appeared to be keeping Intel shares in check in extended trading Thursday.

The Santa Clara, Calif., chipmaker posted sales of $9.5 billion in the three months ended June 28 -- at the high end of its forecast and ahead of the average analyst expectation of $9.31 billion.

At this time last year, Intel had sales of $8.7 billion.

"As we enter the second half, demand remains strong for our microprocessor and chipset products in all segments and all parts of the globe," said CEO Paul Otellini in a statement.

Intel backed up the comments with a strong sales forecast, estimating sales between $10 billion and $10.6 billion in the current quarter, well ahead of the $10.07 billion expected by analysts polled by Thomson Reuters.

The report comes as fear has been building on Wall Street that global demand for PCs may be weakening, as challenging economic conditions and rising energy prices cause consumers and businesses to cut on spending.

As he had in the last several quarters, Otellini told investors in a post-earnings conference call on Thursday that business conditions have not soured for Intel.

"We are very aware of global economic issues," Otellini said, stressing that orders for Intel's products continue to hold up and meet internal forecasts.

In the second quarter, Intel had record shipments of server processors to computer resellers, demonstrating that "demand for our products coming from small and medium business around world continues to be healthy," Otellini said.

Intel notched strong server sales in the quarter even as rival

Advanced Micro Devices

(AMD) - Get Report

finally brought its Barcelona chip to market. AMD is scheduled to deliver its quarterly report on Thursday.

Intel's total server and desktop processor sales increased 13.7% to $4.1 billion in the second quarter, while sales of notebook processors were up 14% year-over-year at $2.7 billion.

However, the brisk sales of notebook processors were marred somewhat by the popularity of lower-priced chips which weighed on Intel's profit margins.

The company's gross margin increased to 55.4% in the second quarter, vs. 53.8% in the first quarter. The margin was below the midpoint of Intel's expectation of 56%, plus or minus a couple of points, due to strong demand for low-cost notebook PCs.

Shares of Intel, which had run up in the past few sessions, were up 16 cents in recent after-hours trading to $20.87.

Intel posted net income of $1.6 billion, or 28 cents a share, vs. $1.3 billion, or 22 cents a share in the year-ago period. Analysts were expecting EPS of 25 cents.

Intel said its results included $96 million in restructuring and asset impairment charges, instead of the $250 million in charges it previously expected. And the company said its tax rate during the quarter was only 31%, instead of its previous expectation of 33%.

It wasn't immediately clear how these items affected Intel's EPS vs. Wall Street estimates.

American Technology Research analyst Doug Freedman said the company's top-line guidance, as well as Intel's projected gross margin of 58% in the third quarter, were all solid.

But he notes that the company's projection of a $30 million loss in the current quarter from the equity investments and an "other" category is unusual, and offsetting the otherwise positive financial forecast.

"This isn't delivering you EPS upside when you would think it would," said Freedman.

It's not clear what is behind the loss in the other category, although Intel's recently formed NOR flash memory joint venture with

ST Microelectronics

(STM) - Get Report

, dubbed Numonyx, may be one of the factors.

Prices for NOR flash memory, as well for the NAND flash memory which Intel produces through a separate joint venture with

Micron

(MU) - Get Report

, have been in sharp decline for more than a year.

One promising new area of growth for Intel in the months ahead is the company's new Atom processor.

Designed for bare-bones "netbook" PCs, the Atom processor is benefitting from demand that is running far ahead of initial projections, Intel executives said. The company's sales projections for Atom are five or six times higher than what it anticipated in November, and 10% higher than just a month ago, said Otellini.

"We've been increasing our planned production of atom for this year and next year every 40 days since last November," Otellini said.