Intel's Strong Quarter Fuels Optimism for Tech Sector

Demand for consumer technology is back -- and companies and governments seem ready to go shopping for tech again too. Intel (INTC), the world's largest chip-maker, handily beat Wall Street earnings expectations Thursday, reporting a blockbuster fourth quarter and forecasting a strong first quarter of 2010. The results are further evidence that the tech industry is on the leading edge of the U.S. economic recovery, and offer reason for optimism heading into tech-earnings season. Intel's results were fueled by strong consumer tech spending -- a welcome development for the economy -- amid signs that corporate technology spending might be set to finally pick up.In an earnings preview Thursday morning, my colleague Matthew Scott nailedIntel's strong report, which sent the company shares up over 1% in after-hours trading.

"The company has successfully increased its market share in the consumer segment, while maintaining its dominance with businesses by developing faster, more powerful servers," Scott wrote. "Consumers propelled the PC market in the fourth quarter, boosted by holiday notebook and netbook purchases, lean inventories and stronger than anticipated demand."

Intel's announcement did contain one sour note: the chip-maker warned that while consumer technology spending has picked up, businesses have yet to substantially increase their tech spending, as many companies remain mired in the worst recession in decades.

"The quarter is not a business spending story," Intel Chief Financial Officer Stacy Smith said.

That could begin to change soon. Many industry watchers believe that corporate and government IT spending will return this year, pushing the sector to handsome profits. On Tuesday, research firm Forrester, a tech research company, predicted that 2010 will see a big increase in tech spending by companies and governments.

In 2009, companies drastically curtailed their spending on IT products, preferring to use existing technology amid a deep recession and a crippling credit crunch that continues.

But the hardware and software markets could be on the verge of a massive refresh, as companies around the world stop putting off capital investment on technology and upgrade to Windows 7, Microsoft new operating system. Many firms will invest in new hardware, the better to take full advantage of the new system.

Intel is poised to reap the benefits of that new spending, with a new line of microchips it unveiled at last week's Consumer Electronics Show in Las Vegas. It's important to remember that Intel's strong quarter came largely on the back of increased consumer spending on PCs. Once enterprise clients join the party, it'll be off to the races.

Intel offered a revenue outlook of $9.3 billion to $10.1 billion for the first quarter of 2010, putting it well above the $9.34 billion average that Wall Street analysts are expecting, according to a poll by Bloomberg.

In the fourth quarter of 2009, Intel reported revenue of $10.6 Billion, up 28% over last year, and profit of $2.3 billion, or 40 cents per share. Wall Street analysts had been expecting 30 cents per share. The chip-maker reported record gross margins of 65%, up from 53.1% last year. Intel reported a net gain of $96 million from equity investments, topping its expectations, and said its effective tax rate was 12 percent, versus the company's revised expectation of 20 percent.

The company results were also impressive given that they came in a quarter that saw a $1.25 billion legal settlement with smaller rival AMD. The two companies had been locked in a bitter series of legal battles for decades. But Intel faces other legal challenges. New York Attorney General Andrew Cuomo and the Federal Trade Commission have both launched investigations into Intel on antitrust grounds. The AMD settlement seems to have done little to change that.

Still, the company has a lot to feel good about.

"Intel's strong 2009 results reflect our investment in industry-leading manufacturing and product innovation," Paul Otellini, Intel's president and CEO. "This strategy has enabled us to generate unprecedented operating efficiencies while growing our traditional businesses and creating exciting new market opportunities, even in difficult economic times."

Otellini said that Intel's "ability to weather this business cycle demonstrates that microprocessors are indispensable in our modern world."
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