Intel easily topped analysts' estimates in its first quarter Tuesday, raking in $2.73bn (£1.72bn), or 78 cents a share, on sales of $8bn.
First Call consensus expected the world's largest semiconductor manufacturer to earn 69 cents a share in the quarter.
Ahead of the earnings report, Intel shares closed up 6 to 129. Net income, excluding acquisition-related costs, was $3.1bn, or 88 cents a share, up 52 percent from the year-ago quarter.
Company officials said the Internal Revenue Service had closed its examination of the company's tax returns up to and including 1998. As part of this closure, the company reversed previously accrued taxes reducing the quarter's tax provision by $600m, or 17 cents a share. Exluding the tax gains, Intel earned 71 cents a share in the quarter.
The $8bn in sales represents a 13 percent improvement from the year-ago quarter when it earned $2bn, or 57 cents a share, on sales of $7.1bn. However, sales were off 2 percent from the $8.2bn it recorded last quarter.
"Demand in the first quarter was stronger than we expected at the beginning of the year and continues to be stronger as we enter the second quarter," said CEO Craig Barrett in a prepared release. "We also expect a strong second half, and are accelerating our investments in capacity to meet future demand."
Demand was so strong in the first quarter that the chipmaker was completely sold out of some versions of its Pentium III microprocessors.
"We expect PC unit growth will accelerate in the second half," said analyst Mark Edelstone of Morgan Stanley Dean Witter, in research note. "Intel is in a very good position to benefit from an uptick in demand."
Barrett went on to say Intel's ramping up its 0.18-micron technology at five manufacturing sites and will expand to eight sites by year's end.
Last quarter, Intel earned $2.4bn, or 69 cents a share, on sales of $8.2 bn.
Looking ahead, Intel says it expects sales to remain relatively flat at around $8 billion in its second quarter.
Gross profit margins will be flat to down a point from the 63 percent it enjoyed in the first quarter, primarily due to the ramp costs associated with its 0.18-micron manufacturing sites.
During the quarter, the company repurchased a total of 9.8 million shares of common stock, at a cost of $1bn, under an ongoing program. Since the program began in 1990, the company has repurchased 669.7 million shares at a total cost of $19.2bn.
Intel shares moved up to a 52-week high of 145 3/8 in March after bottoming out at 50 1/8 in June.
Thirty-five of the 39 analysts covering the stock maintain either a "buy" or "strong buy" recommendation.
First Call consensus expects Intel to pocket $2.96 a share in the fiscal year.
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