Intel's Q2 shines: Server chips trump PC, tablet worries

Chip giant Intel delivered a better-than-expected second quarter as it rode an upgrade cycle for corporate PCs and data centers.

Chip giant Intel delivered a better-than-expected second quarter as it rode an upgrade cycle for corporate PCs and data centers.

Intel reported second quarter earnings of $3 billion, or 54 cents a share, on revenue of $13 billion, up 21 percent from a year ago. Non-GAAP earnings were 59 cents a share. Wall Street was looking for earnings of 51 cents a share on revenue of $12.83 billion. Intel's gross margins of 61 percent in the second quarter were in line with expectations.

Going into Intel's earnings report, analysts had significant questions about how the company would handle slowing PC sales and the decline of netbooks. Indeed, Intel's Atom revenue was $352 million, down 15 percent from a year ago. That revenue tally indicates netbooks are losing out to tablets. In addition, Intel is now landing tablet design wins.

Intel executives have been missing about the excessive focus on the company's tablet and smartphone positioning vs. ARM-based rivals. Intel's argument is that it is already a mobile device player because it powers all the data centers that send content to them via cloud computing.

The quarter was carried by Intel's server chips and corporate demand. In other words, data center upgrades trumped any worries about anemic PC sales. In a statement, Intel CEO Paul Otellini said:

“Strong corporate demand for our most advanced technology, the surge of mobile devices and Internet traffic fueling data center growth, and the rapid rise of computing in emerging markets drove record results."

In prepared remarks, Intel CFO Stacy Smith said:

From a market standpoint, the quarter played out as expected with strength in emerging markets and enterprise, offset by weakness in the mature market consumer segment. We continue to benefit from the strength of our product line-up as mix within both servers and clients was better than expected. Demand for our latest product, Sandy Bridge, remains strong and is the fastest ramping product in our company’s history.

Stacy expanded upon that point during the quarterly investors conference call, noting that PC supply inventories are healthy but did not grow this quarter:

The explosion of devices that compute and connect to the Internet continues to drive the build out of the cloud and fuel our Data Center Group growth. Our embedded business is growing at a rapid pace as the demand for both performance and low power from the Internet drives architectural conversions for Intel. Emerging markets already make up more than half of our revenue and as the technology that we sell becomes more affordable to billions of consumers, we will continue to see robust growth from emerging markets. These are the market forces that drove first half revenue growth of 23% from the first half of 2010. And these are the market forces that give us confidence as we enter the second half of 2011.

As for the third quarter outlook, Intel projected gross margins of roughly 64 percent with revenue of $14 billion, give or take $500 million. Wall Street was expecting gross margins of 63.79 percent with revenue of $13.46 billion and earnings of 58 cents a share.

For 2011, Intel said gross margins will be 63 percent with capital spending of $10.5 billion.

By the numbers for the second quarter:

  • Intel's PC client group delivered operating income of $3.28 billion on revenue of $8.32 billion.
  • The data center unit had operating income of $1.2 billion on revenue of $2.44 billion.
  • Intel's software group, led by McAfee, had an operating loss of $14 million on revenue of $511 million.
  • Other Intel architecture group, mobile primarily, had an operating loss of $33 million with revenue of $1.39 billion.
  • Asia-Pacific revenue was $7.39 billion, or 57 percent of revenue. Americas revenue was $2.9 billion, or 22 percent of sales. Europe was 12 percent of revenue and Japan chipped in 9 percent.
  • Intel ended the quarter with total cash of $11.53 billion.