Intel's success signals a 'refresh' for tech industry

Chip maker is a bellwether for the tech industry and for the U.S. economy in general

When Intel Corp. posted its best quarter ever this past week, industry watchers noted that the good news extends beyond the chip maker and touches on the high-tech industry and possibly the U.S. economy.

Intel, on the strength of strong server chip sales, reported hefty earnings for the second quarter of fiscal 2010. The chip maker reported net income of $2.9 billion for the quarter ended June 26. That is a turnaround from the $398 million loss the company reported in the same quarter a year ago.

The results topped even Intel's own expectations, and its gross margins came in at 67%, passing Wall Street's expectations of 64.1%.

And that, according to various analysts, can only be good news for the tech sector and the economy at large.

"We appear to be at the front end of what could be a strong refresh, which is very good for the technology segment in general," said Rob Enderle, an analyst with the Enderle Group. "This reflects a rising tide, which could raise all boats. Intel is a bellwether for the technology segment. The entire economy is based on things other than technology though, so we need to see other segments, and hiring in general, improve as well. But this is one of the strongest indicators that things could be improving."

Industry analyst firms have been forecasting strong microprocessor and PC sales for 2010.

IDC analysts last month said they expect nearly 20% growth in global PC sales this year. And in January, IDC predicted the PC chip market was on its way back after the dark days of the recession.

The uptick in expectations is linked to an easing of economic troubles , coupled with renewed consumer and corporate buying to give the PC industry a much-needed boost. While the once-growing netbook market is slowing, there's been renewed vigor in the desktop market, with that segment of the industry showing its first yearly growth since the second quarter of 2008.

Intel's record-breaking second-quarter numbers are the latest indication that the chip industry may be pulling itself out of the economic doldrums.

"The demand environment for PC processors has improved because enterprises are opening up IT spending in servers and corporate clients, particularly notebooks," said Shane Rau, an IDC analyst. "Intel is the biggest semiconductor company, and semiconductors are in so many devices that people buy now, so there's a strong tie to the GDP."

Last October, Intel CEO Paul Otellini said companies that had held tight to purse strings during the worst of the recession would have to relax their grip so they could replace aging desktops, laptops and servers. According to Otellini, the economy had already hit bottom, and corporate executives would soon have to start spending again.

Intel rival Advanced Micro Devices, meanwhile, didn't show the same success that Intel did. Last Thursday, AMD reported a net loss for the second quarter of fiscal 2010, breaking a streak of two consecutive quarters of profitability.

Enderle said AMD's slip isn't a sign of overall industry trouble. It's simply not the bellwether that industry heavyweight Intel is.

"AMD actually beat the street. The problem is they are bleeding on the server side a bit because Intel is executing so well there," he added. "On the desktop and mobile side they are actually stronger then they have ever been... Intel is the bellwether for this segment, but, once again, AMD's desktop numbers were vastly better than expected and their hit was competitive and not related to a market problem, so their results also support a recovery."

Dan Olds, an analyst with The Gabriel Consulting Group, said the key point to be made here is that Intel is doing well, and AMD is hanging on, because companies are starting to spend again. And that's just what the economy needs to happen.

"First, companies that have postponed technology purchases due to the economy are now moving ahead with at least some of their plans," Olds said. "Secondly, corporations are using technology to cut their costs in other areas, and companies like Intel and others are the beneficiaries. This doesn't mean that we're necessarily coming out of the recession, but, for technology companies, it means that things ain't so bad."

Read more about processors in Computerworld's Processors Topic Center.

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Sharon Gaudin

Computerworld (US)
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