Intel Beats Expectations, Upbeat About Tablets

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October 13, 2010 11:45 AM EDT

Intel beat its forecasts in its latest quarter, despite slowed revenue growth and pressure from tablets.

In August, the semiconductor giant issued a warning that its third-quarter revenue would fall below prior expectations. The forecast between $11.2 and $12 billion was downgraded to $11 billion. In its latest earnings report, Intel announced revenue of $11.1 billion.

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Operating income was $4.1 billion, net income $3.0 billion and earnings per share was 52 cents. That beat analysts' expectations of 50 cents per share. The company's gross margins of 66 percent were near the revised expectations of 65 to 67 percent.

In major product groups, such as the PC Client and Data Center Group, revenue was only up three percent over the previous quarter. After a huge start to the year-- Intel reported a record second quarter -- this kind of fall-off is not shocking, said Dunham Winoto, analyst at Avian Securities.

"Typically what you see from Q2 to Q3 in notebook shipments is low to high teens in growth, because of the back to school sales. This quarter we saw high single digits, which gives you an idea of how muted things are," he said.

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A combination of growth in tablets and the record first half would make any results pale by comparison. "It was hard to keep up the momentum they had, they were a victim of their own success," Winoto said.

Doug Freedman, analyst at Gleacher and Company, says Intel's move to lower expectations was a bid to make the stock more appealing to potential investors. "Traditionally you want to buy when the margins are low," Freedman said. "When the stock is peaking, you don't buy Intel. It's always easier to buy a stock when the bad news is out before the quarter ends, not after."

Patrick Wang, analyst at Wedbush Securities, says the drop off for Intel was mainly due to back to school sales not meeting expectations. He said he was surprised Intel has raised expectations for the next quarter. For the fourth quarter, Intel has its revenue pegged at $11.4 billion, plus or minus $400 million. It has its gross margin at 67 percent.

"I think longer term Intel is a good buy," Wang said. "However, things are challenging right now. It comes down to the holiday season, if the holiday season is as poor as back to school, it's going to be another round of cuts and another preannouncement."

While some analysts say tablets have caused problems for Intel's notebook business on the consumer side, Wang does not think this is the case. "Their lowered expectations were not because of tablets, right now they represent a low end on the margins."

In a conference call to investors, Intel chief executive officer Paul Otellini said tablets were not cutting into notebook and PC sales. "The dominant factor is the softness in the consumer market," he said.

Otellini said Intel thinks tablets are exciting and credited Apple for reinventing the category. He said the company will utilize its own assets to win the segment, and Intel chips will start appearing in tablets before long. "Broadly and profitably, the tablet segment will be additive and not take away from any of our current businesses," Otellini said.

This article is copyrighted by International Business Times, the business news leader