Intel's Third Quarter Results Break Records, Smash Expectations

At a time when economists and TV pundits are still more likely to characterise the economy as "coasting along the bottom" rather than "recovering," Intel's Q3 results have rocketed past the predictions of even the most optimistic Wall Street analysts. The company's Q4 predictions are similarly rosy—if there's ever been a time when it's been good to be king, the company clearly feels it's now. The very strength of Santa Clara's announcement fueled analyst worries that meteoric results in Q3 could quickly fall to earth in Q4, a worry Intel has been quick to assuade.

First, let's do the numbers. For the third quarter of 2009, Intel reported total revenue of $9.4 billion (up $1.4 billion from Q2) and a net income of $1.9 billion (up $807 million quarter-on-quarter.) The company's gross margin was 57.6 percent, up almost seven percentage points from Q2. The 17 percent growth in revenue from Q2 to Q3 broke records that have stood for over thirty years, but we are still in a recession—year-on-year revenue was down eight percent, although this is still stronger from the year-on-year declines of 26 percent and 15 percent that Intel recorded in the first and second quarters.

Intel attributes the growth to a confluence of factors that includes tighter inventory management, excellent yields at both 45 and 32nm, strong demand for Nehalem across both consumer and enterprise product lines (although the enterprise segment remains weak overall), continuing demand for Atom, and growth in the mobility segment. The manufacturer made a point of noting that mobility demand grew more than demand for Atom-based products and emphasized that while it remains focused on Atom and the new markets it believes the processor will open long-term, current netbook sales are "additive" to the company's business, as opposed to a core driver.
Analyst concerns were aimed at the question of whether or not Intel had outshipped actual OEM demand in the third quarter. Santa Clara addressed these concerns both directly and indirectly (PDF) at multiple points throughout the conference call. According to Paul Otellini, company CEO, "At our large OEM customers, component inventories are roughly half the peak level of late last year and have been approximately flat throughout 2009," Otellini said. "Much of this is due to our implementation of inventory hubs, where we hold the inventory for our large OEM customers who then pull inventory only as needed." (A full transcript of the call may be found here).

Intel is seen as a bellwether of the tech industry; the company's strong results and equally positive expectations for Q4 could be signs that the IT economic recovery is beginning. At the same time, however, Intel noted that the market is being driven by consumer demand for mobile products in particular far more than any enterprise recovery. As a result, there's a higher chance that an unforseen economic shock could take the legs out from under the burgeoning lift. Even if no such shock occurs, the fact that the economic momentum is moderately confined to a particular area means that the benefits of that shift won't be evenly distributed. The rising tide, in this case, will lift the boats of those OEMs and device manufacturers positioned to take advantage of it.

As for AMD, we'll find out tomorrow, but there's not a lot of reason to think Intel's good fortune filled its competitor's sails. AMD's share of the mobile market remains just a fraction of Intel's, and the company's Phenom II faces increased pressure from Intel's Lynnfield/Core i5 platform. The best-case scenario for AMD (and I'll personally be eating crow on this tomorrow if I'm wrong) is that the company reports flat sales for Q3 after seasonal trends are taken into consideration, while the shift to 45nm reduces its cost-per-processor. If all goes well, AMD will report that it narrowed the gap between its net revenue and operating loss, but CEO Dirk Meyer won't have an easy time returning the company to profitability by Q4.