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Intel Crushes Expectations in Strong Q3

Intel earnings

Intel (NASDAQ: INTC) today blew past analyst projections to report sales and earnings very close to 2008 levels -- a period before the economic downturn began in earnest.

Even better, it gave fourth-quarter projections that put it back over the $10 billion range for the first time in five quarters.

The chip giant reported after markets closed on Tuesday that it earned $1.9 billion, or $0.33 per share, on revenue of $9.39 billion in the third quarter. That closes the gap with Q3 2008, its last solid quarter before the economy fell into severe recession, when it earned $0.35 per share on revenue of $10.2 billion.

A consensus estimate from analysts who follow Intel by Thomson Reuters had forecast Q3 earnings of $0.28 per share on sales of $9.037 billion.

Even better, Intel gave guidance of fourth-quarter sales of $10.1 billion, give or take $400 million, with a gross margin at 62 percent, plus or minus 3 percentage points.

This would seem to indicate despite a significant increase in purchasing by OEM partners, those sales were not cutting into future purchases or that there is a fear of an inventory stockpile.

Intel is a major bellwether by any measure in the tech sector, as its chips are the basic components in a wide variety of technology products. It's also the first major technology company to report earnings in the year's third calendar quarter, which sets the stage for the rest of the industry to follow -- or fall short.

"We are very pleased with the company's third quarter," said CEO Paul Otellini during a conference call with business analysts. "The strong financial performance is the result of having the right products, at the right cost, at the right time for a recovering global economy. The strength in our business remains primarily consumer-driven with broad-based demand across all geographies."

For the quarter, the company's Mobility group saw revenue rise 19 percent, the Digital Enterprise Group was up 14 percent and Intel Atom microprocessor and chipset revenue was up 15 percent, all sequentially.

Gross margin was 57.6 percent, higher than the company's expectation. Increases in gross margin come when Intel's fabs are running at higher utilization, as idle plants only cost money, rather than earning it by making chips.

The company also said that average selling prices (ASP) for microprocessors were slightly down sequentially and inventories dropped $315 million sequentially. CFO Stacy Smith promised analysts on the call that both would go up, although he could only control one.

ASPs, he said, would rise when enterprise spending increases and offsets the consumer business, where there is greater ASP pressure. But inventories are within his power to increase.

"Inventory is leaner and we were surprised at some of the requests for supplies. Would like to get more inventory in place," Smith said. "I plan to grow inventories in the fourth quarter."

Inventory with customers remains low, reflecting good inventory management and strong sell-through, but also a new system Intel has in place called the Inventory Hub, which gives visibility in the supply chain, letting Intel know how much is being bought and by whom on a daily basis.

This quarter, Intel began volume production of 32 nanometer parts, which will begin hitting the market in January. Thanks to the design of their fabs, many are able to do 45nm parts, Intel's current product, and 32nm at the same time. Atom processors account for $415 million in the quarter and $1 billion in revenue total since their release.

As such, Intel is getting the most out of its factories. The 58 percent gross margin is up by seven percentage points from Q2 and is the largest sequential Q3 revenue growth in the last 30 years of the company, said Smith.

Intel now sits on $12.9 billion in cash and short-term investments, $1.6 billion higher than in Q2. Intel has been on a cost-cutting tear lately, but Smith hopes that's over.

"We're through the cutting phase of our efficiency efforts and hopefully into the growth phase of our efficiency efforts," he said.

He also said Intel's NAND flash business is doing better and Intel plans to increase the capacity of its solid-state drives, which are currently 64GB and 128GB.

Update adds comments from the conference call.