Intel raises sales forecast

New guidance strengthens investor confidence

Fueling hopes that the hardware sector will bounce back from the recession in the second half of the year, Intel Friday said its expectations for third-quarter revenue are higher than its prior forecast due to stronger-than-expected demand for processors and chipsets.

Intel said it expects third-quarter revenue to be US$9 billion, "plus or minus $200 million," compared to its previous guidance of $8.5 billion, plus or minus $400 million. Even at the low end of the current estimate, Intel would beat expectations of analysts polled by Thomson Reuters, who are forecasting revenue of $8.55 billion.

The prior forecast was issued during Intel's last quarterly financial results statement on July 14.

Intel also said that it expects its gross margin for the current quarter to be in the "upper half" of the previously forecast range of 53 percent, plus or minus two percentage points. Gross margin is the difference between revenue and cost of sales, a key indicator of the financial stability of a company.

Intel is scheduled to report third-quarter results on Oct. 13. The company stressed that before then, the economic outlook could change, and detailed a variety of risks in its Friday statement. "Ongoing uncertainty in global economic conditions poses a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news," Intel said.

However, the increase in Intel's revenue guidance for the quarter is in line with higher expectations for components and hardware on the part of analysts and other vendors.

Worldwide, the outlook for the chip market is better than it appeared a few months ago, according to Gartner. In a report released earlier this week, the market research company forecast global chip revenue to reach $212 billion this year. Though that figure is 17.1 percent lower than last year, it would be higher than Gartner's previous forecast, which predicted a 22.4 percent decline.

Global demand for PCs, mobile phones and various consumer electronics is higher than what was expected earlier in the year, Gartner said.

Intel could benefit as chip sales pick up from new product launches this quarter, wrote analysts from financial analyst firm FBR Capital in a research note. There is a growing momentum surrounding PCs with lower prices, such as netbooks and ultrathin laptops, and many products are due out from top PC makers during the quarter. That could have a positive effect on Intel's chip sales, the analysts wrote.

The company could also see some "slight benefits" from the upcoming launch of Microsoft's Windows 7 OS, due out on Oct. 22.

The chip maker earlier in the quarter released low-power chips for ultrathin laptops, a new class of thin and light laptops that bridge the gap between netbooks and mainstream laptops. Intel is ramping up chip shipments to meet the expected ultrathin laptop demand, which are priced above $500 on average.

However, the cheaper netbooks could continue to have a negative effect on Intel's profits, the analysts said. Chips like the low-priced Atom used in netbooks could impact sales of Intel chips used in mainstream laptops, which deliver better margins.

The pricing pressure on netbooks has already eaten into profits of PC maker Dell. During a second-quarter earnings call on Thursday, Dell CEO Michael Dell said the company is trying to shift its focus from low-margin products like netbooks to enterprise products like servers and storage, which deliver better margins.

Nevertheless, the analysts said Intel's chip strategy could show long-term benefits. "We commend Intel management for its stellar process, product, and business execution in this downcycle," the analysts wrote.

Though both Hewlett-Packard and Dell recently confirmed sales declines for the second quarter, compared to the same period last year, they also said they expected demand to rise in the second half of the year. Dell, reporting quarterly results Thursday, said quarterly earnings declined by 23 percent to $472 million. But CEO Michael Dell was optimistic.

"If current demand trends continue, we expect revenue for the second half of the year to be stronger than the first half," he said in a statement.

IT investors reacted positively to the upbeat forecasts. Intel shares rose by $0.93 to trade at $20.40 three hours after the U.S. markets opened Friday. Advanced Micro Devices was up by $0.22, to $4.45; HP was up by $0.34, to $45.50; and Dell was up by $0.61 to $16.26.

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Marc Ferranti and Agam Shah

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