A Solid Second Quarter for Intel

 Intel (INTC) reported solid second-quarter results, as the firm once again posted record quarterly revenue. For the quarter, sales were $13.0 billion, up 1% sequentially, and an increase from revenue of $10.8 billion a year ago.

The results included the first full quarter of sales from recent acquisitions McAfee and Infineon's wireless chip business, which contributed about $1 billion to the top line. Even when excluding these purchases, the firm had a nice quarter, even though the June quarter is typically seasonally slower.

Intel's growth was driven by strength in microprocessor and PC demand from enterprises and emerging markets, though this was somewhat offset by weakness in the consumer PC market in developed countries. Intel also noted that it continued to see strong demand for its latest Sandy

Bridge processors during the quarter. On the profitability front, gross margin came in at 60.6%, down from 61.4% in the first quarter. Intel was no longer affected by the additional costs needed to repair and replace the problematic chipsets for Sandy Bridge processors, which hurt gross margin last quarter. However, Intel saw higher manufacturing costs, primarily related to the ramp-up of its next-generation chip fabrication process. Operating income was $3.9 billion for the quarter.

For the third quarter, management expects revenue to be between $13.5 billion and $14.5 billion, which would indicate another quarter of strong results. Intel anticipates continued strength from emerging markets and corporations, while consumer PC and processor demand from mature markets is expected to improve slightly. Management presently forecasts that global PC unit growth will be 8% to 10% in 2011, although the firm believes it has opportunities to grow revenue at a faster rate than the broader PC industry, thanks to enterprise-driven product mix.

Intel's bright outlook appears to conflict with whispers that the PC market may be weakening. Although we are weary that the firm could see a business slowdown in the upcoming quarters, we think Intel has good long-term growth prospects. In particular, we are optimistic about the firm's server processor opportunities. The rising popularity of smartphones and tablets will require substantial build-outs of Internet infrastructure and the cloud should drive demand for server processors from Intel.

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