Don't read too much into Intel's success: Eric Auchard

Wed Jul 15, 2009 12:37pm EDT

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-- Eric Auchard is a Reuters columnist. The opinions expressed are his own --

By Eric Auchard

LONDON (Reuters) - Intel Corp (INTC.O) has cheered up investors by once again making forecasts about its financial performance. The trouble with reading too much into its rebound, however, is that this is largely due to productivity gains of its own making, rather than a broader awakening of demand.

To be sure, Intel's revenue, profit and margins surged past all published analyst expectations for the second quarter. Partly, this was merely the "snapback" that occurred after Intel throttled back production to as low as 25 percent of factory capacity in the first quarter, amid a glut of unsold chips and shriveling demand.

Things got so bad that it quit commenting on its outlook for the first two quarters of 2009.

The bigger news was its answer to the question of what was happening in the second half: Third-quarter margins should improve to around 53 percent on revenue around $8.5 billion, and could move up toward historic high levels by year-end. The comments sent Intel shares up as much as eight percent and sparked broad-based buying in technology shares around the globe.

However, there is little here to bolster confidence in other bellwethers of the technology sector reporting this week. Intel is benefiting from healthy demand in China and -- to a lesser extent -- the United States, among consumers rather than businesses. But these are not swing factors for the likes of Nokia, IBM or Google.

IBM (IBM.N) must defy the widespread evidence of weak corporate activity that Intel and others cite. But the company's reinvention as a business services provider makes it likely to once again produce stable results that say little about the overall health of the wider technology sector. Its sales of computers and storage could slip more than expected and currencies will hurt, but if contract signings hold up in its core services segment, IBM will remain a safe haven.

Google (GOOG.O) is expected to show negligible revenue growth compared with a year ago. This is a dangerous season historically for the company and has led to repeated disappointments. Recent industry data shows paid search, the source of Google revenue, slowed faster than ever in the second quarter. Increased capital spending tied to network outages could be another negative factor.

Nokia (NOK1V.HE) is at the mercy of soft demand for phone replacements in a weak global economy. It will be further hurt by currency fluctuations. Quarterly revenue is expected to fall by more than 20 percent versus a year ago. The backlog of unsold handsets that hurt Nokia last year has been worked off. But there are few scenarios in which the company might boost its outlook for the second half.

The difference comes down to this: Intel has been investing for years in the transition to ever smaller 32-nanometre-scale chips that are far more efficient than the prior generation of chips at 45-nanometer scale. Even in the absence of fresh economic demand, efficiencies are once again working in Intel's favor. These are factors that other technology companies can only dream of.

-- At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. --

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(Editing by Martin Langfield)

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