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Intel Sales, Outlook Beat as Demand Weathers Trade Woes

Ian King

(Bloomberg) -- Intel Corp. posted second-quarter sales and profit that topped analyst projections and gave an upbeat third-quarter forecast, signaling the chipmaker is weathering disruptions to the electronics industry caused by the China-U.S. trade dispute.

Separately, the company said it agreed to sell the majority of its smartphone-chip business to Apple Inc. in a deal valued at $1 billion, completing the wind-down of a multibillion-dollar, decades-long effort to break into the mobile industry. Intel shares jumped as much as 8%.

Revenue is getting a boost from rising personal-computer demand, which is still outrunning supply, Chief Financial Officer George Davis said. Purchases of higher-priced server chips and demand from new markets outside of computing are also bolstering sales. Some of the added PC-chip demand is coming from customers anticipating future tariffs related to the China-U.S. trade dispute, and that demand can’t be expected to continue at the same level, he said.

It was an “extremely positive quarter,” Davis said in a phone interview. “Some of the beat in the second quarter was trade- and tariff-related as customers pulled in demand from the second half of the year.”

Intel shares rose as high as $56.33 in extended trading following the report. The stock had earlier slipped 1.4% to $52.16 at the close in New York. Shares have gained 11% this year, lagging behind the 38% jump in the benchmark Philadelphia Stock Exchange Semiconductor Index.

The stock’s gains came at least in part from investor relief that Intel has finally jettisoned its money-losing mobile-chip division via the sale to Apple, according to Logan Purk, an analyst at Edward D. Jones & Co.

“It’s been an awful business and now it’s off the books,” he said. Purk estimates the unit was losing about $1 billion a year. “Hopefully they can deploy that money elsewhere.”

Davis, the CFO, estimates the company will save as much as $500 million in costs from giving up the effort to sell smartphone components. Some of the money saved will be redirected into speeding up improvements in manufacturing, he said.

Second-quarter sales were $16.5 billion, the Santa Clara, California-based company said Thursday in a statement. Analysts on average had predicted $15.7 billion, according to data compiled by Bloomberg. Net income was $4.2 billion, or 92 cents a share, compared with estimates for 85 cents. Gross margin, or the percentage of sales remaining after deducting the cost of production, was 59.8% in the quarter. Intel’s target range for the metric, a key indicator of efficiency for a manufacturing company, is above 60%.

Intel’s Xeon processors account for more than 95% of the market for chips that run servers, the machines that provide the backbone of the internet and corporate networks. In the second quarter, the data-center division posted revenue of $5 billion, a decline of 10%. Sales in the PC chip business climbed 1% to $8.8 billion.

The crucial data-center unit is suffering as demand droops from corporations and government buyers, particularly in China. Chief Executive Officer Bob Swan called that area “brutal,” and said he doesn’t expect it to improve in the second half. Orders from makers of networking equipment and cloud-data center owners will pick up, he said on a conference call with analysts.

Swan said there’s still uncertainty surrounding trade relations between China and the U.S., including restrictions on supplying companies there and whether further tariffs are coming. That’s causing some anxiety, he said. The company’s current forecasts are based on the situation as it exists now and don’t factor in any changes.

Revenue in the current period will be about $18 billion, and net income will be about $1.16 a share, Intel said. That compares with average analysts’ estimates of $17.9 billion and $1.13 a share. For the year, Intel is now predicting revenue of about $69.5 billion and earnings per share of $4.10.

The company said newer businesses -- chips for connected cars and machinery -- helped fuel the better-than-predicted performance in the recent period. The company’s Mobileye self-driving car technology unit had sales of $201 million, up 16% from a year earlier. Internet of things revenue rose 12% to $986 million.

Though the number topped estimates, second-quarter revenue was down 2.7% from a year earlier, representing the first quarterly drop in four years. In last year’s second quarter, Intel posted sales of $17 billion and earnings of $5 billion, or $1.05 a share.

(Updates with analyst’s comment in sixth paragraph.)

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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