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Why Intel Reaped a Profit Payoff

U.S. corporate technology purchases may not be increasing in a big way, but chipmaker Intel (INTC) certainly isn't crying. The Santa Clara (Calif.) outfit's investment in new technology, such as wireless gear, during the long earnings downturn is boosting profits big-time.

How big? On Oct. 14, Intel reported that profits had more than doubled from a year ago. Third-quarter net income came in at $1.7 billion, or 25 cents a share, vs. $686 million, or 10 cents a share, in the same period of 2002. Revenue for the quarter was $7.8 billion, vs. $6.5 billion a year ago. The results blew past Wall Street's profit expectations of 23 cents a share.

MOTORING MOTO. Intel gained from record demand in Asia, as well as increased corporate sales in Japan and parts of Europe. Intel President Paul Otellini says U.S. business demand continues to lag, but ever-resilient consumers continue to snap Intel's Centrino mobile processor/Wi-Fi combo for notebooks. Research firm IDC believes consumer had more money to spend this summer, thanks to tax-refund checks, and opted to put some of it into PC peripherals and the more expensive notebooks.

That trend may help Intel, but what about the rest of the industry? The long-awaited technology rebound clearly is under way. Companies that have spent time and money during the downturn to develop new products are showing impressive growth. Motorola (MOT), too, posted unexpectedly strong results on Oct. 13, a reflection of demand for new cell phones with hot features such as cameras and messaging.

In Intel's case, it's drafting off the strong interest it has created for wirelessly connecting to the Internet. PC makers like Dell (DELL), Hewlett-Packard (HPQ), and IBM (IBM) also will gain because of the $300 million Intel is spending this year to market the new technologies. Says Otellini: "Virtually all our revenue growth is coming from new products."

WAITING FOR ORDERS. Intel's surprise will bolster Wall Street's bulls. For the rest of the tech industry, however, results through the rest of the year are likely to be uneven. Strong competition continues to hammer profit margins as PC makers battle for market share. And Intel rival Advanced Micro Devices (AMD) faces an uphill struggle with the launch of its new Athlon 64 desktop chip.

Even Intel says it faces a tough road in its memory-chip business because of strong competition and pricing pressures. Until corporate tech purchases pick up significantly, only the biggest fish are likely to benefit from a rebounding economy. By Cliff Edwards in San Mateo

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