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The Tech Party Isn't Over

Even as Federal Reserve Chairman Alan Greenspan warns of higher oil prices and other inflation risks that could tap the brakes on global growth, tech-industry sales appear to keep humming along. Third-quarter reports from tech stalwarts point to seemingly insatiable demand for chips, PCs, servers, cell phones, and other consumer electronics.

Chip bellwether Intel (INTC) on Oct. 18 became the latest company to beat revenue projections, citing record sales of processors and so-called flash memory, which is used in PCs, handhelds, and servers. In the PC segment, Intel reported that a third of its sales now come from the notebook business. Strong demand in Europe and Japan in particular has caused shortages of accompanying chipsets.

Third-quarter net income for Intel rose to $2 billion, or 32 cents a share, from $1.91 billion, or 30 cents a share, a year earlier. The results include about 2 cents a share in costs for the settlement of a patent-infringement lawsuit with MicroUnity. Revenue rose 18%, to $9.96 billion, from $8.47 billion a year ago. Analysts surveyed by Thomson Financial were looking for revenue of $9.92 billion, and profit of 33 cents a share.

INDUSTRY BOOM. Intel's news came a day after IBM (IBM) said sales in its hardware and semiconductors business rose 7%, to $5.1 billion. The gain, which excludes results from the PC business sold to China's Lenovo, also exceeded analysts' predictions. It was fueled by double-digit growth in servers and an increase in production of gaming chips for next-generation game consoles from Microsoft (MSFT), Sony (SNE), and Nintendo. Revenue from blade servers -- the thin, fanless systems packaged together for Web hosting and cluster computing -- rose a remarkable 90% year over year (see BW Online, 10/18/05, "Big Blue's Big Hit: Small Biz").

Better-than-expected demand is being felt across the industry. Researchers Gartner and IDC on Oct. 17 said PC shipments for the three months that ended in September rose 17%. Dell (DELL), Hewlett-Packard (HPQ), Lenovo, and other PC makers shipped 50 million units in the third quarter, the researchers said, posting 17% unit growth from the same period a year earlier. That was almost double the 9% percent pace expected by Merrill Lynch analysts.

Cell-phone sales this year are expected to approach 800 million units, up nearly 16% from a year ago. That, in turn, is boosting demand for flash memory from Samsung, Intel, AMD (AMD), and others. Motorola (MOT), the world's second-largest handset maker, on Oct. 18 also reported a better-than-expected third-quarter sales performance (see BW Online, 10/19/05, "Motorola's Razr Thick Profits").

TOUGH ACT TO FOLLOW. But even as demand remains red-hot, analysts are cautioning that fierce competition and pricing pressure could slow sales growth for many players. What's more, rising energy prices will finally start taking a toll on consumer demand in 2006, analysts warn.

Intel's stock retreated nearly 3% in extended trading on Oct. 18, after the chipmaker ratcheted back its fourth-quarter sales forecast to $10.5 billion from $10.7 billion. Intel execs said the third quarter is a tough act to follow. "Growth in the third quarter was a little better than usual, while growth in the fourth quarter is expected to be a little slower," Intel Chief Financial Officer Andy Bryant said during a conference call. Investors say the chipmaker faces the tough competition from AMD's (AMD) well-received Opteron line of server chips (see BW Online, 9/26/05, "AMD Ups the Ante, Again").

Top server makers, with the exception of Dell, report strong customer demand for Opteron chips and two-way and some four-way servers. "We expect Intel will see continued market share pressure in server processors until second half of 2006," said Bear Stearns analyst Gurinder Kalra.

FORTHCOMING CLUES. Even so, strong world demand, particularly in China and India, has helped Intel maintain share against AMD as the overall market grows. Intel CEO Paul Otellini noted China soon will be the second-largest consumer of PCs behind the U.S.

Intel earlier in the quarter had signaled it remains optimistic about growth, announcing plans to spend $3 billion on a new manufacturing plant in Arizona and $105 million to convert a New Mexico plant into a chip-testing facility. Plants in Colorado and Massachusetts also will get a combined $345 million in upgrades to boost capacity.

Further clues on the strength of the sector will come from computer-making giants including Dell. The world's largest PC maker last quarter noted consumer sales had shifted somewhat toward lower-end purchases. It's trying to boost higher-end sales by focusing more on higher value entertainment features over productivity (see BW Online, 9/28/05, "Will Dell's Up-Market Move Compute?").

DIP AHEAD? Gartner reported that Dell's sales for the first time in seven years grew at just the market rate, and Intel reported some PC makers had slight stockpiles of unsold inventory, without saying which ones.

Merrill Lynch analyst Richard Farmer predicts tech companies will close out the year with continued strong growth. But he cautions next year could be tougher. "We still expect the market to dip to high single-digit growth in 2006, the first period of below double digits in three years," he said in a report.

Tech bulls better enjoy the good times while they last.


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