Intel Shatters Seasonal Pattern With Best Quarter Ever

The second quarter of the year is typically the slowest for the semiconductor makers, but don't tell Intel (NASDAQ: INTC) that. The chip giant reported the single best quarter in its history, led by server sales which had been lagging for several quarters.

Intel reported second-quarter revenue of $10.8 billion, up 34 percent year-over-year, with net income of $2.9 billion, up 175 percent year-over-year, and earnings per share of 51 cents. That was well ahead of Thomson Reuters analyst estimates of $10.25 billion and EPS estimates of $0.43. Intel's revenues were up 5 percent sequentially in a quarter when it's usually down 2 percent sequentially.

One particularly noteworthy part of the results is that Intel's data center products group carried the day. PC client product revenue rose 2 percent sequentially from the first quarter, which is actually still impressive because the second quarter is usually down from the first quarter. Atom revenue rose 16 percent and now accounts for $413 million in revenue.

But the Data Center Group revenue was up 13 percent sequentially, a very big jump, with record server microprocessor revenue. Strong server margins helped push the company's overall gross margin for the quarter to 67 percent, well above the 64 percent analysts were expecting.

During the conference call with analysts, CEO Paul Otellini said the IP data center segment -- servers specifically used in Internet and cloud deployments -- grew 102 percent year over year as server sales accelerate.

"In Q2, Intel posted its best quarterly results ever as the economies of the world continue to reflect continued economic momentum. Intel continues to run ahead of economic growth driven by what we believe is Internet momentum," Otellini told the analysts.

Intel's healthy quarter is a strong indication that companies are starting to buy again. Major server vendors like IBM (NYSE: IBM), HP (NYSE: HPQ) and Dell (NASDAQ: DELL), won't necessarily report strong server sales when they report earnings because there's a lag time in between Intel selling the chips and the server vendors making and shipping a server. But at the very least, Intel's results show that orders are being placed.

Otellini said its Atom business remains healthy, with 75 million chips sold since its introduction two years ago. This year, he said the industry will ship about 40 million netbooks, virtually all of them powered by Atoms.

For the second half of the year, Intel is revving up production and increasing capacity in both 32 and 45 nanometer chips. That means Intel will have more 45nm parts than it wants, since it prefers to migrate off old process technology as quickly as possible, but it's a good problem for Intel: demand is higher. "The net result is the market is bigger than we were planning for at the beginning of the year," said Otellini.

He also spoke of Sandy Bridge, the next-generation architecture that will succeed Nehalem, which seems like it just hit the market yesterday but is already 18 months old. Sandy Bridge will have its formal coming out party at the Intel Developer Forum event in September, and Intel is gearing up production already based on customer feedback.

"I am more excited about Sandy Bridge than any product the company has launched in a number of years. Due to the strong reception of Sandy Bridge, we're accelerating out factory ramp and raised Capex guidance to meet demand," he said.

For the third quarter, Intel expects to do even better as it ramps up for the back to school season and the holidays. Intel said it expects revenue to be $11.6 billion, plus or minus $400 million, well above the $10.8 billion analysts have projected.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

(Updated to include comments from Intel earnings call with financial analysts).