The worldwide personal-computer market grew at a better-than-expected-by-Wall-Street rate in the June quarter, with shipments up about 12%, according to market researcher IDC. As you know, I have been estimating PC sales above the Street for this year, with the strength coming mostly in the second half. It is a pleasant surprise to see it starting this early.

Intel (INTC) reported an interesting quarter after the close on July 17. The stock hit a 52-week high at $26.33 before the announcement. Sales rose 8% from last year to $8.68 billion, which was just above the consensus estimate for $8.54 billion. Earnings per share excluding a one-time tax gain hit 19 cents, right on the consensus and up 27% from last year.

The reason earnings only hit the consensus, even though revenues came in better than expected, was that product gross margins fell to 46.9% of revenues, at the low end of guidance. The biggest problem was weak demand for NOR flash memory chips, which are mainly used in cell phones. But Intel is in the process of fixing this problem by spinning off this money-losing division to a joint venture. The company also announced that microprocessor selling prices were a little lower than expected. The stock dropped $1.27 yesterday in reaction to the report.

But the really important points that Wall Street is missing are:

• The NOR flash memory division is irrelevant, even though Intel can't account for it as a discontinued line of business quite yet.


• The company guided for a much better gross profit margin in the September quarter, 52% plus or minus two points.


• The company guided for $9.0 to $9.6 billion in sales, in line with the consensus.


• The last time Intel reported a gross margin this low, in the third quarter of 2002, their operating profit margin was 16.5%. This time it was 19.3%. That means they have delivered on their promise to get leaner and more productive, holding down expenses. Also, Intel reduced its inventory by 5.5% (almost $250 million) from the March quarter. That is the first sequential quarterly reduction in inventory since 2003, and inventory reductions almost always have a negative impact on gross margins.


• Intel's manufacturing efficiency is running far enough above expectations that the company will reduce its 2007 capital spending budget.

Net net, I liked the quarter. And with the semiconductor sector showing strength and PC sales picking up already, I expect Intel to have a strong second half of the year.