Will Intel Buy ARM?

According to a preliminary estimate from iSuppli, global PC shipments grew 9.8% sequentially in the third quarter. This week, Intel Corporation (NASDAQ:INTC), the world’s largest chip maker with annual revenue of $37.6 billion, reported strong third quarter results driven by the rebound in the PC market. Let’s take a closer look.

Q3 revenue was $9.4 billion, down 7.8% y-o-y but up a record 17.5 % q-o-q. The company swung to net income of $1.86 billion or $0.33 per share from net loss of $398 million or $0.07 per share last quarter and net income of $1.093 or $0.18 per share last year. Analysts expected earnings of 0.28 per share on revenue of $9 billion. Q2 analysis is available here.

Gross margin was 58% up from 50.8% last quarter. The number of employees increased by less than 300 in the third quarter, including employees from the completion of the Wind River acquisition. Intel ended the quarter with $12.9 billion in cash, $1.6 billion higher than the second quarter. During the quarter, the company paid nearly $800 million in dividends, purchased $944 million in capital assets, and issued $2 billion of convertible debt.

By region, Asia-Pacific sales were $5.32 billion, up 21% q-o-q. Americas revenue grew 7% q-o-q to $1.82 billion and revenue from Europe grew 16% q-o-q to $1.33 billion.

Intel’s strong results were driven by consumer sales, particularly in notebooks and netbooks. Its Nehalem processor has been well-received in the enterprise market, and Intel expects this processor to be a strong profit driver in the coming quarters. By segment, Digital Enterprise Group revenue in the quarter was down 7.5% y-o-y but up 14% q-o-q to $4.913 billion. Mobility Group revenue was $4.13 billion, down 12% y-o-y but up 18% q-o-q driven by the growth in notebooks. As demand for low-cost netbooks continues, Atom-based microprocessor revenue grew 15% q-o-q to $415 million. iSuppli expects netbook shipments to increase 68.5% to 22.2 million units in 2009.

In a recent post on ARM, we noted how the company’s entry into the netbook space could threaten Intel’s dominance of the netbook processor market. ARM is expected to be successful in this market mainly because its processors are expected to match Intel’s performance at better power and cost factors. According to ABN AMRO Bank analyst Didier Scemama, ARM’s prospective success could make it vulnerable for a takeover, not by Intel but by a consortium of chip companies and electronics OEMs that have a strategic interest in ARM. Will Intel buy ARM?

The PC market has improved dramatically since the beginning of the year. However, annual PC shipments are still expected to decline 4%. Even so, things seem to be looking up for the tech sector. The launch of Microsoft’s Windows 7 OS this month is expected to further improve spending next year.

Based on its strong performance, Intel expects a seasonal increase in revenue for the fourth quarter. Revenue is expected to increase by 23% to about $10.1 billion, plus or minus $400 million. Gross margin is expected in the range of 59% to 65%. The stock is currently trading around $21 with market cap of about $117 billion. It hit a 52-week high of $20.69 on October 13 following the earnings announcement.