SAN FRANCISCO (Reuters) - Intel Corp's fourth-quarter results roared past Wall Street forecasts and it gave a bullish margin outlook on higher prices and firm demand for server chips, reinforcing hopes for a strong recovery in technology.

Intel, whose stock extended gains after rising 2.5 percent in regular trading, said on Thursday its gross profit margin in the fourth quarter rose to a record 65 percent. While it forecast a drop to 59 percent to 63 percent in the typically weaker current quarter, that still surpassed analysts' average projection of 58.8 percent.

"That will alleviate a lot of the concerns people had over whether the surge in buying at the end of the year was one that was going to peter out," said FTN Equity Capital Markets analyst Joanne Feeney. "That will have a positive spillover to other stocks" on Friday.

Some technology stocks rallied after-hours on the news. Intel chip rival Advanced Micro Devices Inc gained 1.7 percent, while Microsoft Corp climbed nearly 1 percent. Japan's Nikkei average hit a 15-month high, lifted by tech shares such as chip equipment supplier Advantest.

Many analysts predict a return of corporate spending in the second half of 2010 that would lift the tech sector out of its worst downturn in decades. Some say new spending has already begun.

"The big picture is that tech remains investable," said Wedbush Morgan's Patrick Wang. "They're giving us reassurance that the PC sector remains intact and more importantly, that we're seeing incremental improvements in the economy and that we're probably well on our way to recovery."

"What they did on the gross margin line was extremely impressive, which was due to the massive upside in revenue."

Intel said average selling prices of its microprocessors rose from the third quarter, driving a 21 percent revenue increase in its data center business which makes server chips, and a 10 percent revenue rise in its PC business.

A BLOWOUT

Despite the blowout quarter, shares of the world's largest microchip maker were up just less than 1 percent in extended trading, after rallying 7 percent in the past two weeks.
The stock initially rose as much as 2.1 percent to $21.94 after Intel reported earnings.
"People had real high expectations going into this quarter. So they may be looking for other ways to play this positive move besides Intel," said Robert Burleson, analyst at Canaccord Adams, recommending other chip names such as AMD.

Chief Executive Paul Otellini told analysts on a conference call that corporate spending should return "modestly in 2010."

"What we are benefiting from in the second half of the year, and what we'll continue to benefit from throughout this year, is the extraordinary return on investment that is incurred by deploying new server technologies," he said.


And consumer spending will remain strong, analysts say.
"The fact that consumers came out and spent so much even in the midst of the recession is a signal of how important the PC has become to the household," Feeney of FTN Equity Capital Markets said.

As the economy recovers and the spending power of consumers and businesses in emerging markets such as China grows, Intel will benefit, she added. "Combine those things and you have a pretty significant demand driver for this year."

Net income totaled $2.3 billion, or 40 cents a share, in the three months ended December 26, beating expectations for 30 cents according to Thomson Reuters I/B/E/S.

That was many times larger than the net income of $234 million, or 4 cents a share, in the year-ago period when the company incurred a $1.1 billion write-down mainly because of an investment in wireless service provider Clearwire Corp.

"The gross margins were better than we had even expected," said Broadpoint AmTech's Doug Freedman. "We're encouraged by the low capital spending and the projection that gross margin would continue to operate within a very tight range."

Revenue rose to $10.6 billion from $8.2 billion a year ago, above the Wall Street target of roughly $10.2 billion.

Intel, based in Santa Clara, California, forecast current-quarter revenue of $9.7 billion, plus or minus $400 million. This exceeds the $9.3 billion average estimate of analysts polled by Thomson Reuters I/B/E/S.