Banking

Intel says so far, so good for second quarter

In a midquarter financial update, the chip giant narrows in on the upper end of its revenue projection for the second quarter, citing stronger-than-expected demand for its flash chips.

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By John G. Spooner
CNET News.com

In a financial update Thursday, Intel narrowed in on the upper end of its revenue projection for the second quarter, citing stronger-than-expected demand for its flash memory chips.

The chipmaker, in its traditional midquarter update statement, said it will turn in revenue of between $8 billion and $8.2 billion for the quarter. During April, Intel predicted that its second-quarter revenue would total between .

The update thus moved the midpoint of Intel's revenue guidance—a figure analysts generally use as a de facto quarterly revenue estimate for the company—upward to $8.1 billion from $7.9 billion.

Before the update, many financial analysts had been expecting Intel to report revenue of just less than $8 billion for the quarter, a hair over the midpoint of Intel's earlier projection. A survey of 29 analysts predicted that on average, Intel would report revenue of $7.96 billion for the quarter, according to Thompson First Call.

Demand for products, which include Intel's PC processors, chipsets and motherboards, has been consistent with the company's previous expectations, Intel said. Communications revenue has been trending above the company's earlier expectations, thanks to higher demand for flash memory, Intel said in its statement. Flash memory is used to store data in electronics such as cellular phones or networking gear.

During a conference call to discuss the midquarter update, Intel CFO said that so far, Intel's second quarter is shaping up to be "a little better than is typical for a second quarter."

If Intel hits the midpoint of its guidance, its second-quarter revenue will equal its first-quarter take, making for a better-than-average quarter. Intel's revenue typically declines by about 2 percent between the first and second quarters, he said.

A trend toward higher flash memory demand is particularly important for Intel, because a move to raise prices cost the chipmaker market share in 2003. During the third quarter of 2003, Intel slipped from first place in flash revenue to . The company responded last February by launching a plan to .

"I feel like we've made significant progress in flash in the last six months," Bryant said.

With the second quarter coming to a close, Intel has been making new efforts to expand its PC chip business, in part by boosting sales in international reseller channels. It's also been pushing its communications and consumer electronics products.

As part of its efforts in PCs, Intel has quietly been moving in a new direction, which has increased its involvement in overall PC design. Intel has long been involved in rolling out new technology and in setting industry standards. But recently, with products like the Pentium M and the Centrino wireless bundle for notebooks, the company has begun taking a more product-oriented approach to its design and marketing. Later this month, it will introduce its Intel Express 915 and 925, new desktop PC chipsets it believes will help launch two new PC categories: lifestyle and entertainment-oriented desktops.

The 900-series chipset launch could help many of Intel's other recent plans, including its , coalesce. By introducing the processor number—the system is designed to help consumers distinguish between similar Pentium or Celeron processors, particularly those that have the same clock speed but differ in other ways—Intel has begun to move away from its long-used marketing method of touting the speed of its chips. It's a major shift for the chipmaker, which spent years focusing on processor speed.

Intel will instead be putting its engineering and marketing weight behind generating chip performance increases by adding new features. The company is working on a host of new features, including and chips with 64-bit addressing. Its . The 64-bit chips are designed to boost server performance, while dual cores are designed to increase PC performance. The dual cores are scheduled to arrive in 2005. Other upcoming chip features include Intel's LaGrande technology for security and its Vanderpool technology for virtualization, Intel executives have said.

AMD in charge?
Although analysts said many of the steps are in the right direction, several added that the chipmaker's moves have been influenced, in part, by rival Advanced Micro Devices.

AMD's current product line makes the company the most competitive it has been in years. AMD's 64-bit-capable Opteron server chip has gained support from several top server makers, while its Athlon chips often outpace Intel Celerons and Pentium 4s. Without competition, Intel might not have come out with 64-bit Xeons for at least a couple more years or fast-tracked its plans for dual-core chips, analysts said.

Intel executives have said the company is reacting to the needs of the market.

"As the environment and the ecosystem changes around you, you adapt to it," CEO Craig Barrett said in a recent interview.

AMD has steadily regained market share it lost during 2002, when its share slipped to about 12 percent, according to Mercury Research. But Intel is still by far the dominant player. It garnered 83.6 percent of the PC chip market during the first quarter, compared with AMD's 14.9 percent, according to Mercury. Historically, AMD's market share has been somewhere in the midteens. Its peak came during the second quarter of 2001, where it had 21.8 percent of the market to Intel's 77.1 percent, Mercury figures show.

Intel could have rolled out a higher-speed version of the Pentium 4: Tejas, which it canceled as part of its accelerated dual-core strategy. But factors including power consumption and heat production changed the company's mind. Intel President Paul Otellini said in an interview with CNET News.com that a 7GHz or faster Tejas chip could consume as much as 200 watts, about twice as much as current Pentium 4s. Dual-core chips, which can raise performance by doing the work of two processors while keeping power consumption and head levels down, made more sense instead.

"The dual-core strategy is basically the easy, low-risk way (for Intel) to make its next transition. They knew they were going there anyway," said Dean McCarron, principal analyst at Mercury Research. "Now Intel is motivated (by AMD) to move more quickly. Whenever it gets into a situation, its usual answer is to move faster."

Intel has changed directions in the past. One of its most publicized moves was away from supporting Rambus dynamic RAM, a high-performance memory technology the company pushed for Pentium III and Pentium 4 desktops. Rambus memory offered high performance, but it never caught on in the market, due in part to higher prices. Intel eventually switched back to standard memory.

"Culturally, Intel had been obsessed with doubling clock frequency every two years. That was its mantra. Now it's getting off the frequency bandwagon—frequency was a bad proxy for performance, anyway—and it's come up with another system," said , editor of the Microprocessor Report.

Krewell estimates that Intel's dual-core chips will offer at least 40 percent greater performance than their single-core cousins, at roughly the same speeds. The company's first dual-core chips are likely to be , the current version of the Pentium 4, and run at 2.5GHz to 3GHz per core. A dual-core chip based on the Pentium M processor will probably follow during 2006.

But at least one analyst said Intel's work to add new features won't be enough to counter AMD's resurgence, particularly when AMD moves to 90-nanometer manufacturing, which it has said will yield higher-performance chips later this year.

"I don't think we have to look forward too far to see AMD gaining (market) share," said , the former Microprocessor Report editor who now owns his own consulting company. Intel is "at a disadvantage today in the PC space, and I think that situation is only going to get worse."

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