Intel Looks to Fight Back in Second Half

By John G. Spooner  |  Posted 2006-04-19

Intel Looks to Fight Back in Second Half

Intel is hitting the reset button, following a lackluster first quarter.

The chip giant, which on April 19 reported first-quarter 2006 revenue of $8.9 billion and earnings per share of 23 cents, down 5 percent and 44 percent, respectively, from the first quarter of 2005, after warning that it would deliver lower than expected earnings for the quarter on March 3.

Now its tightening up its belt. It will reduce spending by about $1 billion, begin its first company-wide business review since the 1980s, and take action to help burn off excess chip inventory at its customers.

But it is also acting to speed the introduction a new generation of processors based on its Core Microarchitecture—its first such transition since the launch of the Pentium 4 in late 2000—that it hopes will put it back in the game in the second half of the year.

Intel executives, speaking in a post-earnings release conference call with analysts, acknowledged that the company lost market share to rival its rival Advanced Micro Devices in the second half of 2005.

Andy Bryant, Intels CFO, said he believed that Intel held the held the line on share in the first quarter.

But AMDs competitive stance, combined with a modest processor inventory glut of several million chips and moderating PC shipment growth rates—they are shifting from double-digit numbers seen in recent years to high-single digits figures this year—all added up to a lackluster first quarter for Intel.

Some of the effects will also spill into the second quarter, historically the low point for the year for PC chips, causing Intel to slightly lower its financial expectations for 2006.

However, Intel expects to emerge in the second half as a stronger competitor, thanks to its new chips. It aims to regain some of its lost market share using the strength of the new products as well as aggressive pricing.

Next Page: The product line.

The Product Line

Intel has been hit the hardest in servers, an area where AMD has gained share for several quarters, and desktops.

Intel still enjoys an advantage in notebooks, said Paul Otellini, Intels CEO, on the conference call.

"We have an extremely compelling product line [for servers] coming out with Woodcrest. That one I expect to start turning the corner in terms of market segment share fairly soon after launch," Otellini said.

"The one that is very interesting is Conroe [for desktops]. Its the most significant gain in performance since the introduction of the Pentium versus the 486. I think that one will see immediate up tic in two areas. One is the enterprise…and in the gamer community."

Click here to read more about Intels shift in focus from speedy chips to multicore and power consumption.

Enterprise customers will seek to use Conroe, Otellini said, in combination with a new business desktop chip platform and brand name the company is prepping. The chip will be the centerpiece of Intels latest Professional Business Platform, a bundle of chips for business desktops, dubbed Averill.

Averills top tier will combine Conroe, a new Intel 965 supporting chip set, along with an Intel network card and will generally allow manufacturers to build smaller, sleeker desktops that incorporate greater management and security capabilities, Intel has said.

Gamers, on the other hand, will seek out the performance that Conroe has to offer, he said.

The chip maker, which demonstrated Conroe running at 2.66GHz at its Developer Forum in March 2006, said it will deliver a 40 percent increase in performance, while using 40 percent less power than its current Pentium D 900-series.

Conroe will feature a 65-watt thermal design power measurement, meaning it will consume up to about that much power.

Woodcrest, for its part, is a dual-core server chip, which Intel has said will bump up server performance by about 80 percent while cutting power consumption by 35 percent compared to its existing 2.8Ghz dual-core Xeon chip.

An interim step, a dual-core chip called Dempsey, is shipping but hasnt yet been made available in products.

Merom will offer a 20 percent performance boost versus todays Core Duo processors while operating within the same power envelope, Intel has said.

Otellini called Merom "icing on the cake" in terms of boosting performance for the portable machines.

Next Page: Rivalry from AMD.

Rivalry from AMD

To be sure, the executives agreed that they face a highly competitive rival in Advanced Micro Devices.

AMD, which delivered an upbeat first-quarter report on April 12, has been taking market share from its larger rival, nipping it for almost four points of share during the fourth quarter.

Intel will attempt to stem the tide by bringing its new Core Architecture chips in on top of its existing price points, meaning top-of-the-line models will cost somewhat more than existing chips like the Pentium D, but will be priced about the same as existing models.

Intel often does so to stimulate demand for the newer chips. It will apply price cuts as well at some point. Such moves will still be necessary to win back some of Intels lost share, Bryant said.

"Were not anticipating anything crazy, but it is a competition environment," he said. "Even though were bringing out new products with new capabilities, you still have to gain back business that you lost."

AMD, for its part, is preparing upgraded PC and server chips that offer capabilities such as virtualization as well as the ability to tap DDR2 (double data rate 2 DRAM).

The first such chips, for PCs, will arrive this quarter. Opterons sporting the upgrades are scheduled to arrive in the third quarter. It has indicated it will charge about the same for its new chips.

Given its high hopes for Core Architecture chips, Intel is expected to deliver them as soon as it can.

"We are particularly pleased with the production readiness of processors based on our new Core Microarchitecture," Otellini said during the call. "We plan to ship Woodcrest, Conroe and Merom in volume during Q3."

The chips will be widely available during the third quarter. Although, given its zeal, Woodcrest and Conroe are likely to come out early in the period, some observers said.

Conroe will also get some extra attention on April 24 in a conference call with reporters.

The call, which will be hosted by Otellini, according to an e-mail invitation received by eWEEK, is expected to unveil the new business brand, for which the chip will be a centerpiece.

Still, the exact timing of chips such as Conroe isnt as important as the weight that Intel is expecting the new architecture chips to bring.

"I think the important element of [the chips] is it will restore Intel as far as having a strongly competitive product line without any problematic design aspects—with Pentium 4, power consumption and design thermals were becoming pretty demanding," for one, said Dean McCarron, principal analyst at Mercury Research in Cave Creek, Ariz.

For its part, "Conroe is very closely aligned with what the market is demanding at the moment…and it makes them more competitive," he said.

"Obviously, its going to have a have a lot of focus on [the chips] helping it maintain or regain market share."

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