Yesterday we reported about the financial details of Intel’s second quarter 2011 earnings report. For the fifth time consecutively the company managed to report record revenue. In this analysis we will touch the finer points of the call regarding Intels strategy going forward in various business units.
One of the big topics at the earnings call was the recently announced Ultrabook initiative. At numerous occasions the CEO and CFO used the catch phrase "redefining the PC category" when talking about Ultrabooks. At the Investor Meeting held in May and a bit later at Computex, Intel lined out their new strategy for notebooks. Until now notebook processor TDP for standard models was at about 25W since Intels Centrino push but later rose to the 35W – 45W range to accommodate for dual- and quad-core CPUs as well as integrated graphics capabilities that were previously budgeted in the chipset TDP.
Intel’s New Roadmap – Focus on TDP and expanding on power limits to expand product range
With their Ultrabook move, Intel aims to move notebook CPUs into the 10W – 15W range. By the end of 2012 they target to make up 40% of notebook shipments with this product category. When asked how this differs from their previous CULV strategy, Mr. Otellini pointed out, that this was merely a point product focusing on form factor. He even outright admits that not a lot of engineering effort was put into it with partners. Ultrabooks at the contrary should be looked at a whole package like Centrino. Centrino jumpstarted notebooks offering decent battery life and wireless networking capabilities 8 years ago.
With Ultrabooks Intel wants to move the whole industry towards a new form factor. This includes not only the thinness of the devices but also features like always on and always connected capabilities. Intel also talked about instant on and instant boot, but some of those aspects are not under their control as these are dependent on the software running on the hardware. All these goals require a tremendous engineering effort which Intel is apparently willing to put into it. A few weeks ago reports have emerged from sources close to vendors that Ultrabooks are received very skeptical. Intel is said to pay massive sums to not only support engineering but also marketing of these products.
Regarding the pricing concerns about Ultrabooks, Intel acknowledges that at this point all these features add to the cost of the product. As they don’t see PC prices generally going up, their investments in engineering of these products also targets cost reductions. Ultimately Intel hopes that with the next generation of silicon the whole thing gets cheaper and thus allows them to target a bigger market. Intel also tries to leverage a bit of the tablet hype currently going on, with stating Ultrabooks will combine PC with tablet functionality. More details about this new type of product will be shared at the Intel Developer Forum in September.
Intel claims to drive mobile Internet through their ever-expanding data center business
Most interestingly Intel keeps touting how they benefit from growth in cloud computing due to the explosion of internet-enabled devices. What they conveniently ignore is the fact that a lot of these devices is powered by chips not made from Intel. Intel still claims that they benefit from this heavily and some of this success can’t be outright denied. The question that remains is how that plays out in the long term, with ARM-based CPUs projected to make inroads into the notebook segment over the course of the next few years.
This brings us to tablets which were only covered in detail in the Q&A part of the call. Mr. Otellini acknowledges Apple’s success in this segment but notes that they consider tablets additive to computing – they shouldn’t replace other products. He admits though that this is one of the reasons that netbooks went down year over year, which are considered additive products as well. He also points out that some of that may also be due to very attractive low-end notebooks.
Intel is currently involved in developing tablet designs for both Android and Windows 8. When specifically asked how Windows 8 will impact the company, Mr. Otellini pointed out that whenever Microsoft released a new operating system, Intel benefited from it. He expects Intel to be very competitive in the Windows 8 tablet segment and plans to "outperform, out battery and out compatibility the ARM guys in Win8 tablets". We can only hope for Intel that in the end "out battery" will not be taken the other way than it was intended.
Intel also touted the advantages of their 22nm process featuring 3D transistors, going into volume production later this year. This and the incremental ramp of the 32nm process had an adversary effect on the gross margin though, something investors are not so happy about. But Intel stays committed to stay in front of the competition with regard to manufacturing and this comes at a price. It also allows them to cover up some shortcomings in their microprocessor designs, especially when it comes to power consumption.
Another interesting point is the success of the Core i3/i5/i7 product line. According to Paul Otellini, about 2/3 of the PC client business is made up of these products, over 50% of which are based on the most recent Sandy Bridge core. Intel states that this is the fastest ramping product to date, with it being ahead of previous generations by 20%. The CFO even admits to have underestimated the success of these products, as they have expected it to make up a lower percentage of their product mix. As a result ASPs have been stronger than anticipated, but will remain largely flat in the third quarter.
In response to a question regarding Romley – the server platform revolving around Sandy Bridge-E, Mr. Otellini said that the schedule remains unchanged, thus providing a strong response to alleged problems. The product will be in volume production this year. The fact that it isn’t already in productions might explain some of the rumors, that Intel needed to roll out another stepping of the chip. So Intel remains committed to deliver this product in time, while not specifying a launch date, as server customers are usually conservative about such things. The CEO also remarks, that its a very exciting product and the performance is quite good.
Another key point in Intels success is the role of emerging markets. While highly developed markets like North America and Western Europe are either flat or down a bit, emerging markets are the key driver here, due to the low PC penetration rate and sinking prices.
"Emerging markets already make up more than half of our revenue. And as the technology that we sell becomes more affordable to billions of consumers, we will continue to see robust growth from emerging markets", said Stacy Smith, Chief Financial Officer at Intel. By 2012 Intel expects Brazil to become the third largest market for computers.