Intel is seeing solid results for the Atom processor--possibly giving the first significant evidence of Intel's likely future as a bigger provider of low-cost processors.
Intel confirmed on Tuesday that Atom is hot. CEO Paul Otellini said that Intel didn't meet demand in the third quarter and still can't meet demand. "We did not meed demand in Q3 for the product. We are up again substantially in the fourth quarter. Our expectation is that we will meet demand by the end of the year," Otellini said.
And many of the questions from analysts in Tuesday's earnings conference call revolved around Atom as it delivered $200 million in revenue to Intel in the quarter. "Between the microprocessor and the chipset, we did have a couple hundred million dollars of revenue from Atom in the third quarter," Chief Financial Officer Stacy Smith said. "We do expect that to grow rapidly in the fourth quarter."
What Intel appears to like most about Atom is what it calls "margin characteristics." In other words, it's a low-cost processor, but it yields better margins than typical inexpensive chips like the Celeron. "What we've seen in the third quarter is a very healthy product margin," Smith said.
"On a dollar basis it's equivalent to what we see in Celeron and on a product margin percent it's higher. So if you look at it relative to our low-end mainstream stack, it's generating nice product characteristics," Smith added.
Here's the question: if more and more consumers--particularly in places like China and India--opt for Netbooks with the Atom processor rather than traditional notebooks with standard Intel mobile processors, what kind of an impact will this have on Intel's profits?
Intel claims cannibalization of (higher-margin) mainstream mobile processors is not taking place. "To date we haven't seen any evidence of cannibalization. And believe me we're looking. It's something we watch very carefully," Otellini said. "And one of the best pieces of evidence that we have is the strength in the core mobile business independent of Atom," he added.
But tighter consumer budgets worldwide could push more people toward Netbooks. A Gartner report came out Tuesday that said third-quarter PC shipment growth was driven by sales of sub-$500 notebooks. Netbooks typically sell for less than $500.
Other notable comments in the earnings conference call:
• Inventories: Taiwan and channel customers cutting back, consumer traffic overall is light--Otellini
• Intel-Micron: Joint Singapore flash memory chip fab now on hold
• Corporate segment: In Q4, corporations to show softness as IT gets rationalized in macro environment
• Nehalem processor: Intel started shipping Nehalem processor, announcement coming in November
Intel CEO Paul Otellini had mostly upbeat news on Tuesday when the world's largest chipmaker reported solid earnings, but Atom processor issues and weakness in the flash memory business were recurring themes in the earnings conference call.
One of the most interesting comments made during the conference call on Tuesday by Otellini was about the Atom processor. "(Atom) is less than a third the performance of our Centrino (processor). You're dealing with something that most of us wouldn't use," he said.
Though he qualified this by repeating the mantra that Atom is "principally designed for Web access" and not something to do photo editing on, the comment crystallizes the challenge Atom presents for Intel. That is, the processor offers only mediocre performance and potentially cannibalizes a market that the longstanding--and higher-performance--Celeron processor has thrived in.
The cannibalization question was brought up by two analysts during the conference call, and Otellini responded this way: "We do not see (Atom) replacing Celeron. If you look at the Netbook products being built around Atom, they're all lower-priced, lower features, smaller screen size notebooks aimed at first-time buyers or second, third, or fourth machine in a household. We don't see any cannibalization."
Another challenge: Intel doesn't have a handle on the Atom market yet. In short, Atom is still a work in progress and it is not yet clear how big the market will be and how it will develop. Otellini said that he believes Atom is creating a new segment. But Atom plays in a very low-cost market segment that has the potential to drag down Intel earnings in the future. At least that was the tenor of many of the questions posed by analysts during the earnings conference call.
Intel has said from the beginning that Atom was designed to make money in low-cost segments, and CFO Stacy Smith repeated several times during the conference call that Atom has been factored into its forecast for better gross margins in the third quarter. "(Atom) is in the 58 percent gross margin that I've forecast for Q3," Smith said.
Otellini and Smith also addressed Atom shortages. "The supply constraints we're seeing with Atom are specifically the back end, the test constraints. We have plenty of die (chips). As demand's going up, kind of month by month, we're jumping to keep enough test capacity in place," Smith said.
"The other part of that is to make sure we have enough chipsets," Otellini added. And he went on to say that Intel has "been increasing planned production of Atom for this year and next (year) every forty days since last November. Not just in Netbook segments but also in embedded and consumer electronics segments."
Flash supply and upcoming Larrabee for workstations
Profit shortfalls in the NAND flash memory business have been weighing on Intel earnings for many quarters. Intel is trying to address this through supply constraints. "Taking some actions to limit the amount of supply growth in this environment. As you know the NAND pricing continues to be very weak, " Otellini said.
Responding to questions about DreamWorks Animation choosing Intel chips over those from Advance Micro Devices, Otellini said this is "reflective of a very competitive roadmap we have, not just in servers but also in workstations as Larrabee comes on."
Larrabee is a high-end graphics chip due in 2009 or 2010 and is expected to offer as many as 32 cores.
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