Despite nagging capacity constraints, whereby demand for its chips outstripped supply, Intel Corp has posted record revenue and higher profit.
The chipmaker said demand was strong across its product range with mobile chips continuing to shine as a jewel in its crown. Mobile platform revenue, which accounted for about one-third of total sales, grew 48% from last year.
We continue to see mobility as vibrant growth, said Intel CFO Andy Bryant, on a conference call. We can expect growth for a while. We don’t think we’ve begun to hit the equilibrium point yet.
Notebook platforms and emerging markets drove an 18% increase in total revenue, which reached $9.96bn, compared to the same quarter a year ago. About one-third of the global PC market now consists of notebooks, said chief executive Paul Otellini, on the conference call.
The Asia Pacific region was Intel’s geographic growth leader with a 28% increase year-over-year, driven by China and India.
China is about to become, if it hasn’t already, the second-largest consumption market in the world for PCs – it’s about to pass Japan, Otellini said.
Emerging markets accounts for about one-third of total Intel business and has done, plus or minus a couple of points, for the past decade. During the current quarter Bryant said he doesn’t expect it moving much out that range.
Mobile microprocessors, flash memory, wireless LAN and application processors had all-time high unit shipments during the quarter.
On the dual-core front, Intel said it shipped more than 1 million notebook, desktop and server units this year and plans to double that by the end of next year. During the third quarter next year, the company would cross over from single- to dual-core platforms, he said in its core platforms.
Currently, Intel has 15 dual-core projects underway, Otellini said. Intel expects to ship millions of dual-core chips in the first quarter of 2006 alone, he said. Intel’s dual-core desktop chip, Presler, recently began to ship and Otellini said to expect desktop systems on the market by early next year.
During the quarter, Intel began commercial production of its 65-nanometer manufacturing process using 300mm wafer technology, which Otellini said he expects to ramp in high volume next year.
The new manufacturing capability is expected to relieve some of Intel’s capacity issues. Even so, the company grew profit 5% to $2bn, versus last year, or 32 cents.
Two factors weighed heavily on profit, Bryant said. He pointed to the unexpected $300m legal settlement with MicroUnity Inc to resolve a patent-infringement case, in which Intel recorded a preliminary $140m charge during the quarter, reducing shares by about 2 cents. Also, Intel was charged $250m, or 4 cents a share, in taxes related to the American Jobs Creation Act.
The company’s bumper third quarter, however, was partly the result of an inventory build in the channel, worth about $100m, in which OEMs stockpiled Intel chips in anticipation of continued capacity constraints. This is typical behavior in the supply chain for computing components and the build will be filled out or used in the current fourth quarter.
However, it has created a mirage effect for the demand of Intel products. The third quarter may seem unseasonably high and, given Intel’s guidance, the fourth quarter looks unseasonably low, but this is not the case. The third and fourth quarters will actually be perfectly seasonal, Bryant said.
Revenue in the fourth quarter is expected to be between $10.2bn and $10.8bn.
Intel’s continued capacity constraints, however, clearly were at the forefront of the minds of Wall Street analysts’ on the company conference call. One analyst asked Otellini if there was any substance to rumors that Intel was getting out of the low-end chipset business, after it decided earlier this year to use outside suppliers to ease its capacity crunch.
We backed off on the low-end desktop volumes this year because of the capacity restraints. We didn’t get out entirely, we backed down, Otellini said. As we get capacity over the next year we expect to reenter that market again. Intel intends to be a broad-base supplier of chipsets, which are intrinsic to its business, he said.
Another analyst asked if there were manufacturing problems that had contributed to the constraint, given this is the first time in recent memory Intel has been capacity constrained for a full year. The factories are healthy, Otellini responded.
AMD overtook Intel for the first time in the US retail desktop market in September, according to research by Current Analysis, and Intel’s capacity issues may have been a factor, Otellini said, in response to another analyst question. But Otellini pointed out the research did not factor in direct business, which left out Dell Inc’s shipment numbers. Dell is not in there and is the largest consumer vendor in the US, Otellini said.
According to Current Analysis’ research, AMD captured a 52% of the US retail desktop space last month compared to Intel’s 46% market share. On a worldwide basis, the numbers don’t look anywhere near like that, Otellini said.
By years’ end, Intel would still be struggling to meet chipset demand, Bryant said. The money that Intel left on the table during the third quarter as a result of the capacity constraint would work out to be the difference between it rounding to the next higher figure for its recent revenue number and probably a bit more, Bryant said.
For the current quarter, he said he expects some lost opportunity in the chipset space, but the rest of the business will be about okay.
Intel continues to own about 80% of the world’s microprocessor market.