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Intel 4th Quarter 2006 Earnings

February 19, 2007

Profits Down 39%

It has been said that you can prove almost anything with statistics.

About the most misleading statistic that has been printed recently about Intel's fourth quarter (Q4 '06) is that, compared to the year before, profits were down 39%.

However, if you compare Intel's fourth quarter to the quarter before, profits were not down, but up.

What's going on?

What's going on started long before Q4 of 2006. Or even Q4 of 2005.

AMD's microprocessors at one time started to outperform Intel's.

The bottom finally fell out of Intel's financials in the first quarter of 2006.

Similarly, the reason Intel did better in the recent quarter, compared to the previous quarter, had to do with developments that were set in motion not just this past year but years ago.

This chart shows the steep decline in the Intel financials in the first quarter of 2006

The Core Microarchitecture

Intel's financials fell into the mire in the first quarter (Q1) of 2006, and Intel has since been digging its way out.

Its notebook and desktop chips and its volume, DP (dual-processor) server chips have now leapfrogged the competition by a factor of two in terms of performance.

Intel first leapfrogged with its first wave of products based on the Core microarchitecture--Core 2 Duo, Xeon 5100, and dual-core Core 2 Extreme.

This move went largely unanswered by the competition, and then back in November Intel introduced processors containing four cores, what Intel calls "the industry's first quad-core microprocessors for volume servers and PCs" (p. 3).

Intel currently has at least "nine different quad-core processors" (p. 4).

These products with four cores go under the brands of Xeon, Core 2 Extreme, and Core 2 Quad.

The server processors with four cores are the Xeon 5300 and 3200 families. The 5300 is for dual-processor (DP) servers, the 3200 for single-socket servers.

On the client side of things, please take note that not all Core 2 Extremes are quad-core.

There is a dual-core Core 2 Extreme as well.

The Core microarchitecture is descended from the Mobile microarchitecture of the Pentium M on the far right

Gross Margins

It appears that Intel has turned the corner, thanks in large part to the Core microarchitecture. Even so, the company still has a long way to go.

Intel may have set a few records in Q4. However, gross profit margins were basically flat.

What's worse, gross margins are expected to be flat for some time to come.

Behind what appears to be slow progress forward is a bitter struggle over market share.

In fact, Intel lost market share last quarter.

AMD's Native Quad-core Microprocessors

AMD's Chief Sales and Marketing Officer proudly shows off AMD's single-die quad-core (left) compared to Intel's dual-die quad design (right)

Leapfrogging the competition by a factor of two generally bodes ill for the competition.

NVIDIA did this to ATI not too long ago, and ATI never recovered.

This is not to say that things are as bad for AMD as they were for ATI.

You remember those processors with four cores that Intel recently released.

Some people say that those processors are not genuine quad-core processors.

The reason is that Intel more or less takes two of it's dual-core parts and places them in a single processor package, the so-called multi-chip package (MCP).

AMD's strategy with quad-core, on the other hand, is different.

AMD is engineering what it calls a native quad-core processor, which consists of a single die with four cores, as opposed to two die with two cores each.

In some respects the design is superior, such as in it having a cache that is shared among all four cores.

When AMD quad-core processors arrive sometime in the middle of 2007, they should level the playing field between AMD and Intel, possibly even give AMD a performance advantage.

It's a winner-take-all business.

Look what happened to Intel when AMD had a better performing chip.

Look what happened to NVIDIA when ATI's graphics processors started winning the benchmarks.

And look what happened to ATI when NVIDIA took back the performance crown.

It's winner take all.

45nm Process Technology

45nm is to debut on the second generation of the Core microarchitecture later this year

One of the milestones of the fourth quarter for Intel was that the company "completed the development of its next-generation 45nm process technology" (p. 3).

Rumors are circulating that processors based on 45nm have either been delayed or are early.

However, official word from Intel has it that 45nm is "scheduled for production in the second half of 2007" (p. 3).

The chips are to enter production in 2007 and ramp in 2008.

Penryn is "the company's first 45nm processor" (p. 3).

Test samples of Penryn were received by one of Intel's teams around 1:00 A.M. in the morning recently.

By about 3:00 A.M. the team had booted an operating system using one of the samples.

Intel has since booted other operating systems "using first silicon" (p. 3).

The Dual-core Ramp

This chart predicted the Intel crossover from single-core to dual-core to occur in Q3. In the event, it did not happen until Q4.

One misleading statistic that Intel published about its fourth quarter was that the company had "ramped dual-core technology to greater than 50 percent of fourth-quarter shipments" (p. 3).

Sounds great.

However, not all dual-core is created equal.

Not all dual-core is based on the Core micoarchitecture. There's still first generation and second generation dual-core that Intel seems to be working through.

WiMAX

Intel seems to be making steady progress on the WiMAX front.

In Q4, the company demoed "its first mobile WiMAX silicon" (p. 4).

The Intel Structure and Efficiency Program

The efficiency review continues at Intel. It is not done.

There may be more layoffs, more selling of divisions of the company, and restructuring.

Intel continues "in the midst of a structure and efficiency program" (p. 5).

Viiv

When will Intel's Viiv initiative start to make enough money that the Digital Home Group is reported as a separate category?

Not yet.

This past quarter the Digital Home Group still did "not meet the quantitative thresholds for reportable segments" (p. 10).

While we do not know precisely how much revenue Viiv or the Digital Home Group brought in this past quarter, or the quarters before, most of what was brought in by the combined Digital Home Group, Digital Health Group, and Channel Platforms Group appears to have come from Viiv if we can assume that Viiv made up the bulk of the sales of the Digital Home Group.

Revenue from these three groups "primarily relates to microprocessors and related chipsets sold by the Digital Home Group" (p. 10).

Since Viiv was launched only about a year ago, it makes sense that the combined groups should have shown strong year over year increases in sales, which was in fact the case.

However, rumor has it that AMD Live! is doing better than Viiv.

And the combined Digital Home Group, Digital Health Group, and Channel Platforms Group spent many times more than they made last quarter.

Ouch!

Source

INTEL FOURTH-QUARTER REVENUE $9.7 BILLION

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