Intel: Flash Business Will Work ‘One Way Or Another’

SANTA CLARA, Calif. – Intel CEO Paul Otellini today attempted to clarify
the company’s situation surrounding NAND flash memory one day after a Q1
financials warning clobbered the semiconductor market.

On Tuesday, Intel (NASDAQ: INTC) warned that its Q1 gross profit margin
would slip from 56 percent in prior guidance to 54 percent, and attributed
this to weakness in the flash memory market. Intel said this was due to
slumping prices.

Otellini, speaking to financial analysts here at Intel’s headquarters,
clarified the statement that hit his company’s stock on Tuesday, as well
as the rest of the semiconductor sector.

Intel had forecast the price erosion from Q4 2007 to Q1 2008 would be 27
percent, when it ended up being 53 percent. This had the double impact of
hurting not only products in manufacturing, but those already done and in inventory.

However, he also noted that Intel has shipped twice as many flash memory
bits as it did in Q4. So while Intel is suffering price erosion, it at least
has a chance to make up for it in volume.

Intel is addressing this problem by focusing on higher value segment
adds, particularly solid state drives (SSDs). The newest notebooks, like
Apple’s Mac Air, use SSD drives, and Intel can offer not just NAND flash but
controllers and power management.

“We will be moving into solid state drives in mid-year to give insulation
against commodity markets,” he told the gathering of suits in the
auditorium. “I have made a personal commitment that this business will not
be a drag on Intel Corporation. We’re going to fix it or make sure it’s
profitable one way or another.”

The Internet Opportunity

As to other areas, Otellini said that thanks to Intel’s restructuring
over the past two years and new cost structure, the company is “in a good
position to go after new markets.” He sees the Internet as the fundamental
driver of the business, because “only” one billion people are online so far.

Intel hopes to see the online population reach two billion over the next several years and expects
to get there by selling more devices to enable more people to get on the
Internet. That’s not just PCs, it’s all devices, and they will need a richer
experience as visual Internet experiences like YouTube and Second Life
demand more processing power.

By the end of Q1, Intel expects to have 72 45nm SKUs on the market, 29 in
server products, 22 on desktop, and 21 in mobile. Otellini confirmed Dunnington
as a six-core multiprocessor Xeon chip that will allow for 24-core servers,
and said Nehalem was on track for a later 2008 release. To prove it, he
announced his entire slideshow was running on a Nehalem-powered box.

Intel has high hopes for mobility, a market it felt would pass 50 percent
of PCs sold in 2009 when IDC was saying 2010. Otellini noted that consumers
are driving notebook sales with just under 50 percent of purchases, and said
that will go up as the cost of parts comes down.

A million free hours

This year marks Intel’s 40th anniversary and Otellini announced an
interesting way of celebrating it. Intel employees will donate one million
free employee hours to assist in their community. “This is our giveback for
turning 40,” said the CEO.

Otellini was followed by Sean Maloney, executive vice president and
general manager of sales and marketing, who said that despite talk of a
slowdown, particularly in servers, he expects growth to continue. He pointed
out that Google, Yahoo and MSN make up eight percent of the Internet server
hardware population, and they will not be going to virtualization, which is
often thought to be a reason for slowing server sales.

Datacenters need more processing power. Data intensive tasks like
financial processing have seen their processing needs go up eight fold,
while oil and gas companies went from nine teraflops of processing power in
2003 to 180 in 2007.

Maloney said that the consumer market is changing to include more
handheld devices, and that Intel’s new Atom processor, codenamed
Silverthorne, will be the chip that takes the company into that market.
“Silverthorne can take us into a number of markets we’ve looked at for a
number of years but never could go after,” he said.

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