Intel Opens Up

Despite successfully launching 22 new core processors in the last three
months, Intel will invest more time and energy
in other areas, the company said as part of the company’s second-quarter financial report.

CEO Craig Barrett said Intel would use the rest of the year to
expand the company’s presence in chipsets, flash and other communications
products. Intel said it is willing to splurge as much as $4.8 billion on R&D
and infuse approximately $4 billion into its capital spending coffers to
make the necessary investments.

“Intel continued to post strong year-over-year results in the second
quarter as our microprocessor business followed seasonal trends and our
communications business grew nicely, led by flash memory,” Barrett said in a
statement. “We had a notable quarter with respect to new product launches
with the introduction of 90 nanometer (nm) processors for mobile and the
enterprise market segment along with our Grantsdale chipset.”

Intel reported strong second-quarter earnings Tuesday, which fell
in line with Wall Street predictions.

The company said its revenue reached $8.05 billion, which is about the
same as the first part of the year but 18 percent better than Q2 in 2003.
The company reported a net income of $1.8 billion — also flat compared to
last quarter but up 96 percent over this same time last year.

It reported earnings per share of $0.27 cents, which is exactly what
analysts estimated the company would report. Last month during its
mid-quarter update, Intel predicted its revenue for the second quarter would
hit between $8 billion and $8.2 billion, as compared to the previous range
of $7.6 billion to $8.2 billion. For its third quarter, Intel is predicting
it will earn between $8.6 billion and $9.2 billion.

Intel’s Architecture microprocessor units were
lower with the average selling price just below the first-quarter level, Barrett said.
Chipset units were higher and Intel said its motherboard units and
connectivity product units set a company record.

Intel said its inventory levels grew by approximately $427 million during
the quarter, with approximately half of the increase coming from
microprocessor inventories, and the balance primarily from flash memory and
chipset inventories.

So why not continue to build on CPU inventories? Its next-generation Pentium 4 (Prescott),
Pentium M (Dothan) and Xeon (Nocona) chips were well received.

Perhaps it has something to do with a Merrill Lynch
that suggests the semiconductor sales cycle will cool off after
two hot years. The analyst firm claims manufacturers are sitting on
inventories as it deals with the current enterprise PC and server refresh.

In-Stat/MDR Principal Analyst Kevin Krewell said Intel also faced many
challenges on the manufacturing and competitive fronts.

“Intel began production on 300mm wafers using a mature 130nm process
technology. But difficulties in a new 90nm process technology caused delays
in the introduction of the Prescott and Dothan processors by close to six
months,” Krewell said in a report. “The problems faced with 90nm led to a
complete overhaul in Intel’s product roadmap for 2004 and beyond.”

Krewell said Intel also faced increasing competition from AMD in processors for servers and desktops.

“With the introduction of the 64-bit-capable Opteron server processor and
the Athlon 64 desktop processor, AMD now stands toe-to-toe with Intel on
mainstream PC performance and against Intel’s Xeon server processor in
performance and scalability,” he said.

“The Opteron challenge to Xeon gained momentum
in 2003, with design wins at HP, IBM and Sun Microsystems. However, Intel
made slow but steady progress in 2003 in unit volume shipments of Itanium,” Krewell continued.
“Intel’s Madison and Deerfield processors improved the prospects of the IA-64
architecture targeted at replacing RISC processor in high-end servers.”

Intel will give its next-generation Itanium processor, code-named Montecito,
a lot of attention. When the
dual-core processor debuts in 2005, it will contain 1.7 billion transistors
and run twice as fast as Intel’s current Itanium family.

Still, Intel’s investments in non-CPU or Application Specific Processors
(ASP) should serve the company well. While they are the most volatile
segment of the semiconductor industry, DRAM sales are projected to grow by
55.8 percent to $26 billion in 2004, according to the recent estimates by
the Semiconductor Industry Association (SIA).

The trade group is also predicting Flash memory
sales will grow by 48.9 percent to $17.5 billion in 2004 and to $20.5
billion in 2007. Flash memory devices are used in cell phones, digital still
cameras and a broad range of other applications.

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