Update: Intel's Q2 Atom revenue down with netbook demand

Netbooks were hurt by interest in tablets and low-priced laptops with full-sized screens, CEO Paul Otellini said

Intel's Atom microprocessor shipments declined during the second fiscal quarter of 2011, but the company reported strong profit growth even as it tried to diversify into the smartphone and tablet markets.

Revenue from the Atom microprocessor and chipset fell to $352 million, down 15 percent from last year's second quarter. Intel first started shipping low-power Atom chips for netbooks in 2008 and is now trying to attack tablets and smartphones with newer generations of power-efficient Atom chips.

Overall PC shipments slowed down during the second quarter as consumer spending slowed and tablets stole the spotlight from netbooks, IDC said earlier this month. Worldwide PC shipments totaled 84.4 million units during the second quarter, growing by just 2.6 percent compared to a year earlier, IDC said.

Intel is now rushing future generations of Atom chips toward release to effectively compete in the tablet and smartphone markets, where the company has virtually no presence. Most smartphones and tablets shipping in volume use ARM processors.

After adjustments and charges related to acquisitions, the company's profit was $3.2 billion, or $0.59 per share, in the second quarter ended on July 2, up 10 percent from the same quarter the previous year. On the basis of GAAP (generally accepted accounting principles), Intel recorded a net profit of $3 billion, or $0.54 per share, growing by 2 percent. Analysts polled by Thomson Reuters had forecast earnings of $0.51 per share.

Intel recorded revenue of $13.1 billion on a non-GAAP basis, going up by 22 percent compared with the second quarter of the previous year. Intel's revenue was $13 billion on a GAAP basis, going up 21 percent year over year. Analysts had expected revenue of $12.82 billion.

Despite the slow growth in PC unit shipments in the quarter, Intel's PC Client Group revenue went up by 11 percent year over year. Revenue for the Data Center Group, which deals in server products, went up by 15 percent year over year.

Intel's revenue in the main PC and server businesses went up due to strong corporate demand and "Internet traffic fueling data-center growth," Paul Otellini, Intel's president and CEO, said in a statement.

The netbook market is weak, but the overall PC market remains strong due to corporate demand, Otellini said on a conference call. Demand for mainstream PC chips -- the Core i3, i5 and i7 -- was two-thirds of overall Intel chip sales, Otellini said.

PC unit shipment growth will be around 8 percent for the full year, which is slightly below Intel's earlier guidance, Otellini said. However, Intel's chip revenue will retain its double-digit percentage growth based on higher-margin sales to corporate customers, Otellini said. Atom margins are lower, because the chips go into low-priced netbooks.

Netbooks were hurt by interest in tablets and low-priced laptops with full-sized screens, Otellini said. This quarter, Intel shipped its first dedicated Atom tablet chip, code-named Oak Trail, but Otellini views tablets as "additive" devices that address specific needs.

"It's a device that some people will use [as] a stand-alone device, but many people will use as a companion device," Otellini said.

Intel is now investing in the development of ultrabooks, which the company is promoting as the next generation of PCs. In May, Intel outlined ultrabooks as thin and light PCs that include tablet features. Ultrabooks will account for 40 percent of consumer laptop sales by the end of next year, and the hardware industry's response has been encouraging, Otellini said.

"The ultrabook project is much more akin to Centrino," Otellini said. Intel changed the way PCs connected with Centrino, and Otellini said the ultrabook development is an engineering project to shift the PC market in a new direction. PC prices won't change, so the company has to engineer thinner components for slimmer PCs that are affordable.

Intel's newly acquired McAfee and Infineon Wireless Solutions units performed well, bringing in revenue of $1 billion together, Otellini said. Intel and McAfee later this year will ship the first product that combines Intel's chip features with McAfee software. More details on that product will be provided at the Intel Developer Forum, which will be held in San Francisco between Sept. 13 and 15.

Intel is expecting revenue of $14 billion, plus or minus $500 million, on a GAAP basis for the third quarter. On a non-GAAP basis, Intel expects revenue to be $14.1 billion for the third quarter.

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