Intel's Q1 boosted by enterprise strength, new products

McAfee and Infineon Wireless contributed to Intel's Q1 revenue and profit growth.

Intel reported growth in revenue and income for the first quarter of 2011, driven by the addition of new products and strength in the enterprise market.

The company reported net income of $3.2 billion on a GAAP (generally accepted accounting principles) basis for the quarter ended on April 2, up 29% compared to the same quarter a year ago. The company reported earnings per share of $0.56.

Intel reported revenue of $12.8 billion for the first quarter, growing by 25% compared to the year-ago quarter. Analysts polled by Thomson Reuters estimated revenue to be $11.6 billion.

Intel earlier this year completed the acquisitions of security company McAfee and Infineon's wireless division, which contributed around $500 million to the first-quarter revenue, said Stacy Smith, Intel's chief financial officer, in a statement. The company announced new Sandy Bridge processors and also fixed the Cougar Point chipset design issue associated with new processors without any revenue impact.

The chip maker on Jan. 31 had said it expected the chipset design error to reduce revenue by approximately $300 million during the first quarter.

Revenue for the Intel Architecture Group during the quarter was $12.2 billion, which was up 23% year over year. Revenue for the PC Client Group, which offers laptop and desktop chips, was $8.6 billion, up 17% year over year. Revenue for the Data Center Group, which offers products for servers, storage and workstations, was $2.5 billion, up 32% year over year.

The strong demand for data center products in the enterprise continued from the previous quarter, and the company's server business exceeded expectations, Smith said in the statement.

"We continue to benefit from demand strength in the enterprise and emerging market segments, despite softness in the consumer market segments of the U.S. and Western Europe," he said.

Intel in early April started shipping new Xeon E-series server chips based on the Sandy Bridge architecture, and there is a strong demand for single-socket server chips, Intel CEO Paul Otellini said during a conference call.

The company is bullish about the data center business and expects it to be a major driver of business for years to come, Otellini said.

Revenue also went up due to a rise in PC chip prices compared to the fiscal fourth quarter of 2010. The inventory of older chips started clearing up during the quarter, and adding new Sandy Bridge chips to the mix kept the price ceiling high, Smith said.

Intel, whose chips go in around 80% of the world's PCs, is trying to fend off a growing interest in tablets, a market ruled by rival ARM, which specializes in making the low-powered chips these devices require. PC shipments during the first calendar quarter of this year totaled 80.56 million units, falling by 3.2% year over year, according to IDC. IDC expects tablet shipments to reach 44 million units this year, up from 18 million last year.

But Otellini said the PC market decline on an annual basis is being overstated by the industry research firms. They do not account for sustained PC growth in emerging markets, and the normal growth pattern will become evident through chip shipments from Intel and other chip makers over the year, Otellini said.

PCs are affordable in markets like Latin America, Eastern Europe and China, where computer penetration is low, Smith said. PC makers also cleared out inventory in the fourth quarter and refilled it this quarter, which led to an increase in chip shipments.

"The PC business has evolved into a global industry" that has expanded to 400 million units every year, Otellini said. The company expects double-digit growth in PC shipments for this year. Emerging markets account for more than 50% of Intel's total business.

Otellini said there could be some tablet "cannibalization" of PC sales, but said the company was agile enough to turn the dial to meet demands in the new markets. Intel is investing more in the design and manufacturing of low-power chips to make tangible progress in the tablet and smartphone markets.

Intel earlier this month launched its first Atom chip for tablets, code-named Oak Trail. The company has "good design momentum" around the chip for multiple operating systems, including Meego, Microsoft's Windows and Google's Android, Otellini said. Companies including Lenovo, Samsung and Fujitsu are expected to launch tablets starting in May.

Intel is currently developing the chip code-named Medfield for smartphones, a market in which it has no presence. The company, however, lost volume shipment opportunities for the chip after Nokia decided in February to establish a future smartphone strategy around Microsoft's Windows Phone OS. Windows Phone OS does not work on Intel's chips. Intel is now pursuing other phone makers to adopt Medfield, Otellini said.

"I would be very disappointed if you didn't see Intel-based phones on sale 12 months from now," Otellini said.

Otellini said Intel is trying to scale down power consumption on its Atom chips to match the ARM processors. He also said that Intel has other advantages over ARM going forward, including robust computer architecture, superior graphics, integration of communications and the advanced manufacturing process.

The company currently makes chips using the 32-nanometer process, and will start making chips using the 22-nm process by the end of this year. Intel has said it would match ARM on power consumption by 2013, when it launches tablet chips made using the 22-nm process.

The company projects second-quarter revenue to be around $12.8 billion, plus or minus $500 million.

Copyright © 2011 IDG Communications, Inc.

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