Intel: Everything is absolutely fab-u-lous, particularly in servers

The chip fab edge will buy Chipzilla time in smartphones, tablets

Paul Otellini may be stepping down in a few months as president and CEO at Chipzilla, but you wouldn't know it by listening to him talk about the company, its strategies to take on a slew of new competition, and evolve to serve new kinds of customers with devices that are largely not Intel Inside.

During the conference call with Wall Street analysts today after the markets closed to go over Intel's fourth quarter financials, Otellini not only stuck to the script, but defended the company's strategy, as did CFO Stacey Smith. It is enough to make one wonder why Otellini is leaving the company in May.

The story line is much the same as we have heard in the past year: servers are great, storage and networking are growing, the PC business has issues but will rebound as the lines blur between tablets and notebooks with Ultrabook convertibles running Windows 8 and genuine Atom-based tablets become more widely available, and Intel will get some traction in the coming year and into next with Atom-based smartphones.

And, because of its impressive chip manufacturing process lead and prowess as a chip designer, Intel will be able to keep current rivals at bay and blunt the attacks of new ones.

This, of course, is going to take money. A lot of money. And lucky for Intel and its virtual monopolies on the desktop, in the laptop, and in the data center, it can throw off $1bn a month in profits, even when things are not going swimmingly, as they most certainly were not in 2012.

Intel's Data Center and Connected Systems Group, which peddles processors and chipsets for servers, switches, and storage arrays (telling the difference is getting increasingly hard there), saved the company's bottom line in the fourth quarter and for the full year, and did its part to shore up the top line, too.

Otellini said on the call that 22 nanometer chips would start ramping in the Xeon and Atom server products in the second half of this year, so if you were expecting to see "Ivy Bridge" family Xeon E5 v2 chips before then, you are bound to be disappointed.

With the entry Xeon E5-2400 and high-end E5-4600 "Sandy Bridge" processors only ramping up last summer after a May launch, no one was really expecting to see Ivy Bridge kickers to these, and given the relatively slow ramp of the workhorse E5-2600 parts launched last March, a refresh this March also seemed unlikely. Intel is perfecting its 22 nanometer processes with Ivy Bridge desktop and laptop parts and needs to get that fully ramped to the "Haswell" family of chips for PCs hits the ground running sometime in the first half of this year.

To put it bluntly, Intel can coast a little in Xeon servers so long as it is addressing concerns about ARM servers but it has to preserve whatever excitement it can create in a PC market that might rebound a bit in 2013 when the world's economies pick up a bit.

Otellini said that the Haswell processors would result in the single biggest generation-to-generation change in improved battery life for an Intel processor, something that is enabled through a very sophisticated power management. If the Haswell chip is so good, it will call into question why there is a high-end Atom S Series server chip, but let's not get ahead of ourselves here.

In the fourth quarter, the Data Center Group (as it is still called in Intel's financial presentations) had sales of $2.83bn, up 4 per cent from a year ago and up 7 per cent sequentially. The Sandy Bridge ramp was rolling along, Otellini said.

The volume of chips and chipsets was flat sequentially and actually down from a year ago, but average selling prices for server, storage, and switch chips were up 5 per cent from a year ago as the mix shifted towards higher priced SKUs and, interestingly enough, good uptake of "MP products," which is Intel shorthand for servers with more than two processors.

The Data Center Group posted $1.33bn in operating income, which was down 8.5 per cent. So something was eating into those server profits even with the revenue bump.

For the year, the Data Center Group had $10.7bn in revenues, up 6 per cent, and posted $5.07bn in operating income, down a half point. For the full year, chip volumes were off 1 per cent but ASPs were up 4 per cent. In his CFO commentary, Smith said that a richer mix of chip sales in the data center (probably helped a bit by Itanium and the four-socket Xeon E5-4600 as well as fat configurations of the Xeon E5-2600) as well as "significant growth" in cloud server sales was partially offset by weakness in the enterprise server market.

Looking ahead, Smith said on the call that Intel expected for the data center side of the Intel house would return to double digit growth in 2013, helped no doubt in part by the Ivy Bridge refresh coming in the second half.

Intel is looking for low single digit growth for the year in the PC Client Group, which makes chips and chipsets for anything that is not in the data center or in an embedded device. This would be driven by the Haswell ramp for PCs during the first half of the year and extending out from there.

Smith said that Intel was qualifying Haswell for sale during the current quarter (meaning Q1 2013) and that it had already done some writeoffs late last year relating to early production runs on Haswell.

In the fourth quarter, the PC Client Group booked $8.51bn in sales, down 6 per cent, and its operating income was $2.82bn, down a much steeper 19.6 per cent. Intel said that OEM customers who build PCs were reducing chip inventories, and Intel took actions in the fourth quarter to rebalanced its fab capacity to ramp up 14 nanometer processes, which will be used for the "Broadwell" family of PC chips in 2014. In any event, PC chip volumes were down 6 per cent and ASPs were flat in Q4.

For the full year, the PC Client Group saw volumes drop one point and ASPs fell 2 points, so it is no surprise that revenues were down 3 points to $34.3bn. Interestingly, notebook PC chip ASPs were off 6 per cent – this is a place where AMD still competes hard with Intel – and desktop PC chip ASPs were up 4 per cent year on year. Operating income for the PC Client Group fell 11.8 per cent to $13.1bn.

In the final quarter of 2012, chips etched using 22 nanometer processes accounted for half of Intel's volume, and the game in 2013 is to ramp 22 nanometer as high as possible as fast as possible, first with Haswell for PCs and then with Ivy Bridge for servers.

The plan calls for Intel to start ramping up 14 nanometer wafer baking as 2013 comes to a close, which will cause a certain amount of consternation to anyone chip designer and fab partner that thinks they can easily take on Chipzilla in any market where it is the dominant incumbent.

It remains to be seen how well Intel can deploy this process lead over the ARM collective to make dents in the tablet and smartphone spaces, but Otellini said that the market for PCs that were less than one inch thick grew by a factor of 18X in 2012 in the United States and Intel expects to see similar patterns in other markets.

Ten different "Clover Trail" Atom SoC tablets are shipping with several more in the works, and there are seven smartphones running the "Medfield" Atom SoCs, which he said were "extremely competitive with the best ARM designs on performance and equal or better on power and battery life."

As usual, Intel is touting its prowess in chip manufacturing and the fact that it has the cash to continue to invest in equipment and facilities to keep this edge over other commercial foundries and the few captive ones that remain. Intel invested $3bn in chip equipment manufacturer ASML in 2012 and spent another $11bn on capital expenses, plus $4bn in dividends and $5bn in stock repurchases.

This year, Intel expects to have about the same level of capital expenses and will fork out $2bn to start doing the initial facilities for 450 mm wafer manufacturing, which is not expected to go volume until the latter half of this decade.

Smith said that he expected that 450 mm gear would be available around 2015 or so, and would not comment on if the 10 nanometer technologies that could be paired with it would use immersion or extreme ultraviolet (EUV) technology to etch wafers.

What Otellini was emphatic about was that Intel continue to invest in wafer baking and fabs.

"As I look forward into the business in 2014 and 2015 as we finish up the 14 nanometer factories and begin deployment and construction and equipping of the 10 nanometer factories, we need those factories," Otellini said.

"Principally for our view of the computing market, and in that I include tablets and also the data center. Remember, the leading edge capacity is the lowest cost for us on a per unit basis, the highest performance, and the lowest power. So regardless of what you think the size of the market is, those leading edge fabs are the single greatest asset that we have." ®

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