Intel Posts Another Record-Breaking Quarter, But Atom Sales Slump

Intel reported its sales figures for the first quarter of 2010 yesterday, and the company's market position could scarcely be better. Revenue in Q1 was $10.3 billion—a record for the quarter—while sales declined just three percent between Q4 2009 and Q1 2010. Processor shipments typically fall about nine percent during this period; Intel didn't just beat the odds, it trounced them.

"The investments we're making in leading edge technology are delivering the most compelling product line-up in our history," said Paul Otellini, Intel president and CEO. "These leadership products combined with growing worldwide demand and continued outstanding execution resulted in Intel's best first quarter ever. Looking forward, we're optimistic about our business as Intel products are designed into a variety of new and exciting segments."

Intel isn't just designing products for new and exciting segments, it's ramping production more quickly than it originally planned. The company currently has two 32nm fabs and is ramping capacity more quickly than it originally intended in order to meet increased demand. By early Q4, Santa Clara expects to have a total of four facilities converted for 32nm production. Sandy Bridge—the 'tock' in Intel's tick-tock design—is already sampling and will enter production later this year.

Revenue for the first quarter was up 44 percent compared to Q1 2009, while the company's net income of $2.4 billion was up 244 percent for the same period. According to Intel executives, strong mobile demand drove revenue and ASPs to higher-than-expected levels; a trend they expect to continue throughout the year. The company implied that it's beginning to see signs of a burgeoning corporate replacement cycle, but ducked questions on whether consumer or corporate spending would drive revenue in 2010.

When it does arrive, said corporate refresh could be enormous. We discussed the vastly superior economics and performance-per-watt of new server ships from both AMD and Intel a few weeks back, particularly when compared to servers that are 4-5 years old. According to Intel, it's not just server rooms that are getting on in years, the average desktop is five years old and the average laptop, four. If the economic recovery continues, corporate purchases could surge in the next 6-12 months.

Atom Decline Mars A Nearly Perfect Quarter

The only bit of bad news in Intel's financial results was a 19 percent decline in Atom processor/chipset revenues in Q1. Intel's chief financial officer (CFO), Stacy Smith, dismissed the surprising falloff as caused by "inventory reductions after a strong consumer-driven fourth quarter."

This seems unlikely, or at least incomplete; Intel gave no sign in January that it expected Atom sales to decline in Q1 even as mobile unit shipments and revenue both grew. One of the points Intel has hammered home in its last three earnings calls is how closely it's monitoring channel inventory and supply. Investors were initially dubious when Intel released its Q3 2009 earnings and Q4 projections, but the CPU manufacturer held firm and turned out to be right. It's similarly dubious that the company took its eye off the ball—Atom/netbook sales were one of the only bright points of 2009 and a huge OEM focus.

It's possible that the beginning of the economic recovery and the launch of Intel's new mobile Core i3/Core i5 processors combined to knock Atom  demand down a peg or three. Consumers who might have opted for an Atom 12 months ago could have stepped up for one of the newer chips (there are some very nice deals on low-end Core i3's available), or might have snagged Core 2 Duo systems that were cut to clear them out and make room for the new SKUs.

Another potential factor is that Atom, in its current incarnation, could simply be running out of juice. Atom is nearly two years old—it's practically ancient in Intel years—but the platform's performance has scarcely budged since its initial incarnation. The various netbooks built around the platform have gotten nicer, RAM loadouts have increased, and SSDs have become more affordable, but Intel has focused on lowering power consumption rather than increasing performance.

The majority of people who buy netbooks already have primary systems and fierce OEM competition have driven netbook prices through the $250 price point. After two years of meteoric growth, it's plausible to think that most of the consumers who wanted a netbook have already bought one. Intel finally thinks a performance boost is in order, as company CEO Paul Otellini noted:

"I think there will still be significant growth in the netbook business year-over-year. I think that there are rather than pricing, I think, we would look to features and integration as a technical novelty or twist here. The next innovation coming out on Atom is dual-core, which comes out in the second quarter, so that it will ramp for the holiday season this year and I think that will be a very attractive product."

We'll be looking forward to it; a dual-core Atom netbook CPU shouldn't actually be too difficult. Moving to the integrated Pineville SoC reduced total platform TDP from 11.8W to 7W, giving Intel a margin to work with while keeping power consumption low. It's also likely that we'll see dual-core SKUs running at 1.2-1.4GHz. The benefits of a second core are substantial enough that Intel could significantly cut the clockspeed of each chip while improving performance.