Notebook chips lift Intel's Q1 results

Chip giant is much happier than IBM and Sun

Intel hit the high end of its own expectations for first-quarter revenue on strong sales of mobile processors, the company said on Tuesday.

Revenue for the period ending April 2 was US$9.4 billion (NZ$13 billion), up 17% from last year's first-quarter revenue of US$8.1 billion and ahead of the target that Intel set for itself during its mid-quarter update. In March, the Santa Clara, California, company predicted it would take in between US$9.2 billion and US$9.4 billion during the quarter, and analysts polled by Thomson First Call settled on the midpoint of that range, US$9.3 billion, when assembling their estimates.

Net income was US$2.2 billion, up 25% from last year's first-quarter net income of US$1.7 billion.

While growth in overall processor shipments was flat during the quarter, as compared to the fourth quarter, mobile processor shipments set a record, Intel says. In January the company launched Sonoma, the second generation of its Centrino notebook technology, and promised to quickly shift its manufacturing resources to the new mobile chips and chipsets.

The strong demand for notebook processors was felt especially in Europe and Asia–Pacific, notably China and India, said Paul Otellini, president and chief operating officer at Intel, on a conference call following Intel's results.

However, the supply of notebook components remained tight throughout the quarter, says Andy Bryant, Intel's chief financial officer. Intel had reduced production in the middle of last year in order to burn off excess inventory accumulated during the first half of 2004, but demand was stronger than expected in the fourth quarter and Intel was forced to catch up, leading to supply problems earlier in the first quarter.

The situation improved toward the end of the quarter, but not as much as Intel would have liked, Bryant says.

For the most part, Intel's outlook on the current state of the IT industry was far rosier than the one advanced by other tech heavyweights, Sun and IBM, last week. Sun continues to struggle as it reinvents the company with servers based on Intel rival Advanced Micro Devices' chips, and problems within IBM's services business led to an earnings miss at that company.

From Intel's point of view, demand for its products is healthy and real, Bryant says. Last year, Intel noted solid growth in demand, but the company had been concerned about growing inventories at its PC and server customers. That concern has now abated as Intel's customers are building its chips right into PCs and servers that are being shipped right away, he says.

Some analysts have been concerned about the slowing growth of the PC market over the remainder of 2005, but Intel is currently expecting a normal uptick in demand during the second half of the year, Bryant says. "This is business as usual in a pretty good environment," he says.

For the second quarter, Intel expects revenue to fall between US$8.6 billion and US$9.2 billion. The second quarter of the calendar year is generally the worst quarter for chip and PC companies, and the first quarter is also considered a seasonally slow quarter.

Capital spending will be higher than Intel's previous estimates as the company rolls out new chip manufacturing equipment for its 65 nanometer processing technology, Bryant says. Intel will begin shipping 65nm chips to its customers by the end of the year, and has been pleased with the early results from the transition to the new manufacturing technology, he says.

This is the first quarter that Intel has reported financial results under its new operating structure, which divided the company into groups such as the Digital Enterprise Group and the Mobility Group. Intel will break out the revenue and profits or losses from those two groups in its 10-Q quarterly filing with the US Securities and Exchange Commission in a few weeks, as well as in subsequent earnings releases, Bryant says.

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