Intel lays out map for stronger demand, 500MHz chips

Intel has met with the Wall Street community, reassuring investment analysts that the company has programs in place to take care of inventory problems as it transitions to new-generation technology, including 500MHz chips in the first half of next year. The event this week came in the wake of last week's disappointing quarterly financial report, with news that Intel's net income in the first quarter tumbled 36% from $US2 billion in the same period a year ago.

Intel has met with the Wall Street community, reassuring investment analysts that the company has programs in place to take care of inventory problems as it transitions to new-generation technology, including 500MHz chips in the first half of next year.

The event this week came in the wake of last week's disappointing quarterly financial report, with news that Intel's net income in the first quarter, ended March 28, tumbled 36% from $US2 billion in the same period a year ago.

Despite the drop in demand from leading PC manufacturers over the last few months, the underlying fundamental indicators for future demand are strong, according to Intel officials.

"We just finished a difficult quarter," said Andy Grove, chairman and chief executive officer of Intel. "The operative word you will hear here is inventory."

Intel's road map continues to segment the microprocessor market into four areas: mobile PCs, basic PCs, performance PCs, and servers and workstations, Grove said.

"Our vision is of a large number of interconnected computers ... driven by millions of servers, and clients will be made up of a wide variety of computers," said Grove. "Our strategy is to be the best in every one of those segments."

In the first quarter, PC manufacturing "ran ahead of demand," said Sean Maloney, vice president and director of sales and marketing. But in the second quarter, there will be a major transition to the P6 micro-architecture, he said.

This, combined with seasonal trends that make the second half of the year typically stronger than the first half, "make us more optimistic for the second half," Maloney said.

There was some discussion today about whether Intel's segmentation strategy and stronger push into the low end with its new Celeron chip would cannibalise higher profit-margin products.

"There's always a risk when a company splits its product line that complications will follow, and the low end will end up bringing margins down," said Robert Merkle, an analyst with Hotchkiss Associates, investment advisors in Chicago.

In the past, Intel would simply bring down prices on older chips, which brought the chips into lower-end machines, he noted. But producing chips with different characteristics for different market segments is complicated and could have a financial impact on the company, analysts noted.

"I don't think anyone knows whether the (basic PC) will cannibalise the higher-performance PCs," said Craig Barrett, president and chief operating officer, adding, "but I think it will be a market expander."

Barrett, who will be taking the reins as CEO from Grove in May, said one advantage of splitting the Intel line into segments is that it allows the company to price chips for one segment without affecting price points for other segments.

Barrett and other executives here today summarized the company's road map for chips in the different segments, which includes delivering 500MHz chips in about a year.

Intel's continuing push into the midrange and higher-end server market will be marked this year with the Xeon chip, announced yesterday.

The Xeon will be delivered in the second half of this year with 0.5Mb to 1Mb of cache, and a 200MHz clock speed, but will quickly move to 0.5Mbto 2Mb of cache and 500MHz clock speeds in the first half of next year, said Barrett.

Meanwhile, the Pentium II, for the performance PC segment, will transition into the chip code-named Katmai in the first half of next year. Clock speeds for the Pentium II will move from the current 233MHz to 400MHz in the first half of this year, to 333MHz a to 400MHz in the second half and 500MHz or greater in the first half of next year, Barrett said.

The chipset and bus speed for the chips will move from the current 440LX and 66MHz, respectively, to 440BX/100MHz in the first half of next year.

The Celeron chip for basic PCs will get 128Kbit on-board cache by the end of the year, and boost in clock speed from the current 233MHz to 333MHz by the first half of next year.

Meanwhile, Intel's rapid move to 0.25 micron chip technology will let mobile PCs consume less power. By the end of the third quarter, Intel will stop producing 0.35 micron chips, Barrett said. The 0.25 micron technology will allow chips to consume 1.7 volts rather than the 2.5 volts consumed by 0.35 micron chip technology.

Intel also outlined several programs designed to trim inventory in the channel.

"Inventory is a life or death issue," said Maloney.

Intel's new programs focus on improving channel technical expertise and channel business operations.

With many PC makers leaving it up to the channel to configure PCs and do final assembly to customer order, Intel has initiated a certified training program. The program offers special communications, priority support and expert tools for manufacturers' channel partners.

The program is designed to improve resellers' credibility and industry recognition through Intel certification, said Maloney.

Intel also has initiated two electronic business programs: supply line management (SLM) and the Intel e-commerce program.

The SLM program replaces the old system of phoning and faxing inventory and order information with frequent network uploads of customers' manufacturing requirements into Intel's logistics systems. There is also a single image of the supply line, jointly managed by Intel and its business partners via the company's ProShare conferencing product.

The Intel e-commerce program allows customers to place orders and get pricing and availability information online.

Both programs are underway in trials with business partners and will take up to 18 months to be completely rolled out, officials said.

Looking ahead, Intel moved to calm investors' nerves after last week's bad news.

For the consumer market, retail sales figures mask a trend toward the purchase of higher-end PCs, said officials. Often, when analysts study the consumer market they only look at retail sales and not at other sources, noted Maloney.

In retail, the average price of purchased PCs has come down from $US1,594 in January 1997 to $1,323 in January 1998, he noted. But many home buyers buy from direct channels, he said.

Taking this into account, between 20% and 30% of all home buyers purchase PCs for less than $1,500, but the rest pay more than that for their computers, Maloney said, citing figures culled from various sources.

On the high end, the move of many software vendors to shrink-wrap enterprise software and package it with Intel-based servers should create a demand, as the high-volume business model that worked on the low end and midrange platforms moves up the scale, said Barrett.

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