Intel sees surging demand for Pentium M

Santa Clara (CA) - In its regular second quarter conference call Thursday afternoon, Intel chief financial officer Andy Bryant reported revenue on the high side of the company's expectations, with a key factor being a surge in demand for mobile CPUs, led by Pentium M.

"We're seeing a conversion to mobile across the world happen faster than we thought," said Bryant. "We expected [mobile CPU demand] to be stronger when we began the quarter, and it's done even better than we expected."

Leading the surge in demand, Bryant noted, are Asian markets, with mobile CPUs experiencing "strength in all geographies," including Europe and the US. However, he also said that "visibility" is greater in Asian markets, where suppliers record their sales in standard databases and sell directly to customers instead of to retailers.

Recently, industry analysts have publicly speculated that Apple's CPU deal with Intel, announced earlier this week, could provide yet another boost to Pentium M demand. A failure on the part of Power CPU manufacturers, including IBM, to develop a G5 chip both small enough and cool enough for use in Apple's PowerBook models, is believed to be one reason for Apple CEO Steve Jobs' decision to move from Power to Pentium CPUs. If efforts to move PowerBook to a Pentium M platform so much as appear to be accelerated, say analysts, competitive notebook manufacturers may respond with increased Pentium M orders themselves.

Would Intel's factories be able to keep up with yet another surge in mobile demand? Yesterday, Bryant commented that factory production during this quarter may actually be catching up with demand, and that the company may find a chance to add to mobile CPU inventory in Q2. "In the microprocessor space, I think we're coming into balance," Bryant added, "and I think with a little luck, I can even build a little bit of inventory in microprocessors for the second quarter. I don't sense a second half where I have unfulfilled microprocessor demand."

With regard to demand for Intel chipsets, Bryant reported demand is exceeding production capacity. "Those factories are operating at what I call 100% plus," he said, "which means we're using the margin that's generally set aside for maintenance as production instead of maintenance. I expect that to continue for a period of time...For right now, I'm chasing demand pretty hard." Later, he added that there appeared to be more demand for chipsets than he could supply, remarking candidly, "I can't build inventory there."

On the negative end of the news scale yesterday, Bryant sounded a note of disappointment with regard to sales in flash memory: "I guess if you ask me, do I see anything that's causing me to say it's dramatically different than expected, no; [flash] continues to be a hard business, and we continue to do our best."

Looking at the raw numbers, Bryant said he expects the second quarter of this year to be "a seasonal quarter at the better end of our forecasts," with final results "largely consistent with our outlook in April." Revenue for Intel during 2Q 2005 was reported at $9.1 - 9.3 billion, a decline from 1Q revenues of from 1 to 4%. However, compared to 2Q 2002, Bryant continued, this quarter's numbers reflect growth of 13-16%.

CPU unit costs were lower than anticipated, Bryant reported "which should improve gross margin compared to expectation at beginning of quarter." Gross margins for the quarter were estimated at 57%, +/- 1%, on R&D and other spending of $2.6 B. For the year, gross margins are estimated at 59%, on R&D spending of $5.2 B, and capital spending of $5.6 B. In all, reported Bryant, "a seasonal quarter at the better end of our forecasts."

Startup costs for new 65 nm production lines were reported to be lower than expected, though Bryant said he'll wait to see if those savings can be recouped in 3Q. "In April, we expected startup costs to be up in the neighborhood of $100 M" in 2Q over 1Q, Bryant said. "It's still up in that neighborhood, though it's not going up quite as much as I expected." He said he expects startup costs to drop by two to three points in 3Q 2005.