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Intel reports Q3 profit growth despite Atom's struggles

Intel's third-quarter revenue grows on strong PC and server chip sales

Intel on Tuesday reported profit and revenue gains for the third quarter of fiscal 2011 on strong PC and server chip sales, overcoming a drop in Atom tablet and netbook chip sales.

Intel benefited from strong microprocessor shipments and double-digit growth in laptop unit shipments, said Intel CEO Paul Otellini in a statement. The company saw strong data-center growth, driven by the growth of mobile and cloud computing, Otellini said.

The company reported profit of US$3.7 billion on a non-GAAP (generally accepted accounting principles) basis for the quarter ending on Oct. 1, up 24 percent compared to the same quarter in 2010. Earnings per share for the quarter was $0.69, beating estimates of $0.61 from analysts polled by Thomson Reuters.

Intel's profit was $3.5 billion and earnings per share was $0.65 on a GAAP basis, after accounting for tax and acquisition charges.

On a non-GAAP basis, Intel reported revenue of $14.3 billion, up 29 percent compared to the previous year's third quarter. On a GAAP basis, Intel reported revenue of $14.2 billion. Analysts estimated revenue for the quarter to be $13.9 billion.

Revenue for the PC Client Group, which deals in laptop and desktop chips, was $9.4 billion, growing by 22 percent compared to last year's third quarter. The Data Center Group, which ships server chips, had revenue of $2.5 billion, up 15 percent year over year.

However revenue from the Intel Atom microprocessor and chipset was only $269 million, down 32 percent year over year. Intel is pinning its hopes on Atom processors as it puts more focus on handheld devices and looks to put the low-power chips in tablets and smartphones.

Atom sales dropped mostly due to the slow netbook demand, said Stacy Smith, chief financial officer of Intel, on a conference call.

Intel's revenue growth comes at a time when analyst firms are reporting slow growth in quarterly PC unit shipments, partly due to the growing interest in tablets. According to IDC, worldwide PC shipments increased by just 3.6 percent during the third quarter this year compared to the year-ago quarter.

Intel's laptop business saw double-digit sales growth due to strong enterprise demand, Otellini said on the call. However, the consumer PC market is weak as demand for products has softened in mature markets such as the U.S. and Western Europe.

By contrast, emerging markets such as China, India and Brazil are growing fast and becoming more important for Intel, Otellini said. Today, China is the top PC market, while Brazil is the third largest, he said. Intel's revenue from China grew by 12 percent year over year, while India revenue went up 21 percent in the quarter.

In a bid to take on tablets and reinvigorate interest in PCs, Intel is pinning its hopes on ultrabooks, which the company is promoting as a new category of thin and light laptops with tablet-like features. The first set of ultrabooks have already been announced by Lenovo, Asus and Toshiba, with prices starting at $899.

But the average price of an ultrabook is $1,000, which critics say is high, especially with consumers looking for discounts in the slumping PC market. However, ultrabooks are still in their early days, and prices will continue to drop as development gains ground, Otellini said.

"When you look at where ultrabooks are this holiday season ... a year from now you may see them at $699 and up," Otellini said. He expects dropping component costs to drive the prices down.

Intel's ultrabooks are currently based on Core processors code-named Sandy Bridge, but will start using the new Ivy Bridge microarchitecture early next year. The company has 70 ultrabook designs in the pipeline, Otellini said. Over the next two generations, ultrabooks will evolve to have touchscreens and advanced security features, he said.

Ultrabook sales should get a boost from the release of Microsoft's forthcoming Windows 8 OS because Intel has traditionally benefitted from the release of new versions of Windows, he said.

In the PC market, Intel faces a challenge from ARM, whose processors go into most smartphones and tablets today. ARM is licensing its chip designs and architectures to chip makers Qualcomm, Nvidia and Texas Instruments, who have expressed an interest in using ARM processors in PCs. The chip makers have already shown ARM-based tablets running Windows 8.

"While there is some possibility of ARM incursion in the PC space, I think it will be minimal," Otellini said.

In fact, Windows 8 could help Intel grow in the tablet market, as users are looking to bring legacy application support over from PCs to tablets, Otellini said. Microsoft has already said that Windows 8 tablets on ARM processors won't be able to run old Windows 7 applications written for x86 chips.

Beyond PCs, the data center continues to be a key growth driver for Intel, Otellini said. The company plans to release the new Xeon-E5 server processors, code-named Romley, in the first half next year. He expects demand for Romley to be 20 times that of Intel's previous generation of server chips based on the Nehalem architecture, which were released in 2010.

In smartphones, Intel and Google are continuing work on developing Android for phones running on an Intel Atom processor code-named Medfield. Tablets and smartphones with Medfield will appear in the first half next year, and Otellini said the company was working with many partners on products, though he declined to name any.

For the fourth fiscal quarter, Intel is expecting revenue of $14.7 billion, plus or minus $500 million.


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