You can't have one without the other: things were going too well for Advanced Micro Devices (AMD) for it not to take a toll on bigger chipmaker Intel (INTC).
Just how much of a toll came to light on Mar. 3, when Intel told investors that revenue this quarter would be below previous projections. Sales will be $8.7 billion to $9.1 billion, compared with an earlier forecast of $9.1 billion to $9.7 billion, Intel said, blaming the shortfall on weaker-than-expected demand for semiconductors -- and what it described as a "slight" erosion in market share.
It all depends on your definition of slight. The trends of the moment are clearly not in Intel's favor. Over the last year, Intel has ceded more than five percentage points in the overall market for chips that go into PCs, notebooks, and servers, according to Dean McCarron at market researcher Mercury Research. In the fourth quarter of 2005, Intel's combined share of the market was 76.9% to AMD's 21.4%. This compares with Intel's share of 82.2% and AMD's 16.6% in fourth-quarter 2004.
BOUNCING BACK. Financial analysts were quick to pile on. Chris Danely of JPMorgan, who had already cut his rating on Intel early in the week (see BW Online, 3/2/06, "AMD Plays Offense"), called the news "worse than expected" and slashed his predictions even further. In a research note, he said he equates every lost point of market share with lost sales of $75 million to $100 million, or about a penny a share in profit. For the second time in a week, Danely cut his 2006 earnings forecast for Intel, this time to $1.22 to $1.28 a share.
Danely wasn't alone. Merrill Lynch's Joe Osha cut his earnings estimate on the current quarter to 24 cents a share, from 26 cents. He further cut his revenue forecast for the year to $39.9 billion, from $41.7 billion. But Osha raised the prospect of light at the end of the tunnel. "If the company can get its next-generation products off the ground in the third quarter, competitiveness in the desktop segment should improve substantially, and Intel's edge should expand" in the area of notebooks, Osha writes.
That's why this week's Intel Developer's Forum (IDF) in San Francisco will be so important. At the event, Intel is expected to reassure both customers and investors that it's readying a new offensive to recapture the lost market share and to take back some of AMD's gains.
PRICE PRESSURE. Still, whatever Intel talks about at IDF won't be showing up in products this quarter or next, leaving the company in a potentially unpleasant transition period. "The first quarter of the year is always seasonally slower, so there's no real surprise there," says Mercury's McCarron. "Adding to that, Intel [offered] some really good deals on chips in the fourth quarter, so computer makers bought more than they needed and stocked up -- and they're working through that inventory. At the same time you've got AMD taking some share away." Historically speaking, McCarron says, the second quarter tends to be worse than the first.
This shifts attention to the third quarter, when PC makers ramp up production plans for the back-to-school and holiday seasons, which are historically strong. What Intel has on tap for later this year may help it turn the tide, says analyst Kevin Krewell with In-Stat/MDR in San Jose, Calif. Intel is currently straddling two generations of manufacturing technology, the older one turning out chips at the 90-nanometer scale, while the newer, more advanced process is at 65 nanometers. "In order to sell the leftover older chips, you have to cut prices," Krewell says.
Expect Intel to disclose new technical details about its next-generation chip architectures, code-named Merom, Conroe, and Woodcrest. Merom is Intel's next major architecture for mobile processors, while Conroe will be aimed at desktop PCs, and Woodcrest at servers.
STAYING COOL. With Merom and Conroe, Intel is expected to move away from its old philosophy of pressing the pedal to the metal and pushing its chip to the highest performance speed at any price. Instead, it may place more emphasis on power efficiency with dual-core chips. These will have two central brains instead of one and will be designed to get more work done while consuming less power.
"Intel's philosophical emphasis is swinging from one extreme to the other," Krewell says. "We haven't seen many details yet, but it may be even more efficient than the AMD chips, and Intel has been hinting at a lot of performance."
That kind of power efficiency will, among other things, allow the chip in a computer to stay cooler, and thus make cooling less an issue. The less cooling needed internally, the smaller and more flexible the computer design can be.
ENTER APPLE. Here's where Intel's relationship with Apple Computer (AAPL) comes into play. Apple has just announced its first Mac mini with an Intel chip (see BW Online, 3/1/06, "Apple's Latest Audio Offensive"). The small, unobtrusive Mac mini is grabbing the attention of PC makers everywhere, Krewell says, and has challenged them to make their own small, eye-catching designs.
That, in turn, forces Intel to find new ways to accommodate that market. "There will always be a demand for the super-big and super-fast boxes. But slimmer, and smaller, and more efficient is what the PC companies are looking at right now," Krewell says.
Meanwhile, Intel will seek to extend its lead in the mobile space, says Jim McGregor, also of In-Stat/MDR. "AMD just can't answer Intel on mobile processors," he says. "That's one big bright spot, and Intel will be looking to transfer some of that technology to the desktop space, and it has very little competition there."
"HEAD TO HEAD." Merom, McGregor says, will likely include extensions for 64-bit computing, something Intel has yet to do in its chips for notebooks, but which AMD has put on its Turion 64 processors for notebooks.
"Fundamentally, we think AMD will have the performance advantage through most of this year," Krewell says. "But later in the year and into 2007 it will start to get interesting as Intel tries to go head-to-head with AMD again."
And this week's IDF is likely to offer a preview of that next round.
Hesseldahl is a writer for BusinessWeek Online in New York
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