Intel Hints of Possible Premium Prices for Penryn Processors
At this time last year, Intel was on the threshold of a major restructuring, the full extent of which had yet to be ascertained, and the impact of which was keeping many investors and customers on edge. The earliest we would expect to see the results of the turnaround, we were told, would be the first quarter of 2007. That quarter has now passed, and by the looks of things, Intel is healthy, breathing, but maybe not out of the woods.
Revenue is down over the last quarter, by 9% to $8.9 billion – down 1% on an annual basis. Operating income is also down a tick over Q1 2006, though up 13% over the previous quarter, during which the costs of restructuring were keenly being felt. But here’s the good news: With CEO Paul Otellini’s cost-cutting program now in full swing, net income is up 19% over the previous year, to $1.6 billion.
Some of the reasons are surprising, including slightly higher gross margin over Q4. Workforce reduction goals were met ahead of schedule, the company claims in its early statement.
But the good news may end there. CPU sales were down over the previous quarter, and since Intel is claiming desktop and mobile CPU sales were basically flat, that leaves the server market to blame. AMD has also been experiencing lower server CPU sales, but it was believed their customers may have switched to Intel; now, that may not be the case after all. Demand for server CPUs may simply be down across the board, along with chipsets – another area where AMD has also been hit, according to its early warnings last week.
10:25 am April 18, 2007 - During yesterday’s quarterly conference call, Intel CEO Paul Otellini gave the general public the first details of his company’s initial tests of 45nm Penryn CPU architecture – some of which were first revealed in Beijing at IDF earlier in the day.
“We have disclosed this week that our Penryn family of processors will offer leadership performance with gains of 15 to well over 45%, when compared to today’s best Core 2 Duo and Xeon processors,” Otellini told analysts. “Cache sizes will be 50% larger, yet die sizes will be 25% smaller. We have six different microprocessors already running based upon this process, and they are running a broad base of applications on five operating systems.”
CEO Otellini at one point spoke of what Intel’s calling its cadence - the rhythm in which it plans to move its roadmap forward. At IDF, Intel execs were calling this the “tick-tock,” with entirely new silicon generations and lithographies rolled out every two years (“tick”), and CPU microarchitectures rolled out in the intervening years (“tock”).
“What you’ll see starting at the end of this year,” he told one analyst, “with the beginning of the 45nm shipments are derivatives of that microarchitecture, shrunk if you will to 45nm, with some new instructions, with some new feature sets, with some larger cache, and with some faster clock speed. All of that combines to give us a nice boost in performance...as well as a significant decrease in die size.”
CFO Bryant later added to that point: “We do believe the key to increasing, improving healthy returns is to have the best products, clearly and unquestionably, which means the cadence Paul talked about, we won’t go back. We will actively continue to drive the technology in both the architecture and the manufacturing side.”
But this wasn’t a technology enthusiasts’ meeting yesterday, so analysts immediately seized upon their core concern: With Intel projecting continuing rises in gross margins – from 50.1% for Q1 2007, which was good, to 51% for the full year – and with Otellini touting performance first and foremost with respect to Penryn, does this mean the end of price cuts? More to the point, does Intel expect customers to pay a premium for Penryn?
The answer, from Otellini and CFO Andy Bryant, was a firm, definitive...maybe. While at least four questions directly inquired about the possibility of higher price points, and even more alluded to it, the most telling response came about 20 minutes into the conference from Bryant: “If you think back over the last year, starting [in the middle of] last year when the new products [Core 2 Duo] were introduced into the desktop, server, and mobile segments, we started to see our products differentiate themselves from the competitor [AMD]. As time passes, and we extend those products into the product stack, we think we have more than just price to compete on. So we find ourselves in a better position than we were in a year ago, we think [things] held up pretty well in the first quarter, and we’ve raised margin percentage for the year.”
Next: How Intel gets there from here: courting the enthusiasts