Intel sees signs of IT spending recovery

Intel UK MD Graham Palmer accentuates the positive

Chip maker Intel saw revenue for its latest financial quarter dip $1.4bn (£850m) to $8bn (£4.9bn) compared with the same quarter in 2008, but a 12 per cent sequential increase compared with the first quarter of 2009 offers some cause for optimism, says the company’s UK managing director, Graham Palmer.

The company posted a loss of $398m (£242m) for the quarter, but as Palmer points out, those figures are skewed by the funds Intel had to put aside to pay a European Union fine of $1.45bn (£882m) for breaching competition rules. Without that hit, Intel would have posted a $1bn (£608m) net profit – and it is appealing against the fine, so could see the money returned or fine lowered.

Computing spoke to Palmer about the current state of the economy, and IT spending patterns in general.

Computing: The Q2 results beat financial analyst estimates, but year-on-year revenue is down 15 per cent and net income down 35 per cent. Are you hopeful that IT spending will rebound any time soon?
Graham Palmer: The year-on-year view is skewed because Intel saw such an extreme market and inventory correction at the end of 2008, but the 12 per cent increase in revenue compared to the first quarter of 2009 is the best we have ever seen.

We are seeing strong sales in the consumer sector, particularly around ultra low voltage mobile parts for new categories of laptops [Ebooks and netbooks]. There has been 20 to 30 per cent sales growth here, and a lot of new incremental business from the Atom chips. But the challenge is in the enterprise space.

When do you think corporates will start buying again?
That is the tough question. Clearly Intel tries to get as much visibility into the market as possible, but we do not have a crystal ball. In the meantime all we can do is continue to invest in new technology and new manufacturing processes. The macro trends in Q2 2009 hide some of the specific highlights, like Intel’s next-generation Nehalem chips, which already make up a third of all dual-socket CPU sales in what is a very tough server market right now.

What is most likely to prompt corporate investment in new architecture, if anything?
We think we have some very compelling corporate client technologies and the key piece of the puzzle will come when those customers come to refresh their aging two- to three-year-old datacentre infrastructure. They already recognise they need to look at the increased performance and manageability available in newer technologies, as well as server energy consumption, to maximise operational efficiency.

Intel’s gross margin grew despite CPU average selling price (ASP) declining, how was that achieved?
We have continued to focus on driving costs out of our own business and moving to a 32 nanometer manufacturing process has helped with that. The value of Intel inventory was down $240m because of a large correction in the amount we are holding, which is still a little bit below where we would expect it to be.

More importantly, the inventory in our customer channels is now at normal levels, whereas the backend of 2008 saw an extreme correction in that supply line as customers tried to flush out stock as quickly as possible in the face of low demand. They have now recognised that demand is starting to return.

One way to maximise revenue is to sell more chips into mobile phones. What is Intel doing there?
We intend to rapidly move what we are doing with the Atom CPU product lines into the handheld and embedded device market, including those mobile and pocket devices with 5-7in screens that will benefit from 32nm chips that consume less battery life. Part of that will come from the $884m (£538m) WindRiver acquisition [a company that specialises in embedded systems], and our future strategic direction as indicated by our partnership on mobile hardware and software with Nokia.