Monday, August 10, 2009

Intel leads PC processor market -– does it matter?

NEW TRIPOLI, USA: There has been a great deal of press lately regarding market shares of Intel and AMD, and a bit of VIA Technologies, in the PC processor (CPU) space.

Since it is really a two-horse race (VIA has less than a 1 percent share), does it really matter? Do PC OEMs like Dell, HP, or Apple wait patiently for the quarterly shares to come out before making a decision to purchase from Intel or AMD? We think not, notes The Information Network.

As market shares between Intel and AMD are not even close (a 4:1 ratio) does it matter to the investor community whether shares change a few tenths of a percent one way or the other? Only perhaps, if there is a trendline or abrupt anomaly.

Our analysis shows that Intel had almost a 79 percent share in the overall PC space that includes desktops, netbooks, notebooks, and servers in Q2. This share was up 1.5 percent from Q1, but down 3 percent from Q4 2008. Clearly, there is no trendline, so we need to look deeper.

In the mobile PC space, which includes notebooks and netbooks, Intel held an 86.9 percent share, up 2.5 percent from Q1 but down 2.1 percent from Q3 2008. Again, no obvious trendline.

The netbook sector is dominated by Intel’s Atom CPU and is growing strongly, as our forecast below shows. AMD has no CPU to compete in the netbook sector. Could the Atom be a factor?Source: The Information Network, USA

In CY2007, before the Atom and netbook took off, Intel held an 82.2 percent share, which grew to an 87.2 percent share in CY2008, as shown in our analysis of shares in the table below.

In Q2 2009, Intel’s share was 86.9 percent. If the netbook market does double in 2009, why isn’t Intel’s share of the mobile sector increasing? Could it be that AMD is gaining share in the notebook space while Intel’s unit shipments of Atom CPU’s increases?Source: The Information Network, USA

"I stated publically before that Intel’s margins have been decimated in the past several quarters, particularly in calendar Q4 2008 and Q1 2009. Intel reported slashed revenues of about a billion dollars for Q4. Could it be that Intel misjudged the success of the Netbook and its Atom processor? Let’s take a look at some figures.

"The Atom is processed with 45nm feature sizes on 300mm wafers and measures 25 square mm. It is priced at about $29. A total of 2,436 Atoms can be made on one wafer for a total selling price of $70.6K (neglecting edge loses and yields for this quick calculation)," noted Dr. Robert Castellano, president of The Information Network.

Intel’s Penryn Core 2 processor is used in notebooks. It is also processed with 45nm feature sizes on 300mm wafers and measures 107 square mm. It is priced at about $279. A total of 660 Penryns can be made on one wafer for a total selling price of $184.1K.

So, even though the Atom is propping up Intel’s unit shipments in the mobile PC sector, so what! It’s making little or no money on the Atom anyway. A more important issue is that it may be losing market share in the notebook market. Why, because Intel had to fill orders for netbooks in Q4 2008 and Q1 2009 and made Atoms instead of Penryns, resulting in lowered margins on a $29 CPU. Once PC OEMs migrated to the AMD CPU, they stayed with it.

And we’ve also forecast previously that while Intel’s Atom will hold more than an 80 percent share of the 23.5-million netbooks sold in 2009, a movement is underway that will enable the ARM processor to gain a 55 percent market share in 2012.

Google’s Linux-based Chrome OS offers an improved suite of productivity applications, which will influence netbook purchasers toward the ARM system.

There is a wide array of open-source software that all Linux distributions share. It is reshaping the software industry by reducing the overall cost structure and represents the future of enterprise software.

As cloud computing becomes more sophisticated, we will see an IP-based convergence of audio, video, productivity applications, and IT data run on ARM-based netbooks.

That could present a dilemma for Intel in the fast growing mobile PC space -– losing market share to AMD in the notebook market and to ARM in the netbook market. As the server PC market comes back to life AMD is positioning itself with the Six-Core AMD Opteron processor.

Except for the bean counters who consume market shares with their cappuccinos, what then is important in the PC space? Clearly, for the investment community it’s profits and outlook. The chart below is a comparison between Intel and AMD for two key financial line items, R&D and gross margins.Source: The Information Network, USA

In the R&D space, AMD is consistently investing greater than 20 percent more of revenues than Intel. This to us is a leading indicator as AMD positions itself in the future. In fact, it is already paying off.

Dirk Meyer, AMD president and CEO noted that "New platform, microprocessor and graphics introductions planned for the second half of 2009 position us well to improve margins and meet our financial goals for the year." This includes the Six-Core AMD Opteron processor months ahead of schedule.

AMD reported that leading enterprise computing providers, including Dell, HP, IBM and Sun Microsystems announced new servers based on the new Six-Core AMD Opteron processor, which is a drop-in replacement for the Quad-Core AMD Opteron processor and delivers up to 34 percent more performance-per-watt in the exact same platform.

Gross margin is another issue and AMD got slammed after announcing its gross margin was 37 percent in Q2 2009 compared to a Q1 gross margin of 43 percent and 38 percent a year earlier.

Intel's closely watched gross margin increased to 50.8 percent from 45.6 percent in Q1 and 53.1 percent in the fourth quarter. VIA Technologies’ gross margin nearly mirrors AMD’s over the past several quarters but we’re still waiting for Q2 to be released.

Investment managers have decided that gross margins are significant. I question that when there are numerous factors affecting margins from one quarter to another.

In fact, Intel concurs, according to their statement “Revenue and the gross margin percentage are affected by the timing of new Intel product introductions and the demand for and market acceptance of Intel's products; actions taken by Intel's competitors, including product offerings and introductions, marketing programs and pricing pressures and Intel's response to such actions; and Intel's ability to respond quickly to technological developments and to incorporate new features into its products.”

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