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Intel and the Nehalem bump

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That nice little bump in server chip sales that Intel just posted in the third quarter? What happens if that's Chipzilla burning off a lot of pent-up demand for decently performing Xeon processors?

Yesterday, Intel said revenues had dropped off by 8.1 per cent in Q3, to $9.39bn, and net earnings fell by 7.8 per cent, to $1.86bn. This is what had Wall Street all feeling warm and fuzzy? No, it was the sequential numbers. The declines are getting smaller as 2009 progresses, and business is being pushed in the last two quarters by the Nehalem family of Xeon server processors.

Intel said that its Digital Enterprise Group - the part of Intel that makes chips and chipsets for desktop PCs and servers - had 14 per cent sequential growth in Q3. (The Mobility Group, which peddles chips and chipsets for laptops, notebooks, and netbooks, had an even more impressive 19 per cent sequential growth rate for revenues. But forget that for a minute. Because Xeon and Itanium chips are where the profits are).

In a conference call with Wall Street analysts yesterday discussing the quarter, Intel's chief executive officer, Paul Otellini, gave a lot of credit for Q3 to the Nehalem chips, the family of processors that the company has been rolling out in phases on desktops and servers since last November and that represent a real re-engineering of Core and Xeon processors for the better. The Nehalems offer lots more memory bandwidth, better support for virtualization, and sophisticated power management features, and it is no small wonder that in these difficult economic times, companies are buying Nehalem servers so they can get rid of boxes that might be three, four, or even five years old.

"We are pleased with the acceptance of Nehalem in the enterprise," Otellini said in reference to the server segment in particular during his opening remarks on the call. "While overall enterprise spending remains weak, the compelling value proposition of Nehalem is generating growth opportunities - even in a down economy - and will be a strong profit driver for Intel in the coming quarters."

A little later, he was more specific about the server space and how Nehalem was faring, and he gave the familiar server-consolidation, greening-of-IT sales pitch all the server makers are hanging their hopes on these days.

"As far as the server upgrade cycle, what we are seeing on the Nehalem DP is that it is not so much an upgrade cycle that is driving the volume right now as it is the economics of the data center," Otellini explained, using the old Intel nomenclature instead of Nehalem EP, which is what the chips were called prior to their end of March launch and are now known as the Xeon 3500 and Xeon 5500 for single-socket and two-socket servers.

"People are looking at swapping out eight to nine older generation servers for a single Nehalem server on a ratio basis, as it has the same performance - the same or better performance and much better power consumption. So it lowers their electricity bill and gives them a little bit more flexibility in their data center footprint."

As for the forthcoming Nehalem EX, the high-end eight core behemoth that is due before the end of the year for servers using four or more sockets, Otellini said that Intel thinks the same consolidation effect will be at work as customers ditch other larger midrange gear and collapse server workloads onto Nehalem EX boxes, but that "the bad news about this is that this part of the market is very small in terms of units."

He said that the margins are good where the Nehalem EX is going to play but that in terms of raw units, Intel can make a lot more sales getting customers using old Xeon chips in two-socket boxes to collapse a bunch of them down to modern Nehalem two-socket machines.

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