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Intel sets out tablet stall for Atom

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In reporting its third quarter financial results, Intel placed the emerging tablets device category far higher up the agenda than in previous quarters, indicating the importance of new form factors in driving growth, as PCs and cellphones both start to mature.

The same trend was highlighted by the latest figures for the baseband chip sector, where the highest levels of growth are being driven by non-handset wireless products. But can Intel's strategy deliver the goods as Atom battles the ARM-based processors and it takes on Infineon to re-enter the baseband space?

The new tablets may cannibalize parts of the PC market, but Intel has no choice but to pursue that segment, and it set out its stall aggressively while announcing a solid third quarter. CEO Paul Otellini had promoted the new format, from an “additive” category to a key growth priority, and was in determined mood. "We will use all of the assets at our disposal to win this segment," he told analysts on the results call. “We fully expect to participate fully and broadly in this market.”

In general, Otellini was in cautious mood, looking for a “slow and steady” upgrade cycle in PCs in general and agreeing that the hybrid market between notebooks and phones was a difficult one. "Low end desktops, netbooks... it's still kind of tough out there. We're assuming modest growth, not a double dip recession.”

Despite the heightened focus on tablets and other mobile devices driven by the Atom low power processor, Atom's revenues were down 4% compared to the second quarter, to $396m, while the higher end product groups – PC and server microprocessors – both enjoyed 3% sequential growth and record revenues. This indicates the price pressure on Atom as well as rising competition from other, ARM-based silicon, although the average selling price for micro-processors as a whole was up year-on-year.

Gross margin was 66%, in line with Intel's forecast, though this was revised downwards a few weeks ago. That reduced guidance helped the Q3 results to come in ahead of expectations, though they looked solid anyway, with an 18% year-on-year leap in revenues to $11.1bn and earnings per share of 52 cents, up from 33 cents a year earlier and ahead of Wall Street predictions of 50 cents. Net profit was up from $1.9bn last year to $3bn.

Intel said the outlook for the fourth quarter is for revenue of $11.4bn, plus or minus $400m, and gross margin of 67%, plus or minus two percentage points.

Tablet plans

Otellini said: "Looking forward, we are particularly excited about our next generation processor, codenamed Sandy Bridge, and the many new designs around our Atom processors in everything from the new Google TV products to a wide array of tablets based on Windows, Android, and MeeGo operating systems."

He was notably quiet about handsets, the most difficult market for Atom to penetrate, given the strong entrenched position of Qualcomm and others. But he was open about Intel's lack of track re- cord in handheld devices such as tablets. "The big question on everyone's mind is how Intel will respond to new computing categories where Intel currently has no presence, specifically tablets,” he said during the analyst call.

“We think tablets are exciting and fully welcome their arrival. Will they impact PC sales? Sure, at the margin they probably will.” He praised the upcoming "Oak Trail" Atom-based system-on-chip, which is designed specifically for tablets and thin netbooks and will appear in products in 2011.

Analysts welcomed Otellini's frank acceptance that tablets would be a tough market, with Samsung/Apple, and Qualcomm Snap- dragon, leading the charge into the first wave of these devices. JMP Securities analyst Alex Gauna said in a research note: “Intel is demonstrating it is the powerhouse in delivering raw computing performance, and we like the candor with which it is acknowledging the tablet threat. If the company gets its energy consumption right with successive generations of Atom processors, there is every reason to believe Intel's claims that it will profitably participate in this expanding product category.”

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Next page: The baseband market

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