For Intel, Record Sales Amidst Fierce Competition

Intel (NASDAQ:INTC), the largest semiconductor company with annual revenue of $35.1 billion, just reported a strong third quarter with record sales that exceeded $11 billion for the first time in its history. These results follow an action-filled quarter in which Intel acquired two large companies, security software maker McAfee for $7.68 billion and the wireless business of Infineon for $1.4 billion. Let’s take a closer look.

Intel on Tablets
During the earnings call, CEO Paul Otellini commended Apple for doing a great job in reinventing computing with the iPad. He conceded that the new device will probably impact PC sales initially like the netbooks. However, he believes that the effect will not last long because three years after the introduction of netbooks, both the PC and the netbook market segments have grown substantially.

Intel said it is engaged with a number of partners to bring to market innovative tablets that run on the Windows, Android, and MeeGo operating systems.

Intel–Infineon
Intel is also pushing hard into the smartphone business with its Moorestown processor. The smartphone market has become crucial for any company wanting to grow. According to In-Stat Research, the processor market for devices with Internet connectivity (IC) will see a CAGR of 22.3% through 2013. In 2013, half of those 750 million units are expected to go into smartphones.

Dylan McGrath of EETimes recently reported that Samsung, the No.2 chipmaker, has increased its IC revenue at a CAGR of 13.5%, while Intel’s IC CAGR has slowed to 3.4% from 1999 to 2009. In fact, IC Insights predicts that at this rate of growth, Samsung has a good chance of becoming the No.1 chipmaker by 2014–2015. But the Infineon acquisition changes the situation.

With this acquisition, Intel not only gains from Infineon’s design wins with Nokia and, more important, Apple’s iPhone 4, it will also gain 3G capabilities, which it intends to use in its core notebook PC platform. Intel said it would continue to support ARM-based platforms, which dominate the smartphone market. The real threat for Intel is not ARM but Qualcomm. According to recent rumors, Apple might forego Intel–Infineon chips in favor of Qualcomm chips in the next iPhone. Infineon has been a supplier for all the iPhone models since the first one was released in 2007.

Intel–McAfee

Unlike for the Infineon acquisition, analysts were initially baffled by Intel’s $7.68 billion acquisition of McAfee. But Intel has indicated that it is a long-term strategic buy. Jon Stokes of Ars Technica says

“Acquiring McAfee is Intel’s way of bringing vPro and subsequent security efforts directly to businesses and consumers by just buying out the middle-man. The McAfee purchase gives Intel an instant foothold on countless PCs, a foothold that Intel itself would have to spend years building.”

Financials
In its third quarter, Intel reported revenue of $11.1 billion, up 18% y-o-y. In August, Intel lowered its guidance for the third quarter to $11 billion to $11.8 billion. Third quarter net income was $2.95 billion or $0.52 per share, up from $2.85 billion last year and $2.9 billion last quarter. Gross margin was 66% versus 67% last quarter. Intel ended the quarter with $20 billion in cash and investments. During the quarter, it paid $900 million in dividends and purchased over $1.4 billion in capital assets.

Intel said the strong results were driven by solid demand from corporate customers, sales of its leadership products, and continued growth in emerging markets. PC Client Group revenue was up 3% q-o-q with record mobile microprocessor revenue. Microprocessor revenue grew 25% y-o-y driven by strong demand for higher-end products. While there was some softness in the consumer market segments in Western Europe and the U.S., other regions such as China as well as the channel had solid results.

Data Center Group revenue was up 3 % q-o-q, with record server microprocessor revenue. Demand for the company’s high-performance Westmere and Nehalem-EX processors drove server microprocessor revenue up over 30% y-o-y. Shipments into the cloud segment are up a strong 200% y-o-y and 50% q-o-q.

Intel’s Atom microprocessor and chipset revenue was $396 million, down 4% q-o-q. The smart TV category is launching this month in the United States with exciting product introductions from Sony and Logitech based on Google TV running on an Intel Atom microprocessor.

Intel expects fourth quarter revenue to be $11.4 billion, plus or minus $400 million, and gross margin of 67%. Analysts expect Q4 revenue of $11.32 billion. For 2010, the company forecasts revenue of $43.6 billion, up 24% over 2009. The stock is trading around $20 with market cap of about $110 billion. It hit a 52-week high of $23.69 on April 14 and a 52-week low of $17.60 on August 31.

Intel is excited about its new multi-function chip, Sandy Bridge, which integrates graphics and video processing. Intel’s rival AMD had long been working on similar integrated chips called Fusion. I recently covered how such integrated graphics chips affect graphic chip maker NVIDIA. There is a huge chance that NVIDIA might lose some business from Apple, which likes integrated, miniaturized electronics. The lack of support for OpenCL in Intel’s Sandy Bridge rules it out as a contender.