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Samsung and TSMC are hindering Intel's mobile dreams

Analysts polled by Bloomberg and Thomson Reuters predicted Silicon Valley giant Intel Corp. (INTC) would take a beating fiscally in Q3 2013 as a sagging PC market was expected to badly dent its traditionally strong bottom line.  The Reuters crowd estimated earnings of 53 cents per share, which works out to about $2.69B USD in total profit, while the Bloomberg survey saw a prediction of 54 cents per share ($2.75B USD, total) in profit.

I. Brian Krzanich : "[Intel Has] an Increasing Focus on Mobile"

Instead Intel surprised, delivering earnings of 58 cents per share -- $2.95B USD total -- which allowed profit to stay relatively flat on a year-to-year basis, down just slightly (3 percent) from $2.97B USD in Q3 2012.  Operating income and net income  -- $3.5B USD and $3.0B USD -- were also higher than expected, despite Intel spending $4.7B USD on research and development.

Intel's revenue tied analysts expectations, drawing in $13.5B USD.  And it was able to reward shareholders with $1.1B USD in dividends and a share repurchasing effort that exchanged $536M USD for 24 million shares (a price of $22.33 USD per share).

Intel CEO
Intel CEO Brian Krzanich [Image Source: Intel]

Intel's data center group posted double digit growth (12.2 percent) as Intel's server chips continue to be top dogs in this market, which has experienced explosive growth with rising cloud storage and software use.

Facebook Data Center
A Facebook data center.  Data center growth was a major factor in Intel's ability to break even in Q3. [Image Source: AFP]

CEO Brian Krzanich, who took the reins from veteran Intel CEO Paul Otellini late this spring, expressed optimism about these results, remarking, "The third quarter came in as expected, with modest growth in a tough environment.  We're executing on our strategy to offer an increasingly broad and diverse product portfolio that spans key growth segments, operating systems and form factors. Since August we have introduced more than 40 new products for market segments from the Internet-of-Things to datacenters, with an increasing focus on ultra-mobile devices and 2 in 1 systems."

II. 22 nm Intel Smartphone chips May Face 16 nm ARM Chips Next Year

That's not to say that the news is all good.  

Overall the semiconductor market is booming, as evidenced by top chipmakers Samsung Electronics Comp., Ltd.'s (KSC:005930) record profit.  But increasingly much of the growth in demand is in the mobile sector, where Intel has struggled ever since the advent of the smartphone in the middle of the last decade.

A perfect case study is Intel's long awaited 22 nm tablet chip, that was supposed to deliver big power savings to the tablet market, via its 3D FinFET design, which saw its PC debut in Ivy Bridge chips.  

But tests of the quad-core 1.5 GHz (2.4 GHz turbo) Atom Z3770 Bay Trail chip -- while impressive versus old Qualcomm Inc. (QCOM) and NVIDIA Corp. (NVDA) CPUs found in various Android smartphones and tablets -- fell short against the Apple, Inc. (AAPL) A7 chip which is built on Samsung's 28 nm gate-first high-κ metal gate (HMKG) process.  The A7 uses ARM Holdings Plc.'s (LON:ARM) proprietary licensed ARMv8 instruction set and is found in the new iPhone 5S.
 
Bay Trail -- chipset

What is impressive about the A7's win in AnandTech's recent thorough testing is that it's actually a lower clocked chip (1.2 GHz) and has fewer cores (dual-core), and is built on a larger 28 nm node, yet somehow -- incredibly -- rivals-cum-partners Apple and Samsung (along with ARM Holdings, of course) have managed to squeeze out a chip that packs more processing power than Bay Trail.


There is also word that Intel's 14 nm mobile smartphone stock won't launch until early 2015, with a H2 2014 launch for 14 nm tablet chips.  Given that TSMC hopes to ship 16 nm chips in devices in H1 2014, it's quite possible that Intel's new 22 nm smartphone chips will have to compete with 16 nm ARM chips after seeing their tablet brethren lose to an ARM chip that was manufactured on what appears to be a far cruder (28 nm) process.

Historically TSMC has had production problems with die shrinks, but it managed to go from 65 nm (starting in 2007) to 28 nm (starting in 2010), so it's clearly advanced down the die-size ladder at a pace competitive to Intel's.

III. Broadwell Delayed, Intel Finds Itself in a Lonely Place

Intel announced during the earnings call a slight delay to Broadwell (which was supposed to launch in Q4, but will launch in Q1 2014) due to higher than expected defects.  Taken alone, this might be easy to dismiss.  But look at Intel's market situation as a while, its a bit troubling.

Broadwell
Intel's 14 nm Broadwell will launch in Q1 2014, followed by tablet counterparts, and (in early 2015) smartphone chips. [Image Source: PC Gamer]

Intel desperately needs an ally in its fight against ARM, but it's find one increasingly hard to come by -- partially because some key supporters of x86 or Intel's hardware are losing faith in both of these quantities amid poor mobile results.

For now Intel is relatively safe in that it has an entrenched market share in the PC space and an even more deeply entrenched lead in the server space.  But if ARM chips can beat Intel chips in power it may convince OEMs to start moving away from x86 -- particularly when Advanced Micro Devices, Inc. (AMD) switches its line slowly to ARM cores, which is expected to happen over the next few years.  That move could leave Intel in a lonely position as the only defender of x86.

ARM engineers
Everyone seems to be in ARM's camp except for Intel and its OEMs. [Image Source: My Statesman]

Even Microsoft Corp. (MSFT) and Intel -- long the sellers of the glorious "Wintel" solution -- have seemed at odds of late, with both companies seeming to view the other as the crucial obstacle to their mobile aspirations.  Intel insists its mission is to be the best for "every operating system", including pointedly asking Microsoft what it was doing to improve Windows 8's poor sales at its recent trade show.  Microsoft meanwhile is swallowing the financial costs of distancing itself from Intel by maturing the Windows RT platform (which runs on ARM processors), which has thus far been slow to take hold.

Of course Intel could always make an ARM core -- and may even has the licenses to do so via its acquisitions (ARM Holdings does not disclose all of its licensees).  But Intel's market dominance is built on x86, by locking demand via software compatibility.  If it loses the fight to keep PC software primarily x86-exclusive -- which could soon be a one company fight against an army of ARM chip producing companies -- it will likely lose the war.

Sources: Intel, Bloomberg [estimate, commentary], Reuters [estimate]





"I'm an Internet expert too. It's all right to wire the industrial zone only, but there are many problems if other regions of the North are wired." -- North Korean Supreme Commander Kim Jong-il



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