Intel Keeps Ball Rolling

The sleeping giant is awake.

Looking to extend the momentum from its positive earnings announcement last week, Intel ( INTC) said Thursday that it is speeding the introduction of a new virtualization technology for desktop chips and chipsets late this year -- earlier than an anticipated launch in 2006.

Intel's Vanderpool technology helps a single computing system act like several systems through the use of partitions. The technology was slated for use in Intel's Itanium server chips this year, but the company has moved up the introduction into its PC microprocessors and chipsets.

It's a relatively minor event, but the announcement, along with Intel's stellar fourth-quarter report has added significance, considering that Intel is coming off a year of technology and execution missteps. Its stock finished 2004 off almost 30%.

In fact, the world's largest chipmaker has already had a noteworthy week: the company earlier reorganized its corporate structure in a sweeping set of changes that sets Intel on a new path only months before President Paul Otellini takes over as chief executive from Craig Barrett. Otellini will become only the fourth chief executive in Intel's 37-year history and its first not to be an engineer.

On Wednesday, Intel rolled out its latest Centrino package, dubbed Sonoma.

Perhaps just as important to investor sentiment, Intel's smaller but primary rival Advanced Micro Devices ( AMD) announced disappointing financial results for the fourth quarter, capping an otherwise very positive year. AMD's recent resurgency against Intel had pushed its stock up nearly 50% in 2004.

On the surface, Intel's announcements and AMD's fourth-quarter problems could signal increased trouble for AMD, but the stock performances of the two companies indicate that nothing beyond the status quo is expected. Shares of AMD have held steady around a three-month low in the $15 range since the company warned on Jan. 10; Intel's stock, too, has drifted in the past week at around $22.50.

AMD blamed its fourth-quarter problems on its flash memory unit, which accounts for almost half of its sales. The chipmaker said the unit would likely take more than a quarter to recover from the missteps.

But the problem could be larger than that. Consider that the flash memory market is about to be inundated with supply, which should contribute to tumbling prices, and AMD could have missed its best, most profitable opportunity to stake out more territory against Intel.

"Everyone is very iffy about 2005 -- no one wants to say it will be a bad year, but everyone is guarded about saying it will be a good year," said Jim Handy, flash memory analyst with Semico Research. "Most companies are predicting flat growth, but there are still questions about that.

"When that overcapacity strikes, expect NOR flash prices to collapse," he said, adding that a collapse typically entails a 60% drop in prices.

The extreme price drop balanced by unit growth will make for a flash memory market that declines by 12% in terms of revenue, Handy predicted.

However, that spells trouble for Intel, too. Although flash makes up less than 10% of Intel's sales, it still amounted to roughly $2 billion in 2004.

"Everyone will have a difficult year in 2005 if prices collapse the way we are forecasting they will," said Handy. "The only thing specific to AMD is that they are going into a difficult year having to recover from a product glitch in the fourth quarter."

AMD blamed the difficulties on a severe pricing environment, weak sales in Japan, and a delay in qualifying a 256-megabit flash chip. But Handy said the pricing decline had less to do with AMD's woes than with sales in Japan and the product delay, adding that the weakness in Japan could be a symptom of the product delay.

Handy estimated industrywide sales of 256-megabit flash products, which are used almost exclusively in cell phones, were about $175 million in the fourth quarter. If AMD had captured even one-third of those sales, the $60 million in revenue would have been enough for AMD to hit Wall Street's original revenue targets.

AMD, for its part, has said it had recovered from the glitches and that sales of 256-megbit flash products would help its results this quarter. The company also vowed to take aggressive actions to recover flash business, but the industrywide headwinds will make the journey even more difficult.

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