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Intel CEO on Atom chip shortage, flash problems

Intel CEO Paul Otellini had mostly upbeat news on Tuesday but there were a few red flags.

Intel CEO Paul Otellini had mostly upbeat news on Tuesday when the world's largest chipmaker reported solid earnings, but Atom processor issues and weakness in the flash memory business were recurring themes in the earnings conference call.

One of the most interesting comments made during the conference call on Tuesday by Otellini was about the Atom processor. "(Atom) is less than a third the performance of our Centrino (processor). You're dealing with something that most of us wouldn't use," he said.

Though he qualified this by repeating the mantra that Atom is "principally designed for Web access" and not something to do photo editing on, the comment crystallizes the challenge Atom presents for Intel. That is, the processor offers only mediocre performance and potentially cannibalizes a market that the longstanding--and higher-performance--Celeron processor has thrived in.

The cannibalization question was brought up by two analysts during the conference call, and Otellini responded this way: "We do not see (Atom) replacing Celeron. If you look at the Netbook products being built around Atom, they're all lower-priced, lower features, smaller screen size notebooks aimed at first-time buyers or second, third, or fourth machine in a household. We don't see any cannibalization."

Another challenge: Intel doesn't have a handle on the Atom market yet. In short, Atom is still a work in progress and it is not yet clear how big the market will be and how it will develop. Otellini said that he believes Atom is creating a new segment. But Atom plays in a very low-cost market segment that has the potential to drag down Intel earnings in the future. At least that was the tenor of many of the questions posed by analysts during the earnings conference call.

Intel has said from the beginning that Atom was designed to make money in low-cost segments, and CFO Stacy Smith repeated several times during the conference call that Atom has been factored into its forecast for better gross margins in the third quarter. "(Atom) is in the 58 percent gross margin that I've forecast for Q3," Smith said.

Otellini and Smith also addressed Atom shortages. "The supply constraints we're seeing with Atom are specifically the back end, the test constraints. We have plenty of die (chips). As demand's going up, kind of month by month, we're jumping to keep enough test capacity in place," Smith said.

"The other part of that is to make sure we have enough chipsets," Otellini added. And he went on to say that Intel has "been increasing planned production of Atom for this year and next (year) every forty days since last November. Not just in Netbook segments but also in embedded and consumer electronics segments."

Flash supply and upcoming Larrabee for workstations

Profit shortfalls in the NAND flash memory business have been weighing on Intel earnings for many quarters. Intel is trying to address this through supply constraints. "Taking some actions to limit the amount of supply growth in this environment. As you know the NAND pricing continues to be very weak, " Otellini said.

Responding to questions about DreamWorks Animation choosing Intel chips over those from Advance Micro Devices, Otellini said this is "reflective of a very competitive roadmap we have, not just in servers but also in workstations as Larrabee comes on."

Larrabee is a high-end graphics chip due in 2009 or 2010 and is expected to offer as many as 32 cores.