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Intel urges investors to take long view

Although a global downturn has hurt the company's bottom line, some of the economic conditions affecting the chip industry are abating, Intel CEO Craig Barrett says.

Business might be down now, but it's going to get better, Intel executives told Wall Street on Thursday.

Although the worldwide economic slump has maimed the company's bottom line, some of the economic conditions hurting the semiconductor industry are beginning to abate, said Intel CEO Craig Barrett and other executives at the company's analyst meeting in New York. Spending on capital equipment and research, combined with administrative cost reductions, will also continue.

"Investing in new technology is the only way to make yourself stronger coming out of a recession," Barrett said. Increasing capital spending to recover from a recession, Chairman Andy Grove added, could safely be called Moore's second law, named for former Intel CEO Gordon Moore, who formulated the maxim that computer processing power doubles roughly every 18 months.

Additionally, the company will release a host of new chips for servers, PCs and portables, including a 2GHz Pentium 4, 1.1GHz notebook chips and Xscale chips for handheld devices.

Still, Grove warned that the chip giant has to watch out for sudden shifts. Holding up a series of charts from the 1981 analysts' meeting, Grove showed how Intel's business of providing chips for mainframe terminals had been growing quite well in the 1970s and 1980.

Then, in the first quarter of 1981, "net income practically disappeared overnight," he said. At the time, IBM was popularizing the PC with corporations. The rest is history.

Asia will also play a huge part in any recovery. Historically, the Americas have been Intel's largest geographic market. In the fourth quarter of 2000, however, greater Asia, which combines Asia-Pacific with Japan, accounted for more revenue because of accelerating growth in China and India, said Mike Splinter, executive vice president for marketing and sales. Overall, more than 60 percent of Intel's revenue comes from overseas.

"Even as growth resumes in our (American) business, I expected this trend to continue," Splinter said. Eventually, "Asia-Pacific will be our largest region."

The region also will continue to grow in importance as a manufacturing arm. For years, major U.S. PC manufacturers have outsourced desktop and notebook manufacturing to Asia. Increasingly, cell phone manufacturers are turning to Asia, and Intel is currently locking up deals with local companies such as China's Legend to use Intel processors. A total of 26 Asian contract manufacturers just agreed to endorse Intel's Personal Internet Client Architecture (PICA), a blueprint for cell phones and handheld computers.

"We have long-standing relationships with these companies," Splinter said.

As far as product segments go, inventories of PC chips have begun to fall, said executives, although there are still large inventories of communications chips and flash memory, which will retard sales of those products. Looking long term, all of the executives maintained companies will continue to invest in communications and computing infrastructure.

As for products, Intel provided some new details of upcoming chips but largely reiterated plans the company has shared at other events.

A 2GHz Pentium 4 for desktops will come out in the third quarter, said Paul Otellini, general manager of the Intel Architecture Group. Speeds will also continue to escalate, now that the new chip design has hit the market.

"Over its life, it (the Pentium 4) will scale above 10GHz," he said. "In the past year, you have seen Intel struggling, quite frankly, to get the next hundred megahertz out of the Pentium III."

Higher speeds, lower prices
While speed will go up, costs will decline. Smaller, less costly versions of the Pentium 4 made with the 0.13-micron manufacturing process will come out in the fourth quarter. In addition, smaller computer chassis coming in the second quarter will reduce costs.

Currently, the base cost of materials for the cheapest PCs, minus processor and memory, is $175. That will drop to between $150 and $125, Otellini predicted. Prices on Rambus memory will also go down, and a chipset called the 845 will allow PC makers to marry Pentium 4s to regular, less-expensive memory toward the end of the year.

Recent price cuts and continued collaboration with hardware makers and software developers will also help proliferate the chip. Already, Pentium 4 computers can be found for less than $1,000 in the United States, he said.

For notebooks, Pentium IIIs running at 1.1GHz and faster made on the 0.13-micron process will come out in the third quarter, along with chips for the subnotebook market running at more than 700MHz. In subnotebooks, Intel chips will offer chips running at "twice the performance and less than half the power consumed" relative to competing chips from Transmeta, Otellini added.

Meanwhile, Itanium processors for servers will come out this quarter. "This is the quarter many of us have waited five or six years for," he said.

As previously reported, the successor to the first Itanium, called McKinley, will appear in pilot projects at the end of the year. The chip will contain 240 million transistors and run at speeds of 1GHz or higher.

In handheld devices, Intel will continue to pursue contracts with cell phone and handheld-computer manufacturers while also working with application developers to create new software for Internet-enabled cell phones. The first Xscale chips, the successor to the StrongARM family, will come out in the second half.

"We will enable parallel development of the communications technology, the computing technology and the applications that run on top of it," said Ron Smith, general manager of the Wireless Communications and Computing Group. "This unlocks the so-called wireless Internet to the PC application developers."

Palm also has endorsed Intel's chips, he said. While showing a slide of software companies that have adopted StrongARM, Smith told analysts, "We could even add Palm to this list because they have already announced that they will (support) our StrongARM and Xscale processors."

A deal to get Intel chips inside Palm devices has been in the works since last year, according to sources.

Every product-division head at Intel made a presentation except for John Miner, who heads up the New Business Group, which oversees Intel Online services and other efforts. Several projects in this group were canceled last year. Miner took over the group earlier this year.