Innovation pays for Intel

With the global economy reeling, businesses and consumers had pulled way back on their typical technology spending, and sales of personal computers had started to decline at their steepest rates in history. The major two-year investment was a matter of faith — in an economic recovery and in the internet continuing to drive a long-term increase in demand for computers, smartphones and other devices with chips inside.

“As you can imagine, there was a lot of uncertainty in that January board meeting,” said Jane E. Shaw, Chairman of Intel’s board.

Intel’s bet on the future is looking as if it will pay off big. The first chips from the plants arrived this month, made with techniques that let the company create smaller, faster and lower-power products than its main competitors.  Just as it has in past downturns, Intel has used its hefty pile of cash to advance its manufacturing prowess and technology while rival chip makers have struggled to stay afloat. Meanwhile, broader technology spending is on the rebound, suggesting that both companies and consumers are more optimistic about their own futures.

Excellent result

On Thursday, Intel said that its revenue rose 28 per cent to US$10.6 billion in the fourth quarter, and the company earned the largest gross profit margin in its history. Net income was US$2.3 billion, or 40 cents a share, up tenfold from the US$234 million, or 4 cents a share, it earned in the last quarter of 2008.

This week, Gartner, reported that worldwide PC shipments rose 22 per cent to 90 million units during the fourth quarter, which is a healthy recovery from the dismal fourth quarter of 2008. Because of its investment in the downturn, Intel, which makes the chips, is poised to benefit from that surge more than most tech firms.

“They continued to innovate while many of their competitors were swimming in debt and reducing their head count,” said Bill Kreher, an analyst with Edward Jones. “The big and strong will emerge even stronger from the downturn, and Intel is no exception.” Wall Street analysts polled by Thomson Reuters had expected Intel to earn 30 cents a share on revenue of $10.17 billion, significantly underestimating Intel’s performance. Company executives attributed the gains to its manufacturing strengths and a long-term plan that lowered the company’s annual operations spending.

But Intel also showed especially strong gains from one of its riskiest bets in recent memory — the Atom chip, a cheaper processor that is used in the small laptops known as netbooks and is being adapted for use in smartphones.

Intel executives had feared that the Atom and netbooks could undermine the company’s more profitable business with traditional laptops, but they pushed hard on the products anyway. The new plants produce the chip at a lower cost, and Intel is the leading player in the fast-growing netbook market. Although Intel recently paid AMD US$1.25 billion to settle long-running litigation, the Federal Trade Commission and the New York attorney general’s office have filed sweeping antitrust lawsuits against the company. The European Union fined Intel US$1.45 billion last May. The governments charge that the company, the world’s largest chip maker, has abused its market power to squelch competition and charge higher prices to its customers.

Industry experts also wonder how long Intel can continue to leverage its manufacturing muscle. Contract chip makers like Taiwan Semiconductor Manufacturing continue to improve their production skills and have a wide variety of customers that help keep their plants full. Intel’s rivals like AMD and Qualcomm are reducing capital costs by using such contract chip makers. Indeed, AMD spun off its factories into a new chip-making venture called Globalfoundries, which is backed by large investments from the government of Abu Dhabi.

More significantly, demand for chips that use the ARM architecture, a competitor to Intel’s architecture, has been rising. Most commonly found in cellphones, ARM chips have started to make their way into computers and even computer servers — two markets where Intel commands an approximately 80 per cent share.

Intel generated in US$11 billion in cash from its operations last year, and its financial strength has enabled it to withstand the economic and political winds and still pour money into some of the most expensive manufacturing facilities ever built.

The company’s critics have long contended that it has earned such a luxury through anticompetitive practices. But other large tech firms are in similarly strong positions and have used the recession as an opportunity to get a leg up on competitors. Oracle, the leader in database software, has moved to acquire the fallen angel Sun Microsystems, adding a large hardware business to its portfolio. Cisco Systems spent more than US$7 billion last year on acquisitions that bolstered its positions in new markets. And Hewlett-Packard, the largest technology company, added the vast services business of Electronic Data Systems to complement its hardware and software product lines.