ARM A Huge Challenge For Intel

The David-versus-Goliath rivalry between Intel (NASDAQ:INTC) and ARM (NASDAQ:ARMH) continues to unfold in a way that will have a major impact on consumer and mobile computing. Intel, which has annual revenue of about $43.6 billion, manufactures its own processors and dominates the computing industry. For the past few years, it has been trying to position its Atom processor for the mobile computing industry but hasn’t been able to counter ARM’s dominance in mobile computing or lure away its licensees, such as Apple and Qualcomm. ARM, which licenses its processor architecture and has annual revenue of $631.3 million, is looking to push its low-power architecture toward traditional computing as well. Both Intel and ARM recently reported strong results.

Intel’s Financials
Intel reported first quarter revenue of $12.8 billion, up 25% y-o-y. Net income was $3.2 billion or $0.56 per share, up 29% y-o-y. Gross margin was 61%, down from 67.5% last quarter. Analysts were expecting earnings of $0.46 on revenue of $11.59 billion. Intel ended the quarter with $11.5 billion in cash and investments after repurchasing stock for about $4 billion, paying dividends of $1 billion and completing the McAfee and Infineon acquisitions during the quarter.

Intel said it saw strength in emerging markets and its enterprise division which that offset the weakness in the mature consumer segment. Intel had introduced its Sandy Bridge multi-function chip that integrates graphic processing early in the quarter, but in February it had to interrupt its shipments after a flaw was discovered in a chipset used alongside them.

The introduction of Sandy Bridge resulted in an increase in average selling prices. PC Client revenue was up 12% q-o-q and 17% y-o-y to $8.6 billion; Data Center revenue was down 2% q-o-q and up 32 % y-o-y; Atom microprocessor and chipset revenue of $370 million was down 5% q-o-q and up 4% y-o-y, and other Intel architecture revenue was up 41% q-o-q. The acquisitions of Infineon Wireless Solutions and McAfee contributed $496 million in revenue.

Despite the Sandy Bridge fiasco and the advent of tablets, Intel surprisingly recorded strong results, especially its PC business. Based on its performance, Intel provided a strong outlook. It expects second quarter revenue to be $12.8 billion, plus or minus $500 million, and gross margin of 61% plus or minus a couple of percentage points. Analysts expect first quarter revenue of $11.87 billion. The stock is trading around $22.63 with market cap of about $122 billion. Its 52-week range is $23.88 to $17.60. The strong performance and outlook have led to a surge in Intel’s share and are sending signals that the PC market may not be as bad. But Intel continues to push harder into the tablet space which has gained huge momentum. But it first has to tackle the huge challenge posed by ARM and its low-power designs.

ARM’s Financials
ARM this week reported first quarter revenue of £116 million ($192 million), up 26%, and EPS of 2.73 pence, up 34%. Analysts were expecting EPS of 2.5 pence on revenue of £109.7 million.

During the quarter, ARM shipped 1.15 billion ARM-processor-based chips in into mobile devices, including smartphones and tablets and 0.7 billion ARM-based chips into a broad range of end applications, including digital TVs, disk drives, and microcontrollers. It signed 39 processor licenses for a range of applications including smartphones, mobile computers, servers, and smartcards. It also signed seven licenses for its Mali graphics processor.
ARM expects revenue for the full-year to be at least in line with market expectations. The stock is trading around $31.63 with market cap of about $14.18 billion. Its 52-week range is $9.50 to $31.81.

ARM is seeking to extend its range of product designs to the traditional computing industry to take on Intel. Its computing efforts got a boost from Microsoft’s announcement that future generations of Windows operating system will support ARM-based chips. ARM also is seeking to partner with AMD, which doesn’t use its designs currently.

Roger Kay on Forbes says:

“Both Intel and AMD have been in the ARM endpoint business before, and both sold their holdings. And both could reenter.   However, reentry for AMD would be far easier than for Intel. Intel has a huge manufacturing commitment to its own x86 architecture and a philosophical predisposition not to back an alternative.  AMD is partnered with Globalfoundries, which already has agreements with ARM licensees (e.g., Qualcomm).  With Globalfoundries making lots of ARM chips now, it could easily make some for AMD if AMD took out a license…

The x86 gang could start up ARM lines, but its unlikely in the short term.  Even with its flexibility, AMD has commitments for the next several years that are stretching its staff.  As noted earlier, Intel is the x86 champion.”

Intel is launching a new generation Atom processor called Oak Trail that will be used in 35 tablets this year. Oak Trail customers include Evolve III, Fujitsu, Lenovo, Motion Computing, Razer and Viliv.

It is hard to pick a winner between these two. Intel has a history of innovation and abundant resources that can help it catch up with ARM. But it has to get one step ahead of ARM to lure away its customers, especially Apple, which has tremendous momentum behind it.