ARM Gaining Momentum

HP last month announced that it would be selling low-power servers based on ARM technology. Earlier, Microsoft announced that future generations of Windows operating system would support ARM-based chips, and Google announced that its Chrome operating system will run on ARM technology. These developments indicate how popular ARM’s low-power technology is becoming, even in the traditional computing industry where Intel dominates. Let’s take a look at their recent performances.

Intel’s Financials
Intel (NASDAQ:INTC) recently reported third quarter revenue of $14.3 billion, up 29% y-o-y. Net income was $3.5 billion or $0.65 per share, up 17% y-o-y. Gross margin was 63.4%, up from 61% last quarter. Analysts were expecting EPS of $0.61 on revenue of $13.9 billion. Intel ended the quarter with $15.2 billion in cash and investments after repurchasing stock for about $4 billion and paying dividends of $1.1 billion.

Intel reported continued strength in the emerging markets and its enterprise division. PC Client revenue was up 22% y-o-y to $9.4 billion; Data Center revenue was up 15 % y-o-y to $2.5 billion; Atom microprocessor and chipset revenue of $269 million was down 32% y-o-y, and other Intel architecture revenue was up 68% q-o-q. The acquisitions of Infineon Wireless Solutions and McAfee contributed $1.1 billion in revenue.

Intel expects fourth quarter revenue to be $14.7 billion, plus or minus $500 million, and gross margin of 65% plus or minus a couple of percentage points. Analysts expect fourth quarter revenue of $14.23 billion. The company said it is on track to reach annual revenue of $55 billion in fiscal 2011, an increase of 26%. The stock is trading around $24 with market cap of about $125 billion. Its 52-week range is $19.16 to $25.20.

ARM’s Financials
ARM (NASDAQ:ARMH) recently reported third quarter revenue of £120.2 million ($192.3 million), up 22%. Normalized profit before tax increased 44% to £55.8 million ($77.1 million).

During the quarter, ARM shipped 1 billion ARM-processor-based chips into mobile phones and tablets, up 10% y-o-y, and 0.9 billion ARM-based chips into consumer and embedded digital devices, up 50% y-o-y. It signed 28 processor licenses, including 14 new customers, many of whom are established semiconductor companies. It also signed two licenses for its Mali graphics processor.The company said it has a healthy opportunity pipeline for licensing and an order backlog which remains at historically high levels. It therefore forecast full year 2011 revenue at $763 million, up 21%. The stock is trading around $28 with market cap of about $13 billion. It hit a 52-week high of $30.27 on February 7.

Recent Acquisitions
ARM this week announced its plans to acquire Prolific Inc, which develops IC design optimization software tools. ARM expects this acquisition to expand its capabilities to accelerate ecosystem adoption of advanced process nodes at 20nm and below. Its customers include AMD, NEC, and Broadcom.

Intel recently closed its acquisition of Fulcrum Systems, an Ethernet switch silicon provider. It said the deal advances its strategy to deliver comprehensive building blocks across the Data Center from servers to storage and networking. This acquisition marks Intel’s shift from a server technology company to a comprehensive data center provider. Leading companies like Cisco, HP, and IBM have been embracing the trend of data center integration.

Yankee Group analyst Zeus Kerravala says on PC World:

“No other vendor yet has all the pieces for the kind of tight integration Cisco has achieved. If Intel makes server and switch chips that can talk to each other at that level, smaller manufacturers will be able to offer coordination with products from other vendors that also use Intel. This gives the rest of the field an opportunity to go compete with Cisco.

Intel has tried to enter the network infrastructure business in the past, with little success. It has a better chance to succeed now because of the closer relationship between computing and networking.”

Intel’s new direction could be bad news for Cisco, but long-time Intel partners HP and Dell could benefit from its move.

Meanwhile, Intel hasn’t been able to match the popularity of ARM’s low-power chips. HP, which accounts for about 19% of Intel’s revenue, recently decided to launch low-power servers using ARM based chips. HP would be experimenting with Intel’s low-power Atom chips as well as chips from AMD, but its decision to first use ARM chips shows how ARM’s low-power technology is gaining momentum. And Intel seems to be faltering in the mobile industry. Its Atom processor revenue has been declining over the past few quarters in the face of rising competition from notebooks and tablets such as Apple’s iPad. It has now pinned its hopes on ultrabooks, superthin notebooks that are competing against tablets.