Intel and Flash Memory...
BUSINESS WEEK ONLINE
July 21, 2000
Intel's Giant Steps into Flash Memory
The king of microprocessors is stealthily becoming the world's biggest maker of this fast-growing technology
Consumers never see Intel's primary product and probably couldn't explain how it works. Yet the company's brand name is universally recognized as the leading supplier of computer microprocessors. Thanks to a multimillion-dollar advertising campaign and an 80% market share, everyone knows that Intel makes the central processing unit (CPU) for most of the world's personal computers.
Few people realize that Intel wasn't always in the CPU business. In the early 1980s, the Santa Clara (Calif.) behemoth was king of the memory-chip market, with CPUs being a nicely profitable side business. As memory chips became a commodity in which one's company product was indistinguishable from another's, Intel engineered a drastic reinvention of itself, casting itself in the role of CPU manufacturer.
Andy Grove, who at the time was CEO, said later that it was a "difficult decision, but it was made much easier because we were staring at our own gallows."
GOOD CHOICE. A glimpse at Intel's second-quarter earnings report shows that once again the company is in the midst of reinventing itself, this time in a stealthier fashion. The new holy grail for the company is the business of selling flash-memory chips -- used in battery-operated devices that hold their memory even when the device's power is off. Intel is quickly rebuilding itself into the world's largest manufacturer of flash chips.
And if you had to pick a business to be in at the beginning of this new millennium, this one wouldn't be too bad a choice. Although overall flash sales two years ago were in single-digit billions of dollars, Semico Research in Phoenix estimates that growth will average 18% a year for the next five years. Semico also says by 2005 many Web-enabled mobile phone sales will be double those for PCs. The primary cost of each of those cell phones will be the flash-memory chips, which store operating information.
You won't hear anyone at Intel openly admitting that it's becoming a flash-memory company. That's because the PC chip business still makes the lion's share of the company's revenue -- some 87% in 1999. But flash products accounted for much of Intel's revenue and income growth in the second quarter and almost all capital-spending projects are going toward flash production. "After you take out interest income, it looks like [flash chips] account for all sequential growth," says CS First Boston analyst Charlie Glavin.
PHENOMENAL GROWTH. For the second quarter, Intel had sales of $8.3 billion, only 4% higher than for the first quarter. The company admits that the prices of its family of computer microprocessors remained flat while giving few specifics on CPU sales. But Intel also said its sales of flash products broke a record.
Although the chipmaker hasn't yet released a revenue and income breakdown for its units, analysts are piecing together a picture of phenomenal flash growth, while CPU revenue growth rates were flat. "The biggest question is whether they are keeping up with demand for flash products," says ABN Amro analyst David Wu, who has a buy rating on the stock. "And it appears that they are over the hump in terms of their manufacturing problems and are meeting demands for their chips now."
Intel Chief Financial Officer Andy Bryant says meeting that demand has been humbling. "We've had trouble getting all the equipment we need to increase production," Bryant said during a conference call on Tuesday, July 18. "We're still not satisfied with the amount of inventory we have, but we're doing a better job this quarter than last."
"GETTING BETTER." Nevertheless, the company's flash sales have once again set a record. "Flash has definitely been one of the all-time success stories of this company," says Senior Vice-President Paul Ottelini. "Quarter after quarter, it just keeps getting better."
Indeed, the most recent quarter has been another good one for Intel. Thanks to a $2.3 billion windfall from the sale of stocks that it owned in other companies, primarily Micron Technology (MU), the company could boast of $3.1 billion in earnings for the second quarter, or 45 cents a share even. Analysts expect Intel to make $1.68 per share for the year 2000 and $1.80 in 2001.
A close observer of Intel shouldn't be too surprised that flash-memory chips have become a major moneymaker for the company. Most of its acquisitions over the past few years have had nothing to do with PCs. Most notably, in 1999 Intel acquired networking-chip designer Level One Communications for $3 billion and wireless-chip designer DSP Communications for $1.6 billion.
The acquisition spree goes on. Last month, Intel announced that it had purchased Visteon Corp.'s Ford Microelectronics Div. That division consisted solely of 75 engineers, all of whom are familiar with wireless chipset design. Intel plans to use those engineers, based in Colorado Springs, Colo., to increase the speed at which mobile-phone chip designs are completed.
BILLIONS AND BILLIONS. The company also signed a landmark pact in June with Japan's Mitsubishi to jointly design and manufacture flash-memory modules for the next generation of cell phones, called 3G. That puts Intel well into the lead for the dominance of that market also.
Finally, chipmaker has announced two major factory constructions this year. In Albuquerque, N.M., it's spending almost $2 billion to expand an existing plant's space to produce more flash chips. And Intel is dropping another $2 billion on a new factory in Ireland that will also make flash chips. Both plants will specialize in making flash chips that have a channel width of 0.13 microns, which will allow for the densest chips ever produced.
Clearly, the PC revolution that made Intel what it is today had to slow down at some point. Now in the race to become the Intel of flash chips, Intel is in the lead. |
