That nice little bump in server chip sales that Intel just posted in the third quarter? What happens if that's Chipzilla burning off a lot of pent-up demand for decently performing Xeon processors?
Yesterday, Intel said revenues had dropped off by 8.1 per cent in Q3, to $9.39bn, and net earnings fell by 7.8 per cent, to $1.86bn. This is what had Wall Street all feeling warm and fuzzy? No, it was the sequential numbers. The declines are getting smaller as 2009 progresses, and business is being pushed in the last two quarters by the Nehalem family of Xeon server processors.
Intel said that its Digital Enterprise Group - the part of Intel that makes chips and chipsets for desktop PCs and servers - had 14 per cent sequential growth in Q3. (The Mobility Group, which peddles chips and chipsets for laptops, notebooks, and netbooks, had an even more impressive 19 per cent sequential growth rate for revenues. But forget that for a minute. Because Xeon and Itanium chips are where the profits are).
In a conference call with Wall Street analysts yesterday discussing the quarter, Intel's chief executive officer, Paul Otellini, gave a lot of credit for Q3 to the Nehalem chips, the family of processors that the company has been rolling out in phases on desktops and servers since last November and that represent a real re-engineering of Core and Xeon processors for the better. The Nehalems offer lots more memory bandwidth, better support for virtualization, and sophisticated power management features, and it is no small wonder that in these difficult economic times, companies are buying Nehalem servers so they can get rid of boxes that might be three, four, or even five years old.
"We are pleased with the acceptance of Nehalem in the enterprise," Otellini said in reference to the server segment in particular during his opening remarks on the call. "While overall enterprise spending remains weak, the compelling value proposition of Nehalem is generating growth opportunities - even in a down economy - and will be a strong profit driver for Intel in the coming quarters."
A little later, he was more specific about the server space and how Nehalem was faring, and he gave the familiar server-consolidation, greening-of-IT sales pitch all the server makers are hanging their hopes on these days.
"As far as the server upgrade cycle, what we are seeing on the Nehalem DP is that it is not so much an upgrade cycle that is driving the volume right now as it is the economics of the data center," Otellini explained, using the old Intel nomenclature instead of Nehalem EP, which is what the chips were called prior to their end of March launch and are now known as the Xeon 3500 and Xeon 5500 for single-socket and two-socket servers.
"People are looking at swapping out eight to nine older generation servers for a single Nehalem server on a ratio basis, as it has the same performance - the same or better performance and much better power consumption. So it lowers their electricity bill and gives them a little bit more flexibility in their data center footprint."
As for the forthcoming Nehalem EX, the high-end eight core behemoth that is due before the end of the year for servers using four or more sockets, Otellini said that Intel thinks the same consolidation effect will be at work as customers ditch other larger midrange gear and collapse server workloads onto Nehalem EX boxes, but that "the bad news about this is that this part of the market is very small in terms of units."
He said that the margins are good where the Nehalem EX is going to play but that in terms of raw units, Intel can make a lot more sales getting customers using old Xeon chips in two-socket boxes to collapse a bunch of them down to modern Nehalem two-socket machines.
Why the lag?
The amazing thing is that server buyers take so long to move to the new technology. Otellini said in the call that "well over half" of the Xeon processors sold in the September quarter were Nehalem 3400 (a reworked Core i7 chip for cheap servers) as well as Xeon 3500 and 5500 varieties. (You would think it would be higher, given the performance and other advantages of the Nehalem architecture).
And when asked if Xeon MP sales were up or down in the quarter, Otellini apologized and said he didn't have the relative sequential growth number in his head. Xeon MPs are the ones for four-socket and larger servers, with the four-core and six-core "Dunnington" 7400s being the latest-greatest chips - and the ones based on the old frontside bus architecture rather than the QuickPath Interconnect used in the Nehalem family.
Otellini said that over the past five years or so, the PC and server businesses have wiggled a bit in terms of driving revenues - not exactly a nod to Advanced Micro Devices, which took some share with the Opterons a few years back in 2006 and 2007 - but that in general, there is not a big shift. But that could change - and in favor of Intel's server chip biz - depending on how the economy shifts buying habits.
"The thing that could change that dramatically is if in coming out of this recession, the Internet data centers start deploying and move toward some of the cloud-based servers," Otellini said. "That could drive pretty healthy demand for rack-mounted servers and blade servers for a while."
Of course, what happens when all the old Xeons are compressed down by a factor of nine to new ones? Or companies boost utilization further by going to shared servers on cloud infrastructure?
A crash is what happens. That is what. But in the meantime, Intel needs to make the money it can selling whatever it can. If there is a virtualization crunch and a cloud crash, that will probably be Sean Maloney's problem, not Otellini's. Maybe Pat Gelsinger, who was the obvious choice to replace Otellini in a few years, left because storage looks like it will just keep on roaring, even with its own virtualization effect? ®