Intel Corp Chief Executive Craig Barrett recalls the February 2001 meeting when engineers first told him they had a way to double the performance of the company's Itanium chip for server computers.
Barrett, a former high school track star, compared the accomplishment to running a three-minute mile -- almost a minute faster than the world record.
When that chip is introduced by midyear, it will have to make a mark outside the laboratory. Itanium adoption has been slow as Barrett tries to take on International Business Machines Corp and Sun Microsystems Inc, and investors say he has yet to prove the world's biggest chipmaker can win more sales from faster-growing, higher-profit areas as personal-computer demand cools.
PHOTO: BLOOMBERG
"Their expansion into new markets has not been positive,"' said Tony Hipple, whose First American Funds owns Intel shares and manages US$110 billion. "Microprocessors dominate revenue."
Analysts expect Intel to report first-quarter earnings of US$0.15 a share on sales of US$6.79 billion, the average estimates in a Thomson Financial/First Call survey. Net income in the year-earlier period was US$485 million, or US$0.07, on US$6.68 billion in revenue.
By meeting targets, Intel would have its first quarterly sales gain from year-ago levels after four straight declines. PC sales, which analysts estimate account for 98 percent of Intel's processor shipments, dropped last year for the first time in 15 years.
The company's stock, down 11 percent this year, still is less than half its September 2000 record of US$73.94.
Itanium, a product analysts estimate Intel spends at least US$500 million a year developing, is aimed at a market that shrank 15 percent last year and may not recover for months. "We always anticipated a slow adoption," Barrett said of Itanium in a February interview.
Analysts say Intel's server chips are 50 percent more profitable than Pentium PC processors, and shipments may grow twice as fast in coming years as PC demand levels off.
Server sales are starting to rebound after a yearlong slump. Revenue from Intel's older Xeon chips is beating targets, the Santa Clara, California-based company said last month. Xeon, the best seller in Intel's server lineup, accounts for more than 95 percent of server chips the company sells, analysts say.
"In individual PCs, business has slowed -- in fact, it's peaked," said Jake Dollarhide, whose Frederic Russell Investment Management sold its Intel stake last year because the stock was too expensive. "The server business is where your growth is at."
Barrett hasn't made much progress in other fledgling markets. He folded a unit that made consumer gadgets such as digital cameras, and ended some Internet services for businesses. His communications chips haven't done as well as investors expected.
"Other divisions don't really get the support and internal clout they probably deserve," said Eric Ross, a Thomas Weisel Partners analyst who rates the stock "market perform." "They're going to be the majority of growth over the next 10 years."
High-end servers may provide a better opportunity because Barrett has a stronger base to build on, shareholders say.
Intel chips powered 88 percent of the servers sold last year, according to researcher IDC -- mostly low-end machines that run Web pages or handle e-mail. That's still left Sun and IBM virtually untouched in the smaller yet more lucrative market for powerful systems that manage corporate databases. To move up the food chain, Barrett has to make sure Intel masters several segments of the business -- from the one- and two-chip Internet boxes to bigger machines like the 32-processor server Unisys Corp introduced in March.
Barrett, 62, who was paid US$1.68 million in salary and bonus and awarded 484,696 stock options last year, is now embarking on what may be his biggest challenge yet. He's got to build on Xeon's success with Itanium, a new design that doesn't run most software available today.
Itanium processes data in 64-bit pieces instead of PC-sized 32-bit chunks. It's the key to getting Intel into high-end servers that sell for millions of dollars each. Itaniums cost as much as US$4,227 each, compared with US$3,692 for Xeons and US$562 for Pentium 4.
Barrett has to persuade software developers to overhaul thousands of applications to make them compatible with Itanium.
Intel says 100 programs have been converted so far. Rival Advanced Micro Devices Inc plans a chip next year that runs both 32-bit and 64-bit software.
"It's a heck of a lot more than just throwing a piece of silicon out there," Barrett said.
He's put more than 1,000 people on software and tools for Itanium, and thousands more engineers designing the chips in Israel; DuPont, Washington; Santa Clara; and Jones Farm, Oregon.
Fewer than 1,000 servers shipped last year had Itanium chips, according to IDC, which predicts 8,000 will be sold in 2002.
Barrett will add to the company's arsenal this year with the second-generation Itanium, the one that impressed him so much.
"Your margins are better on the high-end area, but boy, that lifespan from high-end to commodity is shorter and shorter all the time," said Marian Kessler, whose Rutherford Investment Management owns Intel shares and manages US$100 million.
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