I remember when then COO Paul Otellini took the baton from former CEO Craig Barrett back on May 18, 2005. While Intel (NASDAQ:INTC) at the time had been ushering the move towards "mobile" (laptop) computing quite successfully with the "Centrino" platform, things were still looking pretty grim in the server and desktop PC space, in which Advanced Micro Devices (NASDAQ:AMD) had been outgunning and outrunning Intel for several years, thanks to sensible focus on performance/watt rather than on trying to market "gigahertz". Mr. Otellini managed to steer Intel back on course and under his leadership did some great things. Since this is his last day as CEO of Intel, I would like to say "goodbye" to whom I believe was one of the best CEOs in Intel's history by highlighting the good that he did for the company (there is more than enough out there about how Intel should have been in phones sooner).
Tick Tock - Intel Takes The Lead Across The Board
In the PC space, Intel would update micro-architectures once every five years or so, with the interim filled with a few tweaks and process shrinks. However, to both mitigate risk and to ensure leadership, Intel - under Otellini's watch - instituted the "tick tock" development methodology. This means that in one year, Intel would build a new micro-architecture on a proven process technology, and then in the next, shrink that micro-architecture and use it as a "pipe cleaner" for a new process technology. It has allowed Intel to execute like clockwork in the PC space - brining higher performance, more features, and lower power in each generation:
This not only helped Intel in the PC space, but it also helped it ensure dominance in other, even higher margin areas such as servers, workstations, and now extending into communications and wireless infrastructure. Delivering innovation at a consistent, reliable pace not only helped to instill confidence in Intel's customers, but it also helped to make sure that there was never a "surprise" from a competitor. Since the launch of "Conroe" in 2006, Advanced Micro Devices has not been able to catch up with Intel on performance, performance per watt, performance per area, or any other relevant metric.
Now this tick-tock methodology is being applied to the low power "Atom" platforms, it seems likely that leadership there is fairly likely over the next couple of years as well:
Intel Inside Many More Products
It's not just about PCs, it's not just about tablets, and it's not just about phones. The computing market is large and getting larger, and as a result, there is a real opportunity for Intel to expand its unit volume shipments in ways that many people still don't believe is possible. With the investment in the low power Atom core, as well as the investment in multiple SoC teams and associated IP within Intel to develop solutions for these new end markets, it seems that the next couple of years will probably bring unprecedented growth for the company:
Not only is Intel trying to position itself as a top notch PC/server chip company, but with the acquisition of Infineon's wireless division, it is trying to also become a Qualcomm (NASDAQ:QCOM)-like leader in cellular modem technology. Further, I suspect that given Intel's background in higher power WiFi, it is likely that the company makes the right investments to go after the likes of Broadcom (BRCM) in low power WiFi, Bluetooth chips, and so on. This is all, of course, on top of trying (and apparently on the cusp of success from a product standpoint with the upcoming "Baytrail" and "Merrifield" platforms) to develop leadership apps processors for tablets and phones.
But what else? Well, it looks like Intel is looking to grab the micro-server market by the horns with "Avoton", is making a legitimate push into the networking/comms infrastructure with "Rangeley", and has an unanounced SoC for in-vehicle infotainment. There's a need for high performance compute here, and Intel - once again - is in a pretty good position to be a huge, profitable player here.
I firmly believe that Intel's unit volumes are set to explode in 2014 and 2015, well beyond what many people believe is possible today. And all of this was put in place under Mr. Otellini's watch.
Intel Foundry - Making Friends, Booking Profits
Intel has the world's most advanced process technology, and is used to build a real competitive moat against competitors in its market segments. However, there are adjacent industries in which Intel doesn't really play in that could benefit from better, smaller, and faster transistors. So Intel is finding the players in these spaces (such as FPGAs) where a transistor advantage could completely turn the tables and offering to build their chips - for a juicy premium. Not only does this create a new revenue stream for Intel that almost risk-free falls to the bottom line, but it also helps to build relationships with these adjacent players. Who knows? Perhaps one of these companies would like a custom chip built by Intel incorporating both the third party IP as well as, say, an Atom processor core?
It's hard to quantify what this opportunity will look like, especially as it doesn't start being significant until 2014/2015, but this is yet another avenue that not only exploits Intel's technology leadership, but also helps to deliver some serious profits to shareholders. And for a dividend growth company, what's better than a steady, reliable source of income?
Conclusion - Mr. Otellini, You Will Be Missed
Under Mr. Otellini, Intel did a lot of good things. Could Intel have been more aggressive with "Atom" and perhaps started moving into these new market sooner? Sure. But the company saw a wild increase in sales and profitability under Mr. Otellini's tenure, and a lot of the key, high margin markets are now under lock-and-key thanks to the strategies put in place under him. The future looks bright from here, and I believe that by Q4 2013, investors will be able to really see the fruits of this labor.
Enjoy your retirement, Mr. Otellini - you've earned it.
Disclosure: I am long INTC, AMD, QCOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.