Chicago (IL) - Intel for the first time exceeded quarterly sales of $10 billion in Q4 - thanks to strong growth of its mobile processor business. But there was plenty of not-so-rosy news - including late "third party" chipset shipments and lower than typical sales for Q1. But the company bets on Merom to attack AMD in 2006 and regain market shares in server and desktop segments.

It's not obvious why one would complain about a business that earns $2.5 billion from more than $10 billion of revenues per quarter. A closer look to Intel's earnings report and statements from, chief executive officer Paul Otellini and chief financial officer Andy Bryant, however reveal that the company's growth relies on its mobile products group and that other parts of Intel faced substantial obstacles in Q4 that will also impact Intel's business at least in Q1 of 2006.

Next to its Flash memory business that showed flat revenues and continued to be slightly in the red ($12 million), Intel especially saw lower than expected sales segment. For one, the company said that "third party" supplies of chipsets for its entry-level motherboards came in much later than anticipated, which caused a delay in shipping motherboards that carried Intel processors and "third party" chipsets. While Intel did not name this "third party," there is no doubt that the company meant ATI, which agreed last year to help Intel through its phase chipset shortage. "There was a disconnect between our processors and chipsets," he said. As a result, the company lost market share to AMD, he explained.

Bryant mentioned during the conference call that the shortage has been resolved for Q1; in a presentation in November of 2005 he confirmed that Intel plans to recoup lost market shares in this segment as soon as its 90 nm chipset production lines will be ramping towards the mid of 2006.

Bryant also pointed out that Intel saw much lower sales of desktop PC during Q4, especially in Asia-Pacific. The situation contributed to an environment where OEMs were increasing their inventories for Q1, rather than emptying their available stock. Otellini indicated that this situation may result in less than expected demand for certain products in the first quarter of this year. "Overall, we are starting out a bit more in a hole than we thought," Otellini told analysts.

A look on the balance sheet shows that Intel currently may completely rely on growth harvested from its mobility products group. Over the past year, Intel's revenue grew by $603 million, the firm's mobile group showed improvements of $970 million. The firm's earnings increased by $409 million - the mobility group's earnings climbed by $596 million or 40% year-over-year. In comparison, the firm's Digital Enterprise Group, which includes the firm's server business but also sales from chipsets and motherboards, declined by $327 million from $5.3 billion to $4.9 billion.

This may be an indication that Intel will have to and in fact is shifting its processor business more and more to the Mobility Products Group (MPG). According to sources, Intel in fact may count on the MPG to create the CPUs that will be responsible for all of Intel's profits between 2006 and 2008.

The goal for this year, Otellini said, is to regain market share from AMD in the server and desktop space. While he conceded in the past that the company may continue to give up server market shares to AMD until the new Bensley platform arrives, he stated that Bensley and its Dempsey processors will be shipping in Q1 and get into customer's hands by Q2. Dempsey will be a dual-core server processor that is derived from the Pentium 900 with 65 nm Presler core.

Towards the mid of 2006, Otellini said, Intel will be shipping the majority of its CPUs as dual-core processors and aim to achieve "leadership in performance-per-watt on the desktop, server and mobile." This plan is based on the Merom processor, built on a new microprocessor architecture that will serve as the foundation for new desktop processors (Conroe) and server CPUs (Woodcrest) as well. "We will retake shares over the course of the year," he said. Merom, however, may slip from a mid-year introduction to a third quarter release, as sources recently told TG Daily.

With AMD planning to launch a dozen Socket M2 processors in Q2 and a rumored dual-core Turion mobile chip in about the same time frame, Intel can expect serious competition by the time Merom arrives. However, there is no doubt that Intel will do everything it can to surpass AMD's performance this year, which should set the stage for an interesting year and a level of innovation that we have missed in the past five to ten years.

Intel shares fell 9% to $23.10 in late trading on Tuesday.