Analyst: Watch Intel’s 32nm POTR carefully

Jan. 16, 2009 – The chip giant’s outlook for the current quarter is unnervingly cloudy, but the message from the chip industry giant is of continued investment in leading-edge technology.

Intel’s 4Q08 results were generally in line with what it and Wall Street had expected, after a couple of late revisions: $2.27B in sales (-23% Q-Q and -19% Y-Y) and a $234M profit, a ~90% plunge Q-Q and Y-Y, with gross margins slipping to ~53% from ~59% in the prior quarter. For FY08, sales slipped -2% from 2007 to $8.2B, with a $5.3B profit off -24% from a year ago.

Noting that the current global economic uncertainty hampers the ability to gauge product demand, Intel refused to pin down 1Q09 estimates, except a general “in the vicinity of $7B,” with gross margins sliding to “the low 40s” due to costs associated with factory underutilization and ramping 32nm manufacturing.

But while others in the chip industry are battening down the fiscal hatches, Intel intends to maintain its investment pace and technology schedule in 2009. “We remain on track for introducing our 32nm process technology in the second half of this year, and we will not slow down this introduction,” said Intel president/CEO Paul Otellini, kicking off the company’s investor/analyst conference call. That said, CFO Stacy Smith noted that the company incurred $250M underutilization charges in 4Q08 (equaling about three points of gross margin) and will “bring the utilization of the factories down dramatically in Q1,” to the tune of an additional eight-point margin decline, amid efforts to work down inventory; utilizations not returning to “a normal range” until sometime in 2H09, he said.

For 2009, Smith said R&D spending would be $5.4B, with capital spending “flat to slightly down” from 2008, primarily to invest in 32nm process technology with an eye toward 2010. “Getting the first capability on 32nm is key to our strategy, and we’re going to get there as quickly as possible,” he said during the call. If adjustments to capex are deemed necessary, echoed Otellini, they’d likely first look at adjusting 45nm work. “We take advantage of the fact that we have reusability and roll-forward capability of stuff we bought for 45nm, so we’d convert that over and still get to leading-edge as fast as possible but do it by reusing investments we’ve already made,” he said. “You can’t do that in a six-month horizon, but you can certainly do that in a horizon that stretches out a year or so.”

So what do analysts think of Intel’s 2009 outlook, particularly in terms of investing and capex?

Deutsche Bank’s Stephen O’Rourke thinks the chipmaker’s 2009 capex will be lower than the $5.2B it spent in 2008, not flat, but the company probably will still be the No. 1 spender for the year as the rest of the industry weathers sharp cutbacks in capex (he projects ≥37% Y-Y). Just about everyone in the frontend semiconductor equipment sector has exposure to Intel, he pointed out; Lam Research and Mattson have no production tools of record at the chipmaker, he writes, but both may have dev tools competing for POTR at the 32nm node, for which all tool selections are likely to be finalized by mid-year prior to a full-scale ramp in early 2010. “A win or a loss of a critical PTOR position at Intel could have material implications to SCE companies as the industry recover,” O’Rourke writes, noting to pay particular attention to Intel’s gate etch and reticle inspection POTR selections.

Meanwhile, FBR Research’s Craig Berger thinks Intel’s foggy 1Q09 guidance was actually “not too bad” and just below consensus of $7.2B, though he considers the gross margins “surprisingly low.” While applauding “Intel’s stellar execution and strong product roadmap,” he recommends investors stay on the sidelines in part because there is “more attractive upside” elsewhere in the semiconductor universe where stocks have been brutalized and theoretically better chance to improve.


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