May 11, 2012 — Intel’s annual investor day took place this week in Santa Clara, CA. Capital spending will be high in 2012 and 2013, Intel said, noting that its 22nm and 14nm node capabilities are differentiators. Intel focused on its Ultrabook launches, consolidation in the chip industry, and reiterated that capex is for internal use not foundry services.
Intel’s move into 22nm and 14nm semiconductor manufacturing nodes is increasing its capital requirements, noted Stacey Smith, Intel CFO. With new fabs costing $5 billion, Intel sees its process and manufacturing expertise as effective barriers to competitive firms, noted FBR Capital Markets analysts. Intel has sustainable advantages in manufacturing, its product roadmaps, process leadership, technology leadership (high-k, 3D transistors), and scale, FBR said.
Average capital costs per silicon square inch keep increasing, said Smith, but costs per transistor keep falling, FBR notes. Intel says CPU unit costs will fall in 2012 and 2013.
With slower depreciation than fab equipment, “halls and walls” will be about 40% of Intel’s capital expenditures (capex) in 2012. Expect high capital intensity in 2013 from the company, FBR reported, likely >$13 billion. Intel’s 2013 capex predictions should enable about $8 billion or more on wafer fab equipment, with higher intensity on leading-edge fab techniques such as double-patterning lithography, added Barclays Capital.
CEO Paul Otellini forecast more consolidation among chipmakers as semiconductor manufacturing technology advances, leaving only Intel, Samsung, and a few other players. See the top chip makers of 2011 here. Barclays measures Intel’s competitive advantage at 4+ years. Consolidation is beginning now that the cost of a 300mm wafer fab is $5 billion, Otellini said, and will accelerate with 450mm fabs that cost $10 billion or more, quoted Iain Thomson of The Register (UK). Thomson notes that Gordon Moore, Intel veteran and father of Moore’s Law, had predicted consolidation in the industry once the cost of a new 200mm wafer manufacturing plant hit $1 billion. This proved, Otellini noted, a little early, but the consolidation is now upon the sector.
Barclays sees potential for Intel as a foundry services business, as it extends semiconductor manufacturing leadership beyond competition. Intel said that the company “could become a strategic foundry partner for select customers,” but stressed that this business is in a “crawl” mode today, and that current capex is purely for internal use. If Intel were to expand into foundry services, it would require higher spending.
Despite high and accelerating capex, the company is comfortable with its gross margins (60-65% estimated in 2013), said Barclays. Average unit cost will decline in 2012 and 2013 despite higher capital expenditures, Intel said. Intel’s declining cost structure should enable the company to sustain healthy operating margins in the low-40% level for 2012, added Barclays analysts.
On the product side, Intel says it has more traction for handsets than in 2011, report analysts from FBR Capital markets: “mobile handset penetration with Atom still a priority.” Management discussed ramping 32nm mobile products in 2012, 22nm in 2013, and 14nm in 2014, one new node per year for three years, FBR reported. This is on-track with Intel’s established Atom roadmap, Barclays noted.
Intel highlighted its change in NAND memory strategy, participating only in the higher-margin segments of the market (i.e. SSD), Barclays reported, noting Intel’s recent restructuring of its joint venture with Micron as a way to eliminate risk.
Ultrabooks are of major importance to Intel, with management highlighting 110+ design wins to-date, Barclays reported. Ultrabooks will be 40% of the consumer laptop sector by the end of 2012, said Otellini, who believes that the integration of Touch and Win 8 will enable Ultrabooks to cannibalize tablets, Barclays said.
PC unit growth will come from emerging markets (China, India, etc). Datacenter revenues will stay on track, with high growth in cloud and high-performance computing sectors. The server market keeps segmenting into various sub-categories of workloads, Intel noted. Tablets and smartphones are tempering growth in Intel’s core business, FBR cautioned.
Intel also highlighted the growing opportunity it sees in embedded systems (terminals, kiosk, industrial applications) for auto (in vehicle infotainment), retail (digital signage), and communications infrastructure, added Barclays.
Net, Intel’s execution and strategies in recent years have been successful and respectable and FBR sees nothing in Intel’s presentations to suggest the firm is changing course meaningfully one way or another, concluded FBR.