Intel lowers 3Q outlook: What’s the real driving factor?

September 7, 2012 - Intel is lowering its 3Q12 outlook citing sluggish demand amid challenging macroeconomic conditions. The chipmaker says 3Q12 sales will come in about a billion dollars short of expectations, in a range of $12.9-$13.5 billion instead of $13.8-$14.8B, and gross margins will be about a point lower than projected (62% instead of 63%). The firm also said its capital spending for all of 2012 will be on the low end of its $12.1-$12.9B guidance, as it "accelerates the re-use of existing equipment to the 14nm node." Notably, the company also pulled back its full-year forecasts, which it will update in its 3Q earnings report due Oct. 16.

"[We are] seeing customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory, softness in the enterprise PC market segment, and slowing emerging market demand," Intel said in a statement.

Analysts have for weeks been pointing out warning signs about how a variety of macroeconomic concerns are impacting the semiconductor sector. Both Intel and AMD have been predicting a slowdown in 3Q12. "We anticipate the worst 2H for PC sales since inception," warns Citigroup’s Glen Yeung, citing not just the macroeconomic factors but also increasing tablet competition and undetermined Windows 8 timing. "Multiple challenges in the PC space, with slower ultrabooks, weaker OEM commentary and Win8 pricing [are] affecting a more cautious OEM-ODM outlook," adds Vijay Rakesh from Sterne Agee.

Intel’s downgrade though, provides new clarity on just how dismal the environment is becoming. "It’s worse than everyone expected [...] Their consumer PC business is getting whacked," noted Patrick Wang from Evercore Partners. Adds Barclays’ CJ Muse: "While we believe cuts were clearly in order, the magnitude of the cut came as a surprise (implies ~9M fewer units) and this clearly speaks to the severity of the challenging macro environment, uncertainty in supply chain as to what SKUs will sell, and PC cannibalization by tablets."

Barclays’ Muse also points to the capex cutbacks as another worrisome sign. That Intel is actively seeking to reuse equipment, particularly lithography tools, isn’t a surprise; it’s done so for several nodes now. Nevertheless, "this announcement likely provides a few seeds of doubt as to [the] capex outlook for 2013." And industry watchers are counting on a big bounceback in 2013 semiconductor equipment demand after a flat year in 2012.

What’s still not clear is how much of the sluggishness now acknowledged by Intel is attributable to macroeconomic factors, and how much is attributable to the company’s own product strategy. Outside of its advantages in manufacturing (soon pushing into 14nm) and technology development (see its investment in ASML), Intel isn’t getting much oomph from any non-x86 PC areas (e.g. tablets/handsets). FBR Research’s Craig Berger explains:

In order to grow, Intel needs to ramp ARM solutions into handsets and tablets. Intel’s traction outside of its core x86 processor market seems limited. Intel does not have 4G LTE solutions today (why not??). It does not seem to be pushing highly integrated ARM-based baseband/application processors to effectively compete against Qualcomm and Broadcom (instead saying discrete processors are fine for high-end smartphones…what about the other 1.5 billion handsets?). Intel does not have in-house connectivity solutions that it could eventually bake into its basebands (WiFi and Bluetooth) or RF transceivers necessary to produce a platform solution. If Intel was not going to go all the way with its cellular strategy, then why did it spend multiple billions of dollars to acquire Infineon Wireless?

And then there’s the exploding demand for tablet computers. Berger reminds of the math that roughly 2.5 tablet shipments equals one PC. If Apple and dozens of competitors could ship 85M tablets this year, translates to -9% lower PC unit growth. "In order to grow, Intel needs to ramp ARM solutions into handsets and tablets," Berger concludes. Right now, though, "Intel [is] not taking necessary steps to be [a] real player in ARM-based handsets and tablets," he writes.

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