Earnings Call Analysis: Intel Responds To Weak Demand, Prepares Haswell

Intel [NASDAQ:INTC] recently posted their third quarter 2013 earnings release. In this analysis we try to go a bit deeper and look at the statements of the executives and their implications for the future of the company.


The CFO Stacy Smith made it very clear that the company wants to prepared for potential upside in terms of demand. He explained that it is easier to deal with the low utilization situation the company is currently facing as opposed to not being able to meet demand. Smith detailed that a low utilization situation takes about 6 months to compensate for with realignment of factory lines, while not being able to meet demand takes roughly 2 years to respond to. Intel clearly wants to avoid the latter situation.

On the other hand, this can be a risk for their margin if they overspend on manufacturing. The executives explained that in the fourth quarter they will have a reduced number of wafer in order to make inventory levels at Intel drop down slightly to a more reasonable level. The CEO strained that he is not at all concerned with being unable to sell current inventory, as approximately 70% of it is comprised of Ivy Bridge processors, which go into current mainstream and high-end products.

In the fourth quarter the utilization rate will dip below 50%. Intel will reallocate some of the factory space to 14nm which the company wants to prepare for late 2013. Around 80-90% of the equipment purchased for 22nm can be employed for 14nm as well.


Paul Otellini stated in his prepared statements that more than 20 Clover Trail-based tablets will come to market from six or more leading OEMs. Additionally, some five to eight designs based on Ivy Bridge are being readied as well. The CEO notes that the latter ones are more high-end and geared towards enterprise customers with no-compromise functionality, while the former should appeal more to consumers.

Otellini also made it clear that he does not believe the tablet represents the end-state of computing, responding to a question regarding cannibalization. In their view, there are different form factors, each with its strengths and weaknesses and we will not know for at least another year which one is the ideal intersection of qualities, features, and performance.


Based on the statements made in the call yesterday, it becomes evident that Intel does not plan to change their pricing strategy anytime soon. They do not seem to be overly concerned about rumors of AMD slashing prices. Also, they reaffirmed that it is not the price of their chips that is hampering ultrabook sales. Rather, Intel is focusing on bringing the incremental cost of touch functionality down, to drive that feature into ultrabooks in order to better compete with tablets. One could say that what they are really trying to do is to keep their share of the cost up while trying to reduce the cost of others, or in other words a very cruel form of hypocrisy. However, as long as their sales are at least flat, Intel can probably get away with it.

Haswell Spin in Full Motion

Starting at IDF in September, Intel began unveiling some technical details about their upcoming Haswell chip. Haswell is the successor to Ivy Bridge due out next year. Intel is bullish about starting revenue shipments in the first quarter of 2013, which is looked at with some skepticism by industry observers, some of which believe that Ivy Bridge already slipped by almost a quarter and that subsequently it would be unlikely for Intel to precisely stick with their yearly cadence dubbed tick-tock. It remains to be seen how it will actually play out. During the call Intel promised the first Haswell-based systems to release in the first half of 2013.

During the call it became evident that Intel repeatedly highlighted some of the advantages of the upcoming Haswell-based products. For example the existence of a 10W SKU was repeatedly mentioned which should pave the way for new form factors. Our take is that Intel wanted to attract the attention of analysts with the strengths of their upcoming chip to divert attention away from mediocre sales results.

Microserver Competition

When questioned about competitors bringing ARM-based chips into the cloud space, Otellini dismissed any danger for their products at this point in time, clarifying that the chips simply do not meet the requirements in terms of feature set. They currently lack capabilities like 64-bit or ECC which are crucial for a server today, according to Intel. Also the CEO strained that they are pushing Atom as hard as possible into this market to make sure their customers can continue to operate all the software they are used to.

PC Market Development

It should be remarked that according to Intel, sales did pick up a bit in September compared to August and July, so the basic historic patterns are still in place. Intel attributes some of this to OEMs starting to build systems in preparation for the Windows 8 launch, which is scheduled for October 26th. Similarly Intel?s Q4 2012 outlook shows that while it is expected to be the strongest quarter in the year, the additional revenue will be modest compared to the earnings of previous years. So the takeaway message here is, seasonal growth patterns are not dead, but their effect was cut in approximately half.

However, following last year’s HDD crisis buying patterns in the PC market changed towards lean inventories. While in the previous quarters it was assumed by different players in this space that the inventories would replenish again, this did not quite turn out to be true. The supply chain adopted a very lean inventory management, which they kept after the situation recovered as a downside protection against a difficult macroeconomic environment.