Intel announced a bang up quarter today:
Results
- Revenues of 10.1 billion. Well above the updated forecast of 9.6.
- EPS 31 cents. Beating the Street by 1 cent.
- Gross margin 52.4%. At the high end of their forecast and up 5.5% QoQ.
- Inventories down ~550 million.
- Headcount down to 88k
The story is demand is robust. ASPs are flat. The re-structuring is helping drive down costs and make Intel a trimmer company.
Q407 outlook:
- Revenue 10.5 - 11.1 billion. Mid-point of 10.8 billion.
- Gross margin 57 points +/- a couple of points.
- Headcount down another 2k to 86k.
It mostly sounds like good news. Demand is wonderful. Mobile continues to show strong growth. Costs continue to decrease. We have a leaner stronger Intel.
But there are a few areas of concern:
- Accounts receivables is up by 400 million. Which almost accounts for the entire inventory reduction. The Street is concerned there's been over-booking in Q3 and this will impact Q4 sell through. While it's not unusual to load inventory in Q3 anticipating Q4 is the biggest qtr of the year. But there could be some truth in Wall Street's concerns.
- In spite of a renewed product line and competitive pricing - ASPs remain flat! What's going on...? It's simple. AMD is competing hard and the OEMs are extremely happy to counter-balance Intel's influence with a reasonable mix of AMD product. The real problem here is in Intel's marketing. What's going on is end users either don't care about what CPU they are buying or are so price conscious that they are willing to trade off on the brand. This is highly likely a problem for them in emerging markets. But the bottom line is the OEMs are able to negate Intel's strong brand to a good extent.
I think Intel is being conservative in their guidance ever since their fiasco in early 2006. So I do expect them to meet their Q4 guidance. And if everything clicks - to even beat that guidance. However, AMD is competing hard and probably using pricing to try and win back share. Which I think they will have gained some since they should have cleaned out their channel issues by now. While they're still losing money, their focus is to fill their factories in order to drive up gross margin and share. Even if it means lower ASPs.
As for Penryn and Barcelona. These will not have much impact in Q4. Intel will see some benefit to gross margins probably factored into their Q4 guidance already. Going into 2008 these will take on greater significance and the heat will be turned up by both with new products having real availability. Who will win. The end user. Because AMD will probably start to drop prices if they find they're not gaining traction fast enough. Which will create another mini price war. The bottom-line problem is there's too much capacity between the two players and neither of them seems to be slowing down in their drive to keep building capacity.
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9 comments:
Interesting, maybe I misunderstood, but I thought I heard Intel say they took a write-off on 45 nm inventory this quarter as it begins building inventory for launch, as such this should be a huge boost to margins when they can official recognize revenue in Q4, I understand their 57 +/- a couple of points guidance..... your opinion?
Jack
I haven't had time to listen to the earnings call so you could be right. But my take is that 45nm is launching on server so actual volumes in Q4 will not be high. It's only when they get to mobile in Q1...followed by desktop that I expect 45nm to contribute more significantly to the gross margin.
I suspect what you're referring to is lower start up costs on 45nm which may be helping drive up their margin structure.
I'll get back again after I listen to the call.
Well, it is nice to see you blog I again... always enjoy reading your prespective.
Actaully, the write off was different than the lower startup costs... the write off is a liability, lower start up is a credit to the Q3 net.
I suspect that as they ramp production through Q3 and into Q4, some of that inventory (which will release in Q4) will realize revenue for which costs have been accounted in Q3, that is my understanding... anxious to see/read your analysis.
jack
First - thank you. It's gratifying to know that folks appreciate the blog.
I will get back after listening to the call. But I guess my question would be is there sufficient volume of 45nm to give a 5 point increase in gross margin from Q3 to Q4? My suspicion is that while this may be a contributor. The main reason for the increase in GMs is that with the overall increase in volumes, the factories are running at higher capacity which in turn has a positive impact on gross margins.
"I will get back after listening to the call. But I guess my question would be is there sufficient volume of 45nm to give a 5 point increase in gross margin from Q3 to Q4"
I think they said in the conference call they had to write off some 45nm product they couldn't sell, so that hit the Q3 margin (but won't hit Q4 margin). Otellini, or maybe Bryant, said that was a chunk of the margin story. They also said unit production cost are dropping faster than anticipated. Lastly the mix was heavy on chipset and flash in Q3, which while good for revenue, is a drag on overall margin as obviously these are lower margin than CPU.
I don't think overbooking is an issue - this was asked in the call and Intel said they don't see buildup in the channel and they saw an increase in chipset volume toward the end of the quarter which typically means a good demand for CPU will follow (as Intel has a fairly high attach rate between chipset and CPU, and chipset purchase lead the CPU purchases).
Intel was actually uncomfortable with the inventory, thinking it was too low! They also were a bit concerned that they would likely be unable to build it backup to their comfort level in Q4 due to strong demand! This does not sound like the AMD Q4 channel stuffing of last year....
Take a listen to the conference call - the ASP's were flat due to increased notebook demand (and decrease in ASP as notebook continue to become more mainstream over desktops). Intel indicated desktop ASP's were higher and they were being selective on business they took and shied away from some of the "low end" market. Intel said while they were not happy about notebook ASP's declining, the ASP's were still higher than desktop chips so in the long run this is not a huge concern.
The Q&A part of the call was actually very good.
Thanks...
ASPs remain flat! What's going on...?
ASP's flat on a market that saw inventory levels go down means everything isn't ok. This healthy market won't last forever and if they can't increase ASPs now, they never will.
Kewl, love this site. I'm not an analyst and love reading this "Marketplace" stuff.
I have a bit of an inside in Intel. My source says that they forecasted too low in certain parts destined for retail. Perhap this is part of their uneasiness about low inventory. It's like they're pulling a mini-AMD: They're selling everything they make in higher-end parts, but could sell more.
Another observation I have is that in the fast-growing notebook segment, even though AMD is substantially behind on the metrics, it does seem that price (the metric that matters mosts) will keep them in the game. Your statement that the OEM's are watering down the Intel brand are spot-on.
I can't believe that there is really any collusion between the OEM's to give AMD a (small) place at the table no matter how awful their products are. Though it is suspicious that there is now only 1 major OEM (Sony) that is exclusively Intel. I mean, any time there is a product refresh by any OEM, they could exlude AMD or Intel if they wanted - that's just not happening with any OEM currently. Suspicious?
"I can't believe that there is really any collusion between the OEM's to give AMD a (small) place at the table no matter how awful their products are. Though it is suspicious that there is now only 1 major OEM (Sony) that is exclusively Intel. I mean, any time there is a product refresh by any OEM, they could exlude AMD or Intel if they wanted - that's just not happening with any OEM currently. Suspicious?"
No, not really - what most folks fail to realize is that in supply chain management there are also sorts of factors (other than pure price and performance) that go into stocking decisions.
There is supply stability - having a second qualified source is important here in case there are issue with your primary source. I think this would be more a cause of concern for AMD only shops as AMD doesn't quite have the manufacturoing flexibility/muxcle that Intel does, but even in the case of Intel-only shop it could be a concern.
There's long term competitive reasons - a lot of times you might keep on an inferior product to ensure you have a carrot (or stick) for your primary supplier.
This is also a way of hedging bets in case there is a breakthrough technology in the future. (If you were an Intel only or AMD only house and the other manufacturer had a product breakthrough it it unlikely you would get good access to that product at least initially)
You may have customers who simply demand the one chip over another for no apparent reason.
So all of these (and many other) factors are weighed against the costs and issues of carrying a second set of parts (more validation, more inventory, etc..).
So collusion? No... Suspicious? No....just a business decision for factors many folks don't realize.
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