Business in the first half of 2012 was consistent with expectations.
Intel's 22-nanometer process is exceeding expectations, ahead of Intel's plans and ahead of the progress of the 32-nanometer at the same point in its ramp. As a result, Intel was able to ramp Ivy Bridge to nearly a quarter of its PC volume, which is its fastest ramp ever. Intel denied that it has been cutting prices on Ivy Bridge. Intel will be taking its 32-nanometer offline since demand is declining.
NAND softened in Q2, leading to a little lower revenue numbers for the quarter and Intel expects it to continue to soften in the second half of the year. The fact that Intel has transitioned to higher margin segments of the NAND means the business will still deliver profits and cash flow, even in softer markets.
Last week, Intel announced an agreement to acquire part of ASML which will accelerate the development and deployment of 450 millimeter and EUV Lithography technologies by up to two years.
Intel achieved its volume goals with ultrabooks in the first half of the year. It is tracking over 140 Ivy Bridge base designed in the pipeline. More than 40 of those will be touch based and 12 will be convertibles. It still sees ultrabooks as 40 percent of notebooks as its volume goals, which it expects to meet. It expects there to be $699 ultrabook systems this fall. People are tending to buy high end or reasonably-high end of the product lines right now.
Notebook growth rates continue to exceed growth rates of desktops. A lot of growth in desktops was segmentation and Authorized Solution Provider (ASP) uplift. Q2 was on the low end of growth in desktop and laptop sales. Intel took back a little market share at the PC SKUs.
Intel is also tracking more than 20 Windows 8 Tablet designs based on its low power and low cost Clover Trail Atom SoC. Tablet volumes have increased and are taking a higher share of the consumer wallet, but they are still incremental machines in that consumers still have the primary computer. Although Intel-based tablets are shipping both on Windows 8 and Android, those numbers will not be material this year as there will be a slower ramp.
Intel had record server revenues in its data center business, as a result of volume growth and a rich product mix. Intel's Data Center Group (DCG) grew 15% in Q2 with cloud volume growing at more than twice the rate of the rest of the server market segment. High-performance computing continues to be one of the fastest growing segments within the data center business. The data center business is on track to the growth targets that Intel presented in May.
In the smartphone market, Medfield-based phones were launched by Lenovo, Lava and Orange with great reviews.
Looking forward to the second half of 2012, the recovery by the consumer in Europe and North America is slower than Intel had expected, NAND is slowing, but enterprise demand is growing in line with expectations. Although emerging markets are still growing, the growth is moderating due to GDP expectations and currency fluctuations. As a result of these macroeconomic conditions and the expectation that customers will continue to maintain lower inventory levels, Intel is lowering revenue guidance for full year 2012 to 3 to 5 percent, down from prior expectation of high single digits.
Evaluation of markets
Intel is still seeking growth in all geographies and believes the second half of the year will be stronger than the first half. Although Intel expected a recovery by consumers in the United States and Western Europe from several quarters of softness, that did not happen. As a result, PC sales were not as robust as Intel expected and inventory replenishment coming off of the hard drive shortage was not as large as expected.
In some countries, PCs prices are increasing because of currency fluctuations as most PC components and PCs are priced in dollars.
In China, there is an abatement of GDP growth, although China is still growing.
Financials.
Revenue in Q2 increased by 4 percent. There was strength in the enterprise business in emerging markets, but weakness in mature markets. There was also softness in the NAND memory business. The PC group grew 4 percent and the Data Center Group grew 15 percent. Intel is expecting revenues in Q3 to be 6 percent higher than revenues in Q2 and revenue growth in 2012 to be 3 to 5 percent. It expects revenues in Q4 to return to normal because of the Windows refresh and back half sales tend to be larger than front half sales.
Inventory levels in the worldwide PC supply chain are being managed below historical averages due to macroeconomic uncertainty and ahead of the Windows 8 operating system release. Inventories increased due to the Ivy Bridge ramp offset somewhat by the reduction of older generation products. The growth in inventory is primarily unit growth, not cost growth. Ivy Bridge accounts for all of the inventory growth but is less than half of the total inventory. Intel expects the days of inventory to decline over the next quarter. Capacity for Ivy Bridge will remain full as Intel continues to see strong demand.
Gross margins in Q2 were 63 percent, down slightly from Q1. Intel has not changed its gross margin forecast for full year 2012, which is 64 percent. Its gross margin forecast for Q3 is 63 percent, with Intel expecting the costs of taking the 32 nanometer offline as impacting margins by half a point to a point. Further, Q3 tends to be a more consumer oriented quarter and Intel expects more share gains at the lower end of the market. Gross margins in Q4 should be around 65 percent.
The fast ramp of Ivy Bridge increased costs in Q2, impacting gross margins, but the costs should be lower in Q3 (between half a point and a point on gross margin) and even more in Q4. Based on the current economic conditions, Intel is slowing hiring, which should reduce costs more.
In Q2, Intel generated approximately $5 billion in cash from operations, paid approximately $1 billion in dividends, purchased nearly $3 billion in capital assets, and repurchased approximately $1 billion in stock.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/727571-intel-s-ceo-discusses-q2-2012-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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