Intel: Slower Growth Ahead; May Have Taken Share from AMD

Intel today reported revenue of $13.5 billion for the quarter, up from $12.9 billion sequentially and up from $13.1 billion for Q2 2011. The result is roughly on track with Intel's forecast from April 17, when the company said it expects revenues of about $13.6 billion, plus or minus $500 million. Intel CFO Stacy Smith said that Intel missed the $13.6 billion mark due to "softness" in the company's NAND memory business. He added that the demand trends for the core business of Intel "played out as expected".

Second quarter net income was $2.8 billion, up from $2.7 billion in Q1 and down from $3.2 billion in Q2 2011. While it is good news that Intel was able to grow its sales and profit, growth has slowed considerably. Year over year, Intel revenue gained about 3 percent, while its Q2 2011 growth increased by 22 percent.

Intel CEO Paul Otellini stated in the official press release that Intel showed "solid execution with continued strength in the data center and multiple product introductions in Ultrabooks and smartphones" during the quarter. However, he warned investors that Intel's growth will be "slower than [the company] anticipated due to a more challenging macroeconomic environment" that is based on weaker than expected consumer demand in Western Europe and North America, as well as "moderating" growth in the BRIC countries (Brazil, Russia, India and China). He believes that Intel's product mix will help the company weather the storm. He highlighted Ultrabook, tablet and phone introductions in the second half as the reason why Intel is "well positioned for this year and beyond."

Intel expects Q3 revenue of about $14.6 billion, give or take $500 million to the south and north. Aggregate annual growth has been adjusted to the 3 to 5 percent range, down from "the high single digits," Intel said. Interestingly, Intel expects the slowdown to last only one quarter. For Q4 of this year, Smith said that he would expect a "seasonal quarter on the back of a below seasonal Q3". His optimism was based on low inventory levels in Q3 as well as the expectation of a strong Windows 8 launch.

Investors took the Q2 news and market outlook news with a notably positive attitude and kept Intel's stock about flat in immediate after hour trading.

During the conference call with analysts, Otellini responded firmly to previous speculation that Ultrabooks could not be selling as well as originally predicted. The executive noted that Ultrabook shipments met Intel's shipment goal and that the company was "very pleased with the level of innovation in the market". There are currently 140 Ivy Bridge Ultrabook designs in the "pipeline", 40 of them being touch enabled and 12 being convertible designs. In addition, Intel expects to see 20 Clovertrail-based Windows 8 tablets, in addition to Core-based products.

Otellini stressed that the $699 price goal for Ultrabooks will be met by fall of this year. That goal is apparently on the roadmap without price cuts for Ivy Bridge processors. Contrary to rumors, Smith said that Intel does not plan on cutting Ivy Bridge prices. "I have not seen those [price cut] reports," Smith said. "But we are not changing our pricing strategy. Perhaps those reports to the fact that we are filling in more Ivy Bridge SKUs."

The overall tone of the call was clearly set against any concerns that question the appeal to Ultrabooks (and Intel tablets) in the market. Questions referring to possible threats were quashed rather quickly. For example, a question asking what the impact of Microsoft's Surface tablet may be, was answered with a simple "I don't know" and the note that Intel would want Microsoft as a customer again. "We haven't sold chips to them since the Xbox days," Otellini said.

Needless to say, Otellini was also focused on stressing an "exciting" upcoming launch of Windows 8 "just around the corner". As usual, the executive also commented on the state of its production ramp. According to Otellini, nearly 25 percent of all processors built by Intel are now made in 22 nm. The ramp is proceeding much faster than the 32 nm ramp, he stated.

Based on Intel's statements, it is almost impossible to conclude that there is a serious downturn for the industry looking ahead. The general mood was cautiously positive, which, of course, now raises questions of what may have happened to AMD? If Intel was able to slide through the quarter with a few dings here and there, why was AMD apparently bruised so badly?

AMD recently said that it expects its revenue to decrease about 11 percent sequentially. The reason may be that AMD is much more exposed to the consumer business than Intel is and economic troubles in Western Europe and North America may reveal themselves much more than they do at Intel, which still has a blossoming enterprise business. Intel and AMD executives usually do not comment on each other's businesses, but they do place needle pokes whenever they can. When Otellini was asked why AMD declines and Intel does not, the executive said that Intel may have "taken share" from its rival especially in the low-end consumer business, which would be rather remarkable and troublesome for AMD.

The low-end consumer business is AMD's strength and should have been resistant against an Intel attack, given the fact that AMD secured the supply of more 32 nm APUs in Q2. AMD's recent strategic changes were especially targeted at this market segment and if Otellini is right, AMD may have to make some adjustments.

AMD will report its Q2 results on Thursday.