Intel Uncertain About Near PC Future, Windows 8 Impact

If there is a single sentence that can summarize the company's Q3 earnings call, it would be, "We just don't know."

Intel's quarterly result was slightly above the previous guidance and came in at revenue of $13.5 billion, and net income of $3.0 billion. That is not exactly shabby, but does not reflect some tough spots. PC client revenue was down 8 percent from last year; server CPU revenue were up 6 percent from last year, but down 5 percent sequentially; and other architecture group revenue was down 14 percent year over year. Conclusively, Intel said that Q3 revenue reflected "a continuing tough economic environment."

Of course, Intel has prepared itself with a strong product offering for the year-end finish line and it has fueled the ecosystem with pretty much everything it could to spark innovation. For example, it sent out its engineers to help vendors to design their products and fine-tune them to meet performance expectations. Compared to previous product launches, this has been an unprecedented effort in its scale. During the earnings conference call, CEO Otellini stressed that there will be more than 140 Core-based Ultrabooks to be launched with Windows 8, 40 of which will feature touch screens. The $699 price point will be met and there will be even "bridge SKUs" that will beat that price, he promised. The executive also noted that there will be a handful of Ivy Bridge-based enterprise tablets in Q4, as well as about 20 Clover Trail-based consumer-targeted designs running Windows 8.

This is everything but a weak showing for an operating system launch as disruptive as Windows 8. So. it is even more puzzling how much doubt Intel expressed about the near future of the PC market. There seem to be so many variables in play at this time, and so much uncertainty about the consumer market that even Intel appears to have become uncertain about what to expect. Otellini said that "Q3 PC sales grew approximately half of the seasonal norm and reflected flat enterprise sales." Some improvements were seen at the end of the quarter due to Windows 8 system production, the CEO stated. However, for Q4 Otellini noted that Intel expects that the "overall PC business will grow at about half" of what is typical for the seasonal change. Keep in mind that this is not your average Christmas season. This is the season when Microsoft launches its most disruptive operating system since Windows 95 -- and a season that builds on an already slow quarter that reflected half of the normal seasonal growth.

Intel is apparently creating very low expectations but, in the end, it's better news to beat a low guidance than miss an overly confident forecast. But "half" the growth is pretty dramatic from every point of view, especially when we consider the impact a new Windows launch should have. Otellini remained rather distant from the expectation of Windows 8 sales, but said that Intel's "customers are taking a cautious inventory approach in the face of market uncertainty and the timing of the Windows 8 launch."

Chief financial officer Stacy Smith added that Intel's unit inventory levels are too high at this time, since the already-reduced expectation from September has not materialized yet, causing the company to scale back its utilization to bring back inventory to a much more healthy level. He also hinted that Intel is not relying on seasonality as a sales guidance anymore, which is remarkable in itself. "What we are seeing in the back-half of this year," Smith said, "I am less convinced that normal seasonality is a great guide. What we are seeing is that the customer is managing things very cautiously. Depending on how our sales go, I think we can have multiple different outcomes for [the upcoming] Q1."

On a product level, Otellini noted that it is not entirely clear to Intel what variables are impacting the current flatness in the PC market at which level, leaving an analyst to question whether the PC market could return to normal growth rates with a rather sketchy answer. He mentioned that he does not believe that the tablet is the final computing device the market is trending to at this time, but believes that currently created devices that combine notebooks with the features of a tablet are more likely to prevail and become the "high-volume runners". However, he also noted that he has no idea what this device will be and that he "honestly will not know for 12 months".

Some other topics of the earnings call included the switch to 14 nm processor production and how efficiently Intel will be able to do that. But all the upsides were not able to clear any doubts that Intel has a way out of the current slump. The last time this happened in a similar severity, following the dotcom bust, Intel aggressively pitched the investment and innovation path and the claim that only innovation can save the industry from an even deeper fall. Sure, Intel has innovation in its pockets as well, and it counts on a strong innovative showing from its customers, but the tone is much more subdued and, subjectively, less optimistic.

It is this uncertainty that may create even more concern and may raise some doubt about the real potential of Windows 8.

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