Macro Notes from the Intel Conference Call

Intel put up some surprisingly strong numbers as reflected below.  The stock traded up as much as 7 percent in after hours.  Holding gains after earnings has proven elusive in the past.  It will be interesting to see if “this time is different.”   (click here if chart is not observable)

Japan
As for our business, I want to note that we did not see any unusual changes or fluctuations to our backlog after the earthquake, nor do we anticipate any major disruptions to our supply lines moving forward.

PC Supply Chain and Business
Aggregate inventory levels of the PC supply chain remained healthy and well within normal operating ranges as we enter Q2. In Q1, our customers replenished approximately half of the inventory that was depleted in Q4 primarily with new Sandy Bridge-based products. Compared to the first quarter of last year, which was a very good quarter for us, we achieved double-digit growth across every major product segment, and across every region in the world.

Our PC Client business remains strong and grew 17% from last year. What we are witnessing is an explosion of computing devices that connect to the Internet, and Intel is a big part of this trend. We not only participate through selling our products into these device categories, but we also profit from the wide array of products that we sell in the build out of the data center capacity required to serve all of these devices…

Let me make 2 final comments about demand and CapEx. Like many of you, I noted that some of the third-party research firms issued reduced forecasts for PCs in 2011. I want to be clear that our views differ from some of theirs. The PC business has evolved into a global industry that is approaching 400 million units this year.

While some channels like PCs sold through consumer retail outlets and mature markets have deep visibility, other channels, especially in emerging markets, are not well reflected in the forecast of third-party firms until shipments from Intel and its competitors have been reconciled.

Over the last 5 years, we have put considerable effort into improving our visibility with systems like just-in-time inventory hubs for our major customers, as well as realtime metrics to monitor sales through all of our worldwide channels. As a result, we were able to call the inflection in our business in Q1 of ’09, as well as predicting 2010 growth to within 1 point of accuracy.

Our projections for PC segment growth in 2011 remain in the low double-digit range based on early sell-through strength we are seeing as we begin 2011 and the great reception to Sandy Bridge in both Consumer and Enterprise segments. And while it’s too early to call 2012 with an improving global economy, we see no reason for growth to be materially different from what we see in 2011.

Secondly, we are increasing our forecast for CapEx spending this year. This reflects the widening of our process technology lead and the incremental opportunity that advantage will provide our business. The increased CapEx is focused on both 22- and 14-nanometer capabilities

Emerging Markets
The emerging markets now are well over 50% of our total business level. And I think the dynamic that’s going on there is really one of economics. The desirability of technology is high and the affordability of technology is now coming into the range where when we look across markets like China, Latin America, Eastern Europe, you’ve got a couple of billion consumers that now the price point of a PC is within 1 to 2 months of income and it’s really driving our growth, and penetration rates are still pretty low. So we think this is something that has legs and will drive our growth into the future…

Most — something like 1/3 of all the PCs sold in emerging markets are not branded machines, their white boxes built by the channel through our distribution network worldwide. We saw strength on Sandy Bridge and even strengthened the Desktop business, which we haven’t seen for some time based upon that product in those markets. And of course, those markets are still surging in terms of purchasing notebooks. It’s not a low-end mix, I’d also add. It’s a pretty average mix of products on a worldwide basis.

Tablets
…you’ll see quite a bit of tablet demonstration to Computex. If you notice what we did at IDF in Beijing last week, that was — there were a lot of tablet-centric announcements there around MeeGo and Windows and Android. And so we’re heads down on a number of designs on tablets on all 3 of those operating systems where we see the Android code, Honeycomb version of Android source code from Google, and we’re actively doing the port on that and expect to be able to ramp those machines over the course of this year for a number of customers. In terms of phones, obviously, we lost Nokia, which took a lot of wind out of the sales for phones this year. We’ve redirected those resources onto a number of other major accounts, focusing on carriers who want their own devices and also on handset manufacturers. They’re all based on Medfield, which is, I think, still the first 32-nanometer phone apps processor in the industry. And quite frankly, the limit in terms of them getting to market is going to be the interoperability testing of the networks at this point in time. So I think I would be very disappointed if you didn’t see Intel-based phones for sale 12 months from now

Supply Shortages
Could we run into some shortages? We’re running I’d call it in the healthy range of utilization. So as we said before, not too hot, not too cold. Certainly on the chipset side of the business as we had responded to the Cougar Point issue, we ramped very quickly there. But I’d say in general, we’re not anticipating shortages. And I think we have the ability to respond. If demand ends up being hotter, we can put the capacity in place. And frankly, if we end up in a situation where demand ends up being less, I think you saw in 2009, we now have the tools to respond very quickly to that kind of environment. So I think we can respond to both sides of that equation as we get into the second half and into 2012.

Corporate Spending
I assume you mean corporate PCs, Srini. We’re seeing — obviously on the corporate side, we’re seeing good growth in the data center. Yes, on the — we saw, I think I said that sort of mid-last year, we started seeing the enterprise market start to recover from the recession timeframe. And the most recent data we have is that something like 75% of enterprise PCs are still running Win XP. And so if you think about a 3 to 4 year refresh cycle, we’re probably not even halfway through that cycle yet. And I think that the adoption of Win7 seems to be pretty strong and the combination of the Win7 SKUs with Sandy Bridge as we look forward into Q2 and Q3 look really good from our customers’ perspective.

Consumer Weakness in U.S. and Europe
I think it’s a little bit of everything, plus you mentioned Win7 saturation for consumers, the tablet things and macroeconomics. I think it’s a little bit of each of those, John. But I’ll add 1 more, which I think is a big one. Remember in 2009 in the first half of ’10, during the depths of the recession, the consumer notebook market worldwide, particularly in the U.S. and Western Europe, was very strong and it was strong contrary to GDP at the time. Remember GDP was going south and consumer sales were going north. And I think what happened is that people bought a lot of machines in that timeframe and we’re still just early in the cycle. So those machines are 1.5 years old or less. And so seeing a consumer refresh right now probably isn’t, on average, what you’re going to see in mature markets. Because this is not like emerging markets where people are buying their first machine. This is a mature environment where people are buying a new machine when they decide that they need to upgrade or whatever. Now clearly some tablet cannibalization is impacting that, but I think the bigger 1 is that macroeconomics and the prior cycle.

Point of Enterprise Cycle
Top of the fourth, 3 on, no outs…. We’re less than halfway through.

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