Intel is routinely called a bellwether of the personal computer industry, and for good reason. Not only do they supply most of the world’s CPUs but they have consistently run a highly efficient organization that has achieved the kind of gross margins most other chip manufacturers can only dream of. So when Intel is doing well it’s often a sign of success for the wider PC industry, and when Intel begins to look uneasy it’s usually a sign of things to come.

This is perhaps no more true than right now, where the PC industry has been an extended slump. The hard drive shortage that initially pulled down the PC industry has since abated, but this has been replaced replaced by concerns over a slower economy, not to mention consumers shifting attention and money away from PCs and into tablets and smartphones.  Intel of course has exposure in both the PC and mobile markets, but being a relative newcomer to the latter they are still primarily vested in the PC market, and hence are exposed to any major market weaknesses.

This brings us to Intel Q3 earnings announcement, where we’re seeing those weaknesses take root in Intel’s earnings. For Q3 of 2012 Intel reported $13.5 billion in revenue with $3 billion in net income. This is by most standards a tidy sum – even when those standards are Intel standards – so it was by no means a bad quarter.

But when you start comparing this quarter to past quarters, an otherwise strong quarter stops looking quite as good. Compared to their record-setting performance last year in Q3 of 2011 Intel’s revenue is down 5% and their net income a much sharper 14.3%, offering a rather straightforward look at the weakness in the PC market. Meanwhile gross margins are Intel’s one bright spot for the moment, thanks to the fact that Intel’s gross margin having only fallen by a trivial amount in the last year; their margins have declined from 63.4% in Q3 of last year to 63.3% this year. Again this isn’t a bad quarter for Intel – it’s hard to understate just how good those gross margins are – but this is the significance of being a bellwether.  If even Intel is seeing a drop in net income, what does that mean for the industry as a whole?

Intel Q3 2012 Financial Results
  Q3'2012 Q2'2012 Q3'2011
Revenue $13.5B $13.5B $14.2B
Net Income $3B $2.8B $3.5B
Gross Margin 63.3% 63.4% 63.4%

The answer it seems may not be good. Intel’s Q3 results are only half of the news today; the other half of that news is Intel’s projections and planned actions for Q4. Intel has taken an unusually conservative stance on Q4, projecting that both revenue and their all-important gross margin will be down in Q4 of 2012 as compared to 2011. Specifically, Intel is projecting that their gross margin will be 57%, as compared to their incredible 65.5% gross margin from last year. On a quarterly or even yearly basis this would be a major shift for Intel, and it is a strong indicator that the weakness in the PC market will hurt Intel by more than just reducing their net income a bit like what happened in Q3.

This brings us to Intel’s unexpected revelation during their earnings call and the primary reason we're covering this: idle fabs and inventory buildups. Due to a buildup in inventory and a desire to prevent further buildup in what Intel is projecting to be a weak quarter, Intel will be taking the unusual step of letting quite a bit of fab capacity go idle. For Q4 Intel’s fab utilization will be sub-50%, with that being a combination of capacity idled to keep supply down and another fraction idled for the upgrade to 14nm. Because Intel would rather have too much capacity than too little they routinely take fab capacity idle for both production purposes and upgrade purposes – i.e. the 14nm downtime would need to happen regardless – but it’s very rare for Intel to let utilization fall below 50% like this.

Rolling this back into Intel’s finances, Intel’s incredible gross margins hinge on running their fabs at as close to full capacity as possible. So while idle fab capacity is still better than an inventory glut (or price cuts), it’s not without consequences. The consequences being Intel’s relatively low gross margin forecast for Q4, which if it comes true would be Intel’s lowest gross margin since 2009 at the end of the recession.

On that note, perhaps the cruelest part of this is that because Intel’s overcapacity appears to be at 22nm – Intel’s standing inventory is nearly 70% Ivy Bridge – Intel’s options are to produce Ivy Bridge or go idle. Atom is still built on Intel’s older 32nm process, so even if Intel is in a position to capitalize on the strong mobile market they can’t shift from producing PC CPUs to mobile SoCs. In a situation like this Intel’s accelerated Atom roadmap can’t come soon enough.

Moving on, the real wild card for the moment is Windows 8 and what impact it will have on PC sales. The Windows-induced Osborne effect is practically a tradition in the PC space so it’s expected to see PC sales weaken ahead of a new version of Windows. The difference this time is that the weakness in the PC space isn’t just delayed demand based on Windows, but also due to the aforementioned economic issues and competition from mobile devices. Intel certainly isn’t expecting Windows 8 to reverse PC sales on its own, but just how well it is received will definitely have an impact on Intel’s Q4.

Ultimately the Intel story will be the template for the rest of the PC industry. Regardless of demand for Windows 8 it’s almost certainly going to be a soft quarter for the industry, and unfortunately few companies are in a position to weather it as well as Intel. For those like Asus who have a significant presence to the mobile market they can look forward to a strong mobile market offsetting PC declines, while other manufactures like HP and Dell will face the full brunt of any changes in the PC market, be it good or bad. Even with the hard drive shortage the PC market has enjoyed a good run for the last few years, but if Intel’s Q3 results and Q4 predictions are anything to go by a cyclical slump may quickly be approaching.



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  • shompa - Wednesday, October 17, 2012 - link

    "The hard drive shortage that initially pulled down the PC industry"

    That is just bull. The real reason is the iPad effect. Intel lost 20% market share to tablets last year. That is the real reason. All computer manufactures had long term hard drives contract and had no problem. The hard drive shortage only lead to inflated prises for non-contract customers. You could always buy hard drive.

    Its strange that tablets are not computers. The ASP of an iPad is higher then he ASP of a PC. And its there the money goes. Its not a slump. Its a market that is shifting to another technology.

    BTW The decline of the PC market include Apple that grows. The PC market fell about 6% last year. If you take out Apple, the PC market fell over 10%.

    Intel needs to realise that ARM is quickly taking market share from X86. Only then can Intel change strategy. If Intel continue to lie to them self they will join companies like RIM and Nokia.

    X86 will be a niche chip. The wast majority will be RISC/ARM.
  • jamyryals - Wednesday, October 17, 2012 - link

    Intel has very smart people, and they are experts at execution. To think they are dismissive of the ARM threat to their business would be to dismiss their current roadmap. The statements you see from them are carefully crafted PR to their shareholders. They are moving as fast as they can to go lower in power to better compete in the ultra mobile space. Intel is a big ship and it takes years to make a course correction. They are in the middle of that shift now, but the question is if they will be too late. The good thing is, we will all find out.

    Does anyone know how big a war chest Intel is sitting on if times get really tough?
  • amdwilliam1985 - Wednesday, October 17, 2012 - link

    I totally agree with you.
    Intel can be scary when it means it, just look at the recent history of P4 -> Conroe period, Intel executed their plan well(though with some "unethical" methods).

    I am very interest in them getting into the ultra low powered cpu, expecting to see more phones and tablets based on intel in 2013.
  • mrdude - Wednesday, October 17, 2012 - link

    Their competitive products, Ultrabooks, have been stale as far as sales go. And quite frankly, it's no wonder. They don't offer anything but "thin" at the expense of battery life, a 17W ULV processor and an inflated price tag.

    So when faced with the issue of backed up stock, instead of decreasing prices significantly in order to make their current products more attractive, Intel has decided to let their fabs sit idle? Wasn't it just this week they announced that they're aiming at a 70% Ivy Bridge/22nm penetration rate?

    If Intel really wanted to compete, they'd be dropping the price to spur on more sales of their current products rather than keep prices the same level and ignore the ARM threat. I know Intel has already claimed that ARM is its biggest competitor going forward, but this doesn't sound like they're willing to play ball. Unfortunately for Intel, I don't see tablet and smartphone sales decreasing, but I most certainly do see a slipping PC market.
  • 0ldman79 - Wednesday, October 17, 2012 - link

    They still have to recoup the cost of R&D. They can't just drop the price on it because they want to.

    They are far ahead on the fab technology, but at a hefty cost. They're aggressive way of doing things may have left Intel in a bit of a bind.

    Not that it will have any dramatic outcome, but an uncomfortable situation none the less.
  • mrdude - Wednesday, October 17, 2012 - link

    I don't disagree, but the consumer in me doesn't seem to care, nor will others. Unless tray prices decrease across the board and the cost savings are in turn reflected in product pricing, the sales figures aren't going to recover any time soon. The fact is, people have been buying the shiny mobile gadgets and not Ultrabooks, PCs and laptops, and that trend doesn't seem to be reversing. Part of this stems from pricing and lack of interesting products. Ultrabooks are fancy, but they don't offer anything special and are far too expensive. When confronted with an iPad 3 or an Ultrabook with a TN panel, 6 hour realistic battery life and 4lb weight, they've been consistently picking the tablet.

    Rather than attacking the issue head on with lower pricing and better product lines, Intel has decided to let fabs sit idle and prices stagnate?
  • Roland00Address - Wednesday, October 17, 2012 - link

    Intel has lost less than 20% of laptop sells by people shifting from laptops to tablets. If a laptop is $700 dollars do you think they are going to suddenly recover lots of sales if the laptop is now $600 dollars? The answer is no they will not recover those 20% of sales even with a $100 dollar price drop. Yet by lowering the price a $100 dollars their recommended tray price drops from $225 to about $125 or a reduction of margin of 50%. Those 20% of lost sales are gone forever with the current cpus and <b>droping prices will not lead to profit maximization.</b>


    What will lead to profit maximization will be creating new markets with those laptop cpus, by introducing those cpus into form factors such as tablets. To do this they will have to lower their average tdp for a laptop cpu from 35watts to something less than 10 watts and preferably less than 5 watts so it can be fanless. Well guess what intel design targets for mobile has been recently
    35 watts was sandybridge / arrandale
    17 watts for ivybridge
    10 watts for haswell

    these are the tdp numbers for processor + northbridge
    n series notebook dual core models
    14 watts total =8 watts Atom 330 + 6 watts 945GSE chipset
    8.5 watts Atom n570
    3.5 watts Atom n2600
    1.7 watts Atom z2760 true systems on a chip

    You are right intel has not been pushing fast enough with atom on lowering the power consumption and increasing the performance yet it seems intel has now gotten the message time will tell if intel has learned its lesson. Furthermore intel has been a prisoner to the windows/intel alliance and the fact windows has not been pursuing tablets until recently with the upcoming windows 8. This was a mistake for intel not trying to get an android or other serious tablet os until then, but maybe this was a fatal mistake if windows 8 actually sells as a tablet os.
  • 0ldman79 - Thursday, October 18, 2012 - link


    It isn't like Intel is going to make any money selling the chips at half price.

    The PC market just isn't there. People are going with tablets, smart phones.

    I am losing Internet customers to Verizon and AT&T. People that aren't big Internet users are just going with a smartphone and dropping the land line, high speed, etc.

    The only reason they still have a PC is because it is paid for and something for the kids/grandkids to goof on.

    Essentially it comes down to the PC people have PC's, they'll keep them for years.

    The email and pics people don't care. They push a button and sync everything up and really wish there was a way to permanently save those pics...
  • CaedenV - Wednesday, October 17, 2012 - link

    I'm going to cry bull on this one. The iPad is a great device, but I don't know anyone who uses one as a 'daily driver' yet. It is a nice PC accessory, but not (yet) powerful or functional enough to be a replacement.

    Long story short: If intel cannot get into phones and tablets, then they are doomed. Not because people will not buy their products when needed, but because there is less need for the PC market. 5 year old desktops and 3 year old laptops are more than good enough for most people's workloads. They play back video, do light games, and are great for productivity work like office or even simple video editing. Mainstream programs, and OSs are getting lighter and smaller, which breathes new life into these aging machines. 4GB of ram, and an SSD makes even the oldest C2Duo machines feel quite responsive and fast, so there is little need to replace the whole computer, and most people don't even need that much to be happy.

    If people needed faster computers or laptops, they would buy them. The success of the highly overpriced tablets is proof that the money is out there, but people do not have a need or even a real want for a faster machine, so things slow down on the old markets where people are generally happy, and new markets rise up to take their place.
    Intel is Intel's biggest competitor. If they just had crappier products for longer then people would still need the newest and greatest equipment.
  • Pessimism - Wednesday, October 17, 2012 - link

    I think you have underestimated the continued impact of the hard drive/flood fiasco. Hard drives have still not returned to pre-flood pricing. $50-100 per system on a grossly overinflated hard drive killed the margin of profit on a desktop PC for system builders. Seagate and WD know their days are numbered and are milking everyone for all they are worth. SSDs are falling in price but aren't rising in capacity quickly enough to really dethrone hard drives yet. They have also suffered a bloody nose due to manufacturers pushing them out the door with zero QA and terrible firmware, giving them a bad reliability reputation.

    You also underestimate the psychological impact of the end of the GHZ WAR on Joe Average, the barely informed impulse buying consumer. With AMD basically dead on the CPU front, and Intel pushing tiny, incremental cpu updates with ambigious naming and high, static pricing, noone is buying a PC on impulse, bragging rights or prestige anymore.
    Before, upgrading from a p2-300 to a p3-600 meant WOW TWICE THE POWA
    now, Joe with his i5-6729067MarkII looks at the new i5-6729068LE system and says "HUH"

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