Intel Q3 2012 Earnings: $3 Billion Net Income On Weakening Market; Intel To Idle Some Fab Capacity
by Ryan Smith on October 17, 2012 8:30 AM ESTIntel 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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pityme1 - Wednesday, October 17, 2012 - link
I dont believe many listened to the conference call and Q and A session. The problem is that inventories/channel are very very low so OEM/ODM have not been ordering Ivy Bridge products. This is why Intel is lowering utilization rate. A low inventory market can change very very quickly verses the article implied high inventory low sales. If the ODM/OEM start filling to normal levels, demand will increase significantly. Also Intel stated repeatedly that China market saw a sudden drop in demand. All across industrials this is playing out (non chip exports). Lastly, we have China changing governments shortly and the uncertainty in the policies that accompanies this. With Euro crisis, possible government change in US, the new China policies to be determined, everyone is very cautious currently across all industries not just chip manufacturing. I believe this is the real explaination to their earnings and actions.Beenthere - Wednesday, October 17, 2012 - link
...you'd think there was a world wide economic depression that has been in effect for over four years and counting. Either that of Intel is trying to sell over-priced, under-performing laptops for an outrageous price?whatthehey - Thursday, October 18, 2012 - link
i have an idea: let's re-elect Obama so that he can put his plans into place for four more years and bring us out of this recession! </sarcasm>Hrel - Wednesday, October 17, 2012 - link
3 billion in NET income!!!!! NET!!!! OMG!!!! Hey Intel, you guys think I can get a desktop CPU clocked over 3GHZ with 4 cores that runs 8 threads under 200 bucks? Please! I mean, fuck, 3 BILLION....NET!!!!!! And I still can't have a hyper-threaded quad core for 200 bucks.... just.... NET!!!!! Fucking flying monkeys fucked you sideways twice on Sunday. Hyperthreaded quad core, I wanna see the cost of materials, bill of sales on that right now. NET!!!! Maybe it should only be 100 dollars.krumme - Thursday, October 18, 2012 - link
Its more or less a monopoly marketJKflipflop98 - Saturday, October 20, 2012 - link
Yeah, and the big bosses are already talking about not giving anyone raises because the future looks like it might be rough.gostan - Thursday, October 18, 2012 - link
each day I get at least ten news about consumers shifting to tablet and the PC market is a sunset industry. how much does the consumer segment contribute to Intel's revenue, really? 90%?I thought Intel would be more interested to sell more Xeon (high margin) than pentium or core i3? And when enterprises upgrade, they buy in bulk volume (100, 1000, 5000 units) and enterprises and SME definitely aren't moving away from PCs anytime soon. is tablet really killing Intel, or is it the slowing economy that's causing more harm?
28nm part contributes only 8% to TMSC's Q2 revenue. Forecast 14% for Q3. It just shows the lead Intel has over rivals in fabrication tech. Say if samsung / tmsc had yield issues beyond 22nm, what would to Apple's wonder chips?
krumme - Thursday, October 18, 2012 - link
Man that is bad news. It probably also shows the overall industrial production capacity have low forecast, and therefore investments are kept low.I am surprised Intel lower q4 forecast this late. AMD must be way over their head, when even the money machine slips. Even a piledriver times 3 can save them.
TheJian - Saturday, October 20, 2012 - link
No price cuts=you got all the bleeding edge buyers...You'll now have to drop prices to spur sales. Get over the $329 newegg price and maybe I'll bit. No $309 on sale won't do it either. Release a new bleeding edge model and shove down the i3770K. Heck maybe sell a few below $200 and maybe people will buy some more. Just drop the ultrabooks, nobody buys them. I said this ages ago. Color me shocked regarding their ultrabook sales...ROFL. You couldn't sell those at $200-300 less. Witness the $249 google laptop bomb. 65% margins is over as Arm moves in at 40-50% (less?).I'll be more than happy to just get a 660ti for xmas and put off your chip until haswell if needed. I won't give up $329 for your chip that is barely better than a sandy in most things. I don't rip etc, so I'm only after cpu IPC etc which is going nowhere fast since AMD keeps cutting engineers and falling even further behind. When I buy a movie (as rare as that may be) I can download it ripped from pro's already faster than I can do it to my own movie I just purchased. Odds are a 6-9pass CCE from them will beat whatever I can do alone. I really don't understand anyone who rips (quicksync is useless to me with unlimited internet - netflix/hulu kills 1/2 the point of this too). With most devices hitting 720p & above, no point in ripping. You can watch the same file played on your phone/tablet that you do on TV. With Plexapp it usually doesn't matter what format it's in either in house. The device doesn't even do the crunching, your PC/server does.
Also note, people are halting purchased due to win8. I think they're waiting for it to hit, to see what everyone thinks before biting. At that point you'll see Dell/HP etc shipping win7 and putting 8 ads behind win7 ads on their respective sites :) Dell/HP already said Win8's slow update is hurting sales. Gee, pitch 7 and say you don't need 8, watch sales go up. Some think buying 8 is a waste, and don't get that 7 would be fine. A good portion of the people put off by 8, might actually have win9 in their heads now...LOL. MS better make Win9 a winxp/7 instead of a me/vista or this will just happen again. If people in IT don't like your beta, switch gears as we'll all tell our management to run from winX like the plague (just like we did with Vista). This kills your training/cert money too (and companies that rely on it). Nobody made much off their Vista training. Trainsignal, Nuggets, Learnkey (Learnsmart/Preplogic now) etc would all say this I'd guess. I never paid for ANY vista training in any way shape or form. The WINTEL platform better start paying more attention to USERS rather than catering to DRM from hollywood etc and pandering to people that aren't USING their crap or ARM/Android (chrome, whatever) will start eating their lunch for real. They'd better start pandering to US, the users!
$249 Chromebook should be Compatible with Android games with ease if not out of the box:
http://www.unrealengine.com/en/news/unreal_engine_...
http://tegrazone.com/news/morewildblood
http://tegrazone.com/news/hornannounce
http://tegrazone.com/news/epicfutureofmobile
Check out the graphics, and NOTE the mention of TEGRA specific optimizations. These will look and play better on NV based ARM chips.
http://www.intomobile.com/2012/06/05/nvidia-announ...
By next xmas consoles will have competition as even more get announced. This was 5 months ago mind you at GDC 2012. I have seen NO OTHER company pay to get games better on their chip and NV has a LONG history of doing this on the desktop as alluded to in the anandtech 680m vs 7970m grudge match a few days ago. I mean how the heck do you get your chip to run 2x faster in Diablo3 than the competing top of the line GPU? OPTIMIZE the games for your stuff and cozy up to game devs!
Intel server cpu competition? :
http://www.brightsideofnews.com/news/2012/9/20/nvi...
http://www.tomshardware.com/news/john-carmack-tegr...
Waving goodbye to x86 (NVDA revenge for Intel booting them from chipsets?)
http://www.brightsideofnews.com/news/2011/11/14/nv...
Make no mistake this is Jen Hsun's goal...LOL.
20nm Denver taped out 6 months ago :) OUCH. Sammy+NV hookup=Intel competition.
This is also bad news for AAPL who now has to depend on TSMC after pissing on Samsung for so long with the lawsuits. You reap what you sew correct? I think them leaving on their own was sort of like, quitting before your fired to save face :) Good luck with TSMC apple :) Now they can fight with QCOM/AMD for fab space (bad for AMD who has no money for preferential treatment, I'm sure apple will get their chips in volume - which may be bad for snapdragons future volume wise). Name a chip that has come from AMD/NV etc on time and in volume with high yields in the last 5yrs from TSMC. I don't think I can.
http://money.msn.com/business-news/article.aspx?fe...
NV's take on quadro accessible from anywhere in your company, not just your desktop itself. GPU sharing, nice.
Once games are made all over and at high qual on NV/Android all platforms are in trouble (consoles/Wintel PC's/AMD). This is rimm all over again. Once Enterprise email was on apple etc the party was over. You're not special now, and profits tank. The same can be said about Wintel/DirectX. Google already has Apps which makes Office moot for a lot of people. The only thing left making Wintel desired is GAMES. We can't run to linux, no games (well, not many). But Android won't have that problem by next xmas. Should have some great ones, even oldies like Baldurs 1 & 2 enhanced by then (B1 enhanced comes out next month on android and iphone, two next year, then finally BALDURS 3, yeah baby). If all the Tegra work pays off for other chipmakers also then this will happen very quickly as android phones sell 3 or 4to1 vs. iphone now. That's a crapload of devices to dev a game for and Torchlight ceo just proved he makes the same $14 on a $20 game that he did selling a $60 at retail.
http://www.gamesindustry.biz/articles/2012-09-18-t...
Why dev for WINTEL purely, when you can dev for 1Bil+ devices and port to Wintel if needed (much like console games get ported now - I see consoles dead next xmas as MS/Sony see the writing on the wall and just give this up)? Unreal 3 engine already runs buttery smooth according to Epic on Tegra3. I'm sure NV is putting a Tegra 4 in game devs hands as we speak 6 months after taped out samples popped off Samsungs 20nm process. No fan in the $249 laptop is impressive and it's not 20nm AFAIK. Surface better come out at $300-350 or they'll get killed. Which is kind of Google's point I guess. Dominate the market via volume, then cash in once games are out to play on just about everything currently held in people's hands. Good strategy.
If the next rev of Googles tablet type device is Tegra4 they'll get 3 sales from my family immediately at these insane prices. This will replace the need for a new Wintel laptop (which I need as mine is 7-8yrs old now, but was top of the line back then, NV 6800Go in it still does pretty good in games), and can be HDMI'd to a 24in easily at 1920x1200 or 1080P. We will basically get 2 laptop's replaced with these and the 3rd just so mom has one too...LOL. If it doubles as an xbox/ps2 replacement (I have both) and browses on TV when desired we won't hesitate. We may be put off a few months waiting for features, but surely a lot of people here will be in the same situation or close to it. We have 2 old high end lappy's to replace but are basically waiting for these, just a bit more powerful as I want it to replace the xbox360 sufficiently. Check out all the unreal 3 based games above. As the rest jump to mobile, these will become no brainer purchases for xmas gifts next year. That will be a major dent in any sales of 400-700 units from xbox720/ps4. A ton of people still don't have PS3/xbox360. Wave a PC replacement that doubles as ps3/xbox360 replacements and consoles are dust. Kids can do work (out to monitor/key/mouse setup in bedroom etc) and play on tv when desired with any xbox/ps/pc wireless controller. This is probably why MotelyFool picked NV as the next stock of the decade and 100bil company.
With sammy pulling down 8B this quarter vs. Intel's 3B, it's clear with NV's huge keplers taking fab space as Apple vacates they'll be cashing in for a while even without apple's volume (kepler ~294? if memory serves, is much bigger than A6 ~97mm). Samsung should have no trouble keeping fabs full with 3x bigger gpus coming into play along with tegra's and their own selling 20mil in 3 months. What would happen if kepler ends up in a google laptop with android games out and about? Dead or severely weakened AMD, NV could lock out Intel from their GPU's and move to Mobile & chrome based PC's. Devs would obviously dev for NV over Intel gpu's so things can change here quickly if WIntel doesn't watch out. Remember how fast 3DFX went down? How fast Rimm has gone down? It happens very quickly today. I'm just saying... :) Intel must be sweating bullets over ARM (no matter who leads that charge - or the whole freaking group of soc makers).