Otellini: PC Makers Are Buying Plenty of Our Chips, Thanks

Intel proved its mettle in its quarterly results, easily outdistancing the muted expectations of the market, then took a bit of a victory lap during its conference call with analysts.

Intel CEO Paul Otellini criticized third party research firms–he didn’t mention any names, but he was talking about Gartner and IDC–for giving the idea that the PC industry is on the wane, when their information isn’t as complete as Intel’s is, especially in emerging markets.

While they’re forecasting the market to grow in the single-digit range this year, Intel sees the PC market growing in the low double-digit range, Otellini said, and he expects it to continue into 2012. “I want to be clear that our views differ from some of theirs,” he said. The PC market is getting more complex, and at nearly 400 million units sold per year, it’s bigger than it’s ever been. The research firms don’t see as much data as Intel sees. “While some channels–like PCs sold through consumer retail outlets in mature markets–have deep visibility, other channels, especially in emerging markets, are not well-reflected” in the forecasts from the research firms.

I wonder what Gartner and IDC are going to say in response to that? It seems Otellini has just called their research methods worthless.

Otellini also talked about a forthcoming announcement in May around manufacturing process technology. Having sold its first 32-nanometer processors at the start of last year, it’s time to start thinking seriously about the move to the next manufacturing node, and also the one beyond that. The next is 22 nanometers, and the one beyond that is 14, which should hit the market about 2013 or so. Intel says its going to spend between $9.8 billion and $10.6 billion in fiscal 2011 on capital expenditures as part of bringing up the new technology, and another $15.7 billion in combined research and development plus management and general costs.

Otellini and CFO Stacy Smith both talked about the implications of that shift, and both talked about some big announcements around process technology coming in May. “What we’re realizing is that competitive advantage is becoming very important,” CFO Stacy Smith said. “We’re getting paid both for differentiating, and in terms of pricing.” Pressing the manufacturing nodes forward–which is something Intel does better than anyone else in the world–will indeed give it an advantage not only over its distant rival Advanced Micro Devices in the PC world, but also give it a better chance of combating the persistent competitive threat from ARM chips that not only rule the world so far in smart phones and tablet, but which are starting to show up in mobile PC roadmaps.

Otellini said while demand for PCs among consumers in the US and Western Europe remained soft, demand was strong in emerging markets. Demand for servers–the big surprise of the day–and PCs at business were also strong. He also said that Intel recovered quickly from the design flaw discovered last month in the Sandy Bridge family of chips. He also said that Intel sustained some damage to sales and marketing offices in Japan, but “nothing major that would hinder our ability to service our customers.” Intel is seeing no disruptions in its supply chain as a result of the earthquake there.

He talked at length about Intel’s sales to cloud providers, calling it a “major driver” of the company’s growth. Sales in the Data Center Group grew 32 percent year on year and were led, Otellini said, by sales in China. Sales of Intel chips into storage systems were also strong, up 45 percent over last quarter and 65 percent year over year.

My liveblog from the conference call–joined just a few minutes late–is below.

2:40 pm: Joining a tad late after a technical glitch. Intel CEO Paul Otellini is talking.

Our views differ from the views of the analysts. The PC business is a global industry, it is 400 million units a year. Some channels, especially those in emerging markets, aren’t very visible to research firms. Basically he’s slamming IDC and Gartner for their pessimistic views. “Our projection for 2011 remain in the low double-digit range.”

“We see no reason for 2012 to be materially different from what we see in 2011.”

He says to expect an increase in Capex around the 22- and 14-nanometer manufacturing technology. “We see a need for more features [on chips],” he says.

CFO Stacy Smith is now talking.

The company fixed the Cougar Point problem–referring to the “design errors” found on a chipset accompanying the Sandy Bridge processor–and completely mitigated the revenue impact that was expected.

2:44 pm: First quarter significantly better than our expectations.

Sandy Bridge boosted average selling prices.

Acqusitions of McAfee and Infineon wireless business added about $500 million of the $2.5 billion in new revenue seen year over year.

The Cougar Point impact to gross margin was about 3 percentage points. That explains the 1 percent quarter on quarter drop on that important figure.

First quarter puts us on track to exceed financial goals for the year. Expect another year of double-digit revenue and earnings growth.

We are making some critical investments in process technology that will have a very rapid ROI or return on investment.

Q&A is getting started.

2:48 pm: Glenn Yeung from Citi: Help us understand the emerging markets and growth seen there.

Smith: Emerging markets are well over 50 percent of business. The dynamic is one of economics. Desirability of the technology is high and affordability is high. The price point of a PC is within 1-2 months of income. Penetration rates are so far pretty low.

Otellini: My comment on the channel strength for Sandy Bridge is emerging markets. Most of the machines sold with Sandy Bridge are white boxes in emerging markets. Those markets are still surging in terms of notebooks.

2:50 pm: Yeung with a follow-up. He’s asking about the investment in process technology. Otellini used the word “revolutionary” to describe the 22-nanometer leap that’s coming. He’s asking him to shed some light on what he means by that.

Smith: The Capex number is driven by a few things. Unit growth and ability to meet demand at 22-nanometer and 14-nanometer technology. It give us performance cost and power efficiency advantages. The biggest single chunk of the Capex is with the development fab for 14 nanometer, we’re going to make that fab bigger. That will allow us to bring more products to 14-nanometer technology and ramp it faster.

Otellini: On the process technology, only a teaser today. We’ll be disclosing that technology in early May. When you hear that announcement you’ll understand why that phrase is appropriate.

2:52 pm: Question about how we should think about seasonal trends in the second half of the year.

Smith: We closed McAfee and Infineon, and they added half a billion in Q1 and should add another half a billion in Q2. The second quarter is usually kind of flat compared to the first, which is in line with the pattern we’ve seen over the last five years. We’re not seeing anything that would cause it to be any different than before. Second half tends to be about 2-3 points higher than the first in terms of revenue.

Otellini says to expect to see a lot of tablets with Intel chips demonstrated at Computex. Google’s Android Honeycomb source code will ramp over the course of the year for a number of customers.

Losing Nokia, Otellini says, “took a lot of wind out of our sails” around landing Intel chips in smart phones. Intel has redeployed resources from that. “I would be very disappointed if you didn’t see Intel based phones 12 months from now.”

2:56 pm: Question from BMO. For the total PC market, what is the percent the third parties companies are missing?

Otellini: They are all over the map. Gartner is at 6 and IDC at 7 percent growth for the year, and we’re seeing low double-digit growth.

Q: What about Medfield, the phone processor. What are the metrics that are getting customers interested in it? Is it the fact that you’ve been able to make it competitive with ARM chips?

Otellini: Its both. The product is very good in terms of performance, especially in media processing. And the power envelope is right where you want it to be.

2:58 pm: Question from UBS: You called out storage as up 45 percent within the Data Center Group. We’ve seen this group grow faster than we thought. What’s the longer term growth?

Otellini: We recognize that this group has had phenomenal growth. Expect a deep dive on that at the analyst meeting and on the market for Xeon class chips today and tomorrow. (No mention of Itanium-based servers, by the way. -ed.) Traditional servers, we’re out-growing the market by a factor of 2-3x. We think a big piece of the market is high performance and cloud, and the conversion of other parts of the data center from proprietary to Intel-based designs, you see growth that is representative of all the growth of the Internet. We’re benefiting quite well.

UBS asks about the transition from 22 nanometers to 14 nanometers. Is there anything that is driving the speed now in terms of moving to 14 nanometers and what can you do at 14 versus 22 nanometers?

Smith: I’m going to punt for another few weeks. More to say around 22 nanometer and the secret sauce there, and it will carry into the 14 nanometer node.

What we’re realizing is that competitive advantage is becoming very important. We’re getting paid both for differentiating and in pricing. As we get out to 22 and 14, we’re going to bring capabilities to process technology more quickly than we have before. 22 nanometer will intercept with smart phones and notebooks more quickly, and we’ll get paid for performance and cost over the long term.

3:03 pm: Chris Danely of J.P. Morgan asking about factory utilization rates. He wonders if there may be shortages coming.

Smith: We’re running not too hot, and not too cold. Not anticipating shortages. We have responsibility to respond if demand is hotter, and if demand is less, we now have the tools to respond to both circumstances.

Danely: It seems as though perhaps some of the OEM customers have a more tempered forecast. What’s the difference?

Otellini: We won’t characterize specific customers. I think those who are more enterprise centric than those who are focused on consumer markets in the U.S. and Europe are seeing numbers closer to ours.

Smith: The elephant looks very different depending on what part you’re looking at. Mature markets look tough. Emerging markets look pretty good.

3:06 pm: Question about how much Sandy Bridge accounted as a percentage of sales.

Otellini: Doesn’t want to get into that level of granualarity. He calls it the fastest manufacturing ramp.

Smith: More than 50 percent of my CPU inventory is Sandy Bridge. That’s a good indication of the next few quarters.

3:07 pm: Smith says he’s seeing a little upward tick in component costs, including some impact from Japan.

Average selling prices have a very rich mix. Sandy Bridge ramped at a higher end of the price range, and the mix is going to come down a little.

3:09 pm: CLSA Securities with a question: What’s driving the demand? Is it Windows 7 on corporate PC?

Otellini: In the middle of last year we saw the market recover. The most recent data we have is that 75 percent of enterprise PCs are running WIn XP. If you think about a 3-4 year refresh cycle, we’re not even halfway through it. The combination of the Win 7 machines look good.

Question from Goldman Sachs: If I think about this third-party data issue. Is the Gartner and IDC data really off by 20 percent?

Smith: That misses how much inventory levels came down in the fourth quarter. We were worse off than seasonal. There was a significant bleeding off of inventory ahead of Sandy Bridge release. When we go off and do our looks across the channel we see inventory levels being healthy, and that says something about the health of the supply chain.

Q: That’s a little different than just the third-party data is wrong. Is it just really off?

Otellini: The comments I made were on third-party data year on year. I think our experience is that on an annual basis our numbers are closer than theirs. They correct over the course of the year to be aligned.

Smith: When I talk about Q1, you also can’t lose sight of the fact that Q1 was a 14-week quarter.

3:14 pm: Hans Mosesmann, Raymond James asks about the foundry strategy. What part of the incremental capex is part of that?

Smith: It’s not a driver of our capex. We’re interested in talking to some very specialized companies. We’re not building a broad-based foundry business, and it’s not part of our capex number.

Otellini again teases about a forthcoming announcement on process technology.

3:19 pm: Question from Credit Suisse: Asking about the weakness in consumer sales in the U.S. and Europe. Is it because of tablets?

Otellini: It’s a little bit of everything. Add one more thing. In 2009 and in the first half of 2010, consumer market for notebooks was strong contrary to GDP at the time. I think people bought a lot of machines and we’re just early in the cycle. A consumer refresh isn’t what you’d expect in a mature market right now. Clearly some tablet cannabilization is impacting that. But the bigger impact is macroecononomc.

Q: What inning are we in in the enterprise upgrade cycle?

Otellini: Top of the fourth, three on, no outs.

3:22 pm: Question about notebook and desktop mix going into Q2.

Smith: What we saw was an inventory burn in Q4 that led to units being slightly above seasonable. Q2 looks pretty seasonal.

Q: What do you expect of total wafer production in 2011? Is it consistent with PCs?

Smith: Wafers will grow faster than total available market as we move to the new process.

Craig Ellis, Caris and Co. asks: Are you expecting any change in the mature markets for PCs?

Otellini: I don’t think it has to happen. We don’t build it into our numbers.

Now a question about design wins on the tablet front, and what OS Intel will be stronger on versus others.

Otellini: I don’t have an update. We’ll do a number count on May 17. It’s 35 or so. The bulk of the units this year will be Android-based.

3:28 pm: That’s a wrap. We’ll see you back here for Q2 results on July 20.