During a Thursday hearing, U.S. District Judge Lucy Koh ordered the trio to submit separately to four hours of questioning over the unwritten pacts their companies allegedly entered into not to actively recruit one another’s employees. At issue here is a civil suit brought against Apple, Google, Intel and others that mirrors similar litigation brought by the U.S. Justice Department. The government case, which accused the three companies — along with Intuit, Pixar and Genentech — of collusive restraint of trade, was settled in 2010. But a civil case was subsequently brought against the players by a handful of employees who claim their income was unfairly reduced by the agreements. And Koh is currently considering whether or not to grant it class status.

Attorneys for the plaintiffs estimate that damages in the case could potentially rise as high as hundreds of millions of dollars, and they have some particularly juicy evidence with which to do battle. Among it, an email from Google’s recruiting department stating that “Google has an agreement with Apple that we will not cold call their staff,” and an email exchange between late Apple co-founder Steve Jobs and former Google CEO Eric Schmidt over an apparent violation of that agreement. “I would be very pleased if your recruiting department would stop doing this,” Jobs wrote to Schmidt on March 7, 2007. Schmidt’s response — this terse message to Google’s recruiting department: “I believe we have a policy of no recruiting from Apple and this is a direct inbound request. Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly so please let me know as soon as you can.”

The company’s conference call with analysts is about to begin. Expect some questions from the gallery that test Intel’s assumptions about the state of the PC and server markets and its assumptions about its intentions in the mobile business. And while Intel execs on the call probably won’t say much about any of this, there will be some pressing questions about the state of the search — such as it is — for the next CEO who will take over after current CEO Paul Otellini leaves later this year.

Earlier:
2:11 pm: Joining the conference call in progress. CFO Stacy Smith is reading from his prepared remarks, looking back on the year.

Smith: Spending as percent of revenue was 34 percent. Fourth quarter revenue finished in line with expectations. Worldwide inventory levels reduced as customers reduced their inventory of older PCs.

2:13 pm: Smith: In 2013 we’re expecting revenue growth in the low single digits. Expecting $18.9 billion in spending.

2:14 pm: Smith: As a result of the significant progress we’ve made, I’m optimistic about our long-term prospects. In 2013 we will rev our next-generation tablet chip, Bay Trail for Windows and Android.

Smith: We will start production on the 14-nanometer process this year. This will put us significantly ahead of the competition.

2:16 pm: Moving on to the Q&A session with analysts.

Question from Deutsche Bank: It seems like your Capex and Opex are outgrowing revenues. It looks like investors are dubious about when they’ll see returns on investments. What are the mile markers?

CEO Paul Otellini: You’re seeing our first investments for the 450-millimeter transition for later this decade. (Bigger silicon wafers.) That is more of an extraordinary event that isn’t related to volume in 2014-16. Other than that, it’s about the same as last year. As we finish up the use of the 14-nanometer processes and move to 10-nanometer process, we’re going to need those factories. Regardless of what you think the size of the market is, the fabs (factories) are the most important assets we have.

Smith answering another question on Capex. It’s for building to the peak of 14-nanometer, and starting the early bits of 10-nanometer. Its really for the peak of 2014 and 15. With regard to equipment, the facility-related spend is coming back and it’s for equipment.

2:21 pm: Question on guidance for 2013 revenue, can you walk through underlying assumptions?

Smith: We expect data center group to return to double-digit growth. Cloud data centers and portions of the market like storage and networking. And then for core PC market, we have pretty modest expectations in units. We think growth comes from the devices that sit in the middle. Plus we start to participate in the tablet market.

Is the spending for 450-mm wafers ongoing?

Smith: What changed is, the industry consortium set expectations for the shift, we want to start the construction of a development facility. I expect there’s some spending related, but we won’t get into real capital spending on it until the back half of this decade.

Q: The 10-nanometer spending, does that assume EUV or immersion lithography?

Smith: I’ll save that for the technologists. We’re close to the vest with those details.

2:24 pm: Question: There are some reports about Intel manufacturing some chips for Cisco Systems. Trying to drill down on Intel becoming a specialized foundry, which builds chips under contract.

Otellini: We are very interested in being a selective foundry for certain customers. We don’t expect to be a general purpose foundry. We would not take business that would strengthen a competitor. We have done some announcements in programmable logic, and those companies need a company like Intel to help them. We have been building that capability and we’re now going into production.

Smith: To the extent that we engage with these customers, we want to get paid for it.

Questions about ARM.

Otellini: We’ve looked at the A15, and we’re comfortable that we can maintain a performance lead.

2:27 pm: Another question on the foundry business. Have you earmarked any money for it?

Smith: Other than the three small customers you have heard of, the foundry business is not driving our Capex spending.

Question on PC market guidance. You seem to be guiding them down and making a big bet on 2014. How much do you need to take of tablet share, or how much needs to be eaten by your convertible PCs to make that bet worthwhile?

Smith: I’d take issue with the characterization of PCs guiding down a ton. For the company I said low single digits, data center up in double digits, and you still end up with client (PC) growth in that. The lines are blurring and we are expecting some unit growth. When we get into the back half of the year it’s a fairly reasonable assumption. We expect normal growth, just across a wider range of devices.

2:32 pm: Question on Q4, seems PC client units were down 4 percent. Was this mainly an inventory drain?

Smith: We think there was an inventory drain in the worldwide supply chain for PCs in the first quarter. Our channel checks suggest older Windows 7 systems were burned off in the quarter. When we look at inventory levels, we think it’s a healthy level of inventory. Plus we reduced our own inventory levels.

Q: Any particular dynamic at work regarding average selling prices in the data center group?

Otellini: The big drive was Romley. That helped drive the overall richness. On PCs, we saw strength in the core product line, and more weakness than we thought in the lower end of the market.

Question on potential for hybrids. We’re seeing small tablets. 10-inch tablets are not selling as well. Does that give you an opportunity?

Otellini: Yes. Phones are getting bigger. And the shift to tablets from 10 to seven inches, and that is what you’re going to see. The market will bifurcate between 4- and 6-inch and then 5- and 7-inch products. They only get thinner as Haswell and Broadwell come online.

Question on cash balance. What is the level of cash. Will you have to raise debt again?

Smith: We would certainly look opportunistically as we have been. We generated $6 billion of cash flow from operations, so we’re generating plenty of cash to run the business, to pay the dividend and protect the dividend. I’m comfortable with the cash we have now, and I could live with a little less as well.

Question on an update acquisition of Infineon wireless. Where are you with 4G LTE and an integrated Atom chip? Progress with handsets?

Otellini: Infineon is well on its way to LTE. Dual data and voice mode. First phones early next year. Very competitive solution. The Infineon team is known not for being first to market, but very good, and cost effective. In terms of integrated solutions, expect higher levels of integration next year.

Smith: I’m struck by how hungry the customers (phone makers) are to work with us on this.

2:40 pm: Question on price elasticity in the PC market. Wondering how price drops drive unit growth.

Otellini: I don’t think there’s much elasticity in the classic form factors. What we saw earlier was similar elasticity in desktop in 80s and 90s. It dropped until it reached a point where there was a minimum margin left for all the players.

People will buy based upon their need in those price points. Difficult to see them go from $299 to $99. What we’re likely to see is people willing to spend a little more for a more capable product. We’ve seen it in the Apple model. There is a model of paying for innovation.

2:42 pm: Do you have a view on EUV (Extreme Ultraviolet Lithography)?

Smith: Not prepared to talk about it.

Question: You’re expecting a better than seasonal 2H13.

Smith: That is consistent with our view. The consensus GDP estimates, there is a consistent strengthening of GDP later this year. Haswell gains traction, touch gains traction. We become more represented across Windows tablet and Android across 2013, and that gives us a better than seasonal second half of the year.

Question on regional performance.

Otellini: In China, there were some tablets that impacted some low-end PC sales. Brazil saw some inflation and that affected some PCs sales. China had a regime change, and that affected some sales. China is still outgrowing any large economy in the world. We have been pleasantly surprised by the data center growth in China.

Question on gross margins. They were a little better. Can you share with us your utilization rates in Q4 and what you expect the trajectory to be in Q1 and beyond?

Smith: We came in with gross margins a little better than we expected in Q4. We brought the loadings down in the factories a bit. We redirected some equipment, and brought inventories down by $600 million. We think gross margins are roughly flat. We see continued improvement in excess capacity, and increases in startup costs. Add in some other puts and takes it’s about flat. When we get to Q2 we see further reduction in excess capacity charges, but that is when we will peak in terms of startup costs. So I think Gross margin in Q2 will be flat to down. But we think gross margins later in the year to be closer to low 60s because we’ve guided to 60 percent for the year. Our costs come down over the back half of the year.

2:52 pm: That’s it. Thanks for tuning in! See you in 90 days!

Earnings on a per-share basis were 48 cents, beating the 45 cents that analysts had expected. Sales were $13.5 billion, right in the sweet spot of the consensus.

Intel shares finished the day up by 57 cents, or more than 2 percent. They’re also rising in after-hours trading on the news. Just after market close, they were trading up 39 cents, or more than 1 percent.

For the quarter and year ahead, Intel said it expects sales of $12.7 billion, plus or minus a half-billion dollars. In Q1 2013, it expects a gross margin of 58 percent, plus or minus a few points. For the full year, it expects sales to grow in the low-single-digits percentage range, and gross margins around 60 percent. It expects to spend $13 billion, plus or minus a half billion, on capital expenditures during the year.

Update: The revenue guidance is in the lower range of the consensus so the shares are starting to fall. It’s now down by about 3 percent as of 4:35 pm ET.

Here’s the full text of Intel’s release. I’ll have more as I sort through the highlights. Also, the conference call with analysts will be starting in about an hour. I’ll be liveblogging.

Intel Reports Full Year Revenue of $53.3 Billion, Net Income of $11.0 Billion
Generates $18.9 Billion in Cash from Operations

SANTA CLARA, Calif., Jan. 17, 2013 – Intel Corporation today reported full-year revenue of $53.3 billion, operating income of $14.6 billion, net income of $11.0 billion and EPS of $2.13. The company generated approximately $18.9 billion in cash from operations, paid dividends of $4.4 billion, and used $4.8 billion to repurchase 191 million shares of stock.
For the fourth quarter, Intel posted revenue of $13.5 billion, operating income of $3.2 billion, net income of $2.5 billion and EPS of 48 cents. The company generated approximately $6 billion in cash from operations, paid dividends of $1.1 billion and used $1.0 billion to repurchase 47 million shares of stock.
“The fourth quarter played out largely as expected as we continued to execute through a challenging environment,” said Paul Otellini, Intel president and CEO. “We made tremendous progress across the business in 2012 as we entered the market for smartphones and tablets, worked with our partners to reinvent the PC, and drove continued innovation and growth in the data center. As we enter 2013, our strong product pipeline has us well positioned to bring a new wave of Intel innovations across the spectrum of computing.”

Full-Year 2012 Key Financial Information and Business Unit Trends

· PC Client Group had revenue of $34.3 billion, down 3 percent from 2011.

· Data Center Group had revenue of $10.7 billion, up 6 percent from 2011.

· Other Intel architecture group had revenue of $4.4 billion, down 13 percent from 2011.

Q4 Key Financial Information and Business Unit Trends

· PC Client Group revenue of $8.5 billion, down 1.5 percent sequentially and down 6 percent year-over-year.

· Data Center Group revenue of $2.8 billion, up 7 percent sequentially and up 4 percent year-over-year.

· Other Intel® architecture group revenue of $1.0 billion, down 14 percent sequentially and down 7 percent year-over-year.

· Gross margin of 58 percent, 1.0 percentage point above the midpoint of the company’s expectation of 57 percent.

· R&D plus MG&A spending $4.6 billion, in line with the company’s expectation of approximately $4.5 billion.

· Tax rate of 23 percent, below the company’s expectation of approximately 27 percent.

Business Outlook
Intel’s Business Outlook does not include the potential impact of any business combinations, asset acquisitions, divestitures or other investments that may be completed after Jan. 17.

Full-Year 2013

· Revenue: low single-digit percentage increase.

· Gross margin percentage: 60 percent, plus or minus a few percentage points.

· R&D plus MG&A spending: $18.9 billion, plus or minus $200 million.

· Amortization of acquisition-related intangibles: approximately $300 million.

· Depreciation: $6.8 billion, plus or minus $100 million.

· Impact of equity investments and interest and other: net gain of approximately $100 million.

· Tax Rate: approximately 25 percent.

· Full-year capital spending: $13.0 billion, plus or minus $500 million.

Q1 2013

· Revenue: $12.7 billion, plus or minus $500 million.

· Gross margin percentage: 58 percent, plus or minus a couple percentage points.

· R&D plus MG&A spending: approximately $4.6 billion.

· Amortization of acquisition-related intangibles: approximately $75 million.

· Impact of equity investments and interest and other: net loss of approximately $50 million.

· Depreciation: approximately $1.7 billion.

For one thing, there are questions about CEO succession. Current CEO Paul Otellini (pictured) surprised everyone in November when he announced plans to retire well before it was expected. All the smart money is being placed on an internal successor being named, though Intel’s board of directors will give at least some consideration to outsiders. Here’s a pretty thorough list.

Management issues aside, Intel has a more fundamental question to struggle with: The personal computer industry, to which Intel has long been the primary arms merchant, is contracting. Data from both Gartner and IDC showed a market that shrank in 2012 by more than 3 percent — or about 13 million units. And there’s little sign of that changing.

The damage to the PC industry is being wrought by tablets and smartphones, markets where Intel has yet to penetrate with chips of its own in any meaningful way. At the International CES, Intel showed off its Lexington and Bay Trail generations of mobile chips. Impressive as they may be — one attraction is to bring the x86 instruction set that is a fundamental underpinning of mainstream PCs to tablets and phones — the chips won’t be inside any devices on store shelves until late this year.

It didn’t impress analysts at Piper Jaffray, who wrote in a research note to clients, wrapping up their impressions of CES, that the base of customers the new chips will attract is “not likely large enough to move the needle for the company,” and that “we continue to be concerned about the rate of cannibalization from tablets. We believe it is unlikely that 2013 sees any renewed interest in PCs.”

Meanwhile, Intel has one business that is largely safe from a meaningful competitive threat: Servers. Yes, it’s safe for now, but not entirely. Server chips using technology licensed from ARM — the British chip-design firm whose technology is found in most all of those non-Intel mobile devices — are on the way and, if nothing else, looking like an interesting option for the not-so-distant future.

The uncertainty has certainly weighed on Intel’s shares, which fell by more than 8 percent in 2012 but have since recovered. The shares were up more than 1 percent today in trading on the Nasdaq to $22.41 by midday in New York.

So what does the Street expect today? Per-share earnings of 45 cents on revenue of $13.53 billion. However, there are whispered numbers making the rounds, suggesting that Intel may fall short. That would be rare, as Intel typically beats the Street, even in tough quarters. But then, this isn’t just any tough quarter.

Stop me if you’ve heard this one before.

Intel has dominated the high-end, performance-oriented desktop space for years, producing some of the most powerful chips on the market.

Problem is, desktops are so last decade. The age of mobile computing was ushered in on the backs of millions of pallets of laptops, netbooks, smartphones and tablets. And the chips that Intel has classically produced just don’t do low-power, low-consumption like those of some of its competitors. CEO Paul Otellini is widely seen as having been nudged out of his job for missing the boat on this shift away from PCs.

So once again at CES in Las Vegas, Intel is reminding the world that yes, it can translate its technology over to mobile and do it well.

The company plans to roll out a new smartphone platform aimed at the low end of the Android market with its “Lexington” project. Intel has its “Bay Trail” quad-core Atom chip on the way to cover the high-end smartphones. New chips to come, too, for the Ultrabooks the company has so loudly trumpeted over the past year. It’s all supposed to last longer, work better and just plain beat competitors like Nvidia and others using ARM-based architecture.

Intel gave us a peek at the way this will work in December, when it revealed a new manufacturing process for making mobile chips using Tri-Gate transistors.

It’ll just take ’em a little while. Most of this stuff won’t hit the market until the 2013 holiday season. Yes, a full year from now.

At the very least, Intel had a few partners on board to show off. For the low-end smartphones, Acer, Safaricom and Lava will use Intel’s forthcoming platform. And some analysts think that however far off, this is a smart play for Intel.

“The Lexington platform is absolutely targeted at emerging regions, which will let Intel deliver a more functional phone than others like, say, a Qualcomm or a Mediatek,” Patrick Moorhead, president and principal analyst at Moore Strategy & Insights, told me. “Combined with some of the higher-end features they’re bringing to the low-end phones, they’ll undoubtedly pick up customers with this silicon.”

But we’ll still have to wait until Christmas to see most of this stuff, while competitors like Nvidia continue to introduce subsequent generations of their successful mobile products.

Perhaps by then, the latest and greatest phones you’re seeing launch today might be outdated enough for you to pick up a new one. That’s Intel’s hope, at least.

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Speaking at a Sanford Bernstein conference yesterday covered by Bloomberg News, Otellini said that Intel’s board of directors will likely select an internal candidate to succeed him when he retires next year and not an external one. When Otellini’s decision to retire was announced last month, a lot of attention was paid to the fact that Intel said it would break with tradition and consider external candidates in addition to the internal ones already in the running. Trouble is, there aren’t many available executives who fit the bill.

Intel Chairman Andy Bryant more or less made it clear in comments to the New York Times that the “external candidate” language in the press release issued that day had more to do with covering the Intel board’s backside from a corporate governance point of view than anything else.

“It’s not up to me, but I think that’s the most likely outcome,” Otellini said at the conference, adding that he’s “very comfortable” with the internal people vying for the job.

If you’re not up to speed on who those candidates are, then you should go read this post from last month listing who’s who and why they’re in the running.

The smart money says the race will come down to COO Brian Krzanich and CFO Stacy Smith, with software chief Renée James representing the dark horse who would get the nod if Intel’s board decides to vary pretty substantially from its script.

The thing is, it won’t. Intel needs some radically new thinking in order to rise to the challenges facing it in the smartphone and tablet space. Having essentially conquered the first wave of the digital world by stomping all over every other challenger in the PC and server industry with its chips, churned out by its world-beating manufacturing expertise, it entered a new decade looking flat-footed in the face of its first existential threat in a generation: ARM.

There are now PCs running a variant of Windows with ARM-based chips inside them from vendors like Nvidia and Qualcomm. And while it’s still early to say, the perception in the marketplace is that these devices, not those with Intel chips inside them, have the momentum of the moment. Even Apple, Intel’s showpiece customer on the PC, is said to be close — and by close I mean arguably within a few years — of switching away from Intel chips to its own internally designed ARM-based chips on the Mac.

That leaves Intel with two strongholds: One vulnerable, one seemingly unassailable. The vulnerable one is the server space. The movements by many chip companies to harness new ARM-based designs to attack Intel’s dominance there will, I think, emerge as an important story in 2013.

The unassailable one is Intel’s manufacturing prowess. There is not a single entity on the planet that knows more about manufacturing chips, nor anyone that can do it anywhere near as well as Intel. In time, this fact will force Intel to become more of a foundry company than it has been before.

Consider some other comments that Otellini made at the Bernstein conference yesterday, as reported by Barron’s. Asked about the possibility of becoming a foundry — that is, a company that manufactures chips on contract for companies that don’t have their own chip factories — Otellini said:

We’re running a small foundry business. We are building up our capabilities. We don’t want to compete with Taiwan Semiconductor Manufacturing. But for the right types of products, and not to enable my competitors, I would certainly consider it. There’s a lot of stuff in the pipeline. … I think it makes sense for us to have that kind of capability, particularly as our semiconductor lead gets wider over the rest of the industry.

Which brings me back to the dark-horse candidacy of Renée James to be Intel’s next CEO. A lot of the value that goes into chips is now coming from software. Chips are made to be computing engines, but they’re also programmable, and a lot of secret sauce that gets put into them comes not only from hardware but from software. Intel is still a manufacturing company, but it is also a software company and employs legions of software engineers — including but not limited to the McAfee security software division it acquired in 2010. Software will increasingly become as important a strategic advantage in the manufacturing and customization of chips as the technology itself. Why not put a software executive in charge?

Also, if there were ever a moment to go off the script that Intel has followed since the days of Andy Grove — wherein every CEO has served first as COO — and shake tradition just a bit, it might be now. Just a thought.

Justin Sullivan/Getty Images

Aside from the headline that CEO Paul Otellini is retiring in May, the most important part of Intel’s press release on the subject was this:

The board of directors will conduct the process to choose Otellini’s successor and will consider internal and external candidates for the job.

For the first time in Intel’s 45-year history, the CEO is retiring without a blatantly obvious successor teed up and ready to take over. And on top of that, the board will conduct a search that includes external candidates. That’s kind of a big deal for a company that has always promoted from within.

Otellini’s own succession was a stage-managed affair. When his predecessor, Craig Barrett, retired in 2005, Otellini was clearly the heir apparent, with practically no other candidates worth mentioning. Barrett’s succession was equally clear as he took over from the legendary Andy Grove in 1997.

For some years, Sean Maloney had been the odds-on favorite, until he suffered a stroke in 2010 that affected his speech and motor skills. His recovery was remarkable, and Otellini assigned him to run Intel China for awhile. Until he retired in September, Maloney remained a dark horse in the eternal succession horse race that Intel inevitably is.

Another potential heir had been Pat Gelsinger. Until September of 2009, when Gelsinger decamped for a job at EMC, and a chance to succeed Joe Tucci as CEO there, the race had been between Maloney and Gelsinger. Tucci recently named Gelsinger to run VMWare as its CEO (EMC is a majority shareholder of VMWare.) While Gelsinger’s name will likely be on the early list drawn up by the headhunter firm hired to conduct the search, by leaving Intel he has effectively burned that bridge and is out of contention.

So here’s the breakdown of internal candidates:

David (Dadi) Perlmutter: Currently chief product officer, he’s a well-respected general manager of the Intel Architecture Group. At Intel’s all-important Developer’s Forum in San Francisco in September, he gave a keynote that was intended to set the table for Intel’s resurgence back to relevance following its ongoing failure to attract significant business in the space. His talk didn’t exactly inspire a lot of excitement. He’s largely seen as Intel’s “Mr. Inside,” who can get things done internally, but for whom the external relations portion of the CEO job isn’t his strongest suit. His biggest success at Intel came with the Centrino line of mobile processors that launched in 2003 and soon dominated the notebook market. He also ran Intel’s Israel operations.

Brian Krzanich, chief operating officer: Promoted to the COO job in a surprise shake-up in January, he had run worldwide manufacturing and is probably the smart-money internal candidate. In the new job, he took over some IT and human resources functions that had previously belonged to chairman and former CFO Andy Bryant. He joined Intel in 1982 and has been an on-the-ground plant manager at Intel’s sprawling complex in Arizona. During 2001-2003 he oversaw a complex transition in Intel’s manufacturing technology across its entire global footprint of factories.

If indeed there is an internal horse race, it is between Perlmutter and Krzanich. But here’s an important precedent: Every single Intel CEO since Andy Grove has been COO first.

Stacy Smith, chief financial officer: If Intel again follows the line of thinking it did when it tapped Otellini, then Stacy Smith will be considered for the top job. Where prior CEOs had been engineers by training, Otellini has degrees in economics and an MBA. Smith, too, has an MBA, and succeeded no less an industry statesman than Intel’s former CFO and now its current chairman, Andy Bryant. And make no mistake about it: In the board meetings where these decisions are made, Bryant’s voice and preference will weigh heavily on the choices of other directors.

Here’s another being mentioned today by virtue of having been among the three — including Smith and Krzanich — promoted to the ranks of Executive Vice President:

Renée James, head of Intel’s software business: At a moment when women run two of Intel’s biggest customers, Hewlett-Packard and IBM, it should come as no surprise that James has made the cut. She’s chairman of the McAfee division that Intel acquired when it bought out that security software company last year, as well as of Wind River Systems, another software acquisition. She’s long been the point person on Intel’s relationship with Microsoft. She’s a University of Oregon graduate (and finished her MBA the same year I was wrapping up my BA there). While she’s officially being mentioned as a contender, and would by no stretch of argument fit the mold of an Otellini-like CEO with an MBA instead of an engineering degree, if the board decides to go in that direction, Smith would get the nod. But at age 47, should she choose to remain with Intel, she’d be an early and official contender for the next round of the ongoing CEO succession horse race.

And while we’re on the subject, here’s another internal name that bears mentioning for the next round of succession speculation, Diane Bryant. Formerly Intel’s CIO, she has of late been managing its Data Center and Connected Systems group. I sat next to her at an Intel lunch in New York in March and saw her give a speech at a major Intel even in San Francisco in the spring. She’s put in 25 years at Intel, is about the same age as James, has an electrical engineering degree, and is a terrific and engaging public speaker. Within a few years she’ll either be recruited away or considered a contender to succeed whoever ultimately succeeds Otellini.

External candidates are hard to find. Everyone I’ve spoken to on the subject is scratching their heads. As I said, Gelsinger will be considered — and ruled out — early in the process. But the fact that the board is even willing to say it will consider an external candidate is a big admission. As I said, the last time there was a leadership transition at Intel, it just happened.

A few names are being bandied about as possibles. Sanhay Jha, the former CEO of Motorola Mobility, will likely be considered. Some folks in my Twitter feed have brought up Scott Forstall, the former senior VP of Apple and head of its iOS software business, but he doesn’t seem a good fit to me. I feel the same way about Steve Sinofsky, the recently fired president of Windows at Microsoft, who’s also been mentioned in my Twitter feed.

Here’s a name that comes to mind: Dave Donatelli of Hewlett-Packard. He’s executive vice president and general manager of HP’s Enterprise Group and widely seen as a heavily-favored contender for the top job there when it becomes available. Trouble is, it probably won’t for at least a few more years. Before HP he spent two decades at EMC. The search firms will at the very least put his name on the list.

People are going to wonder if Intel’s board is forcing Otellini out. They’ll point to Intel’s mandatory retirement age of 65. Otellini is only 62, and his predecessor Craig Barrett retired from the CEO job at 65 or 66. But apparently there’s no hard-and-fast rule at Intel. The legendary Andy Grove, the company’s third employee, served as its CEO from 1987 until 1997, retiring closer to age 61.

But the bigger problems stem from the emergence of a fundamentally new computing environment over the last five years. When Otellini was promoted into the CEO job in 2005, Intel essentially set much of the computing industry’s agenda.

It used to be that some of the biggest computing companies in the world outsourced their research and development to Intel. PCs from Dell and Gateway and Compaq were all the same internally, their insides designed by Intel, with only marginal differences on the outside. When Intel made seemingly innocuous choices to the designs of their chips, those choices had a way of rippling throughout an entire industry.

Intel is hands-down the best company in the world at building chips, and also at managing the jaw-droppingly complex accounting and logistics that go with that. But it has largely failed to sell its chips in a meaningful way into the new hot computing products of the moment: Tablets and smartphones.

Apple’s iPad — the most popular tablet in the world — doesn’t use an Intel chip, but one designed by Apple and manufactured by Samsung under contract. The same is true of Apple’s iPhone. And none of the successful Android tablet computers have Intel chips in them. Some smartphones do, but only a few.

In practically all of those cases, the chips inside these devices are derived from designs created by ARM, the British firm that licenses its designs to scores of other companies. In turn, those companies build their own chips — with some of their own custom design work — around the ARM-designed core. I’ve always likened an ARM core design to a recipe for a basic cake, around which a baker can then add his own enhancements like frosting, sprinkles and other adornments.

And it wouldn’t be so bad, if the ARM-based chips weren’t also invading Intel’s home turf, the notebook PC. Nvidia and Qualcomm are among the companies that have parlayed ARM-based chips into notebooks running a variant of Windows called WindowsRT, and while the jury is still out on these machines, they are the machines — Microsoft’s Surface is just one example — that are getting the buzz as Windows 8 has come to market in the last month.

In an interview with AllThingsD’s Ina Fried earlier last month, Otellini seemed dismissive of the threat apparently posed by ARM-based tablets, and was hopeful for touch-enabled convertible and traditional notebook PCs: “I happen to believe that the standalone tablet is not the form factor people will (move) to,” Otellini said at the time. “The fact everybody is now fitting tablets with keyboards suggests that real buyers have come to the same conclusion.”

However, it’s not that Otellini’s tenure at Intel hasn’t been a largely successful one. The company weathered numerous challenges on his watch. In 2005 and 2006, there was a big challenge from rival Advanced Micro Devices in the market for server chips. When AMD entered the market with a 64-bit server chip that extended the compatibility of x86-based computing into the 64-bit realm, it flew in the face of the Itanium architecture toward which Intel had hoped to push the world.

AMD’s approach with its Opteron server chips proved more successful and, for a time, it gave Intel competitive fits that eventually forced it to embrace an approach that mirrored that of AMD. The Itanium chip, recent legal dramas aside, has become something of a footnote in computing history.

Intel also faced down numerous legal guns. Its “Intel Inside” marketing program — in which it underwrote a portion of the marketing costs of its PC-making customers — was the target of a 2005 antitrust lawsuit brought by AMD. It was revealed in pretrial filings that sometimes those marketing dollars made the difference between being profitable and losing money. Intel never admitted wrongdoing, but in 2009 it settled AMD’s complaint at a gathering of the two companies’ highest managers in Maui. It also paid AMD $1.25 billion.

Antitrust had Intel in its sights, as well. In 2009, European Union regulators slapped Intel with a $1.45 billion fine, its largest ever against any company in the world. Intel is still fighting that fine.

The U.S. Federal Trade Commission wasn’t far behind. Arguing that not only AMD, but Nvidia had been harmed by Intel’s behavior, it sued Intel in 2010, and secured a settlement later that year. A $1.5 billion settlement with Nvidia followed last year.

“Intel had a good run under Otellini’s leadership. He survived AMD’s Opteron, the shift to 64-bit computing, and a huge legal onslaught,” says Patrick Moorhead, a former AME executive and head of research firm MoorInsights and Strategy. “The biggest missing piece of his tenure was mobility success.”

Here’s Intel’s announcement:

Intel CEO Paul Otellini to Retire in May
SANTA CLARA, Calif.–(BUSINESS WIRE)–
Intel Corporation today announced that the company’s president and CEO, Paul Otellini, has decided to retire as an officer and director at the company’s annual stockholders’ meeting in May, starting an orderly leadership transition over the next six months. Otellini’s decision to retire will bring to a close a remarkable career of nearly 40 years of continuous service to the company and its stockholders.
“Paul Otellini has been a very strong leader, only the fifth CEO in the company’s great 45-year history, and one who has managed the company through challenging times and market transitions,” said Andy Bryant, chairman of the board. “The board is grateful for his innumerable contributions to the company and his distinguished tenure as CEO over the last eight years.”
“I’ve been privileged to lead one of the world’s greatest companies,” Otellini said. “After almost four decades with the company and eight years as CEO, it’s time to move on and transfer Intel’s helm to a new generation of leadership. I look forward to working with Andy, the board and the management team during the six-month transition period, and to being available as an advisor to management after retiring as CEO.”
The board of directors will conduct the process to choose Otellini’s successor and will consider internal and external candidates for the job.
In addition, the company also announced that the board has approved the promotion of three senior leaders to the position of executive vice president: Renee James, head of Intel’s software business; Brian Krzanich, chief operating officer and head of worldwide manufacturing; and Stacy Smith, chief financial officer and director of corporate strategy.
During Otellini’s tenure as CEO — from the second quarter of 2005 through the third quarter of 2012 — Intel:
Generated cash from operations of $107 billion
Made $23.5 billion in dividend payments
Increased the quarterly dividend 181 percent from $0.08 to $0.225
From the end of 2005 through the end of 2011, Intel achieved record revenue and net income. During this period, annual revenue grew from $38.8 billion to $54 billion, while annual earnings-per-share grew from $1.40 to $2.39.
In addition to financial performance, Intel, under Otellini’s leadership, achieved notable successes in areas of strategic importance. During this period, the company:
Transformed operations and the cost structure for long-term growth
Achieved breakthrough innovations, including High-K/Metal gate and now 3-D Tri-gate transistors; and dramatic improvement in energy efficiency of Intel processors
Reinvented the PC with Ultrabook™ devices
Greatly expanded business partnerships and made strategic acquisitions that expanded Intel’s presence in security, software and mobile communications
Delivered the first smartphones and tablets for sale with Intel inside
Grew the vast network of cloud-based computing built on Intel products

On the one hand, the chipmaker sees the new Microsoft operating system as a way to drive traditional PC sales, as well as to crack the tablet market dominated by Apple’s iPad.

“It’s a watershed event,” Otellini told AllThingsD in a telephone interview Wednesday. “The fact it spans from traditional PCs and tablets and then in all the hybrid devices in between is really very powerful. It allows the hardware side to really exercise creativity in a way that we haven’t been able to do for quite some time.”

However, the release also presents new challenges, and comes at a time when PC sales are under pressure from a weak economy, with consumers opting to spend their electronics budget on other purchases, including tablets.

Intel has already warned that it expects slower-than-traditional PC growth in the fourth quarter, though Otellini said it is hard to say how much Windows 8’s move into tablets might help things.

“That particular element won’t be known until January, when you count the numbers and see how well Windows 8 tablets did versus Android versus iPad,” Otellini said.

Even on the PC side, Intel will have to deal with greater competition. Uused to competing against smaller rival Advanced Micro Devices, Intel now finds itself in competition with ARM-based chipmakers such as Qualcomm and Nvidia, now that Microsoft has a flavor of Windows — Windows RT — that runs on those chips.

Otellini noted that Intel has seen other rivals come and go in the PC market before, including chipmakers such as Via and Transmeta.

“I happen to be around long enough to remember those guys,” he said. “People come and go, and we’ve never had an exclusive, if you will. And, overall, the best chip has won.”

While Windows RT machines can boast strong battery life, Otellini said that Intel-based machines will be able to offer compatibility the ARM-based companies won’t, noting Intel-based Windows 8 machines will run all the software and Web sites written for past versions of Windows.

“That will not be as true on the RT [machines],” Otellini said. “I’m not sure that iTunes runs. I’m not sure that Quicken runs.”

As for whether Windows 8 is ready for primetime, Otellini says the PC industry is ready.

“It’s in perfect shape,” Otellini said.

The company also found itself with some explaining to do, after Bloomberg reported earlier this month that Otellini questioned Windows 8’s readiness at an internal meeting.

The company has since been trying to reaffirm its hopes for the release, including at an event in San Francisco.

Otellini says he is quite excited about the opportunity with Windows 8.

“We’ve been anxiously awaiting it,” Otellini said. “I’ve been doing this for a long time, and I haven’t seen this level of excitement and creativity within the joint Intel-Microsoft customer base in a long time.”

Otellini won’t be in New York for the big launch, though. He and other top Intel executives are at an internal meeting in San Diego for much of this week.

But Windows 8 represents an opportunity for the PC to continue to evolve and change. Touch machines in particular, Otellini said, are poised to become a mainstay throughout the PC market. “A year from now, I think selling a PC without touch will be very difficult, at least (for consumers). Enterprises are slower to change.”

Otellini said he has personally been using a touchscreen Acer machine. “It’s pretty compelling,” he said. “I never thought that I would … touch my screen much, but it works out pretty well.”

That said, Otellini isn’t convinced that everyone will shift to tablets.

“I happen to believe that the standalone tablet is not the form factor people will (move) to,” Otellini said. “The fact everybody is now fitting tablets with keyboards suggests that real buyers have come to the same conclusion.”

Justin Sullivan/Getty Images

Earnings per share were 60 cents on sales of $13.5 billion, both of which were better than what analysts had expected: 50 cents on sales of $13.2 billion. But that’s after Intel disclosed that sales were looking a lot slower than it and analysts had expected.

Expect Intel to give its clearest view yet on what it sees ahead for the markets it controls — chips for PCs and servers — and to attack the markets where its inroads as yet are minimal: Smartphones and tablets. Also expect some color on whether or not Microsoft’s Windows 8 will be much of a catalyst for PCs. As yet, the expectations are pretty low.

Update: The call is now over. Much of the discussion focused on Intel’s decision to slow down product at its many factories, or fabs, for the time being until demand for PCs and the chips inside them picks up.

It’s not a small thing. Chip fabs are expensive to build and expensive to operate, so generally speaking you want them to be running as close to full capacity as possible. But when demand is so slack that your inventory of chips begins to pile up, you have to choose when to slow down and wait for demand to pick back up again.

Also, Intel is using the slowdown as an opportunity to get under way with the transition to 14-nanometer manufacturing technology. This is one of those moments where Moore’s Law is made real, when the elements on a chip get smaller, the chips get smaller, so more of them can be made for every silicon wafer, and they consume less power. Or you can cram more transistors into the same space, and thus get more computing work done for the same cost as before.

That is sort of Intel’s ace in the hole during periods when demand drops off. Eventually it picks up if only because the PC makers need to refresh their products with the latest stuff, especially after a process shrink. It virtually guarantees that demand will pick up again eventually.

Earlier:
2:05 pm: CEO Paul Otellini is speaking. He says to expect PC sales to grow at half the rate seen historically.

Now he’s talking about Ultrabooks and says many will be $699 or less. Also 20 tablets running Clovertail, the latest version of the Atom processor.

Otellini: Talking about Haswell, the next generation of processor. He says previously it had been expected to come in at a power envelope of 15 watts. Some advances have allowed Intel to expect it to run at 10 watts. That’s good news because the lower the wattage, the better the shot Intel has at getting into handsets and tablets.

2:08 pm: Now CFO Stacy Smith is speaking.

Smith: As a result of weaker than expected demand environment, factory loadings have been cut. Factory utilization rates have been taken down. This will reduce operating costs by $500 million. Also capital spending has been cut to $11.3 billion in Q4.

Smith: Gross margin in Q4 57 percent, which is lower than typical for Intel. Ouch. A lot of that is from the cut in capex and utilization.

Smith: We are taking aggressive actions to reduce inventories.

Smith: We continue to expect a benefit from the build out of the cloud.

And now begins the Q&A:

2:13 pm: Question from RBC Capital: Stacy, you gave a number at the analyst day for FY 13 gross margin?

Smith: We’ll provide it in Janurary. Premature to provide that. We need to fight through Q4 first. There’s a few things for 2013. We’re starting up 14 nanometer so that’s worth a few points of gross margin. No excess capacity charges after Q2 in 2013. Beyond that I’ll wait until January.

2:16 pm: Question for Otellini: Assess the PC market? Is it all macroeconomy or Windows 8 pent-up demand?

Otellini: It’s both. China has turned weaker on us. However we do believer that PC consumption did grow at about half the normal seasonal rate. How much that is is TBD, we’ll know a lot more 90 days from now after the Windows 8 launch. We’ll try to quantify that for you in 90 days, but right now it’s a bit of each.

Question for Smith: Is this cut in capex going to save you what you saved in 2009?

Smith: You can see capex in 2012 is down $1.2 billion from what we thought before. We’ll talk about 2013 in January.

Question: Are you seeing any Ivy Bridge tablet designs? Any Haswell tablets?

Otellini: A handful, five to eight on Ivy Bridge. Haswell, it’s too soon to tell.

Otellini: Those tablets tend to skew toward the enterprise. That is where you will see the Ivy Bridge ones migrate. Clover Trail will be more consumer focused.

2:21 pm: Question from Chris Danely of J.P. Morgan: What will it take to pull the PC industry out of this funk? Is this a permanent state?

Otellini: Since we don’t know how much is flatness because of which condition, it’s hard not to know if we’ll return to normal growth in a good economy. That tablet is not the end state of computing. What I can’t predict is which form factor is going to win. These things that have the best of both worlds are likely to be the things that are the most high volume runners.

2:24 pm: Smith speaking about inventory: We’re too high today. That’s why we’re bringing the utilization down. (What this means is that Intel’s factories won’t be running at full tilt pace, and some production lines will be running slower or idled for the time being until demand comes back. It’s kind of a big deal for Intel to do this because letting a factory sit idle is sort of an expensive proposition.)

Wow. Smith just said that utilization rate has been taken down to below 50 percent. Part of that will make room for the new technology, 14 nanometers. But some of it will be idle. Again, ouch.

Question about utilization again: Are you mothballing one building?

Smith: We’re trying to match our capacity that is in place. We were putting in capacity for the second half that is bigger than we got. Our planning model is we’re always looking to have the ability to respond to upsides. We call that “white space.” The risk of being caught short is greater than being caught long. If you’re short it can take two years to get caught back up. If you get caught long, it’s six months.

2:29 pm: Question about inventory again. Does pricing come into play on the PC side? Is that helping? Is there anything else that Intel can be doing to spur demand? Microsoft is taking things into its own hands.

Otellini: The short answer is no on pricing. We think it was priced aggressively. In the PC group, Average Selling Prices were flat. That was us going after some incremental market share at the bottom of the market. That is more the driver.

In terms of demand stimulation: A lot of what we’re doing right now is consistent with where the market was. We’re up to 40 machines that are touch enabled. We’re working with the glass manufacturers to bring the cost of the touch enabled glass down.

Question about competitor AMD. Are you seeing lower pricing from AMD and is that affecting you?

Smith: Ask them. Last quarter and this quarter we believe we have won some share at the lower end of the market.

Question from Goldman Sachs: About profit margins. Is there anything you see to make the profit margin decline worse than you usually see during a demand downturn?

Smith: Historically, the time it took to get things realigned has taken longer than two quarters. Compare now to 2009, when we were in the mid to high 40s on gross margins, now we’re in the high 50s. It’s faster and our margins are higher than in 2009.

Question about ARM-based server players. Are you seeing any competition from ARM chips in servers?

Otellini: They need to add features to be considered like 64 bits. You can look at some of the workloads like Hadoop. They can be handled by micro-servers, and those can be served by Atom.

2:35 pm: Question about mix of demand geographically. Give us more color on demand for PCs from consumers and businesses.

Otellini: The inventory thing is straight. Our OEMs are running very lean. Any kind of demand blip could cause us to reduce even more. In terms of mix, U.S. and Western Europe are soft for consumers. The enterprise PC has gone flat, and that’s a reflection of large corporations making hard decisions.

Otellini: We’ll see how that sorts out over the next quarter. In China, the slowdown there was in consumer notebooks.

Smith: We saw PC units up 1 percent in the quarter. PC ASPs (average selling price per chip) were down 1 percent and server ASPs were down 7 percent.

Question about China: Question about demand from data center customers.

Otellini: Data center ASPs were down a bit year on year. The mix is quite good. Two-way machines versus four-way machines. One of the fastest growing segments is high performance computing (supercomputers). I see the current mix being an anomaly as the result of the soft market for corporate data centers.

2:41 pm: As you think about manufacturing capacity for 2013, what kind of PC environment are you expecting?

Smith: I’m going to hold off on a unit growth or capital forecast. Capital forecast will depend a lot on Q4.

Final question: Inventories are lean and you expect less than half of normal growth. Why are customers choosing to take inventories down further?

Smith: It’s caution. Our customers are being cautious.

And that’s it. A nice short conference call.

So when Bloomberg News reported yesterday that Intel CEO Paul Otellini had told Intel employees at a meeting in Taiwan that Microsoft’s Windows 8 is being released before it is ready, it quickly made waves and prompted questions about precisely what he meant.

Today, Intel, which would normally ignore such a kerfuffle, took the unusual step of slapping back at what it called “unsubstantiated news reports” and reiterating an earlier comment that Otellini had made in public that, “Windows 8 is one of the best things that ever happened to Intel.”

Here’s Intel’s statement in full:

Intel Statement in Response to Unsubstantiated News Reports

SANTA CLARA, Calif., Sept. 26, 2012 – Today Intel Corporation issued a statement in response to unsubstantiated news reports about comments made by Intel CEO Paul Otellini in a meeting with employees.

Intel has a long and successful heritage working with Microsoft on the release of Windows platforms, delivering devices that provide exciting experiences, stunning performance, and superior compatibility. Intel fully expects this to continue with Windows 8.

Intel, Microsoft and our partners have been working closely together on testing and validation to ensure delivery of a high-quality experience across the nearly 200 Intel-based designs that will start launching in October. Intel CEO Paul Otellini is on record as saying “Windows 8 is one of the best things that ever happened to Intel,” citing the importance of the touch interface coming to mainstream computing and the huge wave of exciting new Ultrabook™, tablet and convertible device innovations coming to the market.

Note that the statement doesn’t contain an unambiguous denial.

Anyway. Intel clearly is a tad embarrassed by the story and has been put on the defensive here. As a sign of the long-term fraying of the Wintel alliance that has essentially defined the PC industry for two decades, it’s not entirely surprising. Microsoft did some damage of its own in 2011 when it said it would be launching versions of Windows for ARM-based chips, a flavor now known as Windows RT.

But are the bugginess reports true? There is indeed a lot of chatter about the status of Windows 8, but nothing specific as yet.

I checked in with Patrick Moorhead of Moor Insights and Strategy. He’s a former AMD senior exec with lots of contacts in the PC industry. He says he’s been told by contacts at some PC makers that there are “some compatibility issues in Windows 8.” He went on: “They declined to say what kind of issues or go into details. Problems range from the small, which can be fixed quickly with a patch, to major ones like in Vista, which took years to address. I do not know what kind of issues they are.”

Jim McGregor, a longtime chip industry analyst and founder of TIRIAS Research, has been checking, too. He says Microsoft is undertaking what is by far the most ambitious release of Windows that it has ever attempted. Consider all the flavors of Windows there will be: Windows 8, Windows 8 Pro, three flavors of Windows RT for Nividia’s Tegra chips, Qualcomm’s Snapdragon and Texas Instruments’ OMAP chips, plus a new hardware platform in the Surface tablet. The complexity is clear.

“The greatest complexity comes from the new user interfaces,” McGregor told me. “Just adding touch is challenging because there are a dozen different touch-enabling technologies and they are changing all the time. Plus there is gesturing and other user interfaces to consider. It becomes incredibly difficult to create the same experience with different technologies and on different platforms. The results is that people are calling it ‘buggy.’”

Microsoft, he says, has to nail this release of Windows from the start. “They can’t afford another launch like Windows Vista, which had so many problems, especially if they want enterprise adoption.”

Chambers is in New York today for the Clinton Global Initiative and stopped by the headquarters of Bloomberg News on Manhattan’s Upper East Side. He told reporters there that he sees a scenario where he would step aside as CEO sometime between 2014 and 2016, and, assuming directors approve, becoming chairman.

The statement effectively serves as the starting gun in the race to succeed him. Current COO Gary Moore is the go-to guy in the event that Chambers suddenly dies or is unable to carry out his duties. But he, like Chambers, is 63 and likely to retire about the same time. Update: A Cisco spokesman just called to say that Moore is at or near the top of the list of 10 possible successors that Chambers mentioned in his remarks to Bloomberg, despite the fact that they’re both the same age.

Chambers named three execs on a list of as many as 10 possible successors: Robert Lloyd, the 56-year-old executive vice president of worldwide operations; Chuck Robbins, senior vice president of the Americas; and Edzard Overbeek, senior vice president of global services.

Ambitious Cisco execs have tended not to hang around, judging Chambers to be something of an immovable object. In June, Ned Hooper, a 45-year-old, 14-year Cisco veteran was bounced out of a job as chief strategy officer in a corporate shakeup in favor of 51-year-old Padmasree Warrior, who is also chief technology officer.

Chambers said he thought his successor would come from within Cisco, though it’s hard not to imagine external candidates being considered. Hewlett-Packard’s Dave Donatelli, executive vice president and head of its Enterprise business, occasionally gets mentioned as a contender for the job, though at 47 he could just as easily be a contender down the road to run HP.

Another name that’s worth mentioning is Pat Gelsinger, the current head of VMWare. Long on the short list to succeed Paul Otellini at Intel, he jumped instead to EMC as its COO and heir apparent to Joe Tucci. That is, until Tucci named Gelsinger to take over at VMWare, replacing Paul Maritz, who is now chief strategy officer at EMC. In the same shakeup, David Goulden was named COO and is now apparently next in line at EMC, though Tucci, 65, keeps pushing back his retirement. (EMC basically controls VMWare.)

So while Chambers has generally avoided talk about succession, he’s now officially started the race to see who can take over Cisco. The leaders should start to become clear by this time next year.

He said that Intel is currently tracking more than 140 Ivy Bridge-based machines in various stages of the design process. Of those, more than 40 will be touch-enabled and a dozen will be convertibles, or notebooks with a screen that flips around so it can be used like a tablet.

On the subject of tablets, Otellini says Intel views them essentially as “incremental machines” that will command an increasingly larger share of the consumer wallet. With Microsoft set to release Windows 8 later this year, Otellini said that Intel “will participate in that market,” but that sales of Intel-based Windows 8 tablets won’t be material in 2012. Those tablets, by the way, will be built around a variant of Intel’s low-power Atom chip codenamed Clover Trail. At least 20 of those tablets are in the works, too.

For the third-quarter outlook, Intel says it sees sales of $14.3 billion, give or take a half billion, and gross margins of 63 percent or 64 percent on a non-GAAP basis. The revenue projection is $300 million lighter than the consensus, and shareholders initially panicked and sent the stock down by 1 percent in after-hours trading, though it has since recovered most of that.

Intel also cut its view on the full fiscal year, saying it expects year-on-year growth in the range of 3 percent to 5 percent, down from a “high single digit” expectation given previously. The world economy has finally whacked mighty Intel.

CEO Paul Otellini put it this way: “As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment.”

Here’s Intel’s full announcement:

Intel Reports Second-Quarter Revenue of $13.5 Billion

SANTA CLARA, Calif., July 17, 2012 – Intel Corporation today reported quarterly revenue of $13.5 billion, operating income of $3.8 billion, net income of $2.8 billion and EPS of $0.54. The company generated approximately $4.7 billion in cash from operations, paid dividends of $1.1 billion and used $1.1 billion to repurchase stock.

“The second quarter was highlighted by solid execution with continued strength in the data center and multiple product introductions in Ultrabooks and smartphones,” said Paul Otellini, Intel president and CEO. “As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment. With a rich mix of Ultrabook and Intel-based tablet and phone introductions in the second half, combined with the long-term investments we’re making in our product and manufacturing areas, we are well positioned for this year and beyond.”

Business Outlook

Intel’s Business Outlook does not include the potential impact of any business combinations, asset acquisitions, divestitures or other investments that may be completed after July 17.

Q3 2012 (GAAP, unless otherwise stated)

· Revenue: $14.3 billion, plus or minus $500 million.

· Gross margin percentage: 63 percent and 64 percent Non-GAAP (excluding amortization of acquisition-related intangibles), both plus or minus a couple of percentage points.

· R&D plus MG&A spending: approximately $4.6 billion.

· Amortization of acquisition-related intangibles: approximately $80 million.

· Impact of equity investments and interest and other: approximately zero.

· Depreciation: approximately $1.6 billion.

Full-Year 2012 (GAAP, unless otherwise stated)

· Revenue up between 3 percent and 5 percent year over year, down from the prior expectation for high single-digit growth.

· Gross margin percentage: 64 percent and 65 percent Non-GAAP (excluding amortization of acquisition-related intangibles), both plus or minus a couple points.

· Spending (R&D plus MG&A): $18.2 billion, plus or minus $200 million, down $100 million from prior expectations.

· Amortization of acquisition-related intangibles: approximately $300 million, unchanged.

· Depreciation: $6.3 billion, plus or minus $100 million, down $100 million from prior expectations.

· Tax Rate: approximately 28 percent, unchanged.

· Full-year capital spending: $12.5 billion, plus or minus $400 million, unchanged.

Q2 Key Financial Information (GAAP)

· PC Client Group revenue of $8.7 billion, up 3 percent sequentially.

· Data Center Group revenue of $2.8 billion, up 14 percent sequentially.

· Other Intel architecture group revenue of $1.1 billion, up 3 percent sequentially.

He calls it “the highest-performing handset on the market, as far as we can tell.” It has taken a few years to get to this point, but there’s a two-billion-unit addressable market to be carved out.

In the video below, Otellini also talks about the competitive threat — though he seems not to consider it much of a threat at all — coming from Microsoft’s Windows 8 and its variant that will support chips running the ARM architecture. How much market share does he expect to lose? None. Intel’s chips can offer the same performance and power efficiency that ARM chips do, while being 100 percent compatible with existing PC software. See the full interview below:

First and foremost, non-GAAP quarterly profits are down by about 13 percent from the year-ago period, while sales were up by less than 1 percent.

Even so, the results beat the expectations of analysts: Per-share earnings were 56 cents versus the consensus expectation of 50 cents. And sales at $12.9 billion beat the consensus by about $600 million. Not exactly a blow-out quarter by any means, but Intel’s first fiscal quarter is always seasonally slow.

What’s probably bugging Intel shareholders who are selling it off after hours is the results of the PC Client group that sells chips into the personal computer sector. While Gartner just reported quarterly PC shipments that were better than expected (results which last week helped goose shares of Hewlett-Packard), Intel saw sales into PCs decline by almost 2 percent year on year to $8.45 billion. Sales in the data center group fell slightly to $2.45 billion.

Geographically, Intel saw its sales rise in Asia by 1 percent and fall in the Americas by 6 percent, while Europe increased by 8 percent.

Another thing that has investors worried a bit is probably the operating expenses line. They rose by about 20 percent to nearly $4.5 billion. The main boost seems to have been in research and development, on which Intel spent $485 million more than it did last year.

The conference call is set to begin shortly. Expect lots of questions from analysts about what’s going on and what Intel’s outlook really is.

Earlier:
2:03 pm: And the call is under way. CEO Paul Otellini is speaking. “Our committment to long term research and development is paying off.” Examples: We are ramping our 22-nanometer process and moving to tri-gate manufacturing. Basically, Intel is pushing the envelope on its manufacturing technology. “That’s allowing us to do things others can’t, like improve our Atom processors at twice the rate of Moore’s Law. … Our lead over the rest of the industry continues to grow.”

Otellini on Ultrabooks: With more than 21 designs already shipping and more than 100 designs in the pipeline, we’re very happy with the results. We expect Ultrabooks to reach mainstream price points. By the holiday season, he expects touch interfaces to give the experience of the tablet with the functionality of a notebook.

Otellini: China is the second-largest server market in the world.

Otellini: McAfee posted best first-quarter bookings in its history. Oops, Otellini called something a Day-Zero attack, when he meant Zero-Day.

Otellini: First Intel-based smartphone is coming this week.

Now CFO Stacy Smith is speaking. First-quarter results were slightly better than expectations. “Our business was impacted by the hard drive shortage. We believe it did not impact actual sales of PCs in the quarter.”

Smith: As hard disk drive shipments recover, we’ll see the beginning of an inventory replenishment this quarter.

Smith: We will be ramping up Ivy Bridge production and three factories.

Smith: Spending was in line with expectations. He expects spending as a percentage of revenue to come down in the second half.

Smith: Inventory grew by $400 million with nearly all that growth attributed to Ivy Bridge.

Smith: Against the backdrop of the hard drive shortage and weak macroeconomic conditions, our execution remained strong.

2:12 pm: Time for Q&A

2:13 pm: Question about unit costs.

Smith: It was consistent with what we expected. We have three new 22-nanometer factories. At the start of that ramp, the first products absorb the cost of the factories. Costs peak in the second quarter and come down as the ramp continues.

Question from Sanford Bernstein: Asking about the hard drive shortage impact. Have we seen all the snapback from hard drives coming back or is there potential for more seasonal growth?

Smith: Q2 is consistent with underlying demand. Inventory replenishment begins in Q2. We saw significant reduction in inventory in Q4 and then more in Q1. What you see in Q3 is where you really start to see the worldwide replenishment. They will replenish with Ivy Bridge, and a good Q4 with lots of catalysts driving the market.

And now a question on gross margins. It looks like they’re a little lower on some unit costs. Is this some evidence that the initial ramp of Ivy Bridge saw a push-out?

Smith: If you remember, we shifted the Ivy Bridge launch by three weeks. That was to make sure we had enough inventory. Ivy Bridge explains the good news in Q1 and the Q2 forecasts.

Question from McQuarie: A question about desktop and notebook.

Smith: We don’t forecast at that level of granularity. In general, what you see is that notebooks are growing on a unit basis. Emerging markets are growing and that’s a desktop market. We continue to actually see notebook demand growth.

Otellini: The first Ivy Bridge chips we’re shipping are quad cores, which are going into desktops. The dual core mainstream chips are going into notebooks.

2:22 pm: Question from UBS about Ultrabooks. Can you talk about where you help customers make changes in the bill of materials? I want to know, were you able to help them?

Otellini: The Ultrabook fund hasn’t kicked in to where it is achieving BOM reductions. Some of that is later this year. The biggest change is quite frankly competition. Asus is now shipping a very low profile hard drive in an ultrabook. The biggest change is trying to intercept the Windows 8 launch with sufficient quantities of Ultrabooks with a touch-enabled Ultrabook. Used to be a touch screen added $100 to the bill of materials, but now that is coming down considerably.

2:27 pm: Question from Longbow Research. Give us some insight into the mix you expect in terms of corporate versus consumer.

Smith: We dont get into that. For Q1 our mix was quite healthy. Generally what we see is relative strength based on Ivy Bridge, and then some price competition at the lower end of the market.

Otellini: Typically, the enterprise notebooks tend to be about a third of the businees. But more and more businesses are allowing employees to bring any kind of computer they want into the office. We have some ideas about improving the security and manageability of those devices over time, while still offering the choice.

2:30 pm: Question from Bank of America: Longer term to emerging markets go toward Ultrabooks or tablets?

Otellini: I don’t think anyone in the world knows the answer to that question. In the tablet world, people now buy them as complementary device and they already have PCs. What I’m excited about is the convenience and touch of a tablet with the productivity and the utility of a keyboard in an Ultrabook device.

(Personally, I have to agree here. I get a lot more done on a MacBook Air, which I think is really the first Ultrabook, than I ever did on an iPad. But that’s me.)

2:34 pm: Question from FBR: Can you help us understand what your capacity growth looks like? What do you expect utilization rates to be? (Basically, how busy are the factories going to be?)

Smith: We expect utilization rates to be high through the year. We expect some capacity growth, though probably not as much as you might expect.

Question from Citi: As you talking to potential customers in handset? What matters to them? Roadmap, or the fact that you will have capacity available?

Otellini: The roadmap is the best door-opener we have. … As customers look at the roadmap they want to find ways to differentiate from what’s out there, and services they can charge for.

2:40 pm: Deutsche Bank guy talked way to fast for me to get his question.

2:44 pm: J.P. Morgan asks about the possibility of getting Apple’s iPhone business.

Otellini: Anything is possible.

Another question from J.P. Morgan, this one about geographic regions.

Otellini: We don’t see anything fundamentally different from before. We are going into a year with a new version of Microsoft Windows, and that has been strong for the industry before. Also, we’ll be debuting Touch. Add it all up and the battle for consumer dollars isn’t going to be like it was last year.

Question from Goldman Sachs, asking about the cash position coming down a bit. How low do you feel comfortable with?

Smith: Be careful about free cash flow in Q1 relative. It’s depressed relative to hard drives. Second, remember there are a few big payments in Q1. In terms of cash balances, we don’t peg a specific number out there. In Q1, we’re comfortable with our balance. It’s been bouncing around this level for awhile.

Missed who this question is from: You talked early about manufacturing leadership. Can you update on 14-nanometer ramp? When will you come to market?

Otellini: We’ll give you more granularity in May. Generally its every other year.

And we’re done. Thanks for joining.

Lawyers for both HP and Oracle filed arguments seeking summary judgement in their fight over whether or not Oracle has the right to stop making software that has been ported to run on computers using Intel’s obscure Itanium chip. Oracle said last March that it would no longer support the chip, which is, for all intents and purposes, only used in certain exotic high-end systems sold by HP. For its part, HP has argued that Oracle is bound by a contract to continue to support the chip for several more years. I’ve embedded the competing filing documents below.

The legal moves naturally touched off a renewed salvo of public statements between them that added some interesting details to the proceedings, and which provide some fair insight into how the two players are going to argue at trial. Basically, it’s going to come down to whether or not the two companies have an enforceable agreement that was struck as part of a wider settlement they reached when they settled another lawsuit that followed former HP CEO Mark Hurd’s hiring by Oracle.

Meanwhile, Oracle insists that HP and Intel are lying to the marketplace about the future prospects of the Itanium chip, and has characterized their efforts to keep the chip alive in the marketplace as “a remake of ‘Weekend at Bernie’s.’”

HP scored first:

“The information brought to light during the discovery period further underscores the key facts of this case. In fact, it has led HP to seek a pretrial ruling that Oracle is contractually obligated to offer future versions of Oracle’s software on Itanium. It is time for Oracle to quit pursuing baseless accusations and honor its commitments to HP and to our shared customers.”

HP’s statement then went on to use several historic statements by Oracle, emphasizing the partnership and commitment to Itanium. It even quoted Oracle CEO Larry Ellison:

“Ellison testified that in making his decision to issue Oracle’s March 22 announcement that Itanium was “nearing the end of its life,” he relied on a conversation with Intel’s chief executive officer, Paul Otellini. But Ellison admitted under oath that Otellini did not say that Itanium was nearing the end of its life. And the Intel executive responsible for the Itanium business has now testified unequivocally that Oracle’s claim was not true.”

Oracle attorney Dan Wall issued a pair of statements, and one was more or less the standard summary of that company’s position: So important an agreement as the one that would obligate Oracle to extend a strategic partnership wouldn’t be contained in a settlement over what was essentially a dispute over a noncompete agreement.

“We don’t believe, nor do we think HP really believes, that a settlement agreement relating to Mark Hurd’s employment could possibly obligate Oracle to write new software for a platform that is clearly end of life. We are pleased the Court now has the evidence needed to see HP’s purported contract claims for what they are.”

Then, apparently after seeing HP’s extensive statement , Wall shot back with more extensive — and interesting comments. He cites testimony fromformer HP chief communications officer Bill Wohl as admitting that the lawsuit was more or less a public relations stunt that was part of a wider campaign intended to raise outrage among their shared customers and force Oracle to reconsider.

“Rather than filing a legal motion, HP has yet again filed a press release that continues its campaign of lies about the Itanium roadmap. HP’s PR Director admitted the lawsuit was conceived as part of a campaign designed to ’foment customer outrage.’  HP’s documents and executive deposition testimony make indisputable the fact that Itanium is nearing the end of life as Oracle said. Intel documents confirm that as well–which is why despite repeated efforts by HP to get Intel to refute Oracle’s March 22 press release, Intel has refused to say more than that it intends to deliver the two announced versions of Itanium.

“The status of Itanium, meaning its impending end of life, has been maintained as one of HP’s most ’closely guarded secrets’ from customers, partners and HP employees alike in order to avoid giving its sales organization ’another reason not to sell’ Itanium and to continue to ’milk’ maintenance profits from its customers. HP documents reference HP-UX on Itanium as on a ’death march’ and confess that Intel would be doing ’high fives’ to no longer have to develop the chip given its poor performance and market traction and the huge opportunity cost associated with it. HP’s documents also contemplate various options to deal with the inevitability of Itanium’s end of life, including paying Intel to ’elongate’ its life. HP’s documents make clear that HP was intent on ’creating a market perception of long term viability’ and introducing versions of the chip that are ’more of an illusion than of technical significance.’ In other words, HP’s strategy was to mislead the market and its customers as to the real status of Itanium. Oracle will not participate in this fraud.”

The history and context of this lawsuit is long and complicated, and fraught with the fact that for a time, HP was run by former SAP co-CEO Léo Apotheker at a time when Oracle and SAP were locked in their own nearly-nuclear multiyear legal battle. The fact that former Oracle president and Ellison enemy Ray Lane is HP’s executive chairman only adds to the enmity.

However, there’s evidence to show that HP is the one being hurt the most by the ongoing fight. Without the support and maintenance fees that HP collects from companies who buy its Itanium-based servers, the company is, in the words of one of its own executives, “strategically screwed.” Amid the doubts brought on by the fight with Oracle, sales of HP’s highly profitable business-critical servers have suffered. And with the printer business suffering and PC sales flattening, that is the last thing HP needs.

Oracle, by all appearances, can afford to let its Itanium business die, and has argued that Intel would like nothing better than to get out of the business of making Itanium chips that are only profitable with subsidies from HP; and that it has quietly planned to let the chip reach the end of its life and transition customers over to its more mainstream Xeon chip, which it now says is “suitable for any workload.”

Anyway, the dueling filings are below, HP’s first:

HP Summary Motion

Oracle Summary Motion