Arik Hesseldahl

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Intel: Corporate Sales Strong, Consumer Not So Much

If ever there were a barometer for the health of the computer industry, it’s Intel. The chip maker supplies the world with more than 80 percent of the microprocessors used in personal computers and servers. And when its sales are roaring, it means the sales of companies as varied as Hewlett-Packard, Dell, Apple and numerous others are roaring with it.

Though “roaring” isn’t always the word for it. Analysts, expecting a slowdown, trimmed estimates only to be shown once again that analysts don’t know everything.

Revenue set a record at $13.1 billion, marking the fifth consecutive quarter of record-setting sales at Intel. Per-share earnings were 59 cents a share, up 16 percent year over year. Gross margins were 62 percent, down 5.5 percent from the year-ago quarter. Expect some explanations about that. Most importantly, sales in its PC client group were up 11 percent year over year, defying the perceived PC-industry slowdown. Also, sales of chips used in servers, which Intel calls its data center group, were up 15 percent.

Intel’s conference call with analysts is expected to start at 2:30 pm Pacific time, or 5:30 pm Eastern time. I’ll be dialing into the call and liveblogging what I hear.

2:31 pm: And so we’re waiting for the call to begin. Hold music is still going. It’s classical. I think it’s Vivaldi.

And here’s the intro.

Kevin Sellers, VP of investor relations, reads the boilerplate.

A change to guidance and quiet period. A shorter quiet period that’s two weeks shorter can only be a good thing.

And a plug for the Intel Developer Forum in December September.

Otellini: Another record quarter. The trends that we described at our last investor meeting remain strong. Enterprise PC refresh continues, and data center business is strong.

Strong double-digit revenue growth across every single business segment. If we look at the channel, which is a good proxy for emerging markets, business is strong. (Missed the number.)

Data center group CPU revenues topped $2 billion for third consecutive quarter.

Also, networking revenue grew 40 percent from a year ago.

As for servers, the story is much the same. Cloud customers are fueling strong demand. Demand up 50 percent versus a year ago. We believe we are very early in the cloud build-out, and Intel remains well-positioned to profit from it.

We shipped one million Atom processors into embedded applications, up 76 from a year ago. (Then why are revenues on Atom sales 15 percent lower year over year? — Ed.)

2:37 pm: McAfee turned in a strong quarter. It was a second-quarter revenue by revenue (no number). McAfee is executing very well and the importance of security is never more evident. A new jointly developed product is coming later this year. More details at IDF in September.

2:38 pm: PC business strong. Demand for Sandy Bridge processors is good. Overall trends in PCs are much the same as last few quarters. Corporate market is consistent and healthy, while consumer market is soft.

At this point in the year, we believe PC unit growth will be eight to 10 percent, but above that in revenue, as corporate PCs will be better.

Ah, here’s the channel number again: Up 17 percent. Now he’s talking about strong sales in markets like Turkey and Russia. Brazil is poised to become the third-largest market for computers in 2012. These are all markets where PC penetration remains low.

Going over process technology announcements like 3-D transistors. We expect the lead that we have in process technology will expand going forward.

Second was the Ultrabook announcement at Computex. They combine the best of the consumer PC with the best of tablet functionality. We are pleased at the industry response. More details at IDF in September.

2:42 pm: CFO Stacy Smith is now speaking.

Strength in corporate markets was offset by soft consumer markets.

Smith is going over the numbers again.

As expected, our 22 nanometer start-up costs peaked in the second quarter.

The goal is to keep spending as a percentage of revenue below 30 percent.

There’s that phrase “Internet of things” again. Have they been looking over Cisco’s paper?

2:46 pm: Time for Q&A.

And the first question comes from Deutsche Bank, on total PC unit forecast. How do you reconcile a weaker addressable market to Intel’s view that the guidance hasn’t changed?

Otellini: Our PC client business is running double digits.

Smith: We’re expecting pricing to be relatively flat.

Next question from Evercore: Give us some milestones over the next quarter on emerging markets.

Otellini: The next milestone is three months from today.

Q: Help us get a better sense to track the growth in those areas.

Otellini: There’s no better way than putting feet on the street. I was just in Brazil. The fact that it’s going to be the number-three market is pretty astounding. It’s the dynamic of increase in disposable income and decrease in cost of computing. Some of this stuff is below the radar screen of some of the third-party trackers. (Another dig at IDC and Gartner there.)

2:50 pm: Evercore again. In your emerging markets, what kind of a product mix are you seeing there?

Otellini: The mix in emerging markets is not much different from the overall mix. Each market is different. China has a slightly richer mix than other markets. Just like you’d expect when it’s your first time to buy a TV or a computer — you want value, you tend to buy up a bit.

Question from Citadel: First on geographic trends. Americas seemed stronger than Europe. Any thoughts on dichotomy?

Smith: You have to be a little careful of that data, and that’s billings data. The world builds more of the notebooks in APAC (China and Taiwan).

Next question, Citi: If we look at 3Q guidance, what parts of the business will be above the longer-term average?

Smith: Across the major businesses, what we’re expecting is seasonal. Relative strength in enterprise and emerging markets. Consumer weaker. We usually see a seasonal uptick in consumer in the second half of the year.

Q: When you look into emerging markets client (PC) business, is there a difference in the way that inventories are managed? Is it harder to track or easier?

Otellini: It’s actually better. We have the same visibility in China that we do in Cleveland. We’re seeing a conservatism there to customers moving to air lanes from shipping lanes. In emerging markets in general, a lot of sales come from the channel, in the white box and the build-to-order business. We get a much more real-time feed there. Its more real-time than mature markets or enterprise markets.

2:57 pm: Credit Suisse question: Where are we now with Sandy Bridge as a percentage of the core-branded chips?

Otellini: We’re taking Sandy Bridge below the core brand and taking it into Pentium and Celeron. (They still sell Pentiums?)

A question about the Romley code-named server architecture.

Otellini says Romley is a Sandy Bridge version of the server products. We’ll be in product this year and nothing is changed. No public launch date, because server manufacturers are conservative. I would add that as we’ve seen the product, the performance is quite good.

2:59 pm: A question from MKM Partners about average selling prices. They’re up. How much of that increase is driven by product mix, or marketing, or sales of enterprise clients?

Smith: We’ve spent a lot of energy to articulate differentiated features at different price points, and that has led to a richer mix. Plus the enterprise market being stronger has been a secondary benefit.

Q: How much of emerging markets is enterprise? What’s the split, corporate versus consumer?

Smith: We expect a lot of the growth to come from the consumer part of those markets.

Here’s a question from Doug Freedman of Gleacher. He’s asking about capital expenditures. Is the number a pull in from next year?

Smith: Some of it is. Some of it is construction-related spending, some of it is from 14-nanometer manufacturing. Some of it is the scope of the factories. We’re doing some things to make it easier to allow factories to support new geometries (like seven nanometers!) after 14. It’s easier to spend that now versus later.

3:04 pm: Question from FBR. Can you help us understand how much of the Capex is four-year equipment, and how much is halls and walls, and how to think about depreciation?

Smith: It’s almost all construction. You can have varying depreciation schedules, but they take a long time. Equipment depreciates faster.

3:11 pm: Question from UBS, asking about Ultrabooks. Sean Maloney said they were expected to be 40 percent of consumer mix within a few years. What’s your level of confidence?

Otellini: He’s comparing Ultrabook to a prior Intel project, Centrino, which was a highly successful chip that combined Wi-Fi with the processor. As we talk to our customers, we see a great deal of engineering. The features we want to see in these machines are expensive.

UBS is asking about Intel’s ability to capture more of the space inside a PC.

Otellini: End customers are demanding a higher mix of products. In terms of bill of materiels, we had a strong presence with graphics before Sandy Bridge, and it only got stronger.

3:15 pm: Next up, J.P. Morgan: Paul, take a step back and update us on tablets. What are your share goals on tablets?

Otellini: After I saw the numbers from Apple, I believe this category is additive to computing. It’s not going to replace computing. I think it’s going to replace some discretionary spending. It’s a device that some people will use as a computing device, but some use it as a companion device.

3:19 pm: Question from Bank of America. How will Intel be impacted by the launch of Windows 8. Is that a net positive?

Otellini: In general, I think it’s good. When Microsoft has a new OS, it’s good for us. We have worked with them for some time. The jury is out on how well that will be received by the public on tablets. We intend to be hyper-competitive for the tablets. We plan to out-battery and outcompete the ARM guys on tablets.

3:24 pm: Question from Wells Fargo. Can you go through the gross margin puts and takes from September to December quarter?

Smith: When I think about fourth quarter, we benefit from start-up costs going down. And the big variable for us is that we have a lot products teed up, and where those product qualifications fall says a lot about gross margin.

And that appears to be a wrap. See back here on October 18 for the next Intel earnings call.

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