The quarterly results announced by Intel Corp. (Nasdaq: INTC) on Tuesday contained some bad news about softening PC demand in developing economies, yet the equity market strengthened today partly because investors felt the company's financial numbers and outlook were not as dire as initially assumed.
In fact, even Intel's share price received a nice bump in intraday trading, rising almost 4 percent and helping to boost other high-tech stocks.
What did investors find encouraging about Intel, which had said third-quarter growth "would be slower than anticipated"? The answer can be found in the additional information provided by Intel president and CEO Paul Otellini during a conference call to discuss the results. Demand for Intel's ultrabooks, the thin laptops the company hopes will help it better compete against tablet PCs, "continued to build momentum," according to Otellini, adding that sales into the enterprise market also remains strong.
The company has also been scoring design wins in the tablet PC and smartphone markets. Overall, Intel, even while highlighting problems in the global economy, doesn't see a reason to be worried. Here's Otellini's assessment of the different market conditions:
As we look ahead to the second half of the year, consumer market growth in Western Europe and North America is not forecasted to recover as fast as we had anticipated. Worldwide enterprise demand is growing as expected. Emerging markets, especially China and Brazil are still growing nicely, but are moderating due to GDP adjustments and currency fluctuations. Taken together, these factors have led us to adjust our expectations for the second half.
The news is sobering, but the current weakness does not justify pressing the panic button. In fact, there are more reasons to be optimistic about conditions for the second half of the year. While the full picture has yet to unfold, all the factors that could further depress demand in the year ahead (outside of natural disasters) are already known, and governments as well as companies are taking steps to improve economic and operating conditions.
I read the transcript of Intel's conference call, and instead of focusing on the sales and profit number, I would like to present several key factors that I believe are shaping the market and the company's response. They have implications for several segments of the electronics industry, including component distributors, contract manufacturers, and suppliers like Intel and its customers.
- Inventories remain lean: Some industry observers were hoping the electronics market will get a nice bounce from inventory replenishment during the second quarter as demand firmed in North America and Europe and on expectations for resilient sales in other parts of the globe. This didn't happen, and companies have kept inventories low.
"Inventory levels across the worldwide PC supply chain are healthy but are being managed below historical averages based on macroeconomic uncertainty and ahead of the Windows 8 operating system release," said Stacy Smith, Intel CFO.
- Distribution is evolving and providing new services to OEMs: The components distribution market has always played a major role in the PC sector, but this is changing fast with companies focusing less on functioning as middlemen and now working more as systems integrators supporting OEMs. Companies that used to distribute motherboards for desktops, connectors, and other components reduced these services as volume dropped due to reduced demand for desktop PCs.
"They picked up skill sets to do systems integration and they're now among our larger server channels," Otellini said. "So the distribution channel has sort of reinvented itself and is not just a fairly significant force in desktops, emerging markets or pre-assembled notebooks, but increasingly for servers and storage systems.
- Intel is reducing manufacturing capacity: The company has significantly increased leading-edge manufacturing capacity at the 22-nanometer level over the last year and successfully slashed operating costs as a result. The current market weakness has given it the opportunity to further cut capacity especially by taking 32-nanometer offline, according to Smith. "When we have demand coming in less than expected, we look for opportunities to take the older generation capacity offline and because we can reuse that equipment at the leading edge, we just take advantage of those opportunities."
- Demand for ultrabooks will move higher: Intel is making a big bet on ultrabooks and said it is getting OEMs to push down prices as demand picks up. "Ultrabooks continued to build momentum, and achieved our volume goals for the first half," Otellini said. "We are very pleased with the level of innovation and invention being brought into this category, and are now tracking over 140 Ivy Bridge base designed in the pipeline."
- Emerging market growth is down: Over the last few months, PC sales stayed relatively stable due to continued demand from countries like China, Brazil, and Russia. Events in the global economy and fiscal problems in Europe have drifted into the emerging economies and demand has softened here, too, according to Intel. But the weakness has not turned into a sharp drop-off in demand, which means Intel and many of its rivals will still be able to post positive results for the year.