Intel's Q4 Earnings Call: Other Than That, Mrs. Lincoln, How Was the Play?

A financial analyst recently asked Intel’s (INTC) CEO what certain aspects of the quarter would have been like had the world economy not cratered. Paul Otellini, with pain in his voice, shot back: “That’s just like asking Mrs. Lincoln what the play was like." (See conference call transcript).

The quarter was bad. How bad? It was “only the second time in 20 years that our fourth quarter revenues were below the third quarter”. However, in the year 2000, revenue came in less than one percent below Q3. This time it was 19% below! Q4 is supposed to be Intel’s strongest quarter.

Guidance last quarter was meaningless. So this time they didn’t even bother. The CFO did however say that they were internally modeling for revenue of $7 billion. That will give analysts something to chew on. However, it could be way off. There’s a thick blanket of fog before them.

The problem, or one of the problems, is that inventory in the supply chain is still contracting. Customers are still burning through what they had before the world turned upside down. When the inventory burns off and orders re-emerge is unclear. They hope Q1, but it could be later.

In the meantime, Intel plods on.

Netbooks and Atom

One of the few bright spots in the deepening recession has been netbooks, those little mini-notebooks. They are selling well, and Intel makes CPUs and chipsets for them. Atom sales were up 50% from the previous quarter and brought in $300 million.

Despite the strong sales of Atom, many analysts still don’t think Atom was a good idea, because they fear it will take away sales from Core 2 CPUs. To this, Intel replied that they think Atom is cannibalizing less than 20% of notebook CPUs. Management adduced surveys of buyers and said that they would go into detail at the analyst meeting.

Nehalem

The dual-processor server version of Nehalem, Intel’s latest CPU architecture, “began shipping for revenue in December”.

DP-server Nehalem is not to be confused with desktop Nehalem, which launched in November under the Core i7 moniker. The multi-processor server version of Nehalem ships in the second half. Of the DP-server version, the CEO quite truthfully said: “The performance of this product is stunning”.

While reviews of DP-server Nehalem have not appeared yet, below is a graph of a synthetic memory test that shows the kind of performance Nehalem is capable of. The illustratioin comes from TechReport. Please keep in mind, the Core i7 entries are desktop Nehalems, not server Nehalems, and this gives only a rough estimation of a single subsystem. It’s insightful nonetheless.

One analyst, a few days before the earnings call, surmised that certain announced price cuts to Intel server CPUs may have been the result of share gains by AMD with HP systems. “He contends the timing of the cuts is unique“.

Intel responded that the price cuts were driven by the impending launch of the new server parts and were not reactive. As new products are launched, prices are cut to help clear inventory. It’s “really the continuing process of us bringing in new technology from the top of the stack”.

Mainstream Nehalem parts for clients are also due out in the second half, including at least one SKU with graphics integrated on the CPU. The CFO was point-blank asked if such a part was still on for the “second half for this year”, and he said, yes.

Solid State Drives

One of the most exciting developments in computing these days is solid state drives. SSDs have the potential, among other things, to vastly increase system performance. While sales are not big enough to constitute a separate line item, management did say that Intel was “getting some good early market acceptance of our SSDs”.

32-nanometer Process Technology

Products like Nehalem and solid state drives tend to grab headlines. Intel, however, at heart is a manufacturing company. Their process technology is the foundation of their business. Intel primarily uses a 45-nanometer process technology but is working on 32nm and 22nm. The first products manufactured on 32nm will appear this year. However, the ramp will not occur until next year. Said the CFO: “We’ll have products in production this year, but in 2010 it’s really when that ramps”.

The Marianas Trench

One of the things management did on the earnings call was look out across the Marianas Trench to the other side and leave investors with a sense of what it might be like when things recover. No quick snapback is expected. Rather a process of growth from a bottom is envisioned. When that happens, Intel will be prepared.

Disclosure: Author holds a long position in Intel

Comments

[User 341043:]

You failed to mention that 32nm is the architectural sweet spot for Intel. It is the process node at which Intel can fit their chips into every form factor. You will see an explosion of "intel inside" when that happens.

Jan 20 04:16 PM

[Phil Coffman:]

On Jan 20 04:16 PM User 341043 wrote:

> You failed to mention that 32nm is the architectural sweet spot for
> Intel. It is the process node at which Intel can fit their chips
> into every form factor. You will see an explosion of "intel inside"
> when that happens.
>

Good point.

Jan 20 05:49 PM

[Crocodilian:]

Short term, life looks painful for Intel, and everyone else. Longer-term, the fact that AMD is being trashed looks very nice for INTC

Assume we don't all end up playing pinochle with each other in the poor house, and that this [Depr][Rec] -ession ends in 12 to 24 months.

Then ask the question: Which semiconductor manufacturer will have been able to maintain investment?

And here's a guess: remember that deal AMD did with Abu Dhabi investors to pay for a new foundry? And the billion or so dollars of New York State subsidies to build this foundry in upstate New York?

As Jerry Sanders was quoted in the WSJ:
""AMD has found a way to compete with Intel's balance sheet by using Abu Dhabi's balance sheet," Mr. Sanders said."

Just a guess, but I'd rather compete with Intel's balance sheet than Abu Dhabi's at this point.

Jan 20 08:34 PM

[Phil Coffman:]

On Jan 20 08:34 PM Crocodilian wrote:


> Just a guess, but I'd rather compete with Intel's balance sheet than
> Abu Dhabi's at this point.

AMD + Abu Dhabi is something any investor in Intel, NVIDIA, or TSMC should pay close attention to.

Jan 20 11:24 PM