Intel spent a lot of time talking about inventories on its fiscal third quarter conference call. The industry is stocking up on Intel chips ahead of server refreshes and the launch of Windows 7. The nagging worry for many analysts: Will businesses and consumers show up to drive the upgrade cycle?
The chip giant's quarter was a blowout no matter how you slice it. Earnings, gross margins and revenue were well ahead of estimates. And Intel is managing inventories well. In fact, executives said inventory levels were a little lighter than they would like.
However, analysts are wondering if Intel is outshipping the demand picture. We'll never know for sure because the consumer is a huge wild card this holiday season. And enterprises are still figuring out their capital expenditures for 2010. Intel can rely on the Nehalem platform its server lineup and the penchant for data center overhauls to drive profits, but everything else is a guessing game.
Here's a look at the three big worries and Intel's reaction to them (transcript).
J.P. Morgan analyst Christopher Danely says in a research note:
We believe the company is outshipping demand, as evidenced by Intel getting back to peak revenue while total PC revenue should be down 20% from the peak during 4Q09.
Intel CEO Paul Otellini:
Inventory in the channel remains slightly below normal levels, reflecting both good sell-through as well as disciplined inventory management.
At our large OEM customers, component inventories are roughly half the peak level of late last year and have been approximately flat throughout 2009. Much of this is due to our implementation of inventory hubs, where we hold the inventory for our large OEM customers who then pull inventory only as needed. This helps our customers better manage their inventory levels while giving us increased visibility into real-time system production levels.
We watched supply chain inventory very carefully and believe the pipeline has been appropriately rebuilt to support increased end demand and yet remains well below the peak we saw at the end of 2008.
Goldman Sachs Paul Covello writes:
The ramp of Nehalem server processors had a positive impact during the quarter but management noted that traction with Nehalem was not an indication of an enterprise spending recovery as enterprise spending remains weak for now.
Otellini basically agrees, but notes that Intel is gaining share in the downturn:
In the server segment, we are pleased with the acceptance of Nehalem in the enterprise. While overall enterprise spending remains weak, the compelling value proposition of Nehalem is generating growth opportunities even in a down economy and will be a strong profit driver for Intel in the coming quarters.
But CFO Stacy Smith also adds:
You know, our best guess is that the enterprise market continues to be relatively weak in Q4 and this continues to be more of a consumer led year.
Piper Jaffray analyst Auguste Gus Richard writes:
Strong demand for PCs is catch-up from deferred procurement created by the financial crisis. We would expect this strong consumer-led rebound to slow as end demand approaches post-crisis levels. Thus, we believe there is likely to be excess inventory in Q1. We have modeled a weaker-than-normal Q1 and a seasonally normal Q2 with a strong second half to coincide with what we believe will be a Window 7/corporate upgrade cycle.
I don’t think that we can grow much above the PC growth rate at the end of the day. I mean, there is -- there has been some share gain over the course of this year. We’ll see what this quarter maps out to but I would think that trend could continue this quarter. But at the end of the day, we need the volume. The PC market has to grow.
Our current view of the PC market, as I said at IDF, is that the volume year-on-year, ’09 versus ’08, will be flat to up slightly, which is a significant change from the industry’s views six months ago. And I think you are seeing inside of that Intel do well because of the shift to notebooks where we enjoy a higher market segment share than we do in desktops.
JMP Securities analyst Alex Gauna is betting on the upside for Intel. He writes:
We believe emerging markets, holiday sales cycles, IT budget flushes, and Windows 7 are on deck to drive demand and earnings growth in 4Q09. In 2010, budget refreshes and Windows 7 Service Pack 1 should spark enterprise upgrade cycles, and the broadening of Cloud Computing and Virtualization business models will increase the appeal of already compelling Nehalem EP and EX server architectures. Fear mongering around excess channel inventory and slowing build trends simply doesn’t mesh with our checks, empirical evidence, or common sense, and we believe that barring another economic, energy or geopolitical shock, the PCs and servers being built to anticipated 4Q09 demand will clear and set the stage for a solid 2010.