Intel’s strong 2Q11

the results

INTC reported 2Q11 results after the close of trading in New York yesterday.  The company posted earnings per share of $.59, up 16% year on year, on revenue of $13.1 billion, a 22% gain vs. 2Q10.  The revenue number was an all-time high for INTC, thought it was helped along by the recent acquisitions of McAfee and of some chip businesses from Infineon.  Earnings handily beat the analyst consensus of $.51.


INTC typically doesn’t talk about future eps.  The company expects that 2H11 will show its normal seasonal strength vs. 1H, and that revenues over the period will likely be up by around 25% vs. 2H10.  This seems to me to suggest full-year 2011 eps of $2.50 or so.  INTC expects 2012 will be considerably better than 2011.

The mix of revenues will be different from what INTC thought three months ago, however.  More about this below.


Demand from emerging markets, which makes up the majority of INTC’s business, is booming.

Corporations around the world continue to spend heavily on new servers.  The development of cloud computing is adding to that.

The global consumer appetite for notebooks and desktops, with demand skewed toward the emerging world, is growing at double digits.

INTC saw some weakening of its business in Japan.

The corporate tax rate for the quarter was lower than anticipated, signalling that a greater proportion of its revenues than the company expected are coming from outside the US and EU.

The only fly in the ointment for INTC is netbooks.  Sales of the Atom chips which power them have swung from being up 4% year on year in 1Q11 to being down 15% year on year in 2Q11.

a lower PC unit growth forecast for 2011

Predictably, this is the one thing from the INTC earnings release and conference call that the press has seized on.

Third-party consultants have been saying for some time that they expect growth in global PC unit sales this year to by only about 5%.  INTC, in contrast, has been saying that it expects “low double digit” growth (10%-12%?).

The difference?  INTC says, in effect, that the consultants only have good information about the developed world.  They’re incorrectly extrapolating weakness there to the emerging markets, where conditions are far better.

None of that has changed.  What has taken INTC by surprise is a recent falloff in sales of Atom chips that go into netbooks.  It sounds to me that there’s worse in store for Atom than the 2Q11 sales drop cited above.  That’s  because Atom is the reason INTC is lowering its global PC unit growth forecast by about 2%, to up 8%-10%.

On the other hand, people still buying PCs are selecting higher priced ( and higher profit) chips than INTC thought.  The two factors are cancelling each other out on the revenue line.

my thoughts

They haven’t changed since my last post on INTC.  I was a little surprised, when I looked at a year to date chart a couple of minutes ago and saw that INTC has outperformed the S&P during 2011 (based on price action in July)On a one year view, INTC is a substantial laggard, though.

The bearish case, as I understand it, is that INTC is a child of the PC generation.  That time is past; INTC has been displaced by ARMH in the new tablet/cellphone era.  Therefore, no matter how good earnings are today, they will inevitably decline.  And, as these situations typically develop, the falloff will be sooner than you think and very rapid.

An implicit assumption is that INTC will be unable to adjust.

The bullish case is a little more complicated.  It’s that:

–servers for general corporate needs and for cloud computing will remain booming businesses

–corporate users and consumers in the developing world will ensure that the traditional PC business will be at least stable, and won’t decline precipitously

–at 9x 2011 eps ( and 8x? 2012), and with a dividend yield higher than a ten-year Treasury, all but the most bearish outcome is already baked into the INTC stock price

–it’s possible that some combination of INTC’s chip innovation and the success of MSFT products in the cellphone and tablet markets will enable INTC to transition its consumer business in the developed world to the post-PC era.

I own INTC; I’m in the bullish camp; but I’m somewhat concerned that I’m simply tuning out the (negative) message that the stock price has been sending out for a long time.  I still think, however, that if the developed markets consumer business disappeared tonight and tomorrow INTC appeared as a fast-growing cloud computing and emerging markets play the stock would be a lot higher than it is now.  So for now I’m content to wait.

“Chromebooks,” Chrome-based notebooks finally arrive!! –and they look good

the Chromebook

Remember the Chrome OS from Google?  …announced in mid-2009, with the promise of Chrome-based netbooks in mid-2010 (see my post from way back then)?

What happened?

The Chrome operating system took longer to perfect than Google thought, and netbooks sales began to nosedive.  Whether this was due to the debut of the iPad or more competitive pricing from low-end notebooks (the latter is my guess) doesn’t matter.  Netbooks using Chrome would have been a non-starter.

What Google has just announced instead is the Chromebook, or Chrome notebook, which will be available for purchase in the US and western Europe on June 15th.


–made by Samsung (12.1″ screen, 3.26 lbs, 8.5 hr battery life) or Acer (11.6″ screen, 2.95 lbs, 6 hr battery life)

–Intel Atom processor

–8 second boot up

–small (unspecified size) SSD, cloud storage

–Chrome OS, Google apps–for now, Chrome notebooks will not be able to use traditional PC software; Google is working on a free service that will allow you to access Windows- or Mac-based PCs from a Chromebook, so you can use software installed on them, too

–printing either through Google Cloud Print, or through a link to a traditional PC.


purchase:  $350-$500, depending on screen size and whether you elect 3G service or just stick with wi-fi.

rental:  Schools and students will be able to rent Chromebooks directly from Google for $20 a month; for businesses, it’s $28.  The price includes free replacement of lost/stolen/damaged units + centralized IT support for business users.

my thoughts

Score one for Intel.  Chrome is designed for either Intel or Arm chips, but Google is standardizing on the much more powerful Atom chip.

Google has picked two PC manufacturers with almost no presence in the US, and who therefore have no existing business to cannibalize.  They doubtless see Chromebooks as a huge opportunity to pick up market share and will do everything in their power to make Chromebooks work.

The replacement guarantee for renters should make Chromebooks especially attractive to schools.  If so, Google will gradually grow a generation of users with limited experience of traditional PCs.

Small businesses may find the savings of turning a lot of their IT administration over to Google to be big enough to justify a $28 a month price, since adminstration is a much bigger cost than the PCs themselves.  Large companies are a lost cause, though.  It’s not simply that they have so much legacy software; I imagine large corporate IT departments will fight this potential loss of their power with every office-political trick they have.

If Intel is potentially the biggest winner, other than Google, from the success of Chromebooks, Microsoft stands to be the biggest loser, in my opinion. Maybe buying Skype to dress up the appeal of Windows to consumers (and small businesses) isn’t so crazy after all.

MSFT’s 3Q11: signs of Windows weakness

the results

After the close of the market in New York on Thursday April 28th, MSFT reported its 3Q11 (MSFT’s fiscal year ends in June) results.  The company earned $.56 per share for the three months (+24% year on year), on revenue of $16.4 billion (+13%).  A non-recurring tax benefit raised the final per share tally by $.05, to $.61.  This compares with the Wall Street consensus estimate of $.56.

MSFT shares dropped by 3% in Friday trading, in a flat market for IT.  INTC, the second member of the “Wintel alliance,” whose shares tend to  trade more or less in line with those of MSFT, rose, in contrast, by 1.5%.

the details

picky points (symptoms of analyst’s disease)

–MSFT continues to show impressive control of operating expenses.  Despite this, operating income for the quarter was up by only 10.3% year on year.  That’s less than the rate of increase in revenue–not what you’d expect from a software company.

–The company spent $10.3 billion, or a tad less than 60% of net income, over the first nine months of fiscal 2011 buying back its own stock.  That’s far above the $2.2 billion in new issuance (presumably from exercise of employee stock options) over the same period.  Outstanding shares are down by about 4% year on year–meaning around 4% of the advance in per share income comes, not from an increase in the bottom line, but from shrinkage of the denominator used in the calculation.

more important things

MSFT has five divisions, two big ones, one medium-sized and two that you can safely ignore if you just want a general picture of where growth is likely to come from.  In size order, giving the percent of operating income each represented in fiscal 2011 to date, and year on year growth for 3Q11, the divisions are:

Business (meaning MS Office and related productivity tools)      43.5% of operating earnings, 24.5% year on year growth in 3Q

Windows (the PC operating system)          38.7% of operating earnings, 10% year on year decline

Server and Tools          20% of operating income, 11.7% year on year growth

Entertainment + Devices (X-Box, cellphones…)          5.4% of operating income, 50% year on year growth

Online Services          -7.6% of operating income (a loss of $1.8 billion), a 10.% increase in the year on year loss.

the numbers need a bit of tweaking

Windows 7  launched in late October 2009.  So year-ago sales were flattered by the rush to buy the new product (and ditch Vista).  Office 2010 debuted in June 2010.  Anyone who bought Office 2007 in the runup to launch of the new version got a free upgrade.  Revenue was booked when the upgrade was redeemed, not when the sale was made–meaning that revenues in the Business segment during the year-ago quarter were unusually weak.

MSFT thinks the true rate of the Business segment revenue growth was 13%, not the 20% reported.  Conversely, it believes the decline in the PC market it saw in 3Q11 was 1%-3%, less than the 4.5% drop in sales it posted.

MSFT’s take on the PC market…

According to the company, netbook sales were down 40% year on year, business PCs were up 9% and consumer PCs were down 8%MSFT thinks that emerging markets represent “nearly half” of global PC shipments.

…vs. INTC’s

In simple terms, INTC (see my latest post on the company) is saying that the lion’s share of PC growth is coming in the emerging world, where consultants like Gartner or IDS, who are projecting lackluster growth in the PC market this year, have limited ability to collect data.  The two consultants are mistakenly extrapolating the present weakness in the US and Europe to include the developing world.  As a result their unit sales projections are too low.  INTC, which does over half its business in developing countries, says it has a much better look at demand through its warehouse and sales staffs–and business is better than the consultants think.

In a nutshell, MSFT sees the same picture the consultants do.

my thoughts

I don’t think netbooks are an important factor.  If they comprised 5% of the total PC market a year ago and that’s been cut in half, the resulting unit volume decline is 2.5%.  But they use low-cost Atom processors and Windows 7 Starter, which does little more than start the machine.  So they’re not a commensurate revenue loss.  Also,  to some degree buyers have switched to low-end laptops, which carry higher revenue and profits for both MSFT and INTC.

Macs are a factor, but not the key one, in my opinion.  Macs are growing much faster than the overall PC industry.  They use INTC chips but the AAPL operating system.  However, although Macs represent over 10% of the PCs sold in the US, they’re less than 4% of the world’s unit purchases.  Yes, they’ve been gaining half a point to a point of market share per year, but that probably means less than a 1% unit volume increase for INTC.

The MSFT management didn’t respond to an analyst’s question about piracy, which, in my experience, is rampant in the Pacific.  My guess is that non-branded “white box” computers with unauthorized copies of Windows software are a big part of the difference between MSFT’s experience and INTC’s.  There’s no way of knowing for sure, though, so MSFT’s judgment not to broach the topic is probably its best tack.

One other interesting MSFT management comment about INTC:  The MSFT CFO suggested that maybe the biggest reason for INTC’s good results was its ability to raise prices.  Although he didn’t say this, what seemed to me to be implied is that INTC can raise prices in a way MSFT can’t.  In other words, through constant innovation in chip size, speed, power consumption, INTC has a better value proposition for customers than MSFT does.  I think that’s right, but it’s funny to hear it from the lips of MSFT.

the stock

MSFT is guiding to a 4Q11 about in line with results from 3Q11.  This would bring full-year results to about $2.60 a share.  I think we’ve already seen the crest of the current product cycle with the launches of Windows 7 and Office 2010.  So fiscal 2012 will likely show eps growth at a much slower pace than the likely 24% gain this year.  Let’s pencil in 12%.

If so, the stock is trading at about 9X forward earnings, has net cash of around $4.50 a share, generates free cash flow and yields about 2.5%.  That looks cheap to me.  It’s hard to figure where the upside is going to come from, though.  Certainly, there are isolated interesting products, but I’m not sure there’s anything big or dramatic enough to move the needle for a giant like MSFT and engage investors’ imaginations. So value-oriented investors, the prime potential buyers of MSFT, may well worry that the stock will remain the “value trap” it has been for the last decade.

INTC’s 1Q11: strong earnings, not enough (in my opinion) Wall Street reaction

the results

After the close of New York trading on Wednesday, INTC reported its highest-ever quarterly revenues, $12.8 billion, for 1Q11 and earnings per share of $.59, up 37% year on year.  This compares with brokerage house analysts’ projections of up 7%.

The company suggested that 2Q11 will be a carbon copy of 1Q–which would mean a year on year earnings gain of 15% or so– and voiced its expectation that the second half would show its usual seasonal strength.  INTC  also reiterated its full-year 2011 guidance for revenues (and, in my opinion, earnings–though INTC didn’t say) of up 20%+.  This would imply earnings per share of $2.40 or better for the twelve months (actually 53 weeks, because INTC is adjusting its financial reporting to the calendar year).

This contrasts sharply with analysts’ forecasts averaging $2.03–a mere 2% gain over 2010 actuals.  In fact, analysts have been projecting that earnings comparisons for INTC will be turning negative right about now.

Yes, INTC’s shares did rally almost 8% in trading yesterday.  That brings the stock just barely (+1.8%) into the plus column, year to date, compared with the S&P 500 gain of 5.8%.

The move also raises INTC’s price-earnings ratio from 8.3x 2011 earnings to 8.9x.  The latter figure is about two-thirds of the multiple on the S&P 500, half that on the typical semiconductor stock and 40% of the multiple the market has awarded INTC in the recent past.

the details

Starting with one-time factors Wall Street was worried about:

–INTC appears to have suffered no damage to its production plants, and very little disruption to supplies, from the Japanese earthquake/tsunamis.

–You may recall that INTC found a glitch in the earliest runs of its new Sandy Bridge processor.  The company estimated that 1Q11 revenues would be depressed by about $300 million because of the time needed to fix the problem, reramp production and replace defective chips.  It turns out the company worked quickly enough that there was no negative revenue impact.

–the acquisitions of McAfee and Infineon’s former wireless division have closed.

Two areas are responsible for INTC’s strong performance:

1.  Demand for servers is exceptionally strong:

a)  The more important reason why is the rapid growth of devices that connect to the internet.  They are sparking exceptionally strong demand for data centers to service them, including providing “cloud” applications and storage.  These servers are virtually all standardized on and powered by high-end (read: high profit) INTC chips.  This new market will likely end up being as big as the total traditional enterprise server market within a few years.

b)  In the traditional corporate market for servers, INTC’s offerings are so much better/cheaper that replacing existing equipment pays for itself.

2.  Well over half INTC’s business is now in emerging markets.  Corporate demand for PCs in China, Latin America and Eastern Europe is booming.  In addition, the combination in these areas of rising incomes and falling PC prices has made computers affordable for large portions of the population for the first time.  So consumer demand for PCs–even desktops (!)–is strong there, too.

The only area of weakness for INTC is the consumer PC business in the US and the EU.  Strong replacement buying through the recent recession, weak current economic growth, maturation of the netbook market and the appearance of tablets have all conspired to put the Western consumer on hold as far as buying PCs is concerned.  The bad news is that these markets are at present declining gently.  The good news is that they comprise only a third (my guess) of INTC’s business and the other two-thirds is performing going gangbusters.

where are the INTC smartphones and tablets?

This is Wall Street’s biggest worry.  So far, there’s not much to write about, because processors made by ARM Holdings have a stranglehold on these markets.  INTC’s offerings to date are thought of as too big, too power-hungry, too inflexible.

the stock

Many investors seem to believe what analysts’ numbers are showing–that the traditional PC market is in immediate, terminal decline, with personal computers being replaced in most uses by smartphones and tablets.  From this premise, which I think is incorrect, they draw the conclusion reflected in  analysts’ numbers–that INTC, too, is a company of the past.

Even after Wednesday’s sharp rise, INTC shares have underperformed the S&P 500 by more than 20 percentage points over the past year, despite stellar earnings performance.

The two issues:

1.  Can the market for INTC’s x86 chips be as strong as the company says, while third-party technology consulting firms predict much slower growth for the industry?

This was the topic of more than one analyst’s questioning on the company conference call.

INTC had several points:  the third parties have their best insight into the consumer markets of the EU and US, which is where all the weakness is.  They have less visibility into the corporate market and almost none into the emerging economies that make up the bulk of INTC’s business and almost all of its growth.  This is not the first time the third parties have been wrong.  Last year they underestimated the market growth as well–and for the same reasons. 

I’m willing to believe INTC.

2.  Where are the smartphones…?

INTC has a new chip for tablets.  It has shaken up its mobile business. It hints at great things from its “revolutionary” next generation of chips–details in early May.

But no one really knows whether INTC can be successful with mobile client devices.  The company does point out, that tablets and smartphones are not so tightly wedded to a given processor as PCs are.  So a potential switch from an ARM chip to an INTC one could be made in a given model relatively easily.  So if INTC can manufacture an acceptable chip, it could gain design wins quickly.  Let’s see one, though.

On the other hand, a lot of damage based on this worry has already been done as the PE of INTC’s stock has shrunk from from 21+ to 10-.  At the risk of being too simplistic, if INTC’s consumer business in the US and EU were to vaporize tomorrow, what would remain would likely be a 12 multiple stock with 30% growth in prospect for a number of years–plus a big play on emerging markets.  INTC would seem extremely cheap. 

In other words, I don’t think there’s much downside in holding the stock (remember, I own it) and waiting either for Wall Street to work out that the company’s business is booming, or for some positive development on the smartphone/tablet front.  The greatest near-term stumbling block I can see is that sell-side analysts, who appear to be very wrong about INTC current earnings prospects, are notorious for their unwillingness to admit their mistakes.  And they’re the ones many investors turn to, if not for advice, at least for factual information and industry analysis.

INTC will make chips for Achronix in its newest 22nm fabs

INTC and Achronix

Achronix, a small privately-held fabless semiconductor design firm in Silicon Valley, announced on Monday an agreement that it and INTC have been working on for almost a year.  INTC will manufacture Achronix’s 22-nanometer Speedster 22i, which it calls “the world’s most advanced field programmable gate array (FPGA),” using one of the company’s most advanced fabricating plants, slated to open late next year.

INTC didn’t make an announcement, but did post the news on a company blog.

On the surface this looks like a lopsided deal in Achronix’s favor.  The key feature of FPGAs is that their programming can be improved or upgraded even after the chip is in a device.  So they’re great for putting new technology into telecom or networking equipment.  Achronix claims the Speedster 22i will offer 4x performance vs. competing chips and will use 50% less power, but will cost 40% less.  A lot of this will be due to the INTC process technology.

What does INTC get in return?  The company isn’t really saying and there’s no agreement either among analysts or technology bloggers.

my thoughts

I think there’s a good news/bad news aspect to the answer, which is why INTC is mum.

A semiconductor fab in today’s world costs at least $3 billion to build.  It’s capable of producing about $7 billion in yearly output.  Who can afford to build one?  Who needs that much output?   No one–other than INTC, which has a near monopoly in processors for PCs, Samsung, the dominant force in memory chips, and maybe TXN.

To the degree I’ve thought about these facts–and I haven’t done much–I’d assumed that being big enough to continue to have your own fabs, and to relentlessly push for more advanced fab technology, would prove a critical market advantage.  But it hasn’t.  That’s the bad news.

For most semiconductor design firms, fab ownership is out of the question financially.  They turn to third-parties, the so-called “foundries” like TSMC or UMC, to do their manufacturing for them.  For the fabless firms, then, manufacturing is not a competitive advantage.  What separates winners from losers among them is the flexility of products, the ability to do more creative things within the confines of a standard fabrication technology.  As a result, the fabless industry has made a virtue of necessity and learned how to do a lot more with a lot less.  Arguably, the foundries have done the same.

In other words, the rules of the game for semiconductor device makers–and especially for chips in mobile devices–have changed in a way that puts INTC at a disadvantage.  More bad news.

Where’s the good news?  –it’s that INTC understands what’s going on and has decided to try to change the game once again.   Companies like Achronix get manufacturing prowess that will give their chips features the competition may not be able to match.  INTC learns the mindset of the designer of products for the mobile universe.  Together, the two firms may be able to create system-on-a-chip products that make future generations of the Atom processor more attractive to makers of cellphones and tablets.

My guess is that this move isn’t at all about INTC itself becoming a foundry.  It’s more about changing the chip design culture within INTC to the point where it can meld the best of the fabless world in with its own traditional skills.

If I’m right, this is a real sign of management strength.  It might work.  I don’t see anything in the company’s stock price that suggests this possibility is being discounted at all. Let’s see what happens.