by James Montgomery, news editor
August 30, 2010 – Contributing greatly to the upbeat mood at this year’s SEMICON West was Intel’s blowout 2Q numbers, and said 3Q revenues would grow nearly ~10% to about $11.6B (a forecast midpoint). But with weakness surfacing in the PC supply chain, Intel’s pulling down its outlook to $10.8-$11.2B (flat to +4%).
Industry watchers have pointed out for weeks, citing Asian subcons, that IC inventories were building, and that there is weakness in the consumer PC sector; Intel’s admission seems to confirm fears of consumer PC weakness, perhaps a result of macro economic softness. "There is no "shock and awe" regarding the revenue revision, as negative PC sentiment through the quarter was abundant given the magnitude of expected sub-seasonal builds out of ODMs," writes Gleacher & Co.’s Doug Freedman. Credit Suisse’s John Pitzer suggests "a large (~75%) part of the miss is due to the PC supply chain contraction on weaker than expected developed market 2Q GDP growth," and that notebook demand may also be a little softer thanks to demand for the iPad. (Citing Intel’s lowered 3Q outlook and PC weakness, Pitzer also has dropped his estimates on Micron and AMD.)
"Consumer PC is the weak link in the supply chain at present, with the iPad and coming wave of competing tablets adding increased uncertainty regarding 2H demand," agrees FBR’s Craig Berger. He narrows the PC weakness to a soft back-to-school period, which "caused some finished system PCs to accumulate at retailers and elsewhere. So as HP, Dell, and Acer align production rates with sell-through rates, INTC is seeing consumer order cancellations."
What this all means:
…for the IC sector: When an Intel sneezes, everyone gets a cold. But in this case it was already reported that PC business was slowing out of Asian subcons, so if anything this update from Intel was overdue — and the industry won’t overreact to what it already knows. "INTC’s preannouncement was somewhat widely expected, and so this event clears away some of the sector’s overhead," Berger writes. Freedman agrees: "Intel’s pre-announcement is more a sigh of relief for investors," he writes.
That said, softness means inventories build up, which will need to be worked down — and that means sales further up the chain could suffer. "We cannot help but wonder if PC is just the first shoe to drop for chip firms as downstream customer inventory replenishment (+9% Q/Q in dollars in 2Q) transitions to downstream inventory reductions," Berger writes. Though some PC chip firms (Marvell, LSI, Nvidia) already have seen adjustments, supplies may be building for traditionally scarce components (e.g. capacitors). Look for first signs of inventory movements in communications/networking sectors, industrial, and automotive, he says. "To some degree, PC chip firms have already de-risked from ship-ahead dynamics, while the rest of the chip sector has yet to make this adjustment."
…for PC demand: Inventory ebb/flow is a reality of the industry, and the industry’s done a good job managing it lately — though some warning signs have been creeping in.
But weakness in PCs might actually be a good thing, points out Freedman — consumer may be holding off on purchases until newer products come down the pipeline shortly. "We see the weakness in PC builds as the "calm before the storm" ahead of compelling CPU+GPU offerings," he writes. "Additionally, the sub-seasonal nature through Q4 will result in leaner inventories across downstream retailers, as we believe favorable reviews for Sandy Bridge and Fusion alike will help drive a replenishment cycle.
And PCs are increasingly not the big slice of marketshare pie for ICs anyway, points out Credit Suisse’s Satya Kumar, noting that there could be 9.5M+ unit shipments of tablets in 2H10. These devices’ solid-state drives typically consume 4×-7× the area of NAND flash dies than does laptop DRAM (700-1400mm2 vs. 200mm2).
…for equipment/materials suppliers: Chip equipment/material suppliers rise and fall on the tides of their customers, so weakness at Intel and more broadly in PCs is not good news — and could become a real problem if that weakness extends to other chip-reliant consumer markets such as cell/smartphones LCD TVs, tablets, etc. So far, though, this weakness doesn’t appear to have spread, notes Credit Suisse’s Satya Kumar, who notes that some equipment suppliers are better positioned against this sort of thing: ASML, for example, is more tied to EUV technology trend-up, and Amkor has just 15% exposure to PCs (and only half of that in consumer) with the vast majority of its business (85%) in networking/communications/gaming.
Even though Intel is a top spender of capital expenditures for semiconductor manufacturing, the big money in the near future for suppliers is in memory, points out Kumar. "New capex is already shifting heavily to NAND, perhaps existing wafer starts are also being diverted more to NAND," he writes. "We still think our thesis on increasing memory capital intensity due to a shift in capex from technology to capacity is not really a function of macro — but the extent of capacity capex required can be sharply a function of the total PC demand sell through expected in 2011."
And since the chipmaker expects capacity utilizations to stay high, that means no major adjustment to package substrate inventories, which means continued demand for its Japanese suppliers, notes Credit Suisse’s Hideyuki Maekawa. (Currency valuation differences remain a problem, but nothing surprising or unmanageable, he says.) Interestingly, Intel didn’t drop its outlook for 3Q10 gross margins by much (to 66% vs. 67%), which he suggests is product mix compensating for the lower revenues — and no inventory overhang means suppliers’ materials can stay in demand. "At a minimum, the risk to package makers posed by falling notebook demand has abated somewhat," he writes.