Intel's Earnings Call Sheds Light On Turbulent PC Market

Normally, we cover conference and earnings calls from major companies by hewing pretty strictly to the number and discussing factors that directly relate to them. Today, we're going to break with that format a bit, and examine what Intel's Q3 earnings tell us about the larger PC market, what to expect from AMD when its own conference call happens tomorrow, and what consumers should expect over the next six months.

Intel reported $13.6B in revenue for Q3 2012, slightly above its revised expectations. What's troubling analysts and investors is that the entire PC market is sluggish. Normally, the PC industry is weakest in Q1, somewhat stronger in Q2, and significantly better in Q3 thanks to the back-to-school season. Sales peak in Q4 thanks to Black Friday and the holiday season. This year, the expected BtS bump was only about half the normal size. The question is, how much of this is due to poor macroeconomic conditions, and how much to consumer interest for tablets and smartphones?

Intel's Justin Rattner, with Rosepoint, the company's integrated digital radio + Atom CPU

Intel's answer: We don't know yet. Intel CFO Stacy Smith chided analysts for trying to force his hand on this point, noting at one point that "You are trying to back me into a forecast...What we are seeing is that the customers are managing things very cautiously; depending on how sales go." Otellini noted that he'd just returned from China and that everyone there was managing inventory and forecasts extremely cautiously, partly to control potential overhang on Windows 7 SKUs post Windows 8 launch, but partly because worldwide, there's not a lot of certainty regarding anyone's market performance.

For US readers, news of this country's continuing slow recovery and, to some extent, long-running troubles in the Eurozone are old hat. What's less discussed is that growth in developing countries that led the way out of the 2007-2008 recession has slowed as well. China's own history of massaging numbers and hiding drooping demand by stockpiling products may also be catching up with it.

Faced with these concerns, Intel has trimmed its total manufacturing targets for Q4, but isn't reducing CapEx spending on 14nm production rollouts. It has no plans to cut pricing, mostly because it doesn't need to -- as Otellini noted, "f you look at our PC group numbers quarter-over-quarter, the ASP was about flat, year-over-year, it was down a bit, mobile was down a bit. What that reflects was really us going after some incremental share at the bottom of the market." What Intel believes is that betting on Windows 8, Surface (the x86 version) and its own nascent smartphone business is the way to pull out of the doldrums, even if some of the demand shift <em>has</em> been driven by changes in consumer discretionary spending towards tablets.

Wall Street would prefer to hear about dramatic recoveries and strong sales, but Intel's wait-and-see strategy isn't a dodge, but a prudent refusal to commit to scenarios that may or may not play out in real life. The thrum of back-and-forth over Windows 8 pricing is proof enough that no one really knows what the best price point or marketing position is going to be three months from now. Intel is in a strong position to respond to changes and relatively well protected from any sudden shifts in consumer demand.