Making sense of INTC's 2Q11: PCs down, capex up

Intel handily beat expectations for its 2Q11; PR here, analysis is all over the Web. Besides the general number-crunching, here are two key themes relevant to our semiconductor manufacturing audience:

- PC growth lower. Sales in INTC's PC group rose 11%, despite general malaise reflected by other industry watchers -- and indeed INTC now is cutting its PC growth expectations to ~8%-10%, though sales will still be higher thanks to "a very rich mix" of enterprise PCs, noted CEO Paul Otellini in the financials conference call. INTC also continues to see above-average growth in emerging markets, e.g. India, Russia, China, and Latin America (Brazil will likely be the third-largest PC market in 2012) all showed PC shipment growth in the mid-teens during the quarter.

Otellini also reiterated his view that PCs aren't really threatened by tablets, but the new devices are actually "additive to computing" as "a companion device" and won't replace PCs, though netbooks are showing signs of being affected. (Also note that INTC's PC forecast, while lowered, is still higher than the single-digit growth -- if any at all -- professed by other industry watchers.)

- Capex budget higher. Most relevant to our semiconductor industry were the comments about INTC's hiked capex budget for 2011, and how most of that is going into factory-building, noted CFO Stacy Smith. "It's been a long time since we've had to build incremental shelves, but the growth in our business now requires it," he said. "So we're putting in place some clean room space that we haven't had to do over the last couple of generations."

Often when a company raises numbers in the short-term, it's just pulling them in from future plans -- and some of this increased 2011 capex is just that, Smith acknowledged on the call. "We're going a little faster on the 40nm factories," where the company "saw some opportunities to do some things in the infrastructure" to be able to incorporate post-40nm work, even down to 10nm and 7nm, he said. "It gets kind of high ROI to do that now versus having to retrofit those factories later."

Smith also hinted that 2012 capex will increase again, reiterating that INTC's capacity spend tends to be "a couple years cycle". "Expect elevated capex next year relative to the historical trend line," he said, but without specifically committing to a figure. (Later in the call, Smith noted that the capacity going in can be throttled back "if things end up being softer" than anticipated unit growth, much like the company did in 2009.) (Deutsche Bank's Ross Seymore pegs INTC's 2012 capex at $8B, down -20% from 2011 and ~14% of sales.)

Some other points to ponder about capex, courtesy of Credit Suisse's Satya Kumar:

• In 1H11 INTC spent just a hair under 50% of its total 2011 capex budget, implying neither frontend- nor backend-loaded spending. Given negativity swirling about 2Q-3Q semicap equipment orders, that linearity probably a good thing, especially for companies with INTC exposure.
• From a macro perspective, note that it's the foundries who have been generally understood to have overextended and now cutting back their spending, and that sector (as well as Samsung) has yet to be heard.
• INTC's capex is being raised, even as its PC unit shipment growth is lowered.