What’s the Intel Capex Outlook?

Intel reported revenues of $15.78B and earnings of $0.80 for the quarter beating expectations and previous upward guidance. CCG (PCs) were up 21% Q/Q and 5% Y/Y. Data center was up 13% Q/Q and 10% Y/Y. IOT was up 20% Q/Q and 19% Y/Y. NVM was up 17% Q/Q and down 1% Y/Y. Capex for 2016 will come in more or less as expected at $9.5B +-$500M.

All in all, a very good quarter….outlook is for flattish revenues with slightly lower gross margin….slightly below street expectations.

Our quick takeaway is that Intel has been beating numbers handily and we think that there could be a bit of sandbagging especially with the introduction of a new CFO who isn’t going to want to disappoint his first quarter out of the starting gate, so we will see what the numbers finally come in at but we would bet that they will look better when Q4 is done.

Three quarters of above average Capex spend for three reasons….
The company talked about capex ticking upward for Q4 through Q2 of next year due to above average spending on three projects; 10NM rollout in Israel, 3D NAND in Dalian and 3D XPoint. Math suggests that capex could be $3.5B in Q4 as compared to an average run rate of $2.5B or so ( 40% above normalized run rate).

This perfect storm of spending will obviously help tool companies over the next several quarters. Given that Intels spend has been somewhat reduced, this blip, even though temporary, is a good shot in the arm to get these projects up and running

What wasn’t said is more interesting than what was said
It is interesting to note that Intel management did not even mention the word Israel or 10NM development in their prepared remarks. Also gone are comments on 10NM yield ramp and the associated “technology leadership” that Intel has historically touted. Could it be because TSMC has caught up to or passed Intel, with Samsung not far behind?

Part of the transformation of Intel is also transforming it from a technology and advanced production leader to more of an applications driven company. XPoint is an example of an application driven product rather than a Moore’s law driven product.

The de-focus away from Moore’s law leadership is quite clear as Moore’s law has also been missing from Intel’s recent vocabulary.

Results count towards a better stock price
Its hard to argue with success as Intel put up record numbers in what could have otherwise been a downward spiral of PCs. The restructuring though difficult will likely bear fruit going forward as well. It is not unreasonable to expect the stock hitting and breaking through $40 in the near future given our expectations of performance. The dividend doesn’t hurt either…

ASML- Waiting for 5NM…..maybe
As Intel backs away from pushing the limits of Moore’s Law, its clear that the need for EUV is also backing down (along with the alleged 15 unit order that drove ASML stock up huge…). Samsung seems the most committed to EUV but then again they are furthest behind in the race. We see EUV nowhere in sight at TSMC.

However, ASML will still do quite well with nice high margin immersion steppers.
We would expect them to also see brighter capex spending going forward.

KLAC – Gen 5 will be driven by 10NM and 7NM ramps
We expect KLAC to do very, very well with the current ramp of 10NM and 7NM and will be very well rewarded for its efforts on its new Gen 5 tools. Obviously Intel will buy a lot of tools, and we have heard that TSMC is ordering huge…

We think some of the share loss to E Beam will slow as it has run much of its course so the negative news is somewhat behind them.

KLAC will have some catch up to do as they were prepping to be acquired so they will have to step it up again and we could see increased spend after restructuring over a year ago followed by a fallow period of waiting to be bought.

We would not be surprised to hear of either some pushouts or some business falling out of Q3 into Q4 as lam’s biggest customer, Samsung, may have shifted some spending due to near term cash issues related to exploding batteries. This would make the upside to future guidance look even better.

3D NAND remains the big driver. We would watch the gross margin line as competition may heat up in parts of the etch market. We have heard of some recent success in oxide etch by Semes ( a Samsung company in Korea) as well as an ongoing push by Applied in etch that may eat away at the edges. Rumor also has it that AMEC in China may have etch tools at Intel.

Lam still has its analyst meeting scheduled in November but now rather than a wedding celebration it will likely be a bit more subdued.

The stocks are feeling a bit “toppy”
The stocks have been doing very well, perhaps too well as they are feeling a little more like they are at the end of a strong run. Even though business is clearly very good and we think guidance will be great as well we wonder if that can keep the stocks moving or if they will take a bit of a breather after earnings.