by Calculated Risk on 4/14/2009 06:28:00 PM

More conference call comments (ht Brian). A little long, but provides some insight into how Intel views inventory levels. Note the comment about the "industry's at a new baseline".

Analyst: What do you expect your internal inventory to do and any comment on the channel.

Intel: Those two things are obviously related. I'll start with the channel inventory question first. As we look and do our checks of channel inventory levels, we saw a significant burn-off of the overhang of inventory that we had seen in Q4 and in the beginning of Q1. If anything, that burned off a little more quickly than we thought. That's what allowed us to start loading our factories. And you can see in our inventory levels we dropped significantly from Q4 to Q1. And actually I'd say for our inventory levels, we're probably a little lower than we would like. In general, when we look at channel inventories, they look generally lean across the supply chain. If anything, as we thing about a seasonal second half on the back of a pretty weak first quarter, we'll probably grow inventories a little bit as we get into Q2. I don't think it will be significant but I think it will be up a little bit.

Analyst: How much of what you are seeing at the moment [is inventory adjustments] and when do you think that process will end? I know you mentioned Q2, but just to scale it, when do you think -- how much of that is, there is weak underlying demand and when do you think that process will be done?

Intel: I think there was some replenishment of Intel chips at our OEM's customers in the first quarter but certainly not a number that I think would reflect full inventory levels. I think everyone is still running very lean. We actually have seen some expedites in the March time frame of can you get us product real fast, we're running out of end user built products, et cetera. So I think you're still seeing that. My sense is it will stay that way until the second half of this year when you start seeing normal seasonal growth return into the business.

Analyst: Beginning in the second quarter, would you expect sequential sales [growth] in your overall server, two way server processors in the second quarter?

Intel: The question mark we would have is the overall strength of the enterprise market going forward and what we're seeing is that enterprise budgets are locked down pretty tight and CIOs are going to let their fleets age a bit until they get a little more clarity on what the economy looks like.

Analyst: I was wondering if you might have been able to give some color on how you perceive sort of broader visibility and how you might have compared that to the conversation from January. You talked about a bottom in the PC market and possibly some month over month improvement as you went through the quarter. On the other side of that, your guidance was sort of flat or somewhat similar although it's not formal but just general color on how you see the marketplace and to what extent there is any visibility.

Intel: I think that first of all, when we said that we were planning our business flat in this environment, you have to remember that traditionally the second quarter is seasonally below the first quarter so that alone is at least internally is a sign of how we view the world. In terms of visibility, three months ago we were sitting in a fragile global economic environment and we had just come off of a horrendous Q4 and we weren't sure where sales were of PCs. Three months later, we're still sitting in a fragile global economic environment but we've got three or four months of fairly good trending in terms of where the business is, what the inventory levels are, what geographies are still buying product, what segments are still buying product and so the -- the global environment hasn't changed but our ability to look and plot some points, historical points, has given us the confidence to essentially say that we've seen the bottom, the industry's seen the bottom and I feel pretty comfortable in that, having done this for more than a few years.

Analyst: Do you feel, then that the seasonality is likely to be somewhat similar to broader seasonal patterns in the second half, do you have any color there?

Intel: Well, that goes back to the pipeline. Desktops are a business which is very, very quick. Most of them are assembled to order. 40% of our desktop chips go through our industrial distribution channel. They're sold in white boxes for the most part. There is essentially no inventory on those. When we saw that stabilizing in the early part of the quarter, that was the first stake in the ground in terms of trying to figure out where the business was. The notebook business, we talked about this last time, not only has a longer supply chain and most of it is branded, much of it was put on boats in the third and fourth quarter to save fuel costs and there was a lot of inventory built ahead of the holiday season in Q4 that had to burn off. We now believe that the vast majority of that has burned off. All the patterns we've seen on chip sets for mobile and on microprocessors for mobile are consistent with that in terms of our customers and the Taiwanese mother board manufacturers now beginning to buy again for product that is reflecting end user consumption.

Analyst: So you're confident that you're seeing normal seasonal patterns return but not sure sort of to what degree, perhaps. Is that the main issue that you think that in the second half we do get that uptick but we just don't know how big it is yet and that's why you're being conservative about guidance?

Intel: I think you have it exactly right. Everything I've seen suggested that the industry's at a new baseline. We're starting to see the normal seasonality adjusted a little bit for the inventory. Replenishment we talked about earlier for Q2. And then every sign we see in terms of markets recovering and here's the time phased deal, suggests that we're likely to see typical seasonality in the second half. I talked about Europe being weak. My sense is everything we've seen is that Europe was like the United States except two or three months later. And so Europe is sitting today where we all were two or three months ago, which was still a bit more frozen than we are today. And our recent channel checks in Europe suggest that consumers are now starting to open their wallets for notebooks again.
emphasis added