August 31, 2011 - Everyone's saying PC demand is soft, right up through the back-to-school period. Earlier this year Intel pooh-poohed such pessimism, saying it had a better ear to the end-market ground. But now it seems even the chip giant might be fessing up to market softness, and retrenching accordingly.

Intel's Fab 24 in Leixlip, Ireland is now removed from the company's 22nm roadmap (the '1270' line), says Barclays' CJ Muse, citing "industry checks." If true, it's as yet unclear if Intel would reallocate resources to its Israel facilities or whether this signals a broader lowering of leading-edge support -- i.e. a pending capex reduction. The decision to "reallocate or mothball" the 1270 line will be made by mid-September, he writes.

Citi's Tim Arcuri further clarifies with his own "checks," determining that INTC's plan for Fab 24 is merely to put "on hold" its planned 22nm migration (from 90/65nm output), with a deeper strategic decision over Fab 24's fate coming at 14nm or 10nm.

Meanwhile, Intel told a local paper that there is no delay to its Leixlip Fab 14 plans, where at the start of 2011 it pledged $500M in upgrades -- but this would be separate from the Fab 24/22nm upgrades.

What's sparking Intel's possible 22nm rethink? PC demand indicators continue to pancake. FBR's Craig Berger says PC builds "have deteriorated" with 3Q11 builds now in the red Q/Q, "worse than expected and well below seasonal" due to weak demand across the board from Europe to the US to China, and major OEMs (HP, Acer, Dell) are "clearing inventories." Lazard's Daniel Amir knits together weak outlooks from Micron and Omnivision, along with weak consumer PC spending, and drags down INTC's 3Q-4Q projections. Susquehanna's Chris Caso cites his own checks for "incrementally negative" PC demand, which he says has spawned cancellations from smaller customers and is a harbinger of larger ones. AMAT's Mike Splinter said in the company's 3Q11 results call that the traditional back-to-school PC push has been "disappointing." HP further threw a dash of cold water on the sector by announcing intentions to slough off its PC business. Muse notes that there's already "talk of a hiring freeze at Intel" as well.

The ramifications of Fab 24 delays or shutdowns won't really impact Intel's planned 2011 capex (seen around $6B), with already-ordered tools or shipments. But this could be a big damper on 2012 capex plans. Fully upgrading Leixlip Fab 24's 41K WSPM to 22nm could require $2B in total capex (~$1.5B in wafer fab tools) budgeted within INTC's 2012 spending plans, and erasing that would create a sizeable hole -- Muse thinks it could be $300M-$600M "if it's just a cancel" and the 22nm work isn't reallocated, which would push INTC's 2012 capex as low as $5B. (That figure would also include initial 16nm investments for fabs D1D and newest D1X in Oregon.) Arcuri, meanwhile, puts INTC's possibly 2012 capex quite a bit higher at $7B-$8B.

From a larger industry picture, any Fab 24 cancellation would take a ~5% slice out of what is already expected to be a "flattish" (≤10%) 2012 industrywide WFE spend. But with 3Q11 numbers in the bag, Arcuri maps current WFE order run-rate at a paltry $20B-$22B, which is "not a sustainable level by any stretch," he writes. Look for some help on the horizon thanks to new NAND capacity (Samsung and Hynix), foundries, and even Intel (Fab 28). Arcuri sticks with his position that 3Q11 "is the trough for orders" and a "noticeable bounce" is coming in 4Q11 and we are likely to see a notable bounce back in CQ4 that should "be as quick as the drop-off in CQ3." Still, he notes, "orders have got to get better fairly soon to get anywhere close to any reasonable 2012 capex picture."