Intel Corporation, Q4 2008 Earnings Call, Jan-15-2009 - SEHK:4335

SEHK:4335

During the Q4 2008 earnings call, Stacy Smith, the Chief Financial Officer of Intel Corporation, provided insights and details on the company’s financial performance and outlook. Here’s a detailed summary of Stacy’s comments:

Financial Performance Overview

• Revenue: Revenue declined 19% from the third quarter to $8.2 billion, reflecting inventory corrections and declining demand.
• Microprocessors: Excluding Atom, microprocessor revenue was significantly below seasonal patterns, but average selling prices were up.
• Atom-Based Products: Revenue for Atom-based microprocessors and associated chipsets was $300 million, up 50% from the third quarter.
• Digital Enterprise Group (DEG): Revenue declined due to a decrease in microprocessor and chipset unit shipments.
• Geography: Revenue declined sequentially and year-over-year in all geographies.
• Gross Margin: Gross margin of 53.1% was down six points from the third quarter, largely due to underutilization charges ($250 million) and inventory write-offs ($250 million).

Spending

• R&D and MG&A: Spending was $2.6 billion, down $300 million from the third quarter due to lower revenue and targeted spending reductions.
• Restructuring and Asset Impairment Charges: Expenses were approximately $250 million, with $200 million related to the shutdown of 200mm NAND manufacturing facilities and the Intel-Micron joint venture.
• Employee Count: Approximately 84,000 employees at year-end, down 3% from a year ago and 16% from the end of 2005.

Financial Position

• Equity Investments and Interest Income: Net loss of $1.1 billion, primarily due to a $1 billion reduction in the carrying value of the company's investment in Clearwire.
• Effective Tax Rate: 36.6%, higher than the 29% previously forecasted, due to the inability to take full benefit of impairment charges.
• Cash and Investments: Total cash investments ended the quarter at $11.5 billion, approximately $250 million lower than the third quarter.
• Cash Flow from Operations: Approximately $2.6 billion.
• Capital Spending: $1.8 billion.
• Dividends: Paid nearly $800 million and did not repurchase stock in the quarter.
• Full-Year Cash Generation: Approximately $11 billion in cash flow from operations, spent $5.2 billion in capital, paid over $3 billion in dividends, and repurchased over $7 billion of Intel stock.

Outlook

• Uncertainty: High degree of uncertainty around demand due to the global economic situation.
• First Quarter 2009:
  • No revenue outlook provided; planning for revenue in the vicinity of $7 billion.
  • Gross margin expected to decline significantly due to underutilization charges and the start of 32nm process technology.
  • Spending for R&D and MG&A should be approximately $2.5 billion.
  • Restructuring and asset impairment charges expected to be approximately $160 million.
  • Estimate for gains and losses from equity investments and interest and other income is a net loss of $130 million.
• Full Year 2009:
  • R&D and MG&A spending expected to be between $10.4 billion and $10.6 billion, down 6% from 2008.
  • Capital spending expected to be flat to slightly down from 2008, primarily invested in 32nm process technology.
  • Depreciation forecasted to be $4.8 billion, plus or minus $100 million.
  • Estimated tax rate for 2009 is 27%.

Efficiency Program

• Run Rate Savings: Greater than $3 billion in run-rate savings.
• CapEx Avoidance: Excess of $1 billion.
• Employee Reduction: Reduction of 20,000 employees from the peak in 2006.
• Future Plans: Plan to take another $700 million out of spending in 2009.

Throughout the call, Stacy Smith emphasized the company's commitment to managing costs effectively while investing in strategic areas like R&D and the transition to 32nm process technology.

During the Q4 2008 Intel Corporation earnings call on January 15, 2009, Kevin Sellers, Vice President of Investor Relations, provided the following remarks:

1. Opening Remarks:

   • Welcomed everyone to Intel's fourth quarter 2008 earnings conference call.
   • Introduced Chief Executive Officer, Paul Otellini, and Chief Financial Officer, Stacy Smith, who were also present on the call.
   • Mentioned that the call was being webcast live and a replay would be posted on Intel’s website at around 5:00 pm Pacific time and would remain there for about two months.

2. Non-GAAP Financial Measures:

   • Noted that if any non-GAAP financial measures or references were used during the call, appropriate GAAP financial reconciliations would be posted to Intel’s investor website, INTC.com, after the call.

3. Forward-Looking Statements:

   • Reminded participants that the discussion contained forward-looking statements based on the environment as Intel currently saw it and highlighted that current uncertainty in global economic conditions made it particularly difficult to predict product demand and other related matters. He emphasized that Intel's actual results could differ materially from expectations.
   • Advised listeners to refer to Intel's press release for more information on specific risk factors that could affect Intel's results.

4. Introduction of Paul Otellini:

   • Handed over the presentation to Paul Otellini, CEO, to discuss the quarter's results and Intel's priorities for managing during the economic environment.

5. Q&A Session:

   • Announced that the call would open for questions and outlined the format for the Q&A session, limiting each person to one question and one follow-up to allow as many participants as possible to join the call.

6. Closing Remarks:

   • Thanked everyone for joining the call and reminded participants that Intel's quiet period for the first quarter would begin at the close of business on February 27.

   • Announced that the first quarter earnings conference call was scheduled for April 14, 2009.

During the Q4 2008 Earnings Call, Paul Otellini, the Chief Executive Officer of Intel Corporation, provided insights into the company’s performance and strategies. Below is a detailed summary of his comments:

Opening Remarks

• Q4 Results: The fourth quarter results reflected the difficult economic climate, with revenues declining. This was only the second time in 20 years that Intel’s fourth quarter revenues were below the third quarter.
• Revenue Decline: The pace of the revenue decline in the quarter was dramatic and resulted from reduced demand and inventory contraction across the supply chain. Intel assumes further inventory reduction in Q1.
• 2008 Accomplishments:
  • Launched groundbreaking architectures with Atom and Nehalem, strengthening Intel's competitive position in the traditional PC marketplace and offering growth opportunities in new markets and form factors.
  • Continued focus on efficiencies, divesting non-strategic businesses and spinning out others, such as the NOR flash operations.
  • Achieved scale-out of the 45-nanometer manufacturing process and design completion of the next-generation 32-nanometer process technology.
  • WiMAX entered commercial deployment and holds promise as a ubiquitous mobile broadband technology.

Operational Highlights

• Operational Goals: Intel delivered on operational goals in nearly all elements under its control, demonstrating disciplined execution that remains a strength during the economic downturn.
• Priorities During Downturn:
  • Fiscal discipline: Intel has implemented initiatives focused on savings and modulating investments. The restructuring effort has yielded over $800 million in savings in 2008, leading to cumulative savings of over $3 billion since 2006.
  • Investment in R&D: Intel believes in investing in tomorrow's products, not standing still with today's. In 2009, Intel plans to introduce its 32-nanometer process technology in the second half of the year, without slowing down the introduction.
  • Investment in Growth Initiatives: Atom is a great addition to Intel's product portfolio, enabling new capabilities at affordable price points and good margins. Progress has been made in the consumer electronics and handheld markets with Atom-based products.
  • Confidence in Cash Generation: Intel plans not to reduce or eliminate its dividend, showing confidence in the cash generation element of its business model.

Product and Market Insights

• Nehalem: Intel’s Nehalem dual-processor server offering, which began shipping for revenue in December, offers stunning performance and allows customers to offer businesses unprecedented performance while lowering their operating costs.
• Atom: Atom has seen good market reception and is expected to grow substantially in 2009. Intel’s product is considered the best in the market, with benefits in costs, battery life, and software capability.
• Competition in Netbooks: Intel expects to do well in the netbook market over the next couple of years, despite increased competition, due to its strong product and market leadership.

Financial Insights

• Gross Margin: Gross margin declined in Q4 due to underutilization charges and inventory write-offs. Intel expects gross margin to decline significantly in Q1 as it continues to respond to demand signals and starts the ramp of 32-nanometer process technology.

Strategic Outlook

• CapEx and Utilization: Intel is committed to getting to 32-nanometer process technology as quickly as possible. The company will modulate the ramp rate of the process based on the demand environment.
• Inventory Levels: Intel is committed to avoiding putting unnecessary cost into inventory and is aggressively reducing build plans to align with demand signals.
• Demand Reset: Intel sees the lower level of demand as a function of longer life cycles of PCs and slower replacement cycles, indicating a reset to a new level of demand.

Closing Remarks

• Resilience and Strategy: Despite the unprecedented drop in demand, Intel entered the downturn well positioned both competitively and financially. Its focus on efficiency improvements over the past three years will allow it to weather the downturn.

• Restructuring Efforts: Intel’s restructuring and efficiency program has resulted in run-rate savings of over $3 billion, CapEx avoidance in excess of $1 billion, and a reduction of 20,000 employees from its peak in 2006.

• Future Plans: Intel plans to take another $700 million out of spending in the coming year and continue to respond to the weak demand environment.