Intel Corporation, Q2 2006 Earnings Call, Jul-19-2006 - SEHK:4335

SEHK:4335

Paul Otellini, the CEO of Intel Corporation, discussed various aspects of Intel's business and strategy during the Q2 2006 earnings call. Here is a detailed summary of his comments:

Business Overview and Objectives

• Q2 Objectives Achieved:

  • Worked with customers on inventory levels.
  • Prepared to launch a new generation of microprocessors.

• Market Share:

  • Lost a bit of microprocessor market segment share on a billings basis.
  • Gained a bit of share on a consumption basis, adjusting for inventory reductions.

• Factory Leadership:

  • Opened the third 65-nanometer facility in Q2.
  • Over 50% of microprocessor wafer starts are now on dual-core products.

Product Launches and Innovations

• Woodcrest:

  • Launched Woodcrest, described as the world's best processor for two-way volume servers.
  • Offers clear platform leadership in both performance and performance-per-watt.

• Tulsa:

  • Pulled in the Tulsa processor launch by two quarters to Q3.
  • Expected to deliver industry-leading transaction performance in x86 servers.

• Montecito:

  • Launched the next-generation Itanium processor, code-named Montecito.
  • Uses dual-core technology to double Itanium processor performance at 20% lower power.

• Quad-Core Processors:

  • Notified customers that Intel is pulling in both a desktop and a server version of its first quad-core processors into the fourth quarter of 2006 from the first half of 2007.

• Conroe:

  • Upcoming Core 2 Duo microprocessor for the desktop.
  • Offers 40% more performance and 40% lower power than Intel’s previous best.
  • Already setting new PC performance and performance-per-watt records.
  • Scheduled to launch on July 27th, a month ahead of schedule.

• Merom:

  • Core 2 Duo processor for mobile PCs.
  • Expected to extend Intel’s lead in mobile computing.
  • Fits into the existing Centrino Duo platform.
  • Ramping very quickly.

Brand Strategy and Pricing

• Three-Tiered Brand Strategy:

  • Core 2 Duo: Best PC microprocessor in the world.
  • Pentium: Lowered the price to system price points not previously addressed by this brand.
  • Celeron: Brand for extremely cost-sensitive designs.

• Competitive Advantage:

  • Intel’s 65-nanometer technology and capacity give the company a unique competitive advantage.
  • Accelerating dual-core penetration into more segments than ever before.

Operational Efficiency

• Cost Reduction:

  • Finalized plans to take $1 billion out of Intel’s projected spending in 2006.
  • Comprehensive structural review project designed to produce a leaner and more agile company for 2007 and beyond.
  • Sale of the applications and communication processor business to Marvell.
  • Elimination of 1,000 management positions throughout the company.

• Progress Update:

  • A bit over halfway through the structural review process.
  • Series of significant and well-considered actions to improve competitiveness and operating efficiency.

Summary

• Tight Spending Control:
  • Tight control on spending and making progress on identifying ways to improve efficiency and agility for the long-term.
• Product Leadership:

  • Delivering the best new microprocessors in the world.

  • Using manufacturing leadership to drive the industry's transition to dual-core in all market segments.

During the Q2 2006 Intel Corporation earnings call, Alex Lenke, acting Director of Investor Relations, made the following statements:

1. Opening Remarks:

   • Welcomed attendees to the Intel second quarter earnings conference call.
   • Introduced CEO Paul Otellini and CFO Andy Bryant who were present from Intel.

2. Safe Harbor Language:

   • Provided a disclaimer regarding forward-looking statements made during the call, emphasizing that actual results may differ materially due to risks and uncertainties.
   • Mentioned that the forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rates, interest and other income, capital spending, depreciation and amortization of acquisition-related intangibles, and cost.
   • Noted that the statements do not reflect the potential impact of any mergers, acquisitions, divestitures, investments, or other business combinations that may be completed after July 18, 2006.
   • Indicated that if non-GAAP financial measures are used during the call, the required reconciliation to the most directly comparable GAAP financial measure would be available on Intel's website.

3. Transition to Paul Otellini:

   • Handed over the call to Paul Otellini for further remarks.

4. Closing Remarks:

   • Announced the end of the formal presentation and opened the call for questions and answers (Q&A).
   • Provided instructions for the Q&A session, requesting participants to limit themselves to one question and one brief follow-up.

5. Recording Availability:

   • Announced that a recorded playback of the call would be available at approximately 5:00 p.m. Pacific time.
   • Provided the contact number and passcode for accessing the recorded playback.

6. Closing:

   • Thanked everyone for listening to the call and concluded the presentation.

During the Q2 2006 Earnings Call, Andy Bryant, the CFO of Intel Corporation, provided various insights and updates. Here’s a detailed summary of his remarks:

Opening Remarks

• Revenue Overview:

  • Second quarter revenue was $8 billion, at the low end of the forecast, down 10% from the first quarter.
  • Lower average selling prices and unit volumes of microprocessors for desktop and notebook segments contributed to the decline.
  • Revenue was lower than seasonal in all geographies and channels, indicating some overall softness in the PC market segment.
  • Some of the decline can be attributed to customers working through first-quarter inventory.

• Product Mix:

  • Intel believes it has balanced customer inventories with business levels and appropriate mix for new product ramps.

• Financial Performance:

  • Gross margin dollars were $4.2 billion, including share-based compensation of $66 million.
  • Gross margin percentage was 52.1% on a GAAP basis.
  • Gross margin percentage was 52.9% excluding share-based compensation.
  • Gross margin decreased 3.4 points on a non-GAAP basis from the first quarter, primarily due to lower average selling prices, lower overall unit volume, and a mix shift to lower-margin products.

• Spending:

  • R&D and MG&A spending was $3.1 billion, in line with the forecast.
  • Excluding share-based compensation, spending decreased by approximately 3% from the first quarter but is up 12% from a year ago.

• Employee Count:

  • The number of employees declined to 102,500 during the quarter, not reflecting the loss of 1,400 people to Marvell and 1,000 positions recently eliminated.
  • With these actions and attrition, Intel expects the number of employees to be below 100,000 by the end of the year.

• Earnings Per Share:

  • Fully diluted earnings per share were $0.15.
  • Excluding share-based compensation, earnings per share would have been $0.19.

• Balance Sheet:

  • Inventories increased by over $750 million to $4.3 billion, driven by ramping production of 65-nanometer microprocessors and associated chipsets.
  • Cash, short-term investments, and fixed-income trading assets were $7.2 billion, down $1.5 billion from the first quarter.
  • Stock repurchases were $1 billion, and capital spending was $1.7 billion.

• Outlook:

  • For the third quarter, revenue is expected to be between $8.3 billion and $8.9 billion, an increase of approximately 7.5%.
  • Gross margin percentage is forecasted to be 49%, plus or minus a couple of points.
  • Spending, R&D plus MG&A, is expected to be approximately $3 billion, including approximately $300 million of share-based compensation.
  • Full-year revenue is expected to be lower than the outlook in April, with a decrease of approximately 3% compared to 2005.

Question and Answer Session

• Inventory Levels:

  • Inventory levels increased by over $750 million, driven by the ramping of Broadwater and the qualification of Conroe for production.
  • Inventory levels are expected to increase slightly in the third quarter and decrease in the fourth quarter.

• Unit Growth vs. ASP Direction:

  • ASPs are expected to decline slightly in the third quarter due to a tough pricing environment.
  • Unit growth is expected to be normal, with demand for products appearing to be in line with historical patterns.

• Operating Expenses:

  • Andy expects operating expenses to decrease from the Q4 run rate and year-over-year, although he did not provide specific numbers.

• Capital Spending:

  • The capital spending forecast was lowered by $400 million to $6.2 billion, plus or minus $200 million, reflecting slower construction spending and increased utilization of equipment.

• Gross Margin Forecast:

  • Andy clarified that he is not providing a fourth-quarter gross margin forecast, emphasizing the wide range of outcomes for the fourth quarter.

• Inventory Write-off:

  • An extraordinary inventory write-off would require a significant change in demand, such as a sudden drop of 10% or 15%.

Closing Remarks

• Andy reiterated Intel's focus on delivering compelling products, competing for sales, proceeding with systematic and comprehensive cost-cutting, and executing superbly with 65-nanometer technology.