Intel Corporation, Q3 2020 Earnings Call, Oct 22, 2020 - SEHK:4335

SEHK:4335

Trey Campbell, the former Head of Investor Relations for Intel Corporation, made the following statements during the Q3 2020 Earnings Call:

1. Opening Remarks:

   • Trey thanked the operator and welcomed everyone to Intel's third quarter earnings conference call.
   • He noted that attendees should have received a copy of the earnings release and the earnings presentation, which are also available on Intel’s investor website, intc.com, and in the webcast window for those joining online.

2. Introduction to Speakers:

   • Trey introduced the CEO, Bob Swan, and the CFO, George Davis, who would be providing brief remarks followed by a Q&A session.

3. Forward-Looking Statement Reminder:

   • Trey reminded participants that the discussion contained forward-looking statements based on the current environment and included risks and uncertainties. He directed listeners to the press release for more information on specific risk factors.

4. Financial Measures Clarification:

   • Trey informed the audience that Intel had provided both GAAP and non-GAAP financial measures, and the discussion would focus on the non-GAAP financial measures when describing consolidated results. He mentioned that the full GAAP and non-GAAP reconciliations were available in the earnings presentation and earnings release on intc.com.

5. Handover to CEO:

   • Trey handed the call over to Bob Swan, the CEO, to provide further remarks.

6. Closing Remarks:

   • Trey thanked Bob and everyone for joining the call.
   • He closed the call, thanking everyone for participating and directing them to disconnect.

These statements provide a summary of Trey Campbell’s contributions to the call, including his opening remarks, introductions, reminders about financial measures, and the closing of the call.

George S. Davis, the Executive Advisor of Intel Corporation, provided insights and details on the financial performance and outlook of the company during the Q3 2020 earnings call. Below is a detailed summary of his statements:

Gross Margin and Financial Performance

• Q3 Gross Margin: The gross margin for the quarter was 55%, 2 points below expectations due to lower data center average selling prices (ASPs) and lower PC client ASPs.
• Q3 Operating Margin: The operating margin was 29%, down 1 point versus expectations.
• Q3 Earnings Per Share (EPS): Q3 EPS was $1.11, slightly better than guidance due to lower spending and the impact of the accelerated share repurchase program.

Cash Flow and Capital Expenditure

• Q3 Cash Flow: Generated $8.2 billion in operating cash flow and invested $3.7 billion in capital expenditure (CapEx), resulting in $4.5 billion of free cash flow.
• Share Repurchase Program: Initiated an accelerated share repurchase program for an aggregate of $10 billion of common stock, with plans to complete the remaining $2.4 billion balance when markets stabilize.

Segment Performance

• Data Center Group (DCG):
  • Revenue of $5.9 billion, down 7% year-over-year.
  • Enterprise and government segment down 47% year-over-year.
  • Cloud and communication service provider segments up 15% and 4% year-over-year, respectively.
  • DCG adjacencies grew 34%.
  • Platform units up 4%; ASPs down 15%.
  • Operating margin down 17 points year-over-year.
• Other Data-Centric Businesses:
  • Down 18% year-over-year.
  • Internet of Things Group (IOTG) revenue and operating income declined 33% and 80%, respectively.
  • Non-Volatile Memory Solutions Group (NSG) revenue down 11% year-over-year.
  • Programmable Solutions Group (PSG) revenue down 19% year-over-year.

Client Computing Group (CCG)

• Revenue: $9.8 billion, up 1% year-over-year.
  • Driven by strong consumer notebook demand, offset by lower desktop volumes and declines in the modem and home gateway businesses.
  • PC unit volumes up 11% year-over-year.
  • Average selling prices (ASPs) down 6% year-over-year.
  • Operating margin down 8 points year-over-year.

Outlook

• Q4 Total Revenue: Expected to be $17.4 billion, with PC-centric down low single digits and data-centric down approximately 25% year-over-year.
• Gross Margin: Expected to be 55%, down 5 points year-over-year.
• Q4 EPS: Expected to be approximately $1.10 per share.
• Non-GAAP Tax Rate: Expected to be 14.5%.

NAND Business Sale

• Sale to SK hynix: Announced the sale of Intel’s NAND business to SK hynix for $9 billion in two stages.
  • At the first close, Intel will receive $7 billion and transfer the assets of the factory and the Dalian facility.
  • Intel will continue to operate the factory for SK hynix until 2025.
• Accounting Treatment: Will begin accounting for the NAND business as held for sale, effective this quarter for GAAP purposes.
  • Non-GAAP reporting will be unchanged in Q4 and then NAND will be excluded from non-GAAP reporting effective Q1 '21.

Full Year Expectations

• Revenue: Expected to be $75.3 billion.
• EPS: Expected to be $4.90, $0.05 above July expectations.
• PC Business: Expected to be up mid-single digits year-over-year.
• Data-Centric Businesses: Expected to be up mid-single digits year-over-year.
• Gross Margin: Expected to be 57% for the year.
• Spending: Expected to be approximately $19.1 billion, down approximately $400 million year-over-year.
• Operating Margin: Approximately 31.5%, down 1.5 points year-over-year.
• CapEx: Approximately $14.2 billion to $14.5 billion.
• Free Cash Flow: Approximately $18 billion to $18.5 billion.

Closing Remarks

• Employee Appreciation: Joined Bob in thanking Intel employees worldwide for their dedication and resilience during the challenging environment.

• Financial Commitments: Noted that Intel employees are working through difficult circumstances to deliver financial commitments and support customers.

During the Q3 2020 Earnings Call, Robert Holmes Swan, the former CEO and Director of Intel Corporation, shared several insights and updates about the company’s performance and strategies. Here is a detailed summary of his remarks:

Opening Remarks

• Financial Performance:

  • Delivered solid third quarter revenue and profitability despite COVID-driven headwinds.
  • Generated $18.3 billion in revenue and delivered $1.11 in EPS.
  • Exceeded top-line expectation by $133 million and bottom-line expectation by $0.01.

• Employee Performance:

  • Praised employees for their performance through challenging conditions.
  • Highlighted the team's perseverance and unity.

• Strategic Priorities:

  • Improved execution to strengthen the core business.
  • Extended reach to accelerate company growth.
  • Thoughtfully deployed capital.

Product and Technology Updates

• 11th Gen Intel Core Processors (Tiger Lake):

  • Launched with Intel Iris Xe graphics.
  • Described as the world's best processor for thin and light notebooks.
  • Delivers up to 2.7x faster content creation, 20% faster office productivity, and more than 2x faster gaming plus streaming compared to competitors.
  • Expectation of 100 Tiger Lake-based designs in the market by the end of the year, double the initial expectation.

• Six Pillars of Innovation:

  • Breakthrough architectural improvements in CPU, graphics, AI, and software.
  • 10-nanometer-based technology, SuperFin, delivering the largest single internal performance improvement in Intel’s history.

• Evo Platform:

  • Accompanied the Tiger Lake launch with a new platform brand, Evo.
  • Supports sleek thin and light form factors with premium connectivity, audio, and video.
  • Expected 40 Evo designs in the market by the end of the year.

• Data Center Business:

  • Upcoming launch of the 3rd Gen Xeon Scalable product, Ice Lake.
  • Targeting qualification at the end of Q4 with volume ramp shortly after in Q1.
  • Oracle plans to leverage Ice Lake for the next generation of cloud-based high-performance computing instances.
  • Potential 30% higher performance gains on certain workloads compared to existing instances.

• Graphics and XPUs:

  • First discrete GPU, DG1, shipping now and will be in systems for multiple OEMs later in Q4.
  • Powered on the next-generation GPU for clients, DG2, based on the Xe high-performance gaming architecture.
  • Acquired Habana Labs to deliver game-changing capability to the performance tier of the data center market.
  • Habana’s inference card in volume production and shipping to customers.
  • Proof of concepts with several major cloud service providers on Habana’s training card.

• Packaging Technologies:

  • Awarded the second phase of the state-of-the-art heterogeneous integration prototype program (SHIPP) by the U.S. Department of Defense.
  • Enables the U.S. government to access Intel’s state-of-the-art semiconductor packaging capabilities.

• Software:

  • More than 15,000 software engineers working across the stack.
  • Increased performance of top data center workloads through software optimizations.
  • Working closely with the ecosystem on the open standard oneAPI effort.

Growth Strategy

• Diversified Growth:

  • Actively executing a diversified growth strategy fueled by data and the rise of artificial intelligence, 5G network transformation, and the intelligent autonomous edge.
  • Positioning the company to grow share in the largest market opportunity in its history.

• Recent Examples:

  • OpenVINO download rate doubled peak last year.
  • OpenVINO-related edge design wins scaled more than 5x in the first half of the year.
  • Collaboration with Verizon on the world's first fully virtualized end-to-end 5G data session.
  • Mobileye:
    • 29 new design wins for more than 26 million lifetime units.
    • Collaborations with Geely, AHG, and WILLER.
    • Mobileye is the first of Intel’s IoTG businesses to return to pre-COVID levels.

Capital Allocation

• NAND Memory Business Sale:

  • Signed an agreement to sell the NAND memory business to SK hynix for $9 billion.
  • Allows Intel to focus on differentiated technologies and play a larger role in customer success.
  • Retaining Optane technology and intends to continue investing in and scaling the Optane business.
  • Expanded capacity by more than 25% in 2020 to meet customer demands.

• Accelerated Share Repurchase Program:

  • Entered into agreements to repurchase $10 billion in stock.
  • Completed approximately $17.6 billion of the $20 billion repurchase commitment made in October 2019.

• Balance Sheet Strength:

  • Strong balance sheet and confidence in long-term strategy despite macroeconomic uncertainty.

Future Outlook

• Guiding Principles:

  • Delivering a predictable cadence of leadership products.
  • Engaging the ecosystem differently, treating equipment and EDA providers and third-party foundries as strategic partners.
  • Flexibility in whether to make or buy or whether to make for others.
  • Maintaining IDM (Integrated Device Manufacturer) advantage for attractive economics, co-optimization, and supply assurance.
  • Continuing investment in leading process technology development.

• Product Roadmap:

  • Sampling 2021 client CPU, Alder Lake, and 2021 data center CPU, Sapphire Rapids, in the fourth quarter.
  • Great lineup of products in 2022.
  • Increasing confidence in the leadership of 2023 products, potentially on Intel 7-nanometer or external foundry processes.

Closing Remarks

• Financial Commitments:

  • Despite challenges, expects to deliver the best year in the company’s 52-year history.
  • Plan to grow revenue by $1.8 billion more than January expectations.
  • Expect to beat January free cash flow guide by $1.5 billion to $2 billion.

• Employee Appreciation:

  • Thanked employees for working through difficult circumstances to deliver financial commitments and support customers.

• Purpose:

  • Reaffirmed Intel’s purpose to create world-changing technologies that enrich the lives of every person on Earth.