Intel Corporation, Q1 2008 Earnings Call, Apr-15-2008 - NasdaqGS:INTC

NasdaqGS:INTC

Stacy J. Smith provided detailed insights into Intel's financial performance for Q1 2008 and the outlook for subsequent quarters. Here is a summary of his comments:

• Financial Highlights:

  • Revenue for Q1 2008 was $9.7 billion, at the midpoint of the forecasted range, down 10% from Q4 2007 and up 9% from Q1 2007.
  • Gross margin dollars were $5.2 billion, $1 billion lower than Q4 2007, with a gross margin percentage of approximately 54%.
  • Gross margin percentage was consistent with the midpoint of the revised outlook set in March and 2 points lower than the outlook set in January.
  • Gross margin percentage was 4 points higher than Q1 2007.

• Quarter-to-Quarter Comparison:

  • Gross margin was 4 points lower than Q4 2007, mainly due to CPU unit costs, chipset inventory write-offs, costs associated with ramping 45-nanometer process, and non-product cost of sales.

• Year-to-Year Comparison:

  • Gross margin percentage was 4 points higher than Q1 2007.

• Revenue Breakdown:

  • More than half of total revenue ($5.3 billion) came from the digital enterprise group, down 8% from Q4 2007 and up 11% from Q1 2007.
  • The mobility group accounted for more than a third of total revenue ($3.7 billion), down 11% from Q4 2007 and up 11% from Q1 2007.

• Geographical Breakdown:

  • All geographies experienced year-over-year growth, with the Americas region seeing the strongest growth of 17%.
  • EMEA and APAC were both up 8% year over year, and Japan was up 4%.

• Cost Structure:

  • R&D and MG&A expenses were approximately $2.8 billion, within the forecasted range and down over 4% from Q4 2007.
  • Restructuring and asset impairment charges were $329 million, with $275 million related to the assets transferred to Numonyx.

• Balance Sheet:

  • Total inventories were down $98 million, or 3%, from the quarter.
  • Total cash, investments, and fixed income trading assets ended the quarter at $13.2 billion, $1.6 billion less than Q4 2007.
  • Cash flow from operations was over $2 billion.
  • Capital spending was $900 million.
  • Dividend payments were $740 million, and stock repurchases were $2.5 billion.

• Outlook:

  • Revenue for Q2 2008 is expected to be between $9 billion and $9.6 billion, a decrease of 4% from Q1 2008.
  • Gross margin percentage in Q2 2008 is expected to be 56%, plus or minus a couple of points.
  • Spending for R&D and MG&A in Q2 2008 should be between $2.8 billion and $2.9 billion.
  • Full-year spending for R&D and MG&A is forecasted to be approximately $11.5 billion, up $100 million from the prior forecast, primarily due to foreign exchange impacts of the weakened U.S. dollar.

• Response to Questions:

  • Stacy explained that the quarter came in as expected on the microprocessor side, with no unusual fluctuations in demand.

  • He noted that ASP (average selling prices) were roughly flat in Q1 2008 compared to Q4 2007, and the pricing environment remained stable.

  • Regarding capital expenditures, Stacy confirmed that Intel was on track with the capital forecast for the year, despite spending slightly below the annual rate in Q1.

  • On the NOR Flash business, Stacy stated that the gross margin impact from Q1 to Q2 would be about a point as the $200 million revenue goes to Numonyx.

  • He mentioned that the NAND market assumption for the year includes a continued oversupply, which brings bit pricing down, but Intel's costs improve quarter-on-quarter.

  • Stacy commented that the inventory level was healthy, and Intel planned to build a bit of inventory on new microprocessor products.

  • He explained that the increase in OpEx was due to the impact of foreign exchange rates being higher.

  • Stacy clarified that the tax rate increase was partly due to the Numonyx transaction, which changed the distribution of revenue and led to a higher proportion of revenue in higher tax jurisdictions.

  • He noted that the chipset inventory write-offs were a normal process for products built prior to qualification for sale and would reverse in Q2 2008.

  • Stacy discussed the decline in interest income, attributing it to lower interest rates and plans to bring cash balances down.

  • He confirmed that the NAND business was gross margin neutral for the rest of the year, with costs and pricing coming down at a similar rate.

  • Stacy highlighted that utilizations were in the sweet spot for 2008, neither too hot nor too cold.

  • He mentioned that the mobility business's operating margin was impacted by the allocation of costs across the company and the transition to Centrino-based advertising.

  • Stacy stated that incremental capacity in NAND had a significant impact on Q4 and Q1 results, but Intel did not have additional capacity coming online for the rest of the year.

  • He also mentioned that the next increment of NAND capacity, the Singapore factory, had been pushed out in conjunction with Micron.

  • Stacy confirmed that Intel's forecast encompassed the impact of the battery fire situation, and it was not seen as an impact on the quarter.

  • He stated that Intel's long-term goals included growing spending at a rate slower than revenue and expanding operating margin.

  • Stacy noted that Intel had become more nimble due to the restructuring efforts, addressing underlying efficiency in the manufacturing and R&D organizations.

  • He mentioned that the restructuring charges would drop off dramatically in the second half of the year.

  • Stacy explained that the weaker dollar lowered PC prices in Europe, contributing to the strength in Q4.

  • He commented that Intel saw costs coming down quarter by quarter, despite the impact of commodities on the macroeconomic side.

  • Stacy confirmed that the 57% gross margin forecast for the year included the impact of ATOM processors for 2008.

R. Kevin Sellers, Vice President of Investor Relations at Intel Corporation, made the following statements during the Q1 2008 earnings call:

1. Introduction:

   • Thanked the operator and welcomed everyone to Intel's Q1 2008 earnings conference call.
   • Mentioned that he was joined by Chief Executive Officer Paul Otellini and Chief Financial Officer Stacy Smith.

2. Agenda Overview:

   • Stated that Paul Otellini would discuss the highlights of the quarter, and Stacy Smith would provide details on the financial results of Q1 as well as the outlook for both the second quarter and full year 2008.
   • Announced that they would be happy to take questions after Stacy's comments.

3. Important Items Before Proceeding:

   • Noted that the earnings release and updated financial statements had been posted to Intel's investor website, intc.com, for anyone needing access to that information.
   • Mentioned that if non-GAAP financial measures were used during the call, the appropriate GAAP financial reconciliations would be posted to the website.
   • Indicated that a replay of the call would be posted on the website around 6:00 Pacific Time and would remain there for approximately two months.

4. Forward-Looking Statements Reminder:

   • Reminded everyone that the discussion contained forward-looking statements based on the current environment and included risks and uncertainties. He advised referring to the press release for more information on specific risk factors.

5. Handover to Paul Otellini:

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

6. Q&A Session Introduction:

   • Thanked Stacy Smith and handed over the call to the operator to open the line for questions and answers.

7. Closing Remarks:

   • Thanked everyone for joining the call and provided details on the upcoming quiet period and the date of the second-quarter earnings conference call.

   • Concluded the call and wished everyone a good night.

Paul S. Otellini, Intel's Chief Executive Officer, provided insights and updates on several aspects of Intel's business during the Q1 2008 earnings call:

1. Q1 2008 Performance Overview:

   • The first quarter marked a strong start to 2008, driven by robust demand for Intel's 45-nanometer based processors and chipsets.
   • Revenues grew 9% from the first quarter of the previous year, and operating income improved by 23%.
   • Intel paid a record dividend in the quarter, announced a dividend increase, and bought back $2.5 billion worth of stock.

2. 45-Nanometer Process Technology:

   • There was strong demand for Intel's 45-nanometer based products, and the company continued to ramp up production both in terms of volumes and breadth of product offerings.
   • The benefits of the new process included outstanding performance with low power consumption.

3. Business Segments:

   • All regions showed growth over the previous year, with North America standing out due to strong server demand.
   • The server business had a record quarter in revenues, driven by strength in the high-end, multi-processor segment, particularly in North America.
   • Quad-core shipments continued to grow and now represented a majority of Intel's Xeon dual-processor shipments.
   • Total Xeon processor shipments crossed over to 45-nanometer based products, extending Intel's leadership in this segment.

4. PC Market Transition to Mobility:

   • Intel's results showed continued acceleration of the trend toward mobility, with unit shipments up sharply versus the previous year.
   • The introduction of the low-cost Netbook category is expected to cause the crossover from desktop PCs to mobile PCs to occur this year, rather than next year as originally anticipated.
   • The desktop business also had a solid quarter, with good year-over-year growth, and quad-core remained a competitive strength in this segment.

5. Flash Memory Business:

   • Intel committed to not letting its Flash memory business become a long-term drag on the financials of the company.
   • In the NOR business, Intel closed the Numonyx transaction, which was considered an important step for the company.
   • In the NAND business, Intel was making decisions on capacity to mitigate the current oversupply situation, including delaying the timing of the joint Singapore factory with Micron.

6. New Growth Initiatives:

   • Intel launched its newly branded ATOM processor family, designed for low power and cost-optimized devices.
   • ATOM processors started shipping for revenue in the quarter, and there was early acceptance and interest from a broad range of customers.
   • Intel gained momentum in the mobile internet device (MID) category, announcing 35 new designs across 25 customers.
   • The embedded business showed strong double-digit unit and revenue gains year over year.

7. Outlook for 2008:

   • The competitive position of Intel's core business was strong, and the benefits of its 45-nanometer process technology were tangible.
   • Intel expected its differentiation to grow as it ramped up this new technology.
   • The cost structure was favorable, with product costs expected to decline quarter by quarter in 2008, supporting gross margin expansion.
   • Momentum in new growth initiatives was progressing, both in product development and customer engagement.

8. Strategy and Outlook:

   • Intel's strategy of bringing its architecture to new market segments combined with the world's most advanced process technology was expected to prove valuable to investors.