Intel Corporation, Q4 2006 Earnings Call, Jan-16-2007 - NasdaqGS:INTC

NasdaqGS:INTC

Paul Otellini, the CEO of Intel at the time, discussed several key points during the Q4 2006 earnings call:

1. Q4 Performance Overview:

   • Revenue was at the top of the range forecasted in October, driven by a strong mix shift to the new core microarchitecture in servers, mobile, and desktop.
   • Microprocessor units set an all-time record, with unit and revenue records in both server and mobile.
   • Intel achieved record mobile and server processor units, FLASH units, and chipset billings for the year.

2. Product and Technology Leadership:

   • The 65-nanometer transition was superbly executed, with over 70 million units shipped during the year.
   • Dual-core volumes surpassed 50% of total Q4 microprocessor shipments.
   • In mobile, dual-core reached over 90% of the performance mix within a year.
   • Intel launched the industry’s first quad-core processors for volume servers and PCs, including the first Core 2 Quad processors for mainstream PCs, with plans to deliver 1 million quad-core processors by mid-2007.
   • Development of 45-nanometer technology was completed, scheduled for production in the second half of 2007. Working samples of Penryn, the first 45-nanometer microprocessor, were produced and booted on four different operating systems.

3. Mobile Business:

   • Record units and revenue were achieved, driven by a strong product line.
   • The Santa Rosa platform would be launched later in the first half of the year, supporting new integrated graphics, Intel’s Robson NAND Flash technology, and 802.11n WiFi technology.
   • Intel demonstrated its first mobile WiMAX silicon and is developing products that work on both WiMAX and WiFi networks.

4. Desktop and Digital Home Businesses:

   • Desktop revenues were higher on the strength of Core 2 Duo, while overall units were below seasonal, due to the demand shift to mobile.
   • The digital home business had record units and revenue, driven by the ramp of VIV technology.

5. Server Business:

   • Record units were achieved, while strong demand for new products led to record revenue of over $1 billion.
   • The energy-efficient Woodcrest processor exceeded 50% of total server units, and Itanium revenues were at record levels.
   • Clovertown quad-core processor extended the industry records set by Woodcrest, with energy performance 60% higher than Woodcrest and up to two-and-a-half times the competition’s best.

6. Chipset and Flash Businesses:

   • Chipset units were approximately flat from the third quarter, and billings set a record for the year.
   • The Flash business set a new unit record, with growth in NOR as well as in the new NAND business.
   • Volume shipments of the first 65-nanometer NOR memories capable of storing a gigabit of data on every chip began.

7. Operational Efficiency:

   • Significant actions were taken to increase operating efficiency and reduce ongoing costs.
   • Employee headcount ended the year at 94,100 people, down from 102,500 at mid-year.
   • Spending trends were lower, and capital forecasts now reflect savings identified in the structure and efficiency review.

8. Summary and Outlook:

   • 2006 was a challenging year, and Intel responded by driving for product and technology leadership aligned with the fastest-growing segments of the marketplace.

   • Strong market acceptance of advanced technologies, including the new Core 2 Duo and Xeon processors, was noted.

   • In 2007, Intel would continue to drive technology, including quad-core and 45-nanometer, while further increasing operational efficiencies across the company.

During the Intel fourth quarter 2006 earnings conference call, Alex Lenke, the Manager of Investor Relations, made the following statements:

1. Opening Remarks:

   • Welcomed attendees to the Intel fourth quarter earnings conference call.
   • Introduced CEO Paul Otellini and CFO Andy Bryant as the attending executives from Intel.

2. Safe Harbor Language:

   • Provided a disclaimer that the earnings report and discussion included forward-looking statements subject to risks and uncertainties, and actual results might differ materially.
   • Mentioned that the forward-looking statements did not reflect potential impacts of mergers, acquisitions, divestitures, investments, or other business combinations that might occur after January 15, 2007.

3. Non-GAAP Financial Measures:

   • Noted that if non-GAAP financial measures were used during the call, the required reconciliation to the most directly comparable GAAP financial measure would be available on Intel's website, intc.com.

4. Introduction of Paul Otellini:

   • Passed the presentation over to Paul Otellini, CEO of Intel.

5. Closing Remarks:

   • Thanked everyone for listening to the call.

   • Announced that a recorded playback of the call would be available at approximately 5:00 p.m. Pacific time that evening.

   • Provided the dial-in number (1-888-286-8010) and passcode (53842511) for accessing the recording.

During the Intel fourth quarter 2006 earnings call, Andy Bryant, the CFO, provided detailed insights into the company's financial performance and outlook. Here’s a summary of his key points:

Financial Performance Overview:

• Fourth Quarter Revenue: $9.7 billion, at the top of the forecasted range, up 11% from the third quarter.
• Sequential Revenue Growth:
  • Server business: Double-digit growth.
  • Mobile and desktop processors: Together up 14%.
• Server Business: Delivered double-digit sequential and year-over-year growth for the second quarter in a row.
• Headcount: Down nearly 6% for the quarter and the year, ending at 94,100 employees.

Gross Margin:

• Gross Margin Dollars: $4.8 billion, including share-based compensation of $94 million.
• Gross Margin Percentage: Approximately flat with the third quarter at 49.6% on a GAAP basis and 50.6% excluding share-based compensation.
• Factors Affecting Gross Margin:
  • Under-load charges on the 90-nanometer network and factories: Reduced gross margin by about two points.
  • Flash memory business write-downs and other reductions: Took nearly an additional point.
• Year-over-Year Comparison:
  • Gross margin percentage, excluding share-based compensation, is approximately 11 points lower than the fourth quarter of 2005, primarily due to lower average selling prices for microprocessors.

Spending and Efficiency:

• R&D and MG&A: Approximately $2.9 billion, including share-based compensation of $240 million.
• Spending Trend:
  • Spending, excluding share-based compensation, decreased approximately 12% compared to the previous year.
• Headcount Reduction:
  • Down nearly 6,000 employees to 94,000.

Asset Sales and Impairments:

• Communications and Application Processor Business Sale:
  • Gain of $483 million included in interest and other income.
  • Asset impairments of $317 million related to the divestiture.
• Total Restructuring Charges and Asset Impairments: $457 million.

Balance Sheet Highlights:

• Inventory: Declined by $163 million to $4.3 billion.
• Cash Position:
  • Total cash, short-term investments, and fixed income trading assets: $9.6 billion, an increase of $1.8 billion from the third quarter.

Capital Spending:

• Capital Spending: $1.1 billion.
• Stock Repurchases: $150 million.
• Dividend Payments: Nearly $600 million.

Outlook for the First Quarter:

• Revenue Forecast: Between $8.7 billion and $9.3 billion, a decrease of approximately 7%.
• Gross Margin Percentage: Expected to be 49%, plus or minus a couple of points, nearly a point lower than the fourth quarter.
• Spending Forecast:
  • R&D plus MG&A: Approximately $2.6 billion to $2.7 billion, down approximately 7% from the fourth quarter.
• Restructuring and Asset Impairment Expenses: Approximately $50 million.
• Headcount Reduction:
  • Target: Reduce headcount to approximately 92,000 by mid-year, a 10% reduction from mid-2006.

Full-Year 2007 Outlook:

• Gross Margin Percentage: Approximately 50%, plus or minus a few points, including share-based compensation.
• Start-Up Costs:
  • Approximately two points worth of gross margin compared to 2006.
• Spending Forecast:
  • Research and development: Approximately $5.4 billion, almost $500 million lower than 2006.
  • Total spending, including R&D and MG&A, but not restructuring charges: Forecasted to be $10.7 billion, down 11% or $1.3 billion from 2006.
• Capital Spending: Targeted at $5.5 billion, plus or minus $200 million.

Question and Answer Session:

During the Q&A session, Andy Bryant addressed several questions, providing insights into:

• Gross Margin Guidance:
  • 2007 guidance of 50% not showing significant improvement from the fourth quarter.
  • Start-up costs for the 45-nanometer process expected to cause a four-point margin deterioration in 2007.
  • Unit costs expected to continue decreasing through 2007.
• Expenses:
  • Expenses slightly above forecast due to higher Intel Inside accrual expenses, higher profit-dependent expenses, and timing of headcount reduction.
• Start-Up Costs:
  • Full-year start-up costs of approximately 4% of revenue.
  • Incremental deterioration of two points versus 2006.
• Cost Cutting:
  • $2 billion in cost savings, visible in spending and manufacturing.
• Inventory:
  • Goal to keep inventory flat in the first quarter despite declining revenue.
• Server Market Share:
  • Speculation on market share avoided; waiting for published numbers.
• Flash Business Strategy:
  • Expectation to see quarterly improvements in pre-tax profitability.
  • Go or no-go decision based on profitability or restructuring.
• Capital Expenditures:
  • Higher percentage of equipment spending for 45-nanometer process.
  • Savings in other areas such as office construction and equipment purchases.
• Unit Output:
  • Guidance not provided, but market forecasters predict 8% to 10% unit growth.
• Inventory Levels:
  • Comfortable with current inventory levels, aiming to hold or reduce them further.
• EPS:
  • Down from the peak in December 2005 due to lower revenue and margins.
  • Foundation laid with new products and technology, focus on execution.
• Quad-Core Penetration:
  • Strong penetration in performance-intensive markets like gaming and workstations.
  • Slower consumer penetration until quad-core reaches notebook market.

Overall, Andy Bryant emphasized Intel's commitment to improving gross margins, reducing spending, and executing efficiently, while maintaining competitiveness in the market.