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pww.comIntel Corporation, Q2 2008 Earnings Call, Jul-15-2008 - NasdaqGS:INTC

NasdaqGS:INTC

Stacy J. Smith [Executives] 💬

Stacy J. Smith provided detailed insights into Intel's financial performance and outlook during the Q2 2008 earnings call. Here is a comprehensive summary of his remarks:

Second Quarter 2008 Financial Results:

  • Revenue: Record second quarter revenue of $9.5 billion, up 9% compared to Q2 2007.
  • Gross Margin: Up more than 8 points year-over-year to 55.4%, which is 1.5 points higher than Q1 2008.
  • Operating Profit: Increased by 67% year-over-year.
  • Operating Income as Percentage of Revenue: Up 8 points year-over-year to 24%.

Breakdown by Business Groups:

  • Digital Enterprise Group:
    • Revenue: Flat compared to Q1 2008, up 11% year-over-year.
    • Microprocessor Revenue: Up 14% year-over-year.
  • Mobility Group:
    • Revenue: $3.8 billion, up 3% sequentially and 15% year-over-year.

Geographical Performance:

  • Year-over-Year Growth: All geographies experienced growth.
  • Adjusted for NOR Flash Divestiture: Geographies performed better than average seasonality.

Cost and Expense Details:

  • Gross Margin Dollars: $5.2 billion, flat compared to Q1 2008.
  • Research & Development (R&D) and Marketing, General & Administrative (MG&A): Approximately $2.9 billion, up 3% from Q1 2008.
  • Restructuring and Asset Impairment Charges: $96 million, lower than the outlook of $250 million due to a reassessment of capacity.
  • Employee Count: Down by 2,700 from Q1 2008 to below 82,000, primarily due to the transfer of employees to Numonyx. Over two years, the employee count has decreased by over 20,000.

Balance Sheet Highlights:

  • Total Inventories: Flat at $3.3 billion.
  • Total Cash Investments: $11.5 billion, down $1.7 billion from Q1 2008.
  • Cash Flow from Operations: Over $2.5 billion.
  • Capital Spending: $1.2 billion.
  • Dividend Payments: $800 million.
  • Stock Repurchases: $2.5 billion.

Third Quarter 2008 Outlook:

  • Revenue: Expected to be between $10 billion and $10.6 billion, representing a 9% increase from Q2 2008.
  • Gross Margin Percentage: Forecasted to be 58%, plus or minus a couple of points, up 2.5 points from Q2 2008.
  • R&D and MG&A Spending: Approximately $2.9 billion.
  • Restructuring and Asset Impairment Charges: Approximately $60 million.
  • Depreciation: Forecasted to be approximately $1.1 billion.
  • Gains and Losses from Equity Investments and Interest and Other Income: A net loss of $30 million.

Full Year 2008 Outlook:

  • Gross Margin: Maintained at 57%, plus or minus a couple of points.
  • R&D and MG&A Spending: Approximately $11.7 billion.
  • Tax Rate: Expected to be 33% for the remaining quarters of the year.

Financial Performance Summary:

  • First Half of 2008:
    • Revenue growth of 9%.
    • Operating profit growth of 67% year-over-year.

Factors Driving Growth:

  • Product Leadership: Continuation of strong product performance.
  • Atom Processor Ramp: Increasing contribution from the Atom processor.
  • 45-Nanometer Factory Build-Out: Expansion of three 45-nanometer high-volume factories.
  • Declining Unit Costs: Lower costs due to improved 45-nanometer process.
  • Restructuring Program Impact: Benefits from ongoing restructuring efforts.

Gross Margin Reconciliation:

  • Q2 to Q3: Improvement driven by declining costs and seasonal volume increase in the CPU segment.

Additional Comments:

  • Gross Margin Impact of Atom: Stacy clarified that Atom's impact on gross margin is included in the forecasted 58% gross margin for Q3 and expects a higher gross margin in Q4.
  • NAND Impact on Gross Margin: NAND's gross margin impact remained stable in Q2 compared to Q1, and the weak pricing environment is offset by cost reductions.

Other Remarks:

  • Stacy addressed several analyst questions regarding gross margin, including the impact of ASPs, Atom's gross margin contribution, and the expected gross margin for the full year.

  • He also discussed the company's financial strategy, including stock repurchases and cash balance management.

R. Kevin Sellers [Executives] 💬

During the Intel Corporation Q2 2008 Earnings Call, R. Kevin Sellers, Vice President of Investor Relations, made the following statements:

  1. Opening Remarks:

    • Introduced the call and welcomed attendees.
    • Noted that the call was being webcast live and would be available for replay on Intel's website for approximately two months.

  2. Overview of Agenda:

    • Indicated that Paul Otellini, CEO, would discuss highlights and progress of the quarter.
    • Mentioned that Stacy Smith, CFO, would provide details on financial performance and outlook.
    • Announced that they would be happy to take questions after the presentations.

  3. Pre-Call Reminders:

    • Noted that the earnings press release had gone out at approximately 1:15 Pacific Time and was posted on Intel's investor website along with updated financial statements.
    • Mentioned that if non-GAAP financial measures were used, the appropriate GAAP financial reconciliations would be posted to the investor website.
    • Reminded attendees that the discussion contained forward-looking statements and referred them to the press release for specific risk factors.

  4. Introduction of Paul Otellini:

    • Handed over the presentation to Paul Otellini, CEO, for his remarks.

  5. Transition to Stacy Smith:

    • Passed the call over to Stacy Smith, CFO, after Paul Otellini's presentation.

  6. Announcement of Upcoming Event:

    • Reminded the financial community of the upcoming Intel Developer Forum (IDF) taking place on August 19th through the 21st in San Francisco.
    • Provided details about the keynotes and briefings for investors and analysts.
    • Directed attendees to Intel's website for registration and other information.

  7. Question and Answer Segment:

    • Set guidelines for the Q&A session, limiting each person to one question and one follow-up.
    • Prompted the operator to introduce each questioner and asked if there were any follow-up questions.

  8. Closing Remarks:

    • Announced the start of the quiet period for the third quarter, which would begin at the close of business on August 29th.

    • Scheduled the third quarter earnings conference call for Tuesday, October 14th.

    • Thanked attendees for joining the call and concluded the presentation.

Paul S. Otellini [Executives] 💬

Paul S. Otellini, Intel's Chief Executive Officer, discussed several key points during the Q2 2008 earnings call:

  1. Second Quarter Results: He expressed satisfaction with Intel's second quarter results, noting that revenue for the quarter was a record, marking the fourth consecutive quarter of record revenue. Intel saw strong demand for its leading-edge computing products globally, with revenue and unit shipments at the high end of seasonal norms when accounting for the divestiture of the NOR business.

  2. Record Unit Shipments: Intel achieved record unit shipments in mobile microprocessors, chipsets, and wireless communication units in the second quarter.

  3. Cost Reduction and Efficiency: Otellini highlighted Intel's focus on lowering costs and improving efficiency, which provided considerable operating leverage, with operating income growing 67% from the previous year.

  4. 45-nanometer Manufacturing Process: He praised the performance of Intel's 45-nanometer manufacturing process, stating that it is on track to ship over 100 million units before the end of the year. Yields and throughput times are better than at the same stage in the 65-nanometer ramp, which is lowering unit costs and providing increased flexibility in meeting diverse customer requirements.

  5. 45-nanometer Shipment Crossover: Intel will reach the 45-nanometer shipment crossover point for microprocessors during the third quarter.

  6. Product Highlights:

    • Servers: Record channel shipments demonstrate healthy demand from small and medium businesses worldwide. Noteworthy design wins at Cray and DreamWorks reflect the performance capabilities of Intel's current and future product roadmaps.
    • Mobile: Very strong unit growth, both sequentially and year-over-year, with notebook computer demand growing as prices decline. Notebook unit shipments crossed over desktop in the overall client PC category in the second quarter, earlier than expected.
    • Atom Processor: Launched in the second quarter, Atom processor demand is robust, exceeding ramp targets. Expectations are for unit shipments to grow sharply in the second half.

  7. Strategic Direction: Otellini summarized the success of Intel's strategic direction and restructuring efforts, which are delivering tangible results for shareholders. He highlighted the company's superbly positioned product line, promising new growth initiatives, and outstanding manufacturing execution.

  8. New Product Launches: Intel plans to launch exciting new products in the third quarter, including the new Centrino 2 platform and Dunnington, a six-core server processor targeted at high-end server workloads.

  9. Economic Environment: Otellini acknowledged the global economic challenges but noted that Intel saw order patterns play out as anticipated in the first half of 2008. Inventories remain healthy, and the company benefits from its global footprint and demand for internet computing.

  10. Montevina Launch Impact: Otellini addressed the launch of Montevina, stating that the shortfall in shipments in Q2 was covered by Santa Rosa, allowing customers to keep shipping products. He also mentioned that Montevina is now ramping rapidly in consumer segments.

  11. Notebook Market Acceleration: He commented on the acceleration of the notebook market globally, mentioning the contribution of Atom-based notebooks in the third and fourth quarters. He expects to continue breaking out these numbers in future commentaries to provide trend lines.

  12. Market Share: While not commenting directly on market share gains, Otellini indicated that the mobile volumes in the second quarter suggest strong performance.

  13. NAND Business: Otellini discussed actions taken to limit supply growth in the NAND business due to weak pricing. He emphasized the focus on costs and efforts to improve the pricing environment by shifting to more innovative stacking products into SoCs. He remains committed to ensuring the NAND business is not a long-term drag on Intel's profitability.

  14. DreamWorks Win: He explained that the win with DreamWorks was based on Intel's roadmap compared to competitors' roadmaps, reflecting a multi-year framework involving software and hardware optimizations.

  15. Atom Gross Margin: Otellini clarified that Atom is not expected to replace Celeron in notebooks, emphasizing that Atom is aimed at a distinct market segment. He sees Atom as a new product category that does not cannibalize sales of other products.

  16. Montevina Impact on Back-to-School Season: He addressed concerns about the impact of the delayed Montevina launch on the back-to-school season, noting that the industry's improved efficiency has shortened the lead time for shipping semiconductors. He believes Intel did not miss much, if any, of the back-to-school cycle.

  17. China Demand: Otellini mentioned the impact of the Chengdu earthquake on sales in China but noted that other trends, such as the Olympics buildup and WiMAX trials, indicate strong demand prospects.

  18. Chipset Strategy: He outlined Intel's strategy to continue building the best chipsets and driving a high percentage of microprocessors with Intel chipsets. He addressed the departure of third-party chipset providers, attributing it to economic decisions by those companies.

  19. Atom Demand Sources: Otellini discussed the sources of demand for Atom, emphasizing the role of first-time buyers and additional PCs in households, rather than substitution. He sees Atom creating a new segment in the market.

  20. Atom Performance: He commented on the limited performance capabilities of Atom, designed primarily for net access and web browsing, not robust applications. He sees Atom as appealing to first-time buyers and differentiating based on price and performance.

  21. Embedded Market: Otellini mentioned the strong demand for Atom in the embedded market, with applications ranging from PC processors to general-purpose reprogrammable machines. He expects the embedded market to be a significant part of Atom's product line but does not anticipate it outshipping PC applications.

Overall, Otellini's comments reflected confidence in Intel's performance, strategic direction, and product offerings, despite acknowledging the challenging economic environment.

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