Intel Corporation, Q3 2010 Earnings Call, Oct 12, 2010 - NasdaqGS:INTC

NasdaqGS:INTC

During the Q3 2010 Earnings Call, Paul S. Otellini, the Former Chief Executive Officer, President, and Director of Intel Corporation, provided several insights and comments:

1. Financial Results and Market Performance:

   • Intel achieved new records in revenue and operating income despite a marketplace filled with uncertainty.
   • Investments in product and technology leadership and focus on operational efficiencies have better prepared Intel for improved financial performance in any market environment.
   • Microprocessor revenue was up a healthy 25% year-over-year, driven by strong demand for higher-end offerings.

2. Revenue Patterns and Market Growth:

   • 2010 is proving to be an unusual year in terms of revenue patterns, with steady growth as the year has progressed, rather than typical quarter-to-quarter seasonality.
   • Intel expects PC units to grow roughly 18% in 2010, and the industry is now shipping over 1 million PCs a day.
   • There was some softness in the consumer market segments of Western Europe and the U.S., while other regions such as China and the channel had solid results.
   • The Enterprise segment remains steady and consistent, and Intel's mix from this segment continues to be a source of strength to its profitability.

3. Server and Cloud Business:

   • Demand for Intel’s high-performance Westmere and Nehalem-EX processors drove server microprocessor revenue up over 30% year-over-year.
   • Shipments into the Cloud segment are up a very strong 200% from a year ago and up 50% from just last quarter.
   • The Storage business is up 29% year-over-year, highlighting the importance of the Xeon product family in the data center.

4. Embedded Business:

   • Intel set microprocessor unit and revenue records in the Embedded business, with improved average selling prices (ASPs) this quarter.
   • The Embedded and Communications business is on track to deliver over $1 billion in gross margin this year, with operating margins greater than 30%.
   • Several new categories for SMART computing are emerging, such as SMART TVs, digital signs, in-vehicle infotainment, retail, and ATM solutions.

5. Tablets and Computing Categories:

   • Intel fully welcomes the arrival of tablets and believes they will expand the time for computing overall with new form factors and uses.
   • Intel acknowledges that tablets will impact PC sales at the margin, but consumers will have a limited amount of discretionary income and some will choose to purchase a tablet instead of upgrading an existing PC or purchasing a netbook.
   • Intel takes a longer-term view of the tablet opportunity and expects to participate broadly and profitably in this category, with the tablet category being additive to Intel's bottom line.

6. Sandy Bridge Processor Family:

   • Intel began volume production of the Sandy Bridge processor family and expects to ship revenue units in Q4 2010, preparing for systems launch in the first quarter of 2011.
   • Sandy Bridge represents the largest increase in computing performance in Intel's history and is expected to have a very fast ramp.
   • Early demand from customers is much greater than originally expected.

7. Outlook for 2011:

   • Intel sees double-digit growth in PCs, augmented by Intel's participation in the tablet and smartphone categories, which should make for another strong year for Intel.

   • Intel's Tick-Tock model is working beautifully and creating increasing differentiation for its products.

Stacy J. Smith made several detailed comments during the Q3 2010 Intel Corporation Earnings Conference Call:

1. Financial Results Overview:

   • Despite softness in the consumer market segments of Europe and North America, demand strength in emerging markets and a robust enterprise market segment led to record microprocessor units.
   • Record financial results were achieved due to unit demand, leadership product portfolio, and continued progress on cost structure.
   • Revenue and operating profit were records in the quarter, with revenue reaching $11.1 billion, up 18% from a year ago, and operating profit of $4.1 billion, up 60% from a year ago.
   • The first three quarters of 2010 saw an operating profit of $11.6 billion, the best first nine months in Intel's history.

2. Revenue and Gross Margin:

   • Revenue of $11.1 billion was a record but up less than the average seasonal increase of 9%.
   • Microprocessor average selling prices were approximately flat sequentially.
   • Inventory on the balance sheet increased slightly to $3.4 billion.
   • Worldwide PC supply chain inventory levels remained lean.
   • Gross margin was 66%, resulting from superb execution from Intel's factory network.

3. Cash Flow and Investments:

   • Generated over $3.5 billion of cash flow from operations in the third quarter.
   • Total cash and investments grew by $2.5 billion to approximately $20 billion.
   • Paid nearly $900 million in dividends and purchased $1.4 billion in capital assets.

4. Forecast for Fourth Quarter:

   • The midpoint of the revenue forecast for the fourth quarter was $11.4 billion, up 3% below the seasonal average increase of 8%.
   • The forecast reflected continued caution about the strength in the Consumer Market segment and a reduction in customer inventory levels in anticipation of the launch of Sandy Bridge.

5. Annual Revenue Forecast:

   • Annual revenue for 2010 was forecasted to be a record at $43.6 billion, up 24% from 2009 and up 16% from 2008.
   • The midpoint of the gross margin range was forecasted to be up one point from the third quarter to 67%.

6. Acquisitions:

   • Announced two large acquisitions in the third quarter, expected to close by the end of 2010 or in the first quarter of 2011.
   • On a GAAP basis, Intel expected the combination to be slightly dilutive to earnings in the first year of operations and approximately flat in the second year.
   • On a non-GAAP basis, excluding a one-time write-down of deferred revenue when the McAfee transaction closes and the amortization of acquired intangibles related to both acquisitions, Intel expected the combination to be slightly accretive in the first year and improve beyond that.
   • Intel did not have any other large acquisitions currently being contemplated.

7. Economic Outlook and Factory Upgrades:

   • The worldwide economy was growing but more slowly than anticipated heading into the second half of the year.
   • Intel was taking advantage of the slower growth to more quickly upgrade older generation factories to support the strong customer demand for the new Sandy Bridge products.

8. Gross Margin Reconciliation:

   • Provided a detailed breakdown of the factors affecting gross margin in the fourth quarter, including lower inventory write-offs, higher platform unit costs, and startup costs associated with taking some older generation factories offline.

9. Data Center Group:

   • The Data Center Group saw a 3% sequential growth, which was up 30% from a year ago, indicating robust growth in the segment.

10. Consumer Market in Developed Markets:

    • Acknowledged that the consumer market in developed markets was weaker than expected but provided no specific details on improvements or the impact of China's Golden Week.

11. Gross Margin Strength:

    • Attributed the strength in gross margins to the strength of the product line, improved cost structure, and beneficial mix changes, including the divestiture of the NOR business and improvements to the NAND business.

12. Inventory Levels:

    • Expected inventory units to come down in the fourth quarter, while inventory dollars would increase, primarily due to the ramp of Sandy Bridge.

13. Utilization and Gross Margin Impact:

    • Started to pull some older generation factories offline in response to changing demand, which had a minor impact on gross margin but demonstrated the responsiveness to the changing demand environment.

14. Start-Up Costs:

    • Noted that start-up costs on 22 nanometer would hit Intel next year, with a higher concentration in the first half of the year.

15. Inventory Management:

    • Described the inventory management by Intel's customers as cautious, with lean inventory levels and tools to modulate inventory through methods like shifting to air freight.

16. Forecast for First Quarter 2011:

    • Refrained from providing a forecast for the first quarter of 2011, stating that Intel would provide guidance in January after assessing the market conditions at the end of the fourth quarter.

17. Acquisition Timing and Expenses:

    • Expected the McAfee and Infineon acquisitions to close by the end of 2010 or in the first quarter of 2011.
    • Noted that expenses in the fourth quarter related to the acquisitions were de minimis.

18. NAND Business Decision:

    • Intel had not yet made a decision on the NAND business joint venture with Micron, with the decision expected to be made by the end of the year.

During the Q3 2010 Intel Corporation Earnings Conference Call, R. Kevin Sellers, who was the Vice President of Sales & Marketing Group and Director of Creative Services & Digital Marketing at the time, made the following statements:

1. Opening Remarks:

   • Introduced himself and welcomed everyone to the Third Quarter 2010 Earnings Conference Call.
   • Mentioned that he was joined by Paul Otellini, the President and CEO, and Stacy Smith, the Chief Financial Officer.
   • Noted that Intel had posted the earnings release and updated financial statements, including the CFO commentary, to their Investor website.
   • Stated that if any non-GAAP financial measures or references were used during the call, the appropriate GAAP financial reconciliations would be posted to the website.
   • Indicated that following brief prepared remarks from Paul and Stacy, they would be happy to take questions.

2. Closing Remarks:

   • Thanked everyone for joining the call.
   • Reminded attendees about the Quiet Period for the fourth quarter, which would begin at the close of business on Wednesday, November 24.
   • Announced that the fourth quarter earnings conference call was scheduled for Thursday, January 13, 2011.
   • Concluded by thanking everyone and wishing them a good night.

These statements outline R. Kevin Sellers' role in facilitating the conference call and providing logistical information to the attendees.