Intel Corporation, Q3 2007 Earnings Call, Oct-16-2007 - NasdaqGS:INTC

NasdaqGS:INTC

Stacy Smith [Executives] 💬

During the Intel Corporation Q3 2007 Earnings Call, Stacy Smith provided the following comments:

Digital Enterprise Group Top Line Strength:
- The Digital Enterprise Group experienced very strong top-line performance.
- Units were strong, and average selling prices (ASPs) increased slightly.
- Costs came down in the third quarter, contributing to the improvement in operating margin.
Operating Margin Improvement Factors:
- Improvement in operating margins was observed across the board:
  - Units were strong.
  - ASPs increased.
  - Costs decreased.
  - Startup costs associated with 45-nanometer technology dropped.
  - Spending on next-generation process technology decreased.
Sustainability of Operating Margins:
- Stacy did not directly comment on the sustainability of operating margins for the Digital Enterprise Group over the next 12 months.
Mobility Group Performance:
- Shifted advertising from Core 2 to Centrino, increasing the Mobility Group's advertising costs.
- Strong chipset volume in the Mobility Segment led to a mix effect due to lower overall gross margin percentages for chipsets.
- The Mobility Group attracted a larger amount of spending for next-generation process technology as it grew as a percentage of the total business.
- ASPs were down slightly quarter-over-quarter, contributing to the margin performance.
NOR Flash Business Sale:
- Expectation to close the sale of the NOR Flash business in Q4.
- Modeling considerations for the sale:
  - NOR revenue and associated cost of sales will be excluded.
  - Spending will improve.
  - Gain or loss from the company will be recognized as an interest and other charge.
  - Expected gross margin improvement of 1 to 2 points after the sale.
Gross Margin Impact of NOR Sale:
- Once the sale is closed, the expectation is for a 1 to 2 point improvement in gross margin.
Q4 Revenue Guidance and NOR Sale:
- Q4 revenue guidance includes a full quarter of NOR Flash business.
- Efforts are being made to complete the sale of the NOR Flash business, and it is expected to be completed in Q4.

Kevin Sellers [Executives] 💬

During the Intel Corporation Q3 2007 Earnings Call, Kevin Sellers, the Director of Investor Relations, made the following statements:

Opening Remarks:
- Gave the opening welcome to the earnings conference call.
- Introduced the executives present on the call: Paul Otellini (CEO), Andy Bryant (CFO), and Stacy Smith (Assistant CFO).
Call Agenda:
- Provided an overview of the agenda, indicating that Paul Otellini would discuss the highlights of the quarter and progress on strategic objectives.
- Mentioned that Andy Bryant would provide more details on the financial performance of Q3 and the business outlook for Q4.
- Announced that after Andy's comments, they would be happy to take questions.
Earnings Release Details:
- Noted that the earnings release and updated financial statements had been posted on the investor website, INTC.com.
- Mentioned that if any non-GAAP financial measures were used during the call, the appropriate GAAP reconciliations would be posted on the website.
- Indicated that a replay of the call would be available on the investor website at around 5:00 PM Pacific time and would remain there for approximately two months.
Forward-Looking Statements Disclaimer:
- Reminded listeners that the discussion contained forward-looking statements based on the current environment and included risks and uncertainties.
- Directed listeners to refer to the press release for more information on specific risk factors that could cause actual results to differ materially.
Handoff to Paul Otellini:
- Turned the call over to Paul Otellini for his prepared remarks.
Closing Comments:
- Briefly thanked Paul Otellini for his remarks and indicated that he would provide time for closing comments at the end of the call.
Question-and-Answer Session:
- After the prepared remarks, Kevin Sellers handed the call over to the operator for the question-and-answer session.
Final Remarks:
- Before concluding the call, Kevin Sellers turned the time over to Paul Otellini for closing comments.

Paul Otellini [Executives] 💬

Paul Otellini, Intel's Chief Executive Officer, highlighted the following points during the Q3 2007 earnings call:

Q3 Performance Overview:
- Intel experienced very strong financial performance in Q3 2007, with robust demand for its leading-edge processors and chipsets.
- Demand strengthened throughout the quarter, and the market strength was broad-based, covering all geographies and business segments.
- Intel managed to hold microprocessor average selling prices (ASPs) flat sequentially.
Strategic Objectives Progress:
- Intel laid out a three-pronged strategy a little over a year ago to regain product leadership, leverage its world-class process technology and manufacturing, and restructure the company to become lean and efficient.
- The Q3 performance demonstrated significant progress in all three strategic objectives, with strong gains in year-over-year revenue and operating income.
Business Units Review:
- Quad-Core Processors:
  - Launched the first quad-core processor in November 2006 and shipped the first million units by Q2 2007.
  - Shipped over 2 million quad-core units in Q3 2007 alone.
  - Offers over 20 unique quad-core processor designs.
- Servers:
  - Shipped a record number of units in Q3 2007, with double-digit revenue gains year-over-year.
  - Launched the first quad-core product designed for high-end, multi-processor servers, delivering twice the performance and three times the performance per watt of the previous generation.
  - Completed Intel's transition to the core microarchitecture across all product lines.
- Mobile:
  - Saw revenues grow greater than 30% year-over-year, with a 20% sequential increase during the quarter.
  - The Santa Rosa platform was well-received, and the Centrino brand continues to be widely accepted as the brand of choice for notebook PCs.
- Desktop:
  - Both consumer and corporate desktop products performed well, with increases in units, ASPs, and revenues quarter-over-quarter and year-over-year.
  - The vPro branded platform offering for corporate desktops is ramping extremely well and offers unique value for IT managers.
- Chipsets:
  - Had a record unit and revenue quarter, with strengthening orders as the quarter progressed.
- Flash:
  - Results improved sequentially, with NAND revenue increasing due to higher densities, offset by lower unit volumes.
  - NOR business saw higher volumes but lower ASPs.
Technology Highlights:
- Pleased with the execution of Intel's manufacturing network and its ability to respond rapidly to increased demand.
- Announced the launch of a new family of products based on Intel's breakthrough High-k metal gate 45-nanometer process technology on November 12, 2007.
- Demonstrated working silicon of the next-generation Nehalem microarchitecture, which is booting multiple operating systems and scheduled for production in the second half of 2008.
Platform Strategy:
- Emphasized the value of Intel's platform strategy and its benefits to customers, using the vPro platform as an example.
- Recently launched the second-generation platform called Weybridge for corporate environments, which is ramping well and being well-received.
- Highlighted the benefits of higher levels of integration, solving business problems for users (IT managers), especially in security, manageability, and virtualization.
Outlook:
- Closed by mentioning the promotion of Stacy Smith to Chief Financial Officer and Andy Bryant's appointment as Chief Administrative Officer, reflecting long-term management succession planning.
Question-and-Answer Session:
- Addressed questions regarding ASPs, the competitive environment, demand environment, and inventory levels.
- Provided insights into the strong performance in various segments, including servers, mobile, and desktop, and discussed the company's strategy and outlook.

Andy Bryant [Executives] 💬

During the Q3 2007 earnings call, Andy Bryant, the Chief Financial Officer of Intel Corporation, provided insights into the financial performance and outlook for the company. Here is a detailed summary of his comments:

Financial Performance Overview

Q3 Revenue: $10.1 billion, up 16% from Q2 2007 and 15% from Q3 2006.
Sequential Growth: More than double the average increase for the period in the last ten years, and the highest sequential growth for any quarter in the last ten years.
Gross Margin Percentage: 52.4%, more than 5 points higher than in Q2 2007.
Operating Income: Approximately 22% of revenue, about 7 points higher than both the previous quarter and the quarter a year ago.
Earnings Per Share (EPS): Grew by 41% from the same periods.

Revenue Details

Total Microprocessor Revenue: Grew at about the same rate as total revenue.
Unit Volumes: Reached a new record, with average selling prices (ASPs) flat.
Chipset and Flash Memory Units: Higher than in Q2 2007.
Motherboard Units: Lower than in Q2 2007.
Mobility Group Revenue: Up approximately 20% from Q2 2007.
Digital Enterprise Group Revenue: Up 12% from Q2 2007, with higher revenue for microprocessors and chipsets in desktop, notebook, and server computing segments.
Flash Memory Group Revenue: Sequential growth of approximately 12%, primarily due to growth in revenue from higher-density NAND memory products.

Gross Margin

Key Components:
- Higher unit volumes and lower unit costs for microprocessors.
- Lower startup costs for new manufacturing processes.
- Inventory write-offs for the 45-nanometer process.
Average Selling Prices (ASPs): Held flat, despite expectations of a slight decrease in a competitive environment.
Product Mix Impact: Demand for chipsets and Flash memory exceeded expectations and grew at a faster rate than microprocessors, resulting in a higher proportion of products with lower margins.

Spending

R&D and MG&A: Approximately $2.9 billion, higher than Q2 2007 and higher than the outlook.
Restructuring and Asset Impairment Charges: $125 million, following charges of $82 million in Q2 2007.
Spending as a Percent of Revenue: Down 1.5 points from the previous quarter and more than 3 points from Q3 2006.

Balance Sheet

Total Inventories: Down $600 million, or 14%, from Q2 2007.
Cash, Short-Term Investments, and Fixed Income Trading Assets: Ended the quarter at $12.5 billion, $2.3 billion higher than Q2 2007.
Capital Spending: $1.1 billion.
Dividend Payments: $650 million.
Stock Repurchases: $750 million.

Outlook for Q4

Revenue: Between $10.5 billion and $11.1 billion.
Gross Margin Percentage: Forecasted to be 57%, plus or minus a couple of points.
R&D and MG&A Spending: Forecasted to be approximately $2.8 billion to $3.0 billion.
Restructuring and Asset Impairment Charges: Expected expenses of approximately $130 million.

Full-Year Outlook

Gross Margin: Raised to 52% plus or minus 1 point.
R&D Spending: Forecast to be approximately $5.8 billion.
MG&A Spending: Forecast to be approximately $5.3 billion.
Headcount: Plans to reduce by approximately 2,000 employees in Q4, approaching 86,000 by the end of the year.
Capital Spending: Remains $4.9 billion, plus or minus $200 million.
Depreciation: Remains $4.6 billion, plus or minus $100 million.
Effective Tax Rate: Forecast to be 29%.

Closing Remarks

Progress and Commitment: Highlighted the excellent progress made and the commitment to continue delivering improvements with better products, more innovative technology, and leadership in costs.