Analyst Conference Summary

conference date: January 15, 2015 @ 2:00 PM Pacific Time
for quarter ending: December 27, 2014 (q4; fourth quarter 2014)

Forward-looking statements

Overview: Good year-over-year growth, but still managed to disappoint bulls with Q1 guidance.

Basic data (GAAP):

Revenue was $14.7 billion, up 0.7% sequentially from $14.6 billion and up 7% from $13.8 billion year-earlier.

Net income was $3.7 billion, up 12% sequentially from $3.3 billion and 42% from $2.6 billion year-earlier.

GAAP EPS (diluted) was $0.74, up 12% sequentially from $0.66 and up 45% from $0.51 year-earlier.

Guidance:

For Q1 2015 revenue expected between $13.2 and $14.2 billion. Gross margin around 60%. R&D + MG&A expense around $4.9 billion. $40 million for restructuring. $65 million for amortization of acquisition intangibles. $1.8 billion in depreciation.

For Full Year 2015, revenue is expected to grow in the mid-single percentage digits. Gross margin between 60% and 64%. 27% tax rate. Capital spending around $10 billion.

Conference Highlights:

Called Q4 "a strong finish to a great year." Growth was mainly driven by Data Center revenue. Began the year expecting flat income and operating income, but had a strong year with growth in both. EPS was boosted by passage of the R&D tax credit.

PC Client group revenue was $8.9 billion, down 3% sequentially but up 3% y/y. Volume was down 5% but prices were up 3% sequentially. Strategy was to leave no segment of this market unserved, down to Chromebooks. Broadwell yields have been improving.

Data Center group revenue was $4.1 billion, up 11% sequentially and up 25% y/y. Volumes were up 5% and prices up 7% sequentially.

Internet of Things group revenue was $591 million, up 12% sequentially and up 10% y/y.

Mobile and Communications group had revenue of negative $6 million. [Intel pays tablet and smartphone makers to use its chips in their devices] Exceeded annual goal of shipping into 40 million tablets this year; hit 46 million. Now shipping Sophia chips that integrate CPU and wireless. Partnering for wearable devices.

Software and Services had revenue of $557 million, flat sequentially and down 6% y/y.

Gross margin was 65.4%.

World's PC supply chain seems to be at appropriate levels.

Other segments had revenue of $ million, up % y/y.

$0.96 per share annual interest (an increase) was announced in November.

$5.8 billion cash from operations. Over $4.0 billion used for stock repurchases. $1.1 billion was paid out in dividends. Cash and equivalents balance $14.1 billion, down $1.5 billion sequentially. Debt about $13.7 billion.

Cost of sales was $5.1 billion, leaving $9.6 billion in gross profit. R&D expense was 3.0 billion. Marketing general and administrative was $2.05 billion. With restructuring and amortization total operating expense came to $5.17 billion. Leaving operating income of $4.45 billion. Gain on equity investment was $233 million. Interest and other expense was negative $27 million. Tax provision about $1 billion.

Q&A:

Gross margin trends after Q1? The second half will be above the 62% midpoint, and the first half below. 14 nm startup is driving up costs in the first half of the year, then will come down in the second half. Also we will get back some of the negative impact from tablets in 2014 as the year progresses.

Mobile business goals in 2015? In 2014 we were breaking into the market, which cost us a lot. We now feel we are a top silicon producer in the segment. We can grow at about the rate of tablet growth. We will focus on becoming cost effective. We think we can get $800 million in costs out in 2015. In the second half Sophia will ramp. 3G version has qualified, LTE version will ramp in second half. Sophia has no contra revenue involved.

Receivables spike in Q4? DSOs are still healthy. It was just a back-end loaded quarter.

Data Center market in 2015? There are 5 to 10 very large cloud customers, whose buying trends are somewhat unpredictable, so not so seasonal. Growth trends are still strong, we expect in excess of 15% growth in 2015.

Tablet market? Some forecasts are near zero, or even declines. We don't have a market growth rate prediction, which is why we said we would grow at the rate of the market. Improved profitability comes from not providing contra-revenue with Sophia, and LTE, and shifting the investment profile, so more of the improvement in the back half.

Cash inside vs. outside U.S.? Cash outside the U.S. can be used to build new factories. Most of our cash is generated in the U.S. and is available for stock buy backs.

We have lowered expected capital expense by ordinary care and buy getting better yields on new products than expected.

The PC market ended up a normal seasonal quarter in Q4, with consumer and domestic better than emerging markets. Inventories are good. In 2015 we have the Core M introduction and new thin, fanless devices, Broadwell ... there are price points down to $199 Chromebooks and $249 Windows systems up to new, innovative systems. We are planning on a flat unit year with a slight ASP (average sale price) decline. We burned inventory in Q4, particularly in the low-end products.

Capital expense long-term range is $10 billion to $11 billion; 2 years of $10 billion does not establish a new base line.

Most of the ASP improvement in Q4 was from the server side. We don't expect ASP to be a big driver of gross margin next year.

Design win traction on Sophia? It is a series of products, starting with 3G, then LTE. 3G is internally qualified and has several design wins with our major OEM partners. We are working on carrier certifications. LTE internal qualification should be in first half.

Tablets will have a robust low-end, driving ASPs down, but there will also be Lenovo, Dell, HP innovative, more expensive systems. Similar to PC space.

R&D spend planned up 6% in 2015? We are increasing where we think there will be a significant payoff, particularly data center and process technology. Axia acquisition brings R&D costs along.

We expect to bring out Sky Lake products on schedule.

Market reception of tablet systems? In channel was strong. Intel is a strong brand no matter who is a manufacturer. The major OEMs, like Dell and Lenovo, are selling very well. The broader Chinese market is selling quite well, surpassing our expectations.

Our 2015 model did not build in a resurgence in the emerging market PC segment.

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