Analyst Conference Summary

conference date: July 15, 2015 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2015 (Q2; second quarter 2015)

Forward-looking statements

Overview: Could have been worse.

Basic data (GAAP):

Revenue was $13.2 billion, up 3% sequentially from $12.8 billion but down 4% from $13.8 billion year-earlier.

Net income was $2.71 billion, up 35% sequentially from $2.0 billion but down 3% from $2.80 billion year-earlier.

GAAP EPS (diluted) was $0.55, up 34% sequentially from $0.41 and flat from $0.55 year-earlier.

Guidance:

Q3 revenue is expected between $13.8 and $14.8 billion, up towards the high end of seasonality. Gross margin within 2 percentage points of 63%. Operating expense $4.9 billion. $175 million restructuring chare, $70 million acquisition-related amortization. $2.0 billion depreciation, $100 million interest, gain on investment, or other expenses.

Q3 guidance is up 8% sequentially at mid-range, at the high end of the average seasonal increase.

For the full year 2015 Intel expects revenue down about 1% from 2014. Previous guidance was for flat.

Conference Highlights:

PC market was challenging, but IoT (Internet of Things) group, NAND memory, and data center sales were still growth areas. "We expect the launches of Skylake, Microsoft's Windows 10 and new OEM systems will bring excitement to client computing in the second half of 2015.”

Agreed to acquire Altera for its FPGA technology. Will support their ARM based product. Believes will bring process node advantage to competition with Xilinx. Expects to produce significant shareholder value. $16.7 billion cash will be used for the acquisition.

10 nm technology to launch in second half of 2017, "Cannonlake."

Client Computing group revenue was $7.5 billion, up 2% sequentially but down 14% y/y. Unit volume was flat sequentially but down 10% y/y. Average selling price (ASP) was up 2% sequentially and down 3% y/y. Both desktop and notebook unit volumes were down. Believes inventory in system was normal. 9.9 million tablet units. Operating profit for group $1.6 billion, down 38% y/y.

Data Center group revenue was $3.9 billion, up 5% sequentially and up 10% y/y. Unit volume was up 2% sequentially and up 5% y/y. Average selling price (ASP) was up 3% sequentially and 5% y/y. Cloud and networking infrastructure were strong, but enterprise was week.

Internet of Things group revenue was $559 million, up 5% sequentially and up 4% y/y.

Software and Services had revenue of $534 million, flat sequentially and down 3% y/y.

Other (including NAND) segments had revenue of $715 million, up 38% from $517 million year-earlier.

4G version of Sophia chip is sampling now, with volume shipments later in the year.

Gross margin was 62.5%, sequentially from 60.5%, but down from 64.5% year-earlier.

Cash and equivalents balance $21.05 billion. $3.4 billion cash from operations. $1.8 billion capital expense. $697 million used for stock repurchases. $1.1 billion was paid out in dividends. Debt about $13.2 billion.

Will take into 2016 to get back to zero net cash after the Altera acquisition.

Cost of sales was $4.95 billion, leaving $8.25 billion in gross profit. R&D expense was $3.1 billion. Marketing general and administrative was $1.95 billion. With restructuring and amortization total operating expense came to $5.35 billion. Leaving operating income of $2.9 billion. Gain on equity investment was $100 million. Interest and other expense was $13 million. Tax provision about $277 million.

Q&A:

Concern about PC market vs. seasonal guidance, effect of Windows 10? The seasonal prediction was off a down Q2, we think that is reasonable. Note we lowered revenue guidance for the year. Inventory did not come down as much in Q2 as we had predicted earlier. But in Q2 inventories normally go up. We did not base our prediction on the Windows 10 launch.

Data center growth in second half? The first half was up about 15% y/y. We do not expect a large recovery in enterprise in the rest of the year. Companies are being careful deploying capital. But cloud, networking and storage will continue to grow.

New tick-tock-tock, capital implications? We lowered our cap ex forecast. The reduction is in four buckets: factory efficiency of 14 nm ramp; unit weakness to lower 22nm capacity; desktop units lower; and 3rd wave of products. We will be at the 14 nm peak longer, so 10 nm purchases will be delayed.

10 nm push out cause? Each node has its own recipe of complexity and difficulty. Lithography is getting more difficult, number of steps needed is higher. Nodes are running about 2.5 years, not aiming for 2 years right now, but may try to get back to it, if possible.

When we say second half of 2017 for 10 nm, we mean high volumes. Our competitors are not going to be at high volumes.

Data Center Group in 2nd half? It has been lumpy for years. We are going 14 to 15% fairly consistently. We are not expecting incremental strength in enterprise, but cloud, networking and storage and been stronger than we expected.

Why do you think the PC market is so weak this year? PC has always been tied to GDP, which has slowed world wide, particularly in China, the U.S. and Europe. Combination of delays for Skylake and Windows 10 has had an effect this year. Long term believes the better form factors and battery lives will pull back tablets to 2 in 1 PC devices.

Windows 10 has some great new features that should boost the market long-term.

Inventories are normal. We expect them to build as normal in Q3 in preparation for Q4.

Mobile operating losses, Sophia LTE? Sophia is later than we wanted, is in validation, will ship in volume first half of next year. Has not affected our operating loss goals, we have gotten about a third of the costs out of the system. We have a very good detailed plan to continue to reduce losses.

Strength in memory, stale offerings? Our conversion to 3D NAND is a major boost to our product roadmap. We have an architectural advantage over the competition, and a performance and cost advantage. In enterprise, compure and cloud our NAND sales were strong.

Gross margin will be impacted in Q4 as we start 10 nm startup costs.

Relationships with Chinese mobile chip designers? 3G R was co-designed with Rockchip and is selling today. That relationship has gone quite well. We also have a relationship with Spredthrum (? sp), but we are still waiting for regulatory approvals.

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