Analyst Conference Summary

semiconductor technology


conference date: April 19, 2016 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2016 (Q1; first quarter 2016)

Forward-looking statements

Overview: Solid y/y revenue growth despite declining PC business, as Intel continues its near-monopoly on processors for data centers. But note this includes revenue from the Altera acquisition.

Basic data (GAAP):

Revenue was $13.7 billion, down 8% sequentially from $14.9 billion and up 7% from $12.8 billion year-earlier.

Net income was $2.0 billion, down 45% sequentially from $3.6 billion but flat from $2.0 billion year-earlier.

GAAP EPS (diluted) was $0.42, down 43% sequentially from $0.74 and up 2% from $0.41 year-earlier.


Q2 2016 GAAP Revenue: $13.5 billion, plus or minus $500 million. Non-GAAP gross margin: 61%, plus or minus 2%. R&D plus MG&A spending approximately $5.1 billion. Restructuring charges approximately $1.2 billion GAAP, but Non-GAAP zero. Impact of equity investments and interest and other: approximately $150 million net gain. Depreciation: approximately $1.5 billion

Full 2016 revenue up mid-single digits, down from prior outlook of mid- to high-single digits. Non-GAAP gross margin: 62%, plus or minus a 2%, down from prior outlook of 63%. Non-GAAP R&D plus MG&A spending approximately $20.6 billion, plus or minus $400 million, down from prior outlook of $21.3 billion. Restructuring charges approximately $1.2 billion, but zero on a Non-GAAP basis. Depreciation approximately $6.3 billion. Tax rate approximately 22 percent, for the remaining quarters of the year, down from prior outlook of 25 percent. Full-year capital spending of $9.5 billion, plus or minus $500 million.

Expects the PC market to decline in the high-single digits in 2016 (prior forecast was mid-single digit decline.)

Conference Highlights:

The Altera acquisition closed early in Q1. Intel plans to layoff about 12,000 employees by mid 2017, about 11% of the work force. This will allow to invest in "2-in-1," gaming, and home gateways, as well as expand investments in datacenter and IoT markets.

Intel plans to transition from a PC company "to one that powers the cloud and billions of smart, connected devices."

Results were in the lower half of the range given in January.

Non-GAAP numbers: revenue was $13.8 billion, down 7% sequentially from $14.9 billion but up 8% from $12.8 billion year-earlier. Net income $2.6 billion, down 29% sequentially from $3.6 billion, but up 19% from $2.2 billion year-earlier. Diluted EPS $0.54, down 29% sequentially from $0.76, but up 20% from $0.45 year-earlier. [Intel usually only gives GAAP numbers. They gave non-GAAP numbers this quarter to account for the Altera acquisition]

Client Computing group revenue was $7.5 billion, down 14% sequentially and up 2% y/y. Below expectations on a weaker than expected PC market. Notebook average price flat y/y. Desktop prices increased 6% y/y. PC TAM was down, which led to declines in the global supply chain inventory. There was a richer product mix and a 14th workweek that contributed to the y/y gain. $1.9 billion operating profit, up 34% y/y, as unit costs were lower for 14 nm parts.

Data Center group revenue was $4.0 billion, down 7% sequentially but up 9% y/y. Enterprise was soft, but cloud was strong. $1.8 billion operating profit, up 4% y/y.

Internet of Things group revenue was $651 million, up 4% sequentially and up 22% y/y. Both retail and video display were strong. $123 million operating profit, up 40% y/y.

Memory segment (NAND) had revenue of $557 million, down 15% sequentially and up 6% y/y. 3D crosspoint technology introduced in Q4, which Intel believes is a disruptive technology. Pricing declines hurt revenue.

Security Group had revenue was $537 million, up 5% sequentially and up 12% y/y.

Programmable solutions Group (formerly Altera) revenue was $359 million. Now shipping co-packaged FPGA sample parts. Including adjustment for $100 million deferred revenue was up mid-single digits y/y. Lost $200 million due to charges.

Q1 GAAP gross margin was 59.3%, down sequentially from 64.3%, and down from 60.5% year-earlier.

Cash and equivalents balance $15.0 billion, down $10 billion on Altera purchase. $4.1 billion cash from operations. $793 million used for stock repurchases. $1.2 billion was paid out in dividends. Debt about $25 billion. Capital expense was $1.2 billion.

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

Cost of sales was $5.57 billion, leaving $8.13 billion in gross profit. R&D expense was $3.25 billion. Marketing general and administrative was $2.23 billion. With restructuring and amortization total operating expense came to $5.56 billion. Leaving operating income of $2.57 billion. Gain on equity investment was $22 million. Interest and other expense was $82 million. Tax provision about $462 million.


What led to the restructuring, including management changes? We are moving from client-centric to cloud and connectivity centric models. We've made progress on this, we decided it is time to make the change. As to leadership changes, there were 3. One was a retirement and is staying until we find a successor. One left for outside opportunities. We wanted to be transparent with the Stacy transition and new CFO hire.

How do you get your growth guidance given the seasonality and PC view? We project overall growth. Datacenter, memory, and IoT will offset PC. And add in Altera. The first half is impacted by our customers view of the market shrinking, so bringing down inventory. We don't think the inventory reduction will continue into the second half. Keep in mind mid-single digits is a range.

Areas of the client segment are growing, like 2-in-1 devices and gaming PC. Set top boxes are growing and we are gaining share there. So we are restructuring to narrow our focus.

Mobile clients? We are on schedule to hit $800 million run rate. Mobile segment is growing and our profitability is improving. It is responsible for much of the increase in PC operating profit.

Double digit growth in Data Center group? We have great products like Broadwell, Xeon plus FPGA, omnipath fabric, silicon photonics, 3D crosspoints. We are confident in our data center roadmap. Networking segment grew 60% y/y.

Memory solutions trends? Our SSDs are mostly going into the datacenter. Units grew nicely. We are seeing aggressive pricing in the NAND segment because of the cycling with overcapacity, part of the normal cycle. We believe 3D NAND we are just beginning to ramp will give us a cost and profit advantage in this space.

Your own PC channel inventory, and did you gain share within the industry? We did have a 14th week, which differs from IDC and Gartner. Our customers saw a weaker quarter as they brought inventories down.

Cap ex run rate? The two main items this year are 10 nm and ramp of the NAND factory in China. Both will be heavier in the second half. Neither will be impacted by the restructuring.

Datacenter group mix in 2016? ASPs should increase through the year, despite the weaker enterprise segment. Datacenter is families of products. In each family ASPs are increasing. Customers get more performance at a better price due to new products.

We are not trying to invest more in all PC segments or form factors, just in the growth areas.

The restructuring charge will be largely cash costs and will be front-end loaded. But some will be non-cash.

PC segment ASPs are detailed in the CFO commentary. Notebook ASPs were pretty flat y/y. Desktop was up 6%. But the big ASP jump was in phones and tablets, where we weaned ourselves out of some of the contrarevenue (subsidies to manufacturers) programs.

Part of our datacenter strategy is to dominate the rack, including the interconnects. We are gaining share in networking, storage, and telco, especially with the shift to software defined switching.

Operating margin targets after restructuring? We see significant opportunity to grow despite the decline in the PC TAM. The 55% to 65% gross margin range, we have mostly been over 60% the last few years. Sees no change in the near term, but in 2017 and after we could do better due to restructuring and new products.

In IoT, we are going for the higher-margin systems, like automotive. Or that play into our datacenter strategy.

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Disclaimer: My analyst call summaries may include both our condensations of statements made by company representatives and my own analysis. They are not covered by any warranty. I cannot guarantee anything said by company representatives is true. I try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2016 William P. Meyers