Analyst Conference Summary

semiconductor technology


conference date: October 18, 2016 @ 2:00 PM Pacific Time
for quarter ending: October 2, 2016 (Q3; third quarter 2016)

Forward-looking statements

Overview: Strong y/y growth, combined with AMD's strong y/y growth, shows the CPU business is still a growth category. Record revenue.

Basic data (GAAP):

Revenue was $15.8 billion, up 17% sequentially from $13.5 billion and up 9% from $14.5 billion year-earlier.

Net income was $3.4 billion, up 158% sequentially from $1.33 billion and up 9% from $3.1 billion year-earlier.

GAAP EPS (diluted) was $0.69, up 155% sequentially from $0.27 and up 8% from $0.64 year-earlier.


Q4 2016 revenue is expected between $15.2 and $16.2 billion, with 61% gross margin (63% non-GAAP), $5.2 billion op ex, $100 million other expense, $1.5 billion depreciation, and a 22% tax rate. Below normal seasonality as sees reduction in supply chain.

Conference Highlights:

Data Center Group and IoT Group both set revenue records.

Brian Krzanich, CEO said "We're executing well, and these results show Intel's continuing transformation to a company that powers the cloud and billions of smart, connected devices."

Non-GAAP numbers: Net income $3.9 billion, up 34% sequentially from $2.9 billion, but up 21% from $3.2 billion year-earlier. Diluted EPS $0.80, up 36% sequentially from $0.59 and up 21% from $0.66 year-earlier. [Intel usually only gives GAAP numbers. They gave non-GAAP numbers this quarter to account for the Altera acquisition.] 63.3% gross margin.

Client Computing group revenue was $8.89 billion, up 22% sequentially from $7.3 billion, and up 4% from $8.51 billion year-earlier. Saw increasing demand for PCs in Q3, including a strengthening supply chain.

Data Center group revenue was $4.54 billion, up 14% sequentially from $4.0 billion, and up 10% from $4.41 billion year-earlier. 32% increase in cloud service provider segment. Non-CPU adjacencies grew 34%. But Enterprise revenue was down 3% y/y.

Internet of Things group revenue was $689 million, up 20% sequentially from $572 million, and up 19% from $581 million year-earlier. Retail, video, and transportation segments all did well.

Memory segment (NAND) had revenue of $649 million, up 17% sequentially from $554 million and down 1% from $655 million year-earlier. Believes 3D Crosspoint will sell well once available.

Security Group had revenue was $537 million, flat sequentially from $537 million but up 6% from $506 million year-earlier. 51% of Security Group will be sold, so it will become a private company.

Programmable Solutions Group (formerly Altera) revenue was $425 million, down 9% sequentially from $465 million, and up 6% from year-earlier, when it was still independent.

GAAP gross margin was 63.3%, up sequentially from 58.9%, and up from 63.0% year-earlier.

Cash and equivalents balance $17.8 billion, up $0.1 billion sequentially from $17.7 billion. $5.8 billion cash from operations. $457 million used for stock repurchases. $1.2 billion was paid out in dividends. Debt about $24 billion. Capital expense was $2.5 billion. $324 million share-based compensation.

Cost of sales was $5.80 billion, leaving $9.98 billion in gross profit. R&D expense was $3.07 billion. Marketing general and administrative was $2.0 billion. With restructuring of $372 million and amortization of $74 million, total operating expense came to $5.52 billion. Leaving operating income of $4.46 billion. Loss on equity investment was $12 million. Interest and other expense was $132 million. Tax provision about $940 million.

Restructuring savings are on track. Security group sale will result in new restructuring charges. Most charges done by mid 2017. Increasing investment in datacenter and IoT.


DCG (datacenter) lower Q4 guidance, implications for 2017? Strong cloud, storage, networking growth rates. Enterprise was slow in Q3 and probably will be in Q4. We'll talk about 2017 in January.

PC unit demand was strong in mature markets, and China was better than forecast. Enterprise was strong, consumer better but still weak. Good mix between desktop and mobile.

Down operating profit y/y at DCG? In Q3 we continued to increase investment, but also ramped first 14 nm server product, so that hit margins. Mix is not much of a driver in datacenter because most products have strong margins. ASPs were up in all server categories. Networking is the fastest growing part. Photonics and fabric are also rapid growth areas. Even Atom based servers have healthy margins.

Why would enterprise stabilize after years of decline? Some weakness is from moving applications to the cloud. Which is fine for us. We are in talks with several enterprises that want to grow their own private clouds, but we don't see it as a growth segment, just a slower long-term decline.

ASICs are actually the most efficient accelerators for specific machine learning workloads, that is in addition to FPGAs and GPUs; all require a Xeon to work so they are not cannibalistic.

For capital expense it is lumpy, so don't take Q3 as a future run rate. $9.5 billion for 2016, same as forecast.

PC trends, inventory? We saw stronger demand in Q3, pipeline refilled, Q4 demand seasonal with using up of inventory.

Contra revenue in mobile PCs? Small piece, but phone and tablet products saw lower volume in Q3, so APSs are up on lower contra-revenue program.

The new Chinese memory factory is making wafers with good yields, the volume ramp of 3D NAND will be in 2017. 3D Crosspoint is shipping samples, qualification should complete in 2016, and the ramp is in 2017.

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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