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conference date: January 16, 2007
for quarter ending: December 31, 2006 (4th quarter)
Overview: Beating expectations by 1 cent per share, results compare well with Q3 but are below year-earlier levels. But expects in 2007 prices for microprocessors will not allow margins to increase because "Will have to fight to win orders."
Basic data:
Revenues of $9.7 billion were up 11% sequentially from Q3 but down 5% from Q4 2005.
Net income was $1.5 billion or $0.26 per share. Net income rose 15% sequentially but fell 39% from Q4 2005. Results included a gain of $483 million from sales of a division to Marvell and a loss from impairments, for a net increase of 2.5 cents per share. Restructuring charges decreased EPS by 1.5 cents.
Non-GAAP results were stated as $1.7 billion net income or 30 cents EPS.
Gross Margin increased to 49.6% from 49.1% the prior quarter.
Cash and short term investments ended at $8.87 billion. Including trading assets was $9.6 billion.
Guidance:
Expects for Q1 2007: revenue between $8.7 and $9.3 billion; gross margin near 49%; R&D + MD&A between $2.6 and $2.7 billion; 30% tax rate; $1.2 to $1.3 billion in depreciation. $50 million restructuring and asset impairment expense.
Full year 2007 gross margins 50%. R& D $5.4 billion. Total R&D + MG&A $10.7 billion.
Conference Highlights:
Units and revenue were at the high end of guidance; units were a record. 90% of mobile units were dual-core. 65nm process transition was successful. Desktop growth was offset by shift to mobile sales. Server business had record unit sales. Itanium revenues at record levels.
$150 million was used for share repurchases and the quarterly dividend was increased to 11.25 cents per share.
Restructuring continued with 94,100 employees at the end of the quarter. Spending is trending lower and capital forecasts show savings. Increasing operating efficiency. Expects $2 billion in savings from restructuring in 2007.
Total microprocessor units set a record and ASPs (average sale prices) were higher. Chip set units were flat, motherboards lower, flash memory higher.
Sales increased the most in Asia (13%) and European (18%) markets, increase in Japan only 1% and in the Americas was 6%. But only year-to-year revenue growth was in the Americas region.
45nm process is scheduled to appear in the second half of 2007. Dual core technology was more than 50% of quarter's shipments. The new Apple TV device uses an Intel processor. Introduced 65 nm NOR flash chips.
Non-mobile microprocessor revenue was $3.855 billion, down from $4.9 billion in Q4 2005. Mobile microprocessor revenue was up to $2.67 billion from $2.4 billion in Q4 2005. But 14% overall processor gains from Q3. Server business had higher units and ASPS, but mobile unit of 19% led revenue growth.
$2.9 billion R&D and MD&A spending. Capital spending $1.1 billion.
$163 million decline in inventory.
Q&A:
Gross margins, 2007 guidance? Startup costs are for 45nm and newer products, which normally takes 2 points of margin, but will be 4 points in 2007, front-end loaded for year. Lower ASPs expected. Unit costs will continue to decrease. Expects continued competitive business environment. Expects 2008 to revert to normal patterns. Margins will be 3 points lower in Q1 but will improve as year goes forward.
Expenses above forecasts for Q4? Higher revenue means higher costs, higher profit dependent expenses, employees left later in quarter than expected.
Why not higher margins? "Will have to fight to win orders."
Inventories? In Q1 2007 looking for flat at best.
Said same thing about 65 nm startup costs in 2005? Thinks still on a two-year cycle for startup spikes.
Vista? Optimistic will drive consumer market sales. Q4 action was in consumer notebooks despite specter of Vista launch. But not planning Q1 to be unusual seasonality.
Servers? Does not give margins by product segments. Sequential increase in ASP, but not a record. They don't have data yet on market share, but hopeful for gains. Believes goal is to regain market share lost in 2006, but technology allows for pricing options.
NAND? Did have additional NAND startup costs and write-down of flash inventory, so margin did not improve with increased unit sales.
Quad-core pricing will decrease, and increase in percentage compared to dual-core.
NOR Flash? Trying to turn around. 2007 has opportunities for market penetration, but Q1 is typically seasonally down. In a good position, but requires execution.
Demand environment? Inventories are under control. Concerned competitor could have excess inventory in channels.
Pricing? Remains competitive. Reset entire price stack for all lines in 2006. Pricing more from new technologies more than competition. Desktop more competitive than mobile.
Unit increases going forward? Independent market forecasters say 8 to 10% increase, but beyond that depends on market share.
Santa Rosa delay? No delay, on original schedule. Would not give a date certain.
Comfortable with independent forecasts of 8 to 10%, with Vista helping consumer sales and more servers needed for Internet. Unknown is refresh rate of enterprise desktop PCs.
ASPs (actual sales prices)? Partly due to better mix with more servers and notebooks, plus increased ASPs for server chips.
Quad-core ramp? For performance-intensive, will have good penetration, but slower consumer penetration as price is still too high for that.
Woodcrest? Was 50% in Q4, will near 100% in mid-2007.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We 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 2007 William P. Meyers
