Analyst Conference Summary

conference date: October 13, 2015 @ 2:00 PM Pacific Time
for quarter ending: September 26, 2015 (Q3; third quarter 2015)

Forward-looking statements

Overview: Revenue within guidance and about normal seasonality. Not really growing, but still very profitable because of Intel's dominance of the datacenter processor business.

Basic data (GAAP):

Revenue was $14.5 billion, up 10% sequentially from $13.2 billion but down 1% from $14.6 billion year-earlier.

Net income was $3.1 billion, up 14% sequentially from $2.71 billion but down 6% from $3.3 billion year-earlier.

GAAP EPS (diluted) was $0.64, up 16% sequentially from $0.55 and down 3% from $0.66 year-earlier.

Guidance:

Q4 2015 revenue between $14.3 and $15.3 billion. 62% gross margin. R&D plus MG&A expense about $5.0 billion. $25 million restructuring charges. $70 million amortization of acquisition-related intangibles. $1.9 billion depreciation. 25% tax rate.

Capital spending for full 2015 between $6.8 and $7.8 billion.

Conference Highlights:

Introduced the 6th gen Intel Core processor line and 3D XPoint memory technology. Client mix was richer. "There were signs that the PC market is beginning to stabilize. Part of strategy is to be a supplier of Internet infrastructure. Altera acquisition still on track as it has been approved by U.S. regulators.

Client Computing group revenue was $8.5 billion, up 13% sequentially but down 7% y/y. PC Market is weak in emerging markets and for consumers. $2.4 billion operating profit.

Data Center group revenue was $4.1 billion, up 8 % sequentially and up 12% y/y. Cloud was strong, enterprise segment good. $2.1 billion operating profit.

Internet of Things group revenue was $581 million, up 4% sequentially and up 10% y/y.

Software and Services had revenue of $556 million, up 4% sequentially and flat y/y.

Memory segment had revenue up 20% from year-earlier. Believes 3D Xpoint could disrupt the market.

Gross margin was 63.0%, up sequentially from 62.5%, but down from 65.0% year-earlier.

Cash and equivalents balance $20.8 billion. $ billion cash from operations. $ billion capital expense. $1 billion used for stock repurchases. $1.1 billion was paid out in dividends. Debt about $21 billion, including about $8 billion new debt to prepare for Altera acquisition.

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

Cost of sales was $5.35 billion, leaving $9.11 billion in gross profit. R&D expense was $2.93 billion. Marketing general and administrative was $1.91 billion. With restructuring and amortization total operating expense came to $4.92 billion. Leaving operating income of $4.19 billion. Gain on equity investment was $165 million. Interest and other expense was $104 million. Tax provision about $1.14 billion.

Q&A:

Was the revenue beat driven mostly by pricing? In our client group the mix was richer, which accounts for the revenue beat.

Margins were hit by 14 nm costs. We ramped the Ireland factory early, so the first wafers were more expensive.

China demand? Asia and developing countries were weak. China was soft, mainly in the consumer segments.

ASPs on CCG vs. the notebook and desktop ASPs? The difference is tablets. Last year we had contra-revenue (subsidies) to sell tablet processors, which has abated. We are shipping a rich mix into a weak PC market. The strength is at the high end.

Mobile, cellular, Marvell exit? 7260 modem has been shipping. 7360 will be shipping before year end. Sophia 3G and 3Gr is in market today. Sophia LTE will appear next year. It is a competitive market at the leading edge.

Capital spending cut? We upgraded our specifications for a specific kind of equipment, which delayed the shipments. Cap ex should be up next year.

Is it implied that units are weak for Q4, with pricing strong? The cap ex shift is not about units. What we spend today has an effect in late 2016 or early 2017. We see Q4 units as typically seasonal. But it will be a higher percentage of Skylake, so a richer mix. Inventories at the end of Q3 were healthy.

Generally cloud enterprises don't buy much in Q4 because that is their peak season, they don't want disruptions. They return to purchasing in Q1.

NAND market? Over 80% of what we sell is enterprise SSDs. Next year we will ramp our 3D NAND process. And Xpoint will transform the business.

Mobile communications group, loss by quarter? We no longer have that segment. The broad mobile business is on track. 75% of overall target ($800 million in savings) for the year has been achieved.

PC market is becoming more segmented, with higher-value machines appealing to many consumers.

Mobility target, did tablet units soften? Intel's strategy is to reduce the losses and improve the P&L. We are keeping our share in the market, but the market itself has shrunk, and prices for tablets have dropped. We are being even more careful on phones, where we aim to sell modems to the general market and processors to specific partners.

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