Analyst Conference Summary

semiconductor technology

conference date: January 14, 2016 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2015 (Q4; fourth quarter 2015)

Forward-looking statements

Overview: Okay quarter considering the weakness of the PC market.

Basic data (GAAP):

Revenue was $14.9 billion, up 3% sequentially from $14.5 billion and up 1% from $14.7 billion year-earlier.

Net income was $3.6 billion, up 16% sequentially from $3.1 billion but down 1% from $3.7 billion year-earlier.

GAAP EPS (diluted) was $0.74, up 16% sequentially from $0.64 and flat from $0.74 year-earlier.

Guidance:

For Q1 2016 revenue is expected near $14.0 billion. Gross margin 58% GAAP, 62% non-GAAP. R&D + MG&A expenses around $5.6 billion GAAP, $5.5 billion non-GAAP. This reflects some caution about demand, particularly in China.

For full year 2016 revenue is expected to be up, as a percent, in the mid to high single digits over 2015.

Guidance does not include Altera acquisition expenses.

Conference Highlights:

The cash dividend was increased to $1.04 per share annually effective Q1 2016. The Altera acquisition closed early in Q1.

In November 14nm products surpassed 50% of Client Computing Group volume.

Believes most future growth will come from the datacenter, IoT, and memory.

Full year 2015 revenue was $55.4 billion, about flat y/y, with net income of $11.4 billion and EPS of $2.33. Cash from operations was $19.0 billion.

Client Computing group 2015 revenue was $32.2 billion, down 8% y/y. For Q4 revenue was $8.8 billion, down 1% y/y. Notebook units decreased 10% y/y, but average price increased 6%. Desktop units decreased 9% y/y, but prices increased 9%. Tablet volume decreased 33% y/y to 9 million units.

Data Center group 2015 revenue was $16.0 billion, up 11% y/y. For Q4 revenue was $4.3 billion, up 5% y/y. But macroeconomic weakness kept demand growth below prior expectations. 40% of Cloud segment was custom chips.

Internet of Things group2015 revenue was $2.3 billion, up 7% y/y. For Q4 revenue was $625 million, up 6% y/y.

Software and Services had 2015 revenue of $2.2 billion, down 2% y/y. For Q4 revenue was $543 million, down 3% y/y.

Memory segment (NAND) had 2015 revenue up 21% y/y. For Q4 revenue was up 10% y/y. 3D crosspoint technology introduced, which Intel believes is a disruptive technology.

Q4 gross margin was 64.3%, up sequentially from 63.0%, but down from 65.4% year-earlier.

Cash and equivalents balance $18.0 billion. $5.4 billion cash from operations. $525 million used for stock repurchases. $1.1 billion was paid out in dividends. Debt about $22.7 billion.

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

Cost of sales was $5.3 billion, leaving $9.6 billion in gross profit. R&D expense was $3.1 billion. Marketing general and administrative was $2.1 billion. With restructuring and amortization total operating expense came to $5.3 billion. Leaving operating income of $4.3 billion. Gain on equity investment was $18 million. Interest and other expense was $14 million. Tax provision about $690 million.

Believes global inventory is at normal levels.

Depreciation expense going forward will be lower due to changing the useful time of factory equipment from 4 to 5 years.

Q&A:

Increased average selling prices? It is the ongoing trend. Clients are buying up the stack. But for now for 2016 we see prices relatively flat. Server will become a larger part of the mix, which will affect overall margins.

The depreciation change was prompted by an examination of the current cadence of equipment obsolescence.

Uncertainty in Q1? It is the same type of trend as in 2015. Emerging markets a problem, China and the rest of Asia slow. More client side than datacenter, but we are seeing some affect on datacenter segment.

Can you improve operating margins? The y/y comps are complex because of the Altera acquisition and change in depreciation rate. Taking those out we are getting an improvement in operating margins. We are still committed to driving spending as a % of revenue down, even as we invest in areas that are critical for long-term growth. Including process technology leadership.

Server chip roadmap given Altera close? The first server chip will be a multi-chip package which will sample in limited quantities starting this quarter, with production in 2017. Monolithic chips will be a longer roadmap for servers. But we will sample in the IoT space this quarter with a single chip.

Deceleration of datacenter growth in Q4 causes? In 2014 Q4 was one of the strongest quarters, up over 20%. So it was unique. Enterprise stabilized in the second half. Cloud tends to slow down in Q4 since that is peak demand. We saw strong share game in the networking and telco side.

Previously you had said you wanted to move node migration back to 2 years, rather than 3? The life expectancy is not really affected by changing the depreciation to 5 years.

Weakness, when did it start, when do you guess will end? We have a cautious stance becuse of weak client unit sales in Q4, including sell-through to final customers. Our China team is cautious, and that is the largest PC market. Other than that we expect the year to play out normally.

Altera revenue forecast, is it conservative? They have not released 2015 results yet. We did not see anything surprising. We expect revenue growth in 2016 to $1.6 billion, with revenue above our corporate average. Plus the one-time deal related costs.

Channel now and expectation? We believe we entered 2016 with healthy inventories, lower than we expected. Channel clients are being cautious with their inventory. Our internal inventory ended 2015 was a little bit higher than we like, partly because the rich was mix and yields of 14 nm were better than expected. We will work through the inventory we have.

A 14 nm Xeon will launch in the first half of 2016.

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