Analyst Conference Summary

semiconductor technology

conference date: July 20, 2016 @ 2:30 PM Pacific Time
for quarter ending: July 2, 2016 (Q2; second quarter 2016)

Forward-looking statements

Overview: Revenue was down slightly sequentially, and up just 3% y/y. And if you take out the Altera acquisition, flat y/y. GAAP net income and EPS well down. Even excluding a big accounting charge, EPS down 5% y/y.

Basic data (GAAP):

Revenue was $13.5 billion, down 1% sequentially from $13.7 billion and up 2% from $13.2 billion year-earlier. [Intel claims a 3% rise y/y, which you can get to if you start with enough decimals and then round up from 2.54%]

Net income was $1.33 billion, down 33% sequentially from $2.0 billion and down 51% from $2.71 billion year-earlier.

GAAP EPS (diluted) was $0.27, down 36% sequentially from $0.42 and down 50% from $0.55 year-earlier.

Guidance:

For Q3 revenue is expected at $14.9 billion, plus or minus $0.5 billion. Gross margin expected near 60% GAAP or 62% non-GAAP. R&D + MG&A expense $5.1 billion. Depreciation $1.5 billion.

Full year 2016 revenue is expected to increase by mid-single digits over 2015. Gross margins again 60% and 62%, +/-. R&D + MG&A $20.8 billion GAAP, $20.7 billion non-GAAP. $1.6 billion restructuring GAAP only. $350 million amortization GAAP only. $6.3 million depreciation. 21% tax rate. Capital spending $9.5 billion +/_ 0.5 billion.

So basically very little change from prior broad guidance ranges, mainly a $0.2 billion bump in operating expenses.

Conference Highlights:

The decrease in GAAP net income and earnings was mainly due to a $1.4 billion restructuring charge largely from the Altera acquisition. Non-GAAP profit numbers were better, but still down y/y.

Results were in line with outlook according to Brian Krzanich, CEO. "We're gaining momentum heading into the second half. While we remain cautious on the PC market, we’re forecasting growth in 2016 built on strength in data center, the Internet of Things and programmable solutions.”

Non-GAAP numbers: revenue was $13.5 billion, down 2% sequentially from $13.8 billion but up 3% from $13.2 billion year-earlier. Net income $2.9 billion, up 9% sequentially from $2.6 billion, but down 6% from $3.1 billion year-earlier. Diluted EPS $0.59, up 9% sequentially from $0.54, but down 5% from $0.62 year-earlier. [Intel usually only gives GAAP numbers. They gave non-GAAP numbers this quarter to account for the Altera acquisition.] 62% gross margin.

Client Computing group revenue was $7.3 billion, down 3% sequentially and also down 3% y/y. But operating margin was up 19%. PC supply chain reduced inventories at a slower rate. ASPs were higher.

Data Center group revenue was $4.0 billion, up 1% sequentially and up 5% y/y. Cloud was up, enterprise down. Seeing a preference for performance across the spectrum, leading to increased ASPs. Doing well with network infrastructure chips. Gained share in supercomputing. Shipped first silicon photonics for revenue. Costs increased as 14 nm products were ramped.

Internet of Things group revenue was $572 million, down 12% sequentially but up 2% y/y. Result was below expectations due to an inventory burn. In a new collaboration with BMW for autonomous driving.

Memory segment (NAND) had revenue of $554 million, down 1% sequentially and down 20% y/y. Pricing environment was competitive. 3D crosspoint NAND for SSDs should ship before the year end. $224 million operating loss.

Security Group had revenue was $537 million, flat sequentially and up 10% y/y.

Programmable solutions Group (formerly Altera) revenue was $465 million, up 30% sequentially from a partial Q1, and up 12% y/y from Altera's y/y results. Should sample 14 nm chips this year.

GAAP gross margin was 58.9%, down sequentially from 59.3%, and down from 62.5% year-earlier.

Cash and equivalents balance $17.7 billion, up $2.6 billion sequentially. $3.8 billion cash from operations. $804 million used for stock repurchases. $1.23 billion was paid out in dividends. Debt about $29 billion, including $2.7 billion in new long-term debt. Capital expense was $2.3 billion.

Cost of sales was $5.56 billion, leaving $7.97 billion in gross profit. R&D expense was $3.15 billion. Marketing general and administrative was $2.01 billion. With restructuring of $1.4 billion and amortization of $89 million, total operating expense came to $6.66 billion. Leaving operating income of $1.32 billion. Gain on equity investment was $478 million. Interest and other expense was $126 million. Tax provision about $340 million.

Continues to believe PC market will decline in the high-single digits y/y, but will expand in other areas.

Q&A:

Server expectations second half? In Q2 we saw enterprise stabilize. We are ramping the Broadwell server chips, which should increase ASPs. Plus customers are signaling there will be a second-half buy in. The cloud will continue to expand as data increases by orders of magnitude.

7360 designs? Customers will announce. We see an above seasonal growth rate in the 2nd half driven by cloud in particular. We see better memory and IoT revenue.

PC view for Q3? Built our forecast around the high-single digit decline, even though the decline was mid-single digit in Q2. ASPs could improve.

Memory business startup costs, long-term outlook? In short term, 2H, expecting consisting losses as 3D crosspoint costs play through. But NAND demand should improve in Q2. Long term 3D NAND and our cost structure, plus crosspoint, should give us overall profits. 3D crosspoint DIMMs should start shipping in 2017. We are long-term bullish on units and our cost structure.

DCG (datacenter) growth? Compared to expectations at the beginning of year, the miss was enterprise related. We have good insight into cloud customers, and some customers have a purchasing cycle kicking in.

Days sales outstanding? Nothing unusual there, it is really healthy. Inventory ended Q1 higher than desired due to better than expected yields, and yields also increased in Q2. We expect inventory to go down meaningfully in 2H.

PC gaming and new graphics products? 3 or 4 PC segments did better than PCs in general. Laptops did better. 2 in 1 devices are growing. Enthusiast & gaming sold better than anticipated, growing at a double digit rate.

Vertical strength in IoC? Industrial, security video, and automotive.

Gross margins for DCG? We expect operating margins to continue to improve this year. The big driver is costs, which should come down on Broadwell. But are also expecting 10 nm startup costs to ramp in Q4, as well as crosspoint startup costs.

PC inventories? We see them overall as healthy. The supply chain is fairly lean and cautious. The burn in Q2 was less than expected, probably because they saw a better than expected end market.

There are no obvious headwinds for margins in 2017, but we will not be more specific until the investor meeting.

In PCs, view on commercial enterprise models? We are hearing some conversion increase due to shifting to Windows 10. Our forecast for 2H is cautious.

Crosspoint DIMMs will have applications anywhere you need storage type data with high performance, like datacenters.

Buy backs? Our goal is to get to net cash zero, which we had hoped would happen this year, but now looks like 2017 due to the restructuring charges. Then we might increase buy backs.

Intel intends to show it is a world-class modem company.

Made the case that explosive data growth will require extensive growth of cloud datacenters.

Debt, foreign cash? I would not take on debt to do buy backs or a special dividend. There is a level of debt I would not be comfortable with.

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