Analyst Conference Summary

semiconductor technology

conference date: January 26, 2017 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2016 (Q4; fourth quarter 2016)

Forward-looking statements

Overview: Record quarterly revenue. I am impressed.

Basic data (GAAP):

Revenue was $16.4 billion, up 4% sequentially from $15.8 billion and up 10% from $14.9 billion year-earlier.

Net income was $3.56 billion, up 5% sequentially from $3.4 billion but down 1% from $3.61 billion year-earlier.

GAAP EPS (diluted) was $0.73, up 6% sequentially from $0.69 but down 1% from $0.74 year-earlier.

Guidance:

For the full year 2017 revenue is expected to be flat from 2016. Gross margin range near 62% to 63%. R&D + MG&A expense $20.5 billion. $400 million for restructuring, $150 million for amortization. $7.0 billion for depreciation. Operatingincome $15.7 billion GAAP, $17.1 billion non-GAAP. Tax rate 26% GAAP, 22% non-GAAP. EPS $2.53 GAAP, $2.80 non-GAAP. Cap ex $12.0 billion.

For Q1 2017 revenue near $14.8 billion. Gross margin 62%-63%. R&D + MG&A expense $5.3 billion. $300 million restructuring. $40 million amortization. $50 million negative impact from equity investments and interest. $1.6 billion depreciation. Leaving $3.6 billion operating income, with a 22% tax rate. EPS $0.56 GAAP, $0.65 non-GAAP.

Conference Highlights:

Brian Krzanich, CEO said “The fourth quarter was a terrific finish to a record-setting and transformative year for Intel. In 2016, we took important steps to accelerate our strategy and refocus our resources while also launching exciting new products, successfully integrating Altera, and investing in growth opportunities."

Non-GAAP numbers: Net income $3.9 billion, flat sequentially from $3.9 billion, but up 4% from $3.7 billion year-earlier. Diluted EPS $0.79, down 1% sequentially from $0.80 and up 4% from $0.76 year-earlier. [Intel usually only gives GAAP numbers. They gave non-GAAP numbers this quarter to account for the Altera acquisition.] 63.1% gross margin.

Client Computing group revenue was $9.1 billion, up 2% sequentially from $8.89 billion, and up 4% from $8.76 billion year-earlier. ASP was up on richer mix.

Data Center group revenue was $4.67 billion, up 4% sequentially from $4.54 billion, and up 8% from $4.31 billion year-earlier. Expects cloud growth, but not enterprise growth in 2017.

Internet of Things group revenue was $726 million, up 5% sequentially from $689 million, and up 16% from $625 million year-earlier. Won key designs in automotive and video in Q4.

Memory segment (NAND) had revenue of $816 million, up 26% sequentially from $649 million and up 25% from $654 million year-earlier. SSD demand outpaced supply. Believes 3D Crosspoint will sell well once available. Just qualified the first Crosspoint product and expect revenue in Q1.

Security Group will be spun off in the second quarter, called McAfee, in joint venture with TPG Capital.

Programmable Solutions Group (formerly Altera) revenue was $420 million, down 1% sequentially from $425 million. Up 7% from year-earlier when it was Altera. Sampling 14 nm products.

GAAP gross margin was 61.7%, up sequentially from 63.3%, and down from 64.3% year-earlier.

Cash and equivalents balance $17.1 billion, down $0.7 billion sequentially from $17.8 billion. $8.2 billion cash from operations. $533 million used for stock repurchases. $1.2 billion was paid out in dividends. Debt about $25.2 billion. Capital expense was $3.5 billion. $308 million share-based compensation.

Cost of sales was $6.27 billion, leaving $10.11 billion in gross profit. R&D expense was $3.28 billion. Marketing general and administrative was $2.16 billion. With restructuring of $100 million and amortization of $41 million, total operating expense came to $5.58 billion. Leaving operating income of $4.53 billion. Gain on equity investment was $18 million. Interest and other expense was $104 million. Tax provision about $878 million.

Costs in the quarter increased due to product warranty costs and IP payments. Also ramp of 14 nm products.

Weighted average shares outstanding 4,881 million.

Full year 2016 revenue was $59.4 billion up 7%, with $10.3 billion net income and $2.12 EPS. Non-GAAP net income was $13.2 billino and non-GAAP EPS was $2.72.

Intel believes it is the leader in AI. Because almost all datacenter chips are Intel.

Believes global PC supply chain is healthy and some inventory was burned off.

Q&A:

CCG operating margins, trend? Record margins came from strong mix and good unit costs as 14 nm matures, also constrained investment.

DCG margins? ASPs should increase in 2017, but unit costs also up, overall relatively good. Will make considerable investment in this sector. We also had a product quality issue in Q4, working on a fix. That should not continue in 2017.

PC market drivers? We have a more conservative view of 2017 than 3rd parties. In Q4 we had record i7 mix. We see a mid-single digits decline, which is an improvement over 2016. Our focus is on making money despite the declining market. If the third parties are right, we will see how it plays out.

Cloud vs. enterprise, unit projections? We expect enterprise to be flat or decline in 2017 from 2016 as it moves to the public cloud. We are working on private clouds too. Cloud is the growth engine. Enterprise is now under 50% of datacenter for us. Networking and storage space is growing, we have a small % of the market, so can grow there.

10 core gaming system sales exceeded our projections.

AMD affect on guidance? We always look at the competion vs. our own product road map. We believe our product roadmap is the best ever. So competition did not cause our cautious guidance, rather the overall market.

Share count? Over all, flat y/y.

We are investing disproportionately in datacenter, IoT, and memory, in 2017. These are new and expanding TAMs, including our focus within the datacenter group, like networking and storage. We are also investing in 5G.

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