Analyst Conference Summary

semiconductor technology

conference date: October 26, 2017 @ 2:00 PM Pacific Time
for quarter ending: October 1, 2017 (Q3; third quarter 2017)

Forward-looking statements

Overview: Raised full year guidance.

Basic data (GAAP):

Revenue was $16.1 billion, flat sequentially from $14.8 billion and up 2% from $15.8 billion year-earlier.

Net income was $4.5 billion, up 61% sequentially from $2.8 billion, and up 32% from $3.4 billion year-earlier.

GAAP EPS (diluted) was $0.94, up 62% sequentially from $0.58, but up 36% from $0.69 year-earlier.

Guidance:

Raised full year 2017 revenue estimate to $62 billion; GAAP EPS to $2.93; and non-GAAP EPS to $3.25.

Conference Highlights:

Brian Krzanich, CEO said "Intel’s product line-up is the strongest it has ever been with more innovation on the way for artificial intelligence, autonomous driving and more."

Non-GAAP numbers: Net income $4.8 billion, up 37% sequentially from $3.5 billion, and up 23% from $3.9 billion year-earlier. Diluted EPS $1.01, up 40% sequentially from $0.72 and up 26% from $0.80 year-earlier. [Intel usually only gives GAAP numbers. They gave non-GAAP numbers this year to account for the Altera acquisition.] 63.9% gross margin.

Client Computing group revenue was $8.9 billion, up 9% sequentially from $8.2 billion, and flat from year-earlier. ASPs were up 7%, units down 7%. The TAM shrank y/y. Launching 6 core desktop CPU with improved gaming. 10 nm chips are sampling, volume in 2018.

Data Center group revenue was $4.9 billion, up 11% sequentially from $4.4 billion, and up 7% from year-earlier. Strong cloud growth, while enterprise declined modestly. $2.3 billion operating income.

Internet of Things group revenue was $849 million, up 18% sequentially from $720 million, and up 23% from year-earlier. Won automobile entertainment and autonomous driving slots.

Memory segment (NAND) had revenue of $891 million, up 2% sequentially from $874 million and up 37% from year-earlier.

Programmable Solutions Group (formerly Altera) revenue was $469 million, up 7% sequentially from $440 million. up 10% from year-earlier when it was Altera. Datacenter and automotive led growth, but communications was weak. Critical to AI success. Will ship the nervana neural network processor, "the industry's first commercially available processor of its kind." Working with Facebook. Believes AI TAM will be $260 billion.

GAAP gross margin was 62.3%, down from 63.3% year-earlier.

Cash and equivalents balance $17.5 billion, down sequentially from $19.2 billion. $6.3 billion cash from operations. $1.1 billion used for stock repurchases. $1.3 billion was paid out in dividends. Debt about $30.3 billion.

Cost of sales was $6.1 billion, leaving $10.0 billion in gross profit. R&D expense was $3.2 billion. Marketing general and administrative was $1.7 billion. With restructuring of $4 million and amortization of $49 million, total operating expense came to $4.94 billion. Leaving operating income of $5.12 billion. Gain on equity investment was $846 million. Interest and other expense was $31 million. Tax provision about $1.41 billion.

Intel is committed to reducing spending to 30% of revenue by 2020.

Q&A:

AI advancements, competition? We lead in inference and are growing in that space. It is the smallest datacenter workload, but the fastest growing. You will start to see Nervana revenue in the back end of 2018. It will take time for clients to figure out how to use it.

Biggest server refresh in a decade, why not better revenue y/y? The ramp of new chips has just started. We have over 200 design wins at customers. It will take a year or more.

Gross margins down? 63% gross margin was our outlook, and that is where we are. "We feel pretty good about where we are." Good scale through the fabs has been a positive. Unit costs are down. 10 nm ramp costs are lower. But memory and modem business growth hurts gross margins, as do the higher engineering sample costs.

Inference part of cloud spend? We don't have a number. Partly because it is hard to tell what units go to AI workloads. But we know it is small.

Sustainability of modem side? We are on a yearly cadence of world class modems. We believe we can continue to grow that business.

Free cash flow tracking down this year, 2018? 2017 free cash flow is well above our guidance from early this year. It is from solid earnings growth and reduced cap ex, from $12 billion to $11.5 billion. We also reduced the impact of memory capital use. We are looking to reduce our net capital deployed in memory.

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