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Intel's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Intel Corporation (INTC) Q1 2014 Results Earnings Conference Call April 15, 2014 5:00 PM ET

Executives

Mark Henninger - Head of IR

Brian M. Krzanich - CEO

Stacy J. Smith - EVP and CFO

Analysts

Christopher Danely - JPMorgan

Jim Covello - Goldman Sachs

Ambrish Srivastava - BMO Capital Markets

Christopher Rolland - FBR Capital Markets

Doug Freedman - RBC Capital Markets

John Pitzer - Credit Suisse

C.J. Muse - ISI Group

Blaine Curtis - Barclays Capital

Stacy Rasgon - Sanford C. Bernstein & Co

Ross Seymore - Deutsche Bank

Mark Lipacis - Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the Intel Corporation First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to Mark Henninger, Head of Intel Investor Relations. Please go ahead, sir.

Mark Henninger

Thank you. And welcome everyone to Intel's first quarter 2014 earnings conference call.

By now, you should have received a copy of our earnings release and the CFO commentary that goes along with it. If you've not received both documents, they're available on our investor website, intc.com. I'm joined today by Brian Krzanich, our CEO; and Stacy Smith, our Chief Financial Officer. In a moment, we'll hear brief remarks from both of them followed by Q&A.

Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it and as such, does include risks and uncertainties.

Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Also, if during this call we use any non-GAAP financial measures or references, we'll post the appropriate GAAP financial reconciliation to our website, intc.com.

So, with that let me hand it over to Brian.

Brian M. Krzanich

Thanks Mark. 2014 is off to a solid start with our first quarter closing much as we expected. PC client platform unit volume was up year-over-year for the second consecutive quarter. Even as challenges remain in the consumer client segment, we saw continued improvement in enterprise clients, driven by increasing form factor innovation and refresh.

Mobile unit volume was up year-over-year for the first time since Q2 2012, while desktop units were flat year-over-year, with all-time record core volume and mix.

Our Data Center revenue grew 11% year-over-year and the enterprise segment was again in positive territory, up 3% over last year. While cloud, networking and storage were all up in excess of 20%.

The newly formed Internet of Things Group, which includes our embedded business, grew 32% year-over-year, with particularly strong demand in in-vehicle infotainment and retail. While the Internet of Things Group Atom volume nearly doubled over Q1 of last year.

We had all-time record NAND revenue driven by the Data Center and particularly, in cloud. And McAfee reported record Q1 bookings along with an 8% year-over-year increase in consumer bookings.

Perhaps more importantly, we made progress against our most critical strategic objective. And I'd like to take a few minutes to highlight that progress.

In PCCG, where we're working to reinvent computing with new form factor innovation, longer battery life and OS of choice, we saw 2 in 1 volume increase more than 20% sequentially in a seasonally down quarter.

We're now expecting more than 70 two-in-one designs for the back-to-school selling season and many will be offered at $699 or less. These trends, in combination with renewed interest in Windows 8 from our customers, are encouraging.

At the same time, we're ramping more than 130 Atom microarchitecture notebook and desktop designs with our Bay Trail M&D platforms, significantly increasing our presence in the value segment. And we exit the quarter with market segment share leadership on Chrome Systems and saw positive traction in small form factor and all-in one computing.

In DCG, we launched our Ivy Bridge MP server CPU family known as Xeon E7. The new E7 line, which features the largest memory footprint in the industry, saw particularly strong reception from enterprise as a result of its high speed, real-time data analytic capabilities.

We also announced an important strategic alliance with an investment in Cloudera which is designed to accelerate Hadoop innovation and penetration, particularly on IA.

We've broken out MCG results for the first time this quarter. In order to achieve long-term success in all of our market segments, from 2 in 1s all the way through to the Internet of Things, we're making the investments necessary for leadership, and you can see these investments in MCG's results.

For example, at Mobile World Congress in February, we announced multi-year, multi-device agreements with Lenovo, Asus, Dell and Foxconn to expand availability of out-of-base smartphones and tablets.

We set an aggressive goal of shipping 40 million tablet SOCs this year. And I'm happy to say we've tallied more than 90 designs on Android and Windows and shipped 5 million units in the first quarter, placing us squarely on track to that goal.

Our first LTE solution, the 7160, is now available in the Samsung Galaxy Note 3 Neo and the Asus Fonepad 7, in addition to the previously announced Samsung Galaxy Tab 3. Our Cat 6 LTE solution, the 7260, with carrier aggregation, is on track to ship this quarter. And Samsung, Asus, Lenovo, and Dell are all committed to the platform on a combination of phone and tablets, along with module vendors like Huawei and Sierra Wireless.

We demonstrated SoFIA, our first integrated apps processor and baseband, after adding it to the roadmap late last year. We're on track to ship the 3G solution to OEMs in Q4 2014, with the LTE version following in the first half of 2015.

In the new devices and Internet of Things Group, we're working to extend Intel technology into the fast-growing world of interconnected devices. We completed the acquisition of BASIS. BASIS provides access to new world-class technology and a team of proven innovators.

We also shipped our first Quark SoCs for the Internet of Things and announced an upgrade of Edison to the Silvermont Atom architecture. Edison is on track to ship this summer.

And in the Technology and Manufacturing Group, who've worked to advance Moore's Law as foundational to our long-term success, we began production on our 14-nanometer process technology and remain on track to launch Broadwell in the second half of the year.

And the foundry team extended our collaboration with Altera to the development of multi-dye devices that take advantage of our world-class package and assembly capabilities and Altera's leading-edge programmable logic.

Taken together, these milestones give me confidence that the pace inside our company and our progress with our customers is accelerating. We've made a lot of changes. We have more work to do, but I'm confident that we will continue to transform and realize our vision that if it computes, it does it best with Intel.

With that, let me turn the call over to Stacy.

Stacy J. Smith

Thanks, Brian. The first quarter came in consistent with expectations, demonstrating financial growth and a solid start to the year. For the first quarter, revenue came in at $12.8 billion, up 1% from a year ago and in line with expectations.

PC Client Group revenue was down 1% from a year ago. We saw PC Client Group platform unit volumes grow 1% year-over-year. And inclusive of tablets, we saw high single-digit unit growth. PC platform average selling prices declined 3% on a year-on-year basis.

Our Data Center Group revenue grew 11% from a year ago, with platform volumes up 3% and platform average selling prices up 8% over the same period.

Some insights into the revenue results of our new segments. The Mobile and Communications Group is down 61% from a year ago. The underlying dynamics are consistent with what we shared at the investor meeting last November.

We're seeing a decline in our feature phone and 2G/3G multi-[com] [ph] business, as we're in the midst of a transition to integrated LTE solutions. In addition, the ramp in tablet volume is being offset by an increase in contra revenue dollars.

The Internet of Things Group is up 32% year-on-year. We continue to see robust growth across segments with particular strength in point-of-sale devices in retail and automotive in-vehicle infotainment systems.

Gross margin of 60% was down two points from the fourth quarter and one point above our guidance. Spending came in at $4.9 billion, $100 million above our outlook, primarily driven by a current period charge relating to ongoing litigation.

Operating income for the first quarter was $2.5 billion; up 1% from a year ago, and earnings per share was $0.38, down 5% from a year ago.

As we look forward to the second quarter of 2014, we're forecasting the midpoint of the revenue range at $13 billion, up 2% from the first quarter. This forecast is in line with the average seasonal increase for the second quarter.

We're forecasting the midpoint of the gross margin range for the second quarter to be 63%. The three point increase from the first quarter is primarily driven by lower factory startup costs as we ramp 14 nm.

We're also forecasting higher platform volume and lower platform write-offs on the qualification of our first 14-nanometer products. This is partially offset by the increase in tablet volume and related contra revenue dollars.

Turning to full year 2014. We're still planning for revenues to be approximately flat to 2013. We expect PC Client Group revenue to decline in the mid-single-digits and the Data Center Group revenue to grow in the low double-digits.

We're forecasting the midpoint of our gross margin range at 61%, up one point from the outlook provided in January. This increase is primarily driven by lower unit costs across both our PC and tablet products and lower non-production manufacturing costs.

We are forecasting spending for the year at $18.9 billion. This $300 million increase over the prior outlook is driven by increased R&D investments and litigation expenses. We still expect capital spending to be flat to 2013 with the midpoint at $11 billion.

The first quarter was a solid start to 2014, reinforcing our view of the underlying market trends. The PC market has stabilized and on a year-over-year basis, we saw unit growth for the second quarter in a row.

In the Data Center, we continue to see robust growth rates in the cloud segment and the enterprise segment grew in the first quarter. These trends led to Data Center growth of 11% year-over-year.

We're winning designs and ramping our tablet volume rapidly and we have design wins in LTE that will result in a second half revenue ramp.

Our Internet of Things business grew over 30% in the first quarter on a year-on-year basis. And we're driving significant innovation in this area as we invest to extend our architecture into the very low power space and acquire IP and capabilities.

At IDF Beijing two weeks ago, we showcased the broad range of products we're bringing to the marketplace. These products range from servers in the Data Center to innovative PC form factors like detachables and all-in ones, to tablets, to phones, and to wearables. This is our strategy in action. If it computes, it does it best with Intel Inside.

With that, let me turn it back over to Mark.

Mark Henninger

All right. Thank you, Brian and Stacy. We're getting a little bit of feedback that some of you may be having a hard time hearing us, so I'm trying a different mic here and we'll hope that that's better.

Moving on to the Q&A, as is our normal practice, we'd ask each participant to ask one question and a follow-up if you have one. Jamie, please go ahead and introduce our first questioner.

Earnings Call Part 2:

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