Intel Corporation. (INTC) Q2 2013 Earnings Conference Call July 17, 2013 5:00 PM ET
Brian M. Krzanich - CEO
Stacy J. Smith - EVP and CFO
Mark Henninger - Investor Relations
Glen Yeung - Citigroup
Vivek Arya - Bank of America Merrill Lynch
Christopher Danely - JP Morgan
John Pitzer - Credit Suisse
Stacy Rasgon - Sanford Bernstein
Ross Seymore - Deutsche Bank
David Wong - Wells Fargo
James Covello - Goldman Sachs
Tristan Gerra - Robert W. Baird
Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Intel Corporation Earnings Conference Call. My name is Jamie, and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I’d now like to turn the presentation over to your host for today’s call Mr. Mark Henninger, Director of Investor Relations. Please proceed sir.
Great, thank you Jaime and welcome everyone to Intel’s second quarter 2013 earnings conference call. By now you should have received a copy of our earnings release and the CFO commentary that goes along with that. If you’ve not received both documents, they’re available currently at our investor website, intc.com.
I’m joined today by Brian M. 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 reconciliations to our website, intc.com.
Lastly, I’d like to highlight a change we’ll be making to our earnings release process starting with the third quarter earnings announcement on October 15, 2013. To ensure the timely and controlled release of information, we plan to make our results available on our IR website intc.com about a minute after the market close and no longer distribute quarterly financial results through a newswire service.
With that, let me hand the call back over to Brian.
Brian M. Krzanich
Thanks, Mark. It’s great to have a chance to speak to you all on my first earnings call as CEO. The last two months have been exciting for me. I’ve spent the majority of my time meeting with customers, employees, and my executive team. I have heard a wide variety of views about our industry and Intel, how we’re positioned, where we’re strong and where we can improve. I have the opportunity to share my vision and strategy for our Company and lay out my expectation as we move into the new era with an updated set of priorities.
Those conversations lead me more enthusiastic and more confident than ever about our opportunity as a Company. Intel has unmatched assets in process technology and architecture. A powerful brand and talented employees that are producing some remarkable results.
Let me give you a few highlights from the second quarter. There were several significant milestones in mobility. First, we unveil details about our next generation atom architecture, code named Silvermont. The Silvermont architecture will deliver up to 5x reduction in power at the same level performance or up to a 3x improvement in performance over our prior generation of architecture.
Silvermont is unique and its ability to span the market’s appetite for computing. From ultra-mobile devices to the datacenter. And it supports both windows and android. The Silvermont platform were underpinned – are underpinned our products for tablets, two in ones and desktops, as well as our phones and microserver products for the datacenter. The products will be Bay Trail, Merrifield and Avonton respectively.
Then at Computex, we launched the Haswell family of processors, which delivered the biggest improvement in battery life in Intel’s history, making no comprises, high performance, two-in-one devices that make – that all day battery life a reality. Haswell along with Bay Trail will power more than 50 different two-in-one devices in the pipeline, including the very first fanless Core design.
During the same week at Computex, we also announced the landmark tablet design in the Samsung Galaxy Tab 3. The Galaxy Tab 3 will use an atom SoC and our LTE solution, signaling important progress in the tablet space. The datacenter strategy is continuing to pay dividends.
Our cloud storage – cloud and storage business each grew their revenue more than 40% year-over-year. Networking grew more than 20% and high performance computing business were 98% of all new systems entering the top 500 list. In fact, the number one system on the top 500 was all Intel for the first time since 1997, using a combination of Intel Xeon CPU’s and Xeon Phi accelerator.
And finally our investments and expertise in process technology continue to be the foundation of our industry leadership. With 22 nanometer defect density and throughput times at record low levels and 14 nanometer on-track to enter production by the end of the year. Together, these accomplishments highlight to me what’s possible when we focus our resources on the right objectives and we hold ourselves accountable for results.
At the same time, I understand that we’ve not always lived up to the standard that we have set for ourselves. Intel was slow to respond to the ultra-mobile PC trend. The importance of that can be seen in the current market dynamics. The traditional PC market segment is down from our expectations at the beginning of the year while ultra-mobile devices like tablets are up.
Even more important, there were always be another next big thing. It’s our job to continue to scan for emerging trends, unlocking, participating in, and shaping these nascent markets. Doing that will require some changes at Intel, which we have begun.
Just a few weeks ago, I announced a significant reorganization. The changes we’ve made flatten the organization, improved decision making and will contribute to a culture of even greater accountability. These elements are critical in the fast paced ultra-mobile environment.
In addition to the organizational changes, we have made several strategy and priority changes that will allow us to focus and win in that environment. These changes will drive a greater emphasis on Atom-based products bringing the full weight of our process and architectural leadership to the Atom family.
We will move Atom even faster to our leading-edge silicon technology and focus on the SOC integration of key components like graphics, communications and other devices. This does not mean we will lessen the value or leadership of our Core product family, but rather make Atom an equal player in technology leadership for the ultra-mobile space. Both product lines will be driving Intel's future.
Some of the changes we're making are subtle and some are more transformational. In general, you're likely to see us making moves and adjustments in the market before you hear us talking about them. But we'll of course have a substantive update for you at the investor meeting in November.
What I can say now is that all of the changes are focused on value creation. Our company has a strong record of cash flow generation and returning that cash to our owners. I recognize that we are the stewards of our owners' capital and that tradition will continue. I'm excited about what lies ahead.
Intel is a company with extraordinary assets at its disposal and I'm looking forward to making the most of those assets in an environment where the pace of innovation and market trends force transformation is faster than it's ever been.
With that, let me turn it over to Stacy.
Stacy J. Smith
Thanks, Brian. I'd like to take a few minutes to walk through our second quarter financials and our expectations as we head into the back half of the year. Then we can get right into Q&A.
The second quarter results came in as expected. Second quarter revenue came in at $12.8 billion, up 2% from the first quarter. The Core business came in as expected but we saw some softness in our baseband business. At a segment level, the PC group grew 1% sequentially and the data center group grew 6%.
As expected inventory levels across the worldwide PC supply chain grew slightly as customers began building Haswell based PCs, but inventory levels are still being managed well below historical averages based on uncertainty heading into the back half of the year.
For the third quarter of 2013, we are forecasting the midpoint of the revenue range at $13.5 billion, up 5% from the second quarter which is at the lower end of the historical range as a result of our expectation that our customers will continue to operate with lean inventory levels exiting the third quarter.
Moving to gross margin, second quarter gross margin of 58% was in line with our guidance and up 2 points from the first quarter as a result of the qualification for sale of additional Haswell products and higher volume. As expected, the reduction in excess capacity charges in the second quarter was offset by an increase in 14 nanometer start-up costs.
For the third quarter, we expect gross margin to increase 3 points to 61% as we qualify our Bay Trail product line for sale, increase our volume, and start to see factory start-up costs come down.
For the second quarter, spending was in line with expectations at $4.7 billion. For the third quarter, we're forecasting an increase to total spending of $100 million. The reclassification spending on process engineers from across the sales to R&D increases our spending but we expect this will be mostly offset by spending reductions across the company. These spending reductions allow us to reduce our spending forecast for the year to $18.7 billion.
Operating income for the second quarter was $2.7 billion with earnings per share of $0.39. Taking a look at the balance sheet, total cash investments ended the quarter at $17.4 billion, up slightly from the first quarter. In the second quarter, we generated approximately $5 billion in cash from operations, paid approximately $1 billion in dividends, purchased almost $3 billion in capital assets and repurchased over $0.5 billion in stock.
While our first half financials played out as expected, the overall PC market segment for 2013 is expected to be weaker than we forecast at the beginning of the year. Our expectation is now that revenue will be approximately flat to last year. As a result, our gross margin forecast for the year is now 59% versus the prior forecast of 60%. Additionally, we have reduced our forecast for capital spending by $1 billion to $11 billion.
We have an unprecedented lineup of products coming to market in the second half of this year across all the segments of our business. Haswell delivers a historical increase in battery life across a diverse line up of ultra-mobile form factors like 2-in-1 convertibles, tablets and other touch-enabled devices. In the second half, we will launch Bay Trail which will further extend our product line across screen sizes and price points in both tablets and PCs.
In our phone business, we are on track to ship multimode data and voice LTE baseline solutions as well as our next generation applications processor codename Merrifield by the end of the year. In the data center, we have new microserver and Xeon [class] products coming to market in the second half.
This leadership product portfolio is built on an extending manufacturing lead which gives us the world's highest performing, lowest cost and lowest power transistors. Building on its leadership further, we are on track to start production on our 14 nanometer process technology in the back half of this year.
With that, let me turn it back over to Mark.
All right. Thank you, Brian and Stacy. Moving on to the Q&A, as is our normal practice, we'll ask each participant to ask one question and a follow-up if you have one. Also, we are experiencing some network interference, so I'll ask all the participants to speak slowly and clearly and if we're not able to hear you, we will ask you to repeat the question.
Jamie, if you could go ahead and introduce our first questioner.
Earnings Call Part 2: