Intel Corporation (INTC) Q3 2013 Earnings Conference Call October 15, 2013 5:00 PM ET
Mark Henninger - Director of Investor Relations
Brian Krzanich - Chief Executive Officer, Director
Stacy Smith - Chief Financial Officer, Executive Vice President, Director, Corporate Strategy
Joe Moore - Morgan Stanley
Blayne Curtis - Barclays
Patrick Wang – Evercore
Doug Freedman - RBC Capital
John Pitzer - Credit Suisse
Romit Shah - Nomura
Glen Yeung - Citi
Christopher Roland - FBR
Kevin Cassidy - Stifel, Nicolaus & Company
Ambrish Srivastava - BMO
Timothy Arcuri - Cowen and Company
Jim Covello - Goldman Sachs
David Wong - Wells Fargo
Vivek Arya - BoA/Merrill Lynch
Good day, ladies and gentlemen, and welcome to your Intel Corporation Q3 2013 Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Mark Henninger. Sir, you may begin your conference.
Thank you, Nova, and welcome everyone to Intel's third quarter 2013 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 have not received both documents, they are currently available currently on our Investor website, intc.com. I am joined today by Brian Krzanich, our CEO and Stacy Smith, our Chief Financial Officer. In a moment, we will hear brief remarks from both of them followed by Q&A.
Before we begin, let me remind everyone that today's discussions contain forward-looking statements based on the environment as we currently see it, and as such, it 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 will post the appropriate GAAP financial reconciliation to our website, intc.com.
And finally, I would like to remind everyone that we will be hosting our Investor Day here at our Santa Clara headquarters on November 21. If you have questions about the event or the logistics, please contact Investor Relations.
So with that, let me hand the call over to Brian.
Thanks, Mark. During the third quarter, our revenue grew 5% sequentially and was flat versus the third quarter of 2012. Year-over-year PC CPU volume declines slowed and were offset by solid growth in the data center and enterprise. While consumer demand in emerging markets was sluggish, we started to see early signs of improvement in North America and Western Europe. I see our performance in this environment as evidence of an increasingly broad and diverse product portfolio. I would like to highlight a few of the most important results from the quarter.
Following the launch of Ivy Bridge EP and the Atom-based Avoton SoCs, the Data Center group delivered all-time record revenue. DCG saw strength across its lines of business and geographies. Cloud revenue was up 40% year-over-year, storage was up 20%, and high performance computing was up 27%. Even traditional enterprise servers were up a bit over the last year on the strength of our MP product line.
While the Data Center Group's results demonstrate some of Intel's core capabilities, we saw strong performance beyond DCG. Our embedded business grew 21% year-over-year, reaching an all-time record for revenue driven by communications infrastructure, transportation, the internet of things, and retail. Embedded revenue is well on its way to a double-digit growth year.
Just a few weeks ago, we announced our newest product family, Quark, an ultra-low power and low-cost architecture. And while any significant revenue impact is some time away, the architecture and the speed with which we are bringing it to market are evidence of the changes we are making to ensure we are in a better position to lead and define technology trends moving forward.
Finally, our NAND business grew 20% over last year. As enterprise and data center customers increasing use of high-performance SSDs have put this segment on a path to double-digit growth for the year. We continue to make progress with the industry's first 14 -nanometer manufacturing process and our second-generation 3D transistors. Broadwell, the first product on 14 nanometers is up and running as we demonstrated at the Intel Developer Forum last month.
While we are comfortable with where we are at with yields, from a timing standpoint, we are about a quarter behind our projections. As a result, we are now planning to begin production in the first quarter of next year.
In the Wireless business, I was pleased with our progress on LTE. Our multimode data modem is now available in the Samsung Galaxy Tab 3. By the end of the year, we expect to have voice-over-LTE versions available for customers and our second generation of voice-over-LTE product with carrier aggregation will be available in the first half of next year.
Over the past couple of months, we have also launched 15 new 22-nanometer Atom SoCs. These products are designed for markets ranging from consumer tablets to cloud data centers. During the holiday selling season, you will see Atom SoCs and tablets as low as $99, and in 2-in-1 systems as low as $349.
At the same time, you will also find Haswell Systems with outstanding performance and 50% better battery life using Windows 8, Mac OS, and Chrome as low as $299. Together, Bay Trail and Haswell are making possible a range of innovative new form factors at breakthrough price points.
The past few years have seen dramatic changes in the way consumers use and interact with technology, and those trends aren't slowing down. While preferences for form factor OS’s and price points have evolved, the market’s appetite for computing has continued to grow.
We are going into the fourth quarter with the broadest portfolio in Intel's history, positioned to fully participate in all of that growth.
With that, let me turn the call over to Stacy.
Thanks, Brian. The third quarter revenue came in as expected and gross margin was slightly better than the mid-point of the forecasted range. Third quarter revenue came in at $13.5 billion, up 5% from the second quarter. At the segment level, the PC Client Group grew 4%, sequentially, and the Data Center Group grew 6%. The Data Center Group returned to double-digit year-on-year growth in the third quarter growing 12% from a year ago. As expected, inventory levels across the worldwide PC supply chain grew slightly as customers built Haswell-based PCs, but inventory levels are still being managed well below historical averages.
For the fourth quarter of 2013, we are forecasting the mid-point of the revenue range at $13.7 billion, up 2% from the third quarter. Relative to the historical seasonal increase, the fourth quarter forecast reflects the orders we are receiving from our customers and their desire to keep inventory levels lean.
Moving to gross margin, third quarter gross margin of 62% was up 4 points from the second quarter and up 1 point from our guidance. The increase from the second quarter was as a result of lower platform unit costs, higher platform revenue, and lower write-offs. In addition, factory start-up costs came down in the third quarter as spending on process engineers was reclassified from cost of sales to R&D.
For the fourth quarter, we expect gross margin to decrease by 1 point to 61% as we increase factory spending on 14 nanometer. For the third quarter, spending was down $100 million from expectations and flat from the second quarter at $4.7 billion. The $100 million decrease from expectations was as a result of a lot of small actions across the company to reduce spending. For the fourth quarter, we are forecasting spending consistent with the third quarter at $4.7 billion.
In order to better align resources with our priorities, during the third quarter we approved and communicated several restructuring actions. Restructuring charges in the third quarter were just north of $100 million and we expect restructuring in the fourth quarter to be roughly flat. Operating income for the third quarter was $3.5 billion with earnings per share of $0.58.
Taking a look at the balance sheet, total cash investments ended the quarter at $19.1 billion, up $1.8 billion from the second quarter. In the third quarter, we generated approximately $6 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.
Inventories were flat from the second quarter. The fourth quarter revenue forecast of up 2% reflects the caution we are seeing from our customers due to weak consumer end markets for the PC segment of our business. That said, we are seeing some important positive trends. The enterprise market for PCs strengthened in the third quarter and the consumer markets in the U.S. and Europe appear to have bottomed out. Our Data Center business returned to double digit year-on-year growth based on a resumption of growth in the enterprise market segment and continued robust growth in cloud, high-performance computing, and storage.
From a product perspective, we have an unprecedented line-up of products coming to the market this holiday season. Haswell delivers a historical increase in battery life across the diverse lineup of ultra-mobile form factors by like 2-in-1 convertibles, tablets, and other touch enabled devices. We are also starting to see our customers come to market with Bay Trail based designs that will further extend our product line across screen sizes and price points in both tablets and PCs. This extension of our product lineup across devices, price points, and operating systems positions us to grow our business across a broad range of compute devices.
With that, let me turn it back over to Mark.
Alright. Thank you, Brian and Stacy. Moving on to Q&A, as is our normal practice we would ask each participant to ask one question and just one follow-up, if you have one. Nova, would you like to go ahead and introduce our first question please?
Earnings Call Part 2: