Intel’s (INTC) CEO Brian Krzanich on Q2 2014 Results – Earnings Call Transcript

July 21, 2014 2:06 am | By More

Source: Seeking Alpha

 

Intel Corporation (NASDAQ:INTC)

Q2 2014 Earnings Conference Call

July 15, 2014, 17:00 PM ET

Executives

Mark Henninger – Head of IR

Brian M. Krzanich – CEO

Stacy J. Smith – EVP and CFO

Analysts

Vivek Arya – Bank of America Merrill Lynch

Joe Moore – Morgan Stanley

John Pitzer – Credit Suisse

Jim Covello – Goldman Sachs

Ross Seymore – Deutsche Bank

David Wong – Wells Fargo

Mike McConnell – Pacific Crest Securities

Stacy Rasgon – Sanford C. Bernstein & Co.

Romit Shah – Nomura Securities

Hans Mosesmann – Raymond James

Christopher Rolland – FBR Capital Markets

Ian Ing – MKM Partners

Operator

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

I would now like to turn the conference over to Mr. Mark Henninger, Head of Intel Investor Relations. Sir, you may begin.

Mark Henninger – Head of IR

Thank you, Saied, and welcome everyone to Intel’s second 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 discussions contain 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 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 investor website, intc.com.

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

Brian M. Krzanich – CEO

Thanks, Mark. The second quarter exceeded our expectations. The improving economic environment, PC refresh, form factor innovation and the end-of-life of Windows XP combined to drive better than expected demand. In fact microprocessor volume in the second quarter was an all-time record.

From the most powerful supercomputers to the smallest energy-efficient embedded machines, the breadth and strength of our results suggest that our reach is extending. The PC Client Group’s results reflect the third consecutive quarter of year-over-year unit growth. In Q2, both the desktop platform revenue and the notebook platform revenue grew year-over-year.

The installed base of PCs that are at least four years old is now roughly 600 million units and we are seeing clear signs of a refresh in the enterprise in small and medium businesses. While there are some signs of renewed consumer interest and activity, the consumer segment remains challenging, primarily in the emerging markets.

The Bay Trail family of SoCs has been a standout that has helped us expand into [new] [ph] segments. Bay Trail’s performance allows us to deliver a much smaller and lower cost Atom based core in our Pentium and Celeron brands for the first time. Our Bay Trail SoC volume in desktops and clam shells more than doubled over the last quarter and now represents more than 60% of our Pentium and Celeron mix and nearly 20% of our notebook mix.

This is enabling our growth at lower price points and in new segments like Chrome-based systems without sacrificing margin. The data center business had a strong quarter with 19% growth year-over-year leading to all-time record revenue $3.5 billion. Following last quarter’s launch of the Ivy Bridge-based Xeon E7 processor family, we saw strong NP volume and a richer product mix and ASP mix.

Cloud, networking, high-performance computing and enterprise revenue all grew more than 15% in the second quarter. Demand and revenue growth in several segments demonstrated the growing reach of Intel technology beyond CPUs for PCs and servers. Our Internet of Things Group grew 24% year-over-year and set a revenue record, as the retail and manufacturing sectors performed especially well. NAND revenue grew 20% and McAfee revenue grew 5%.

Finally, we are squarely on track to our 40-million-unit tablet goal shipping 10 million units in the second quarter. We also achieved some important milestones during the quarter. We qualified the first Broadwell-based Core M processors and at Computex we highlighted the form factor innovation that 14-nanometer Core M product family will enable. Systems like Llama Mountain reference design, a fanless detachable two-in-one that is razor thin at 7.2 millimeters and weighs just 24 ounces.

We also announced a landmark strategic relationship with Rockchip to accelerate and expand our SoC roadmap for the value and entry tablet market segment. And our foundry business announced that Panasonic joined the growing list of companies that will use our leading-edge 14-nanometer process technology.

While I’m pleased with the second quarter results and the strength in the enterprise in small and medium businesses, we’re watching for signs of sell-through in consumer PCs in the second half of this year. Additionally, we have important work to do in the months ahead. We are working towards qualification of our 7260, our Category 6 LTE product with carrier aggregation early this quarter.

Later this quarter, we’ll launch our next generation Haswell-based Xeon E5 platform codenamed Grantley. We also expect the first 14-nanometer Broadwell Core M processor-based systems including fanless two-in-ones will be on shelves for the holiday selling season, followed by broader OEM availability in the first half of 2015.

In SoFIA, our integrated baseband and apps processor for smartphones and tablets remains on track for Q4 of this year. All of this work is critical to growing the business. Along with our earnings results, we announced a $20 billion increase to our buyback authorization and we intend to pursue a sizable repurchase of stock over the second half of the year.

Stacy will talk more, specifically about our plan, but this change to our capital structure and allocation is a direct result of our ongoing commitment to delivering shareholder value and a thoughtful stewardship of our owner’s capital.

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

Stacy J. Smith – EVP and CFO

Thanks, Brian. The second quarter came in above the expectations we provided in the April earnings call and consistent with the revised outlook we released on June 12. It was a good quarter representing financial growth and solid momentum as we enter the second half of the year.

Focusing on our second quarter results, revenue came in at $13.8 billion, up 8% from a year ago. Both the PC Client Group and the Data Center Group achieved better growth than we expected at the beginning of the quarter. PC Client Group revenue was up 6% from a year ago.

We saw PC Client Group platform unit volumes grow 9% year-over-year and inclusive of tablets, we saw almost 20% unit growth. PC platform average selling prices declined 4% on a year-on-year basis. Our Data Center group revenue grew 19% from the year ago with platform volumes up 9% and platform average selling prices up 11% over the same period.

Looking beyond the PC and data center businesses, the mobile and communications group is down 83% from the year ago. The underlying dynamics are consistent with what we shared at the investor meeting last November. We are ahead of our expectations in tablet volume but the billing increase is being offset with an increase in contra revenue dollars.

We are seeing a decline in our feature phone and 2G/3G multi-comm business as the industry transitioned to integrated LTE solutions. The Internet of Things Group is up 24% year-on-year. We continue to see robust growth across segments with particular strength in the retail and manufacturing segments.

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