Edited Transcript of Intel Q3 2014 Earnings Conference Call..
Company: Intel Corp (INTC)
Event Name: Q3 2014 Results Earnings Conference Call
Date: October 14, 2014 5:00 PM ET
Operator: Good day ladies and gentlemen and welcome to the third quarter 2014 Intel Corporation earnings conference call. (Operator Instructions) As a reminder, today’s conference is being recorded.
I would now like to turn the call over to Mark Henninger, Head of Intel Investor Relations. Please go ahead sir.
Mark Henninger – Head of Intel IR
Thank you, Jamie. And welcome everyone to Intel’s third 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 are 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 investor website intc.com.
And finally, I’d like to remind everyone that we’ll be hosting our annual investor meeting here in our Santa Clara headquarters on Thursday, November 20. If you have questions about the event or logistics, please contact Investor Relations.
So with that, let me hand it over to Brian.
Brian Krzanich – CEO
Thanks, Mark. Our third quarter results were consistent with our expectations and included a number of important milestones.
Revenue and earnings per share both set new records with strong performances from the PC and the Data Center groups. The trends we observed in the PC market last quarter continued with stability in mature markets, offset by ongoing declines in emerging markets.
The PC Client Group launched Core M, a new family of products with full core performance in both compute and graphics in a fanless design, enabling breakthrough designs and form factors. The first of these systems will be available by the end of this month.
In the Data Center, we saw a double-digit revenue growth across all four major market segments: Enterprise grew 11%; networking grew 16%; and HPC and cloud service providers grew 22% and 34%, respectively.
We also launched the new Xeon E5 processor, formerly known as Grantley. This product family provides leadership features and performance for compute, storage and network workloads. Formally launched just five weeks ago, E5 is already 10% of our DP or two-socket volume.
In the mobile communications group, losses declined sequentially and that’s the trend we need to see continue. Tablet volume was nearly 15 million units and we remain on track to our 40 million unit goal for 2014.
Third parties estimate that we are now the second largest tablet SoC vendor worldwide and the largest among merchant suppliers.
In addition, Samsung chose our Cat6 LTE modem with carrier aggregation known as the 7260, for its recently announced Galaxy Alpha and Galaxy Note 4. The strategic importance of these capabilities continues to grow.
Our LTE technology, which we originally developed for phone, is becoming increasingly valuable in tablets and even PCs as wireless wide area network connectivity becomes increasingly common. We estimate, for example, that by 2018 the rate of baseband attached to tablets will roughly double and that PCs will rise to more than 15%.
Overall we’ve made some good progress during this quarter. Yet, we have important work left to do. Within our factory network, 14-nanometer yields improved meaningfully, but we’re behind where we expect it to be. These challenges highlight just how difficult it has become to ramp advanced process technology.
I’m most pleased that our strategy for growth is beginning to yield results across a remarkably wide range of products. We sold record volumes of PC, server, Internet of Things, phone and tablet products. The diversity and scale of our products uniquely position us across the breadth of devices that compute and connect.
Importantly, our results demonstrate that we are building on our success in the PC and Data Center segments to successfully pursue adjacent opportunities. These businesses are the source of tremendous intellectual property and that IP creates valuable and important synergies that position us to compete in an increasingly diverse computing market.
Let me share a few examples. At IDF, I showed the world’s thinnest tablet. A Dell Venue with Intel RealSense technology. It has an industry first 3D camera that enables features like after the fact focusing, and a host of capabilities that have the potential to change how people engage with their photography. That technology was first developed for PCs and was adapted for tablets. In this case we’re in a position to differentiate in tablets precisely because we invested in next generation technology for PCs.
Another example of IP synergy is the Atom microarchitecture. We first brought Atom to market as an extension of the PC product family. We’ve purposely evolved that IP to the point that it now spans from smartphones to tablets and mainstream PCs and from storage, networking and compute devices in the data center to the Internet of Things.
Lastly, I’m excited about the moves we’re making to engage the ecosystem in new and potentially disruptive ways. We’re establishing our position and capabilities in emerging sectors like wearables before they become mainstream.
The data center team is customizing our Xeon products for specific customers and workloads. Custom SKUs now number roughly 35 and over the last year volume from custom SKUs has grown at 3x the rate of our off-the-shelf product.
And we’re also striking groundbreaking strategic agreement. Our recently announced collaborations with Rockchip and more recently, Spreadtrum will provide new sources of innovation and a new set of partners that will work with us to scale Intel architecture. Our vision is that if it’s smart and connected, it’s best with Intel. The breadth of our results this quarter, our progress against our strategic goals and the changes we’re making in our approach to end markets, leave me convinced that our strategy is working.
With that, let me turn the call over to Stacy.
Stacy Smith – CFO
Thanks, Brian. The third quarter was the highest revenue in the company’s history, with overall results demonstrating solid financial growth as we approach the end of this year.
Focusing on our third quarter results. Revenue came in at $14.6 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 9% from a year ago. We saw PC Client Group platform unit volumes growth 15% year-over-year and inclusive of tablets, we saw almost 30% unit growth. Of note, our notebook platform units grew over 20% year-over-year as we were enabling innovative two-in-one devices and growing our market segment share with Bay Trail at lower price points.
Our Data Center Group revenue grew 16% from a year ago with platform volumes up 6% and platform average selling prices up 9%. We are seeing robust growth rates across all the segments of our data center business.
Operating income for the third quarter was $4.5 billion, up $1 billion and 30% from a year ago. Operating income in the PC Client Group was $4.1 billion and in the Data Center Group operating income was $1.9 billion.
The Mobile and Communications Group had $1 billion of loss, which is an $81 million improvement from the second quarter. The company generated $3.3 billion of net income for the third quarter, up 12% from a year ago. And earnings per share was $0.66, up 14% from a year ago.
Our net inventory levels rose modestly quarter-over-quarter as we were efficiently managing capacity while ramping Broadwell on 14-nanometer. The worldwide PC supply chain appears to be healthy with inventory levels appropriate in anticipation of the fourth quarter retail cycle.
Moving to gross margin. Third quarter gross margin of 65% was up 0.5 point from the second quarter and down 1 point from our guidance. The increase from the second quarter was primarily due to lower platform unit costs on 22-nanometer and higher platform volume, mostly offset by higher production costs on 14-nanometer products.