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

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.

Gross margin of 64.5% was up almost five points from the first quarter and one a half points above our original Q2 guidance. The five-point increase relative to the first quarter is due to lower 14-nanometer start-up costs, higher platform volumes and lower platform unit costs. Spending came in at $4.9 billion in line with our revised outlook provided on June 12.

Net income for the second quarter was $2.8 billion, up 40% from the year ago and earnings per share was $0.55, up 41% from the year ago. The business continued to generate significant cash with over $5 billion of cash from operations in Q2. We purchased $2.8 billion in capital assets, paid $1.1 billion in dividends and repurchased over $2 billion of stock.

Total cash balance at the end of the quarter was roughly $17 billion, down approximately $1.7 billion from the prior quarter. Our net cash balance, total cash less debt, is approximately $4 billion, and inclusive of our other longer term investments is closer to $7.5 billion.

Our capital allocation philosophy is to first invest in our business, then generate shareholder return through our dividend and then to return cash to shareholders via stock repurchases. Our business generates healthy free cash flow through economic cycles but as a result of this capital allocation philosophy, we have brought down our net cash balances plus longer term investments from over $23 billion in 2010 to around $7.5 billion today.

We plan to continue our journey returning cash to our shareholders by adjusting our capital structure to further bring down our net cash balances. The intention is to repurchase $4 billion of stock in the third quarter with additional buybacks in Q4. This strategy enables the sufficient liquidity for our operations and provides strategic flexibility to invest in our business while continuing to return cash to our shareholders.

As we look forward to the third quarter of 2014, we are forecasting the midpoint of the revenue range at $14.4 billion, up 4% from the second quarter. This forecast is in line with the average seasonal increase for the third quarter that we are seeing over the last several years.

We are forecasting the midpoint of the gross margin range for the third quarter to be 66%. The one and a half point increase from the second quarter is primarily driven by lower platform unit costs and higher platform volumes. This is partially offset by lower platform average selling prices.

Turning to full year 2014, we are planning for revenue growth relative to last year. This is approximately 5%. We are forecasting the midpoint of our gross margin range at 63%, up two points from the midpoint of the outlook provided on April 15. This increase is primarily driven by lower platform unit costs, higher platform volumes partially offset by lower platform average selling prices.

As I reflect on the first half of 2014, I believe the strategy that we put in place for this year are playing out nicely to extend the reach of Intel technologies across the spectrum of the smallest embedded devices to the most powerful supercomputers. We have seen better than expected trends in the overall PC market but strength in both non-consumer and desktop segments.

We’re enabling innovative two-in-one devices and lower price points and we are growing our market segment share. We have brought new products into the data center which drive a strong return on investment for our customers to upgrade their infrastructure and we are benefitting from both our product line up and the build out of the cloud.

The Internet of Things business is growing fast as we bring intelligence to more and more devices and we are making investments in communications and tablets that benefit the breadth of our businesses and set us up for improving financial results going forward. As a result of these trends and our execution, our financial results are improving. We’re generating free cash flow and we were returning more of that cash to our shareholders.

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

Mark Henninger – Head of IR

Okay. Thank you, Brian and Stacy. Moving on to the 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. Saied, please go ahead and introduce our first questioner.

Question-and-Answer Session

 

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