Full Transcript of Intel's 3Q05 Conference Call - Prepared Remarks (INTC)

| About: Intel Corporation (INTC)

Here’s the entire text of the prepared remarks from Intel's (ticker: INTC) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
[[ more ]]


Doug Lusk, Intel Corporation - Director, IR

Thank you, and welcome to the Intel third quarter earnings conference call. Attending from Intel are CEO, Paul Otellini, and CFO, Andy Bryant.

Before we begin, please bear with me a minute while I read our Safe Harbor language. The third quarter earnings report discusses Intel's business outlook and contains forward-looking statements. These particular forward-looking statements, and all other statements that may be made on this call that are not historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially.

Please refer to our press release for more information on the risk factors that could cause actual results to differ. The specific forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rate, interest and other income, capital spending, depreciation, and amortization of acquisition-related intangibles and costs.

These statements do not reflect the potential impact of any mergers, acquisitions, divestitures, investments, or other business combinations that may be completed after October 17, 2005. Lastly, if during this call we use any non-GAAP financial measure as defined by the SEC and Reg G, you will find on our website, http://www.intc.com/, the required reconciliation to the most directly comparable GAAP financial measure. With that, I will turn it over to Paul.



Want to know about a more tax-efficient, better diversified way to invest in US large-caps?

iShares S&P 500 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and taxes, of US large-cap stocks, as represented by the Standard and Poor’s 500 Index. Learn how IVV’s holdings represent a smart way to invest in US large-caps. Compare returns for the iShares S&P 500 Index Fund.

iShares is the world’s largest family of exchange traded funds, or ETFs. With nearly 100 different equity and fixed income funds to choose from (about 4 times the selection of any other ETF family, investors can create an asset allocation plan that’s precise, tax-effecient, and tailored to your specific needs. Contact iShares for more info.

To sponsor a Seeking Alpha transcript click here.

Paul Otellini, Intel Corporation – CEO

Thanks, Doug. Revenue in the third quarter finished just below $10 billion, and was an all-time record for Intel. 18% year-over-year growth was driven by robust demand for our notebook platforms, and emerging market strength, with records in several countries, including China and India. At the product level, we set new unit records for microprocessors, chipsets, flash memory, wireless LAN connections, and applications processors. We also continue to make excellent progress with our transition to dual-core, with over 1 million units shipped so far this year, and plans to more than double that by year end.

Last week, our Digital enterprise group launched our first dual-core products for the server space. These new Xeon processors code-named Paxville are ramping ahead of schedule, with DP system announcements from over 30 OEMs to-date, and MP systems launching later this quarter. These systems provide industry-leading price performance, with a system from Dell breaking the $1 per TPC mark for the first time ever.

Our 65-nanometer dual-core Bensley platform remains on-track for production in Q1, and we are already providing seed units to end customers, to help in the rapid adoption of this exciting new platform, which will feature faster memory and IO, plus new virtualization and manageability technologies. I am pleased to announce that Intel is now in commercial production of its 65-nanometer, 300-millimeter process technology, and that we recently shipped our first dual-core Presler processors for revenue, with desktop systems expected in the marketplace early next year. Our overall dual-core ramp is also proceeding very nicely, and we plan to ship millions of dual-core units this quarter across notebook, desktop, and servers.

Moving to our Mobility Group, we had an excellent quarter with record shipments of mobile CPUs, chipsets, and wireless LAN components. Notebook demand remains strong in all of our geographies, and we believe notebooks now represent about one-third of the PC market worldwide, with levels well over the 50% mark in the consumer segments, in Japan and Western Europe. Our first dual-core CPU for Mobile, code-named Yonah, remains on-track for revenue shipments later this quarter, with an early first quarter launch with our Napa platform.

In Flash, we had an all-time record in unit shipments, and grew our #1 position in NOR. Our application processor business also had record units, and continues to grow rapidly, with units doubling versus last year. In addition, Research In Motion announced plans to use Intel's new cellular processor code named Hermon, in its next-generation BlackBerry device.

In the Digital Home Group, we unveiled the new Intel Viiv brand name, for upcoming digital home platforms, that will deliver our best-ever consumer experience, with a variety of online services and software, such as movies, music, photos, and games. Available in the first quarter of 2006, Intel Viiv platforms will come in a variety of shapes and sizes, and will include dual-core processors, chipsets, and platform technologies designed from the ground up, to deliver ease of use in the digital home.

We are also developing platforms to power consumer electronics devices, such as digital televisions, set-top boxes, and digital media recorders. We announced the Oplus system-on-a-chip multimedia display processor, for flat panel displays and HDTV monitors. We also announced plans to acquire tuner technologies and capabilities from Zarlink Semiconductor, that will allow our platforms to receive, process, store, and display digital broadcast signals.

In summary, the third quarter was a record quarter for Intel in a number of areas. Our 65-nanometer process technology is in production, and on-track to ramp into high volume in 2006. We are executing on our dual-core roadmap, with 15 projects underway, and expect to ship millions of dual-core units in the fourth quarter alone. In 2006, we will aggressively ramp dual-core across all of our platforms, with plans to crossover from the single core in our performance segments by the third quarter of that year. With that, I will turn it over to Andy for more details on the quarter.

Andy Bryant, Intel Corporation – CFO

Thanks, Paul. For several years, we have spoken of three powerful forces shaping our business. Growth in emerging markets, demand for mobility, and advances in manufacturing. The third quarter was another case-in-point, as these forces combined to deliver strong financial results.

Revenue, gross margin dollars, and operating income in the third quarter, each achieved year-to-year growth rates in the double digits. In manufacturing, we are ahead on our cost targets. Stock repurchases and cash dividends during the quarter returned approximately $3 billion to stockholders. And average shares outstanding are down 5% from a year ago, and 10% from the peak in 1998.

We expect a seasonal second half, our third consecutive year of double digit growth and revenue, our fourth consecutive year of progress in gross profit margins, and our tenth year with cash from operations in excess of $8 billion. Two non-operating items weighed heavily on profits. Accrual of a charge related to an unexpected legal settlement, lowered gross margin percentage by 1.4 points, and earnings per share by approximately $0.02. Estimated taxes related to repatriation of cash, lowered earnings per share by approximately $0.04.

Revenue for the third quarter was approximately $10 billion, just over the midpoint for the ranges we forecast in the July earnings release, and the September update. The growth of 8% in the second quarter was slightly higher than we typically see for this period. Revenue grew 18% from the third quarter a year ago.

On a geographic basis, as Paul mentioned, the leader in year-to-year growth was Asia-Pacific, where revenue growth of 28% sustained the momentum of the second quarter. Growth in this region was fueled by continuing broad strength in demand for mobile platforms, including strong local consumption in China and India. Japan's growth of 20% marked over 10 quarters of year-to-year growth in quarterly revenues.

In Latin America, an economic environment that appears to be more positive and stable is helping business, and government-assisted PC programs are driving revenue growth. Europe's year-to-year growth of 6% was led by European emerging markets. Overall revenues were also 6% higher than a year ago in the Americas region, where seasonal growth and demand was offset by movement of sales and manufacturing to Asia-Pacific.

The geography leading sequential growth was Europe, where revenues were up 11% in the second quarter, and set a record for the third quarter. In most markets, overall demand and revenues were above seasonal patterns, offset in some cases by tightness in chipset supplies. Channel revenues were approximately flat with the second quarter, reflecting some movement of sales to direct customers.

Gross margin dollars of approximately $5.9 billion reflects the impact of an estimated charge of $140 million related to a legal settlement. This is part of a total of $300 million in payments. The remainder of which we expect to amortize over 10 years. Even so, gross margin dollars grew faster than the sequential and year-to-year growth rates of revenue up 14% in the second quarter, and 26% from a year ago. Including a reduction of 1.4 points for the charge, gross margin percentage was 59.7%.

If Intel's results were adjusted for the legal charge announced today, gross margin percentage would have been 61.1%, just over the top of the range we forecast in September. As we anticipated in July, the improvement in margin was driven by higher revenue than in the previous quarter, lower start-up costs relating to the ramp of the 65-nanometer process technology, and lower unit costs of products offset by higher reserves.

Sales of microprocessors were a little higher than we expected in September. In a year-to-year comparison, gross margin percentage is 4 points higher than the third quarter of 2004, and includes the reduction of 1.4 points for the legal charge. The improvement was primarily a function of higher revenues and lower unit costs.

Spending on R&D, Marketing, and G&A was $2.8 billion, in-line with our previous forecast, and up 12% from the second quarter. The largest part of the increase was in R&D, as we began production on 65-nanometer and transitioned resources to develop development of 45-nanometers. For the year to-date, spending as a percent of revenue is nearly a point lower than the first nine months of 2004.

The number of employees rose during the quarter to 96,000 at the end of September. The year-to-year increase of 14% is lower than the year-to-year growth in revenues, and keeping with our goal to keep the growth in annual spending, at or less than annual growth in revenue.

Before looking at non-operating income, I will highlight results for Intel's two largest operating segments. About two-thirds of the total revenue came from the Digital Enterprise Group, which achieved growth of 6% from the second quarter, and 9% from a year ago.

Microprocessor revenue for the group was at the high end of the seasonal patterns for all microprocessors, and up 7% from the second quarter. The chipsets constrained by tight supply, revenue from chipsets, motherboards, and other, was up 3% sequentially. The Digital Enterprise Group make good progress in operating profit, which was up 8% sequentially, and 20% from a year ago.

Revenue in Intel's Mobility Group accounted for one-third of total revenue. Revenue from mobile microprocessors was up 13% from the second quarter, and 48% from a year ago. With the success of mobile platforms, revenue from chipsets and other products was up 82% year-to-year.

Our Flash memory business shipped record units with higher ASPs in a competitive market, and revenue was up 8% from the second quarter, although down 10% from a year ago. The Mobility Group also made good progress in operating profit, up to 23% from the second quarter, and 76% from a year ago.

And now to non-operating items. Intel's tax rate of 38.5% included accrual of tax expense of approximately $250 million, related to the repatriation of accumulated income earned abroad. Fully diluted earnings per share, which includes potential dilution attributable to employee stock options was $0.32. The charge related to the legal settlement lowered earnings per share by approximately $0.02.

On the balance sheet, inventories of $2.8 billion were up slightly from the second quarter. Inventories have been leaner than we would like, and we expect to build to higher levels in the fourth quarter, as we produce more 65-nanometer processors. Total cash investment comprised of cash, short-term investments, and fixed income trading assets ended the quarter at $13.6 billion, a decrease of 900 million from the second quarter, after stock repurchases of $2.5 billion, capital spending of $1.3 billion, and dividend payments of nearly $500 million.

As we turn now to the outlook for the fourth quarter, please keep in mind that the forecast data do not include the effects of any new acquisitions, divestitures, investments, or similar transactions that may be completed after October 17. I will use the midpoint of forecast ranges when making comparisons to specific periods.

We are planning for revenue in the fourth quarter to be between $10.2 and $10.8 billion. The midpoint of this range would mean sequential growth of 5%, which is less than the 8% five-year average for this period. And year-to-year growth of 9%, which is lower than that in the previous three quarters. The picture is different as you look at the second half overall. Growth in the third quarter was a little better than usual for this time of year, while growth in the fourth quarter is projected to be a little slower. Added together, they point to a second half with revenue that is 10% higher than the first half, and consistent with a five-year average for these periods.

While there appears to have been a small inventory build in the range of $100 million among our large OEM customers in the third quarter, demand looks healthy and seasonal. Our expectation for growth margin percentage in the fourth quarter is 63%, plus or minus a couple points. This is approximately 3 points higher than the third quarter including the the legal charge. We anticipate that most of this increase will be a function of the qualification of new dual-core products as we ramp 65-nanometers. legal charge, and 2 points higher excluding Higher revenue will also contribute to better gross margins.

Spending, R&D, plus MG&A should be approximately $3 billion, up from $2.8 billion in the third quarter. In addition to revenue and profit-dependant items, the increase includes seasonal marketing programs. Depreciation should be between 1 and $1.1 billion, approximately flat with the third quarter. We expect amortization of acquisition-related intangibles for the fourth quarter to be approximately $20 million. Our estimate for gains and losses from equity investments, and interest and other income is a net gain of $130 million.

For the entire year, we continue to target capital spending of $5.9 billion, plus or minus $200 million. The outlook for R&D spending for the year is also unchanged at approximately $5.2 billion. Depreciation forecast remains 4.3 to $4.4 billion.

The estimated tax rate for the fourth quarter is expected to be approximately 31%. Our outlook combined with the results for the year-to-date, anticipate a year with revenue in the range of around $39 billion, which would be growth from 2004 of approximately 14% to 15%. The same process points to gross margin percentage for the year in the range of around 60%, up more than 2 points from 2004. Spending for the year is growing roughly in-line with revenues, and we anticipate that spending as a percentage of revenues will be approximately flat for 2004. With cash from operations in the first two quarters of nearly $7 billion, we are on-track for another year of strong cash generation. With that, let me turn it over to Doug for Q&A.

Doug Lusk, Intel Corporation - Director, IR

Thanks Andy, we will now open the conference call for Q&A, We will attempt to take questions from as many participants as possible. To help in the process, we ask that you please limit yourself to only one question, no more than one follow-up. Thank you. Operator?

On to the Q&A.



Want to know about a more tax-efficient, better diversified way to invest in US large-caps?

iShares S&P 500 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and taxes, of US large-cap stocks, as represented by the Standard and Poor’s 500 Index.Learn how IVV’s holdings represent a smart way to invest in US large-caps. Compare returns for the iShares S&P 500 Index Fund.

iShares is the world’s largest family of exchange traded funds, or ETFs. With nearly 100 different equity and fixed income funds to choose from (about 4 times the selection of any other ETF family, investors can create an asset allocation plan that’s precise, tax-effecient, and tailored to your specific needs. Contact iShares for more info.

To sponsor a Seeking Alpha transcript click here.