Intel’s First-Quarter Earnings Call: Execution Remained Strong
First and foremost, non-GAAP quarterly profits are down by about 13 percent from the year-ago period, while sales were up by less than 1 percent.
Even so, the results beat the expectations of analysts: Per-share earnings were 56 cents versus the consensus expectation of 50 cents. And sales at $12.9 billion beat the consensus by about $600 million. Not exactly a blow-out quarter by any means, but Intel’s first fiscal quarter is always seasonally slow.
What’s probably bugging Intel shareholders who are selling it off after hours is the results of the PC Client group that sells chips into the personal computer sector. While Gartner just reported quarterly PC shipments that were better than expected (results which last week helped goose shares of Hewlett-Packard), Intel saw sales into PCs decline by almost 2 percent year on year to $8.45 billion. Sales in the data center group fell slightly to $2.45 billion.
Geographically, Intel saw its sales rise in Asia by 1 percent and fall in the Americas by 6 percent, while Europe increased by 8 percent.
Another thing that has investors worried a bit is probably the operating expenses line. They rose by about 20 percent to nearly $4.5 billion. The main boost seems to have been in research and development, on which Intel spent $485 million more than it did last year.
The conference call is set to begin shortly. Expect lots of questions from analysts about what’s going on and what Intel’s outlook really is.
2:03 pm: And the call is under way. CEO Paul Otellini is speaking. “Our committment to long term research and development is paying off.” Examples: We are ramping our 22-nanometer process and moving to tri-gate manufacturing. Basically, Intel is pushing the envelope on its manufacturing technology. “That’s allowing us to do things others can’t, like improve our Atom processors at twice the rate of Moore’s Law. … Our lead over the rest of the industry continues to grow.”
Otellini on Ultrabooks: With more than 21 designs already shipping and more than 100 designs in the pipeline, we’re very happy with the results. We expect Ultrabooks to reach mainstream price points. By the holiday season, he expects touch interfaces to give the experience of the tablet with the functionality of a notebook.
Otellini: China is the second-largest server market in the world.
Otellini: McAfee posted best first-quarter bookings in its history. Oops, Otellini called something a Day-Zero attack, when he meant Zero-Day.
Otellini: First Intel-based smartphone is coming this week.
Now CFO Stacy Smith is speaking. First-quarter results were slightly better than expectations. “Our business was impacted by the hard drive shortage. We believe it did not impact actual sales of PCs in the quarter.”
Smith: As hard disk drive shipments recover, we’ll see the beginning of an inventory replenishment this quarter.
Smith: We will be ramping up Ivy Bridge production and three factories.
Smith: Spending was in line with expectations. He expects spending as a percentage of revenue to come down in the second half.
Smith: Inventory grew by $400 million with nearly all that growth attributed to Ivy Bridge.
Smith: Against the backdrop of the hard drive shortage and weak macroeconomic conditions, our execution remained strong.
2:12 pm: Time for Q&A
2:13 pm: Question about unit costs.
Smith: It was consistent with what we expected. We have three new 22-nanometer factories. At the start of that ramp, the first products absorb the cost of the factories. Costs peak in the second quarter and come down as the ramp continues.
Question from Sanford Bernstein: Asking about the hard drive shortage impact. Have we seen all the snapback from hard drives coming back or is there potential for more seasonal growth?
Smith: Q2 is consistent with underlying demand. Inventory replenishment begins in Q2. We saw significant reduction in inventory in Q4 and then more in Q1. What you see in Q3 is where you really start to see the worldwide replenishment. They will replenish with Ivy Bridge, and a good Q4 with lots of catalysts driving the market.
And now a question on gross margins. It looks like they’re a little lower on some unit costs. Is this some evidence that the initial ramp of Ivy Bridge saw a push-out?
Smith: If you remember, we shifted the Ivy Bridge launch by three weeks. That was to make sure we had enough inventory. Ivy Bridge explains the good news in Q1 and the Q2 forecasts.
Question from McQuarie: A question about desktop and notebook.
Smith: We don’t forecast at that level of granularity. In general, what you see is that notebooks are growing on a unit basis. Emerging markets are growing and that’s a desktop market. We continue to actually see notebook demand growth.
Otellini: The first Ivy Bridge chips we’re shipping are quad cores, which are going into desktops. The dual core mainstream chips are going into notebooks.
2:22 pm: Question from UBS about Ultrabooks. Can you talk about where you help customers make changes in the bill of materials? I want to know, were you able to help them?
Otellini: The Ultrabook fund hasn’t kicked in to where it is achieving BOM reductions. Some of that is later this year. The biggest change is quite frankly competition. Asus is now shipping a very low profile hard drive in an ultrabook. The biggest change is trying to intercept the Windows 8 launch with sufficient quantities of Ultrabooks with a touch-enabled Ultrabook. Used to be a touch screen added $100 to the bill of materials, but now that is coming down considerably.
2:27 pm: Question from Longbow Research. Give us some insight into the mix you expect in terms of corporate versus consumer.
Smith: We dont get into that. For Q1 our mix was quite healthy. Generally what we see is relative strength based on Ivy Bridge, and then some price competition at the lower end of the market.
Otellini: Typically, the enterprise notebooks tend to be about a third of the businees. But more and more businesses are allowing employees to bring any kind of computer they want into the office. We have some ideas about improving the security and manageability of those devices over time, while still offering the choice.
2:30 pm: Question from Bank of America: Longer term to emerging markets go toward Ultrabooks or tablets?
Otellini: I don’t think anyone in the world knows the answer to that question. In the tablet world, people now buy them as complementary device and they already have PCs. What I’m excited about is the convenience and touch of a tablet with the productivity and the utility of a keyboard in an Ultrabook device.
(Personally, I have to agree here. I get a lot more done on a MacBook Air, which I think is really the first Ultrabook, than I ever did on an iPad. But that’s me.)
2:34 pm: Question from FBR: Can you help us understand what your capacity growth looks like? What do you expect utilization rates to be? (Basically, how busy are the factories going to be?)
Smith: We expect utilization rates to be high through the year. We expect some capacity growth, though probably not as much as you might expect.
Question from Citi: As you talking to potential customers in handset? What matters to them? Roadmap, or the fact that you will have capacity available?
Otellini: The roadmap is the best door-opener we have. … As customers look at the roadmap they want to find ways to differentiate from what’s out there, and services they can charge for.
2:40 pm: Deutsche Bank guy talked way to fast for me to get his question.
2:44 pm: J.P. Morgan asks about the possibility of getting Apple’s iPhone business.
Otellini: Anything is possible.
Another question from J.P. Morgan, this one about geographic regions.
Otellini: We don’t see anything fundamentally different from before. We are going into a year with a new version of Microsoft Windows, and that has been strong for the industry before. Also, we’ll be debuting Touch. Add it all up and the battle for consumer dollars isn’t going to be like it was last year.
Question from Goldman Sachs, asking about the cash position coming down a bit. How low do you feel comfortable with?
Smith: Be careful about free cash flow in Q1 relative. It’s depressed relative to hard drives. Second, remember there are a few big payments in Q1. In terms of cash balances, we don’t peg a specific number out there. In Q1, we’re comfortable with our balance. It’s been bouncing around this level for awhile.
Missed who this question is from: You talked early about manufacturing leadership. Can you update on 14-nanometer ramp? When will you come to market?
Otellini: We’ll give you more granularity in May. Generally its every other year.
And we’re done. Thanks for joining.