Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Intel’s Q4 Earnings Call: Modest Growth, More Investment

When Intel’s results for the fourth quarter and full year of 2012 crossed the wires a little less than an hour ago, shareholders were initially happy, but not so much with the guidance looking ahead.

The company’s conference call with analysts is about to begin. Expect some questions from the gallery that test Intel’s assumptions about the state of the PC and server markets and its assumptions about its intentions in the mobile business. And while Intel execs on the call probably won’t say much about any of this, there will be some pressing questions about the state of the search — such as it is — for the next CEO who will take over after current CEO Paul Otellini leaves later this year.

Earlier:
2:11 pm: Joining the conference call in progress. CFO Stacy Smith is reading from his prepared remarks, looking back on the year.

Smith: Spending as percent of revenue was 34 percent. Fourth quarter revenue finished in line with expectations. Worldwide inventory levels reduced as customers reduced their inventory of older PCs.

2:13 pm: Smith: In 2013 we’re expecting revenue growth in the low single digits. Expecting $18.9 billion in spending.

2:14 pm: Smith: As a result of the significant progress we’ve made, I’m optimistic about our long-term prospects. In 2013 we will rev our next-generation tablet chip, Bay Trail for Windows and Android.

Smith: We will start production on the 14-nanometer process this year. This will put us significantly ahead of the competition.

2:16 pm: Moving on to the Q&A session with analysts.

Question from Deutsche Bank: It seems like your Capex and Opex are outgrowing revenues. It looks like investors are dubious about when they’ll see returns on investments. What are the mile markers?

CEO Paul Otellini: You’re seeing our first investments for the 450-millimeter transition for later this decade. (Bigger silicon wafers.) That is more of an extraordinary event that isn’t related to volume in 2014-16. Other than that, it’s about the same as last year. As we finish up the use of the 14-nanometer processes and move to 10-nanometer process, we’re going to need those factories. Regardless of what you think the size of the market is, the fabs (factories) are the most important assets we have.

Smith answering another question on Capex. It’s for building to the peak of 14-nanometer, and starting the early bits of 10-nanometer. Its really for the peak of 2014 and 15. With regard to equipment, the facility-related spend is coming back and it’s for equipment.

2:21 pm: Question on guidance for 2013 revenue, can you walk through underlying assumptions?

Smith: We expect data center group to return to double-digit growth. Cloud data centers and portions of the market like storage and networking. And then for core PC market, we have pretty modest expectations in units. We think growth comes from the devices that sit in the middle. Plus we start to participate in the tablet market.

Is the spending for 450-mm wafers ongoing?

Smith: What changed is, the industry consortium set expectations for the shift, we want to start the construction of a development facility. I expect there’s some spending related, but we won’t get into real capital spending on it until the back half of this decade.

Q: The 10-nanometer spending, does that assume EUV or immersion lithography?

Smith: I’ll save that for the technologists. We’re close to the vest with those details.

2:24 pm: Question: There are some reports about Intel manufacturing some chips for Cisco Systems. Trying to drill down on Intel becoming a specialized foundry, which builds chips under contract.

Otellini: We are very interested in being a selective foundry for certain customers. We don’t expect to be a general purpose foundry. We would not take business that would strengthen a competitor. We have done some announcements in programmable logic, and those companies need a company like Intel to help them. We have been building that capability and we’re now going into production.

Smith: To the extent that we engage with these customers, we want to get paid for it.

Questions about ARM.

Otellini: We’ve looked at the A15, and we’re comfortable that we can maintain a performance lead.

2:27 pm: Another question on the foundry business. Have you earmarked any money for it?

Smith: Other than the three small customers you have heard of, the foundry business is not driving our Capex spending.

Question on PC market guidance. You seem to be guiding them down and making a big bet on 2014. How much do you need to take of tablet share, or how much needs to be eaten by your convertible PCs to make that bet worthwhile?

Smith: I’d take issue with the characterization of PCs guiding down a ton. For the company I said low single digits, data center up in double digits, and you still end up with client (PC) growth in that. The lines are blurring and we are expecting some unit growth. When we get into the back half of the year it’s a fairly reasonable assumption. We expect normal growth, just across a wider range of devices.

2:32 pm: Question on Q4, seems PC client units were down 4 percent. Was this mainly an inventory drain?

Smith: We think there was an inventory drain in the worldwide supply chain for PCs in the first quarter. Our channel checks suggest older Windows 7 systems were burned off in the quarter. When we look at inventory levels, we think it’s a healthy level of inventory. Plus we reduced our own inventory levels.

Q: Any particular dynamic at work regarding average selling prices in the data center group?

Otellini: The big drive was Romley. That helped drive the overall richness. On PCs, we saw strength in the core product line, and more weakness than we thought in the lower end of the market.

Question on potential for hybrids. We’re seeing small tablets. 10-inch tablets are not selling as well. Does that give you an opportunity?

Otellini: Yes. Phones are getting bigger. And the shift to tablets from 10 to seven inches, and that is what you’re going to see. The market will bifurcate between 4- and 6-inch and then 5- and 7-inch products. They only get thinner as Haswell and Broadwell come online.

Question on cash balance. What is the level of cash. Will you have to raise debt again?

Smith: We would certainly look opportunistically as we have been. We generated $6 billion of cash flow from operations, so we’re generating plenty of cash to run the business, to pay the dividend and protect the dividend. I’m comfortable with the cash we have now, and I could live with a little less as well.

Question on an update acquisition of Infineon wireless. Where are you with 4G LTE and an integrated Atom chip? Progress with handsets?

Otellini: Infineon is well on its way to LTE. Dual data and voice mode. First phones early next year. Very competitive solution. The Infineon team is known not for being first to market, but very good, and cost effective. In terms of integrated solutions, expect higher levels of integration next year.

Smith: I’m struck by how hungry the customers (phone makers) are to work with us on this.

2:40 pm: Question on price elasticity in the PC market. Wondering how price drops drive unit growth.

Otellini: I don’t think there’s much elasticity in the classic form factors. What we saw earlier was similar elasticity in desktop in 80s and 90s. It dropped until it reached a point where there was a minimum margin left for all the players.

People will buy based upon their need in those price points. Difficult to see them go from $299 to $99. What we’re likely to see is people willing to spend a little more for a more capable product. We’ve seen it in the Apple model. There is a model of paying for innovation.

2:42 pm: Do you have a view on EUV (Extreme Ultraviolet Lithography)?

Smith: Not prepared to talk about it.

Question: You’re expecting a better than seasonal 2H13.

Smith: That is consistent with our view. The consensus GDP estimates, there is a consistent strengthening of GDP later this year. Haswell gains traction, touch gains traction. We become more represented across Windows tablet and Android across 2013, and that gives us a better than seasonal second half of the year.

Question on regional performance.

Otellini: In China, there were some tablets that impacted some low-end PC sales. Brazil saw some inflation and that affected some PCs sales. China had a regime change, and that affected some sales. China is still outgrowing any large economy in the world. We have been pleasantly surprised by the data center growth in China.

Question on gross margins. They were a little better. Can you share with us your utilization rates in Q4 and what you expect the trajectory to be in Q1 and beyond?

Smith: We came in with gross margins a little better than we expected in Q4. We brought the loadings down in the factories a bit. We redirected some equipment, and brought inventories down by $600 million. We think gross margins are roughly flat. We see continued improvement in excess capacity, and increases in startup costs. Add in some other puts and takes it’s about flat. When we get to Q2 we see further reduction in excess capacity charges, but that is when we will peak in terms of startup costs. So I think Gross margin in Q2 will be flat to down. But we think gross margins later in the year to be closer to low 60s because we’ve guided to 60 percent for the year. Our costs come down over the back half of the year.

2:52 pm: That’s it. Thanks for tuning in! See you in 90 days!

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