Intel Earnings Call Insights: Second Half Outlook and PC Segment

Intel Corp (NASDAQ:INTC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Second Half Outlook

Glen Yeung – Citigroup: The first one is on the second half of the year and your outlook there. If I look at your guidance for the year and your guidance for Q3, the implication is 7% sequential growth in revenues for the fourth quarter, and I wonder, that’s obviously high relative to historical norms kind of like numbers we saw back in the early part of the last decade, and I wonder, what gives you the confidence there, is there something about the mix, obviously, new product, is there also something about the mix maybe between Data Center and Client?

Stacy J. Smith – SVP and CFO: Hi Glen. This is Stacy. I would characterize – I guess, I’d say this, it’s a little early to get that specific about Q4. At this point, I’d expect seasonal, which is a little less than what you said but still gets us into that kind of flat year-on-year revenue growth, and I think the tale for us will really be written in the back half of Q3 when we start to see how our customers are putting in place inventory in anticipation of that fourth quarter selling season. Right now, our view on that is fairly cautious. We expect that they’ll continue to run lean inventory levels, but the reality is we won’t know that until we get into late August or early September, that’s when you normally start to see them putting in the supply line, that also aligns with other things in the industry and so we think that’s when we’re likely to really get a sense of Q3 and the momentum into Q4.

Glen Yeung – Citigroup: The next question is for Brian. First of all, Brian, congratulations on your new role. The question is now that you‘ve seen that role for a couple of months and as you say, you’ve talked to customers. Today, Intel has very good products in mobile and tomorrow, we’ll have arguably the best products in mobile (indiscernible) do today. I wonder in your discussions with customers, if you think that, that’s enough, if the customer base is now open to accepting an x86 based processor, where it’s traditionally been an ARM market or does it matter?

Brian M. Krzanich – CEO: Okay, as Mark said, it was a little hard to hear you on our side. We’re having some network issues, but let me try and answer your question. The question is, can x86 go into these ultra-mobile markets, and how do the customers view that? My answer would be, they are more than willing to accept it. The fact that x86 works on both Android and Windows is a real advantage to our OEM base. They look at that and say that they can have one architectural design, one set of products and use both operating systems. So, it’s a unique feature that we are able to provide. It’s more been in focus by Intel of actual going in and designing for those markets and moving our products in there. You really see that with Haswell and Bay Trail. Haswell on the Core side, and Bay Trail on the Atom side, really being designed for those ultra-mobile products. We talked about Haswell producing the first fanless Core products out there in the market at any kind of real volume and then Bay Trail, really being designed for the much lower price points that you see, these tablets and even down to the entry level tablets, and so the fact that it’s x86 is an advantage actually because, we’ve been able to produce both Android and Windows on our product now.

PC Segment

Vivek Arya – Bank of America Merrill Lynch: Brian, first of all, how should we think about ASP trends in the PC segment? I think you outlined 3% sequential declines in Q2 and you’re guiding to another 50 point gross margin hit from lower ASPs in Q3. Why are you not seeing more of an uplift from the rollout of Haswell?

Stacy J. Smith – SVP and CFO: This is Stacy. I’ll take that one because it was in the CFO commentary that I put out. You should think of it as mix shift for us and share win at the low end of the market. I think if you look at our first half results, you’ll see we came in pretty much in line with what we thought. But during a time where the TAM was somewhat weaker than we thought. I think offset there, the plug is that we gained some share low ends and so we have a bit more mix at the lower end and then due to share win in that particular segment of the market.

Vivek Arya – Bank of America Merrill Lynch: And as a follow-up why are we not seeing more benefits from the decrease in 14-nanometer startup costs? Like when I look at the uplift we should expect this time, they are not as much as uplift we have seen prior cycles when the startup costs have decreased and I think your guidance implies a sequential gross margin decline in Q4. If you could just walk us through the puts and takes, I’d appreciate that.

Stacy J. Smith – SVP and CFO: Yeah. I’m sorry. We are having networking problems. So, let me just make sure I got your question. You’re asking to simplify and what are we seeing in terms of the startup cost trend relative to prior and what are the puts and takes for Q4. Is that what your question is?

Vivek Arya – Bank of America Merrill Lynch: Yeah, relative to gross margins, that’s right.

Stacy J. Smith – SVP and CFO: Relative to gross margins, sure. So, the startup costs trend directionally is the same as what we’ve seen in other generations. It will be the shame shape, generally the same impact on gross margins. So, you see the peak in startup costs in the second quarter. They’ll come down some in Q3 and then we’ll get a bigger benefit in Q4 and then it will come down a bit more in the first half of next year. So, it’s a comparable trend. In the fourth quarter, the puts an takes, so let me just do the gross margin progression across the year. We were at 56% in Q1. We hit our forecast in Q2 of 58%. We are expecting a few points of increase in the third quarter to 61%. And then as I think about Q4, I think we have a couple of tailwinds. So, I would expect the volume to be up some. We should get some good news associated with startup costs and then the offset in Q4 is going to be – we should be well into the build of Broadwell. So, doing the build on the prequalification material, so my sense is we’ll have an increase in inventory write-offs in the fourth quarter and that offset some of those good news. Net of all that we expect gross margin in the fourth quarter to be at or maybe a little bit higher than where we are in Q3 and we’ll provide that forecast in another 90 days. And just so that we don’t get lost in codenames, that product is our lead product in 14-nanometer. So, that kind of aligns with being in manufacturing in the back half of the year on 14-nanometer.

Mark Henninger – IR: If I can remind the participants to please slowly, we apologize for the network issues we are having.