Intel Earnings Call Nuggets: Return on Investments and Brick and Mortar Spending

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

Return on Investments

Ross Seymore – Deutsche Bank: For Paul, if I look back between the last two years and then heading into what you just guided too for 2013, it seems like your CapEx and your OpEx are outgrowing revenues, and I guess if I partner that together with where the stock is trading valuation-wise, it really looks like investors are dubious as to when any returns are going to come from those investments. So, I guess the question after that is when do you see the investments come or the return on these investments coming? How long do you think this investment stage last and what are some of the mild markets we should look for to see those returns being generated?

Paul S. Otellini – President and CEO: Well, there’s two parts to the CapEx this year, I mean, two large parts of the CapEx this year, Ross. One is you are starting to see our first significant investments in brick-and-mortar and some equipment for the 450-milimeter transition which happens later part of this decade. We had to make those investments earlier. Those are – now that we’ve solidified our relationship and – contractual relationship with ASML, it gives us line of sight to that conversion, and therefore are in a better position to predict the exact timing and deploy capital for that. So, I would treat that as a more of an extraordinary event. This is not related to the day-to-day in terms of volume in ’14, ’15 and ’16. The CapEx that we are projecting on a base level, and if you look $13 billion minus the $2 billion is $11 billion, which is about what we spend last year.

And, as I look forward into the business in ’14 and ’15, as we finish up the 14-nanometer factories and begin deployment – the construction of and equipping the 10-nanometer factories, we need those factories principally for our view of the computing market, and in that I would include tablets and certainly the data center. So, as we look at it, it gets used. Remember the leading edge capacity is the lowest cost for us on per unit basis. The higher performance and the lowest power, so regardless of what you think the size of the market is the most-leading edge fabs are the single greatest assets that we have.

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Ross Seymore – Deutsche Bank: I guess as my one follow-up…

is the capacity that you are going to have and I realized the 450 stuff has been coming till later, but is most of the incremental capacity for your core PC related business or when you say computing, is it more DCG and I guess that we’re computing could even include tablets and smartphones?

Paul S. Otellini – President and CEO: When I’m talking about, that I was specifically including the enterprise business – data center business, the PC business as we’ve known it and as its evolving and I would include tablets in that, because as we look forward, it’s very difficult to distinguish between a detachable clamshell notebook and a table. The form factors are going to blur here; the performance requirements are going to be the spectrum of performance requirements that we think we’ve seen in PC space over the last few years. I kept phones separately out of that discussion because I think the relative volume in phones in terms of this deployment of CapEx is still relatively small.

Brick and Mortar Spending

C.J. Muse – Barclays Capital: I guess, as a follow-up to Ross’ question on CapEx. If we exclude that $2 billion on 450 and we look at the core spending, can you talk about the spending on bricks and mortar last year and anticipated this year as a percentage and also how we should think about equipment spend as part of that?

Stacy J. Smith – SVP and CFO: C.J., this is Stacy. I’ll take that. Yeah, let me break out that capacity-related CapEx in a couple of different ways. First, if you look at it by process, it’s very much driven by building for the peak of 14-nanometer and then it’s the start of the investment in 10-nanometer. So, just building on what Paul said, if you think about that, it’s really building for units that we expect in 2014 and 2015, because that’s where you start to see the peak of 14-nanometer and the start of the ramp of 10. In terms of the breakout between what’s for facilities versus what’s for equipment, as I had showed at the Investor Meeting back in May, we’re seeing that the facility-related spending is coming back and a higher proportion – is coming down and a higher proportion of that CapEx is for equipment.

C.J. Muse – Barclays Capital: Just as a part of that, are you capitalizing investment in ASML or the R&D investment in ASML?

Stacy J. Smith – SVP and CFO: No, that’s not a capital expense. It was an investment expense.

C.J. Muse – Barclays Capital: I guess, as my follow-up, in terms of the guidance for low single-digit top line growth in ’13, can you walk through the underlying assumptions, particularly as it relates to your outlook for PCs and the DCG group?

Stacy J. Smith – SVP and CFO: Yeah, we said on the – or I said in my prepared remarks, we expect the Data Center Group to return to double-digit revenue growth and just diving into that, it’s the cloud data center plus our participation in portions of the market like storage and some of the networking sections of the market. It’s both unit and ASP based on the strength of our product line and sellout. Then for the kind of core PC market, the traditional PC market, we have pretty modest expectations around units and we think where the growth comes from are these devices that sit in the middle, so the convertibles that’s kind of the best of the tablet and the PC, and then our beginning of participation across the tablet market.

A Closer Look: Intel Earnings Cheat Sheet>>