Highlights From INTC's Q1 Conference Call: Strong Quarter and Guidance
2:06 pm ET 04/20/2011 - StreetInsider

Intel (NASDAQ: INTC) reported Q1 EPS of $0.59, $0.13 better than the analyst estimate of $0.46. Revenue for the quarter came in at $12.9 billion versus the consensus estimate of $11.6 billion. Shares are flying, up 6.77% today.

Highlights From INTC's Q1 Conference Call:Sees Q2 sales $12.8 billion, plus or minus $500 million. Street looking for sales of $11.85 billion.(Paul S. Otellini) As anticipated, consumer demand in the U.S. and Western Europe was soft, but consumer sales in emerging markets and demand for both enterprise servers and clients were better than expected.The combination of a feature led product segmentation strategy and a simplified branding structure has been very effective in improving the purchasing process for buyers and leading us to achieve our best product mix in many years.

Additionally, the rapid recovery from Cougar Point chipset issues earlier in the quarter enabled a much faster ramp of Sandy Bridge products than we anticipated in January.I want to note (on Japan) that we did not see any unusual changes or fluctuations to our backlog after the earthquake, nor do we anticipate any major disruptions to our supply lines moving forward.Compared to the first quarter of last year, which was a very good quarter for us, we achieved double-digit growth across every major product segment and across every region in the world. Revenue for the data center business was up 32% from a year ago, with operating profit improving nearly 50%.Our other businesses also showed solid growth.

The embedded business was up 33%, NAND Flash was up 17%. And I'm pleased to note that one of our new business areas, the Digital Home Group, grew 129% from last year, and is now shipping at a rate of over 10,000 units per day into set-top boxes and smart TVs.Our PC client business remains strong and grew 17% from last year.Turning to the Data Center Group specifically, the first quarter was another very strong quarter. DCG recorded Q1 revenue of $2.5 billion, putting us on a trajectory to reach $10 billion in revenue for this year across our server, storage, and networking products.Within the Data Center Group, the storage business increased 45% sequentially, and was up 65% from a year ago.During the quarter, we launched Sandy Bridge Xeon platforms for the single-socket market, and early demand for this product has been very strong. Looking ahead, we are very bullish about our Data Center business and expect it to be a major growth driver for years to come.This past quarter, we also launched Sandy Bridge for client PCs. As I've stated before, I believe that this is the very best product Intel has ever delivered to our customers. Early demand for Sandy Bridge has been outstanding. In fact, the ramp of Sandy Bridge in the channel is the fastest ramp we've ever seen, and sell-through has been robust.We also launched Oak Trail just last week, which is a platform designed specifically for tablets. We are seeing very good design momentum with Oak Trail across multiple operating systems. Over the course of this year, Intel will have tablet platforms that run Windows, Android, and MeeGo.Overall, we begin 2011 with great momentum. We've added McAfee and the Wireless division of Infineon to our portfolio, and have ambitious plans for both acquisitions going forward.Let me make two final comments about demand and CapEx. Like many of you, I noted that some of the third-party research firms issued reduced forecasts for PCs in 2011. I want to be clear that our views differ from some of theirs. The PC business has evolved into a global industry approaching that is approaching 400 million units this year.All of our major product segments are growing, and these new segments are expected to add to that growth momentum. We remain on track to begin production on our 22-nanometer silicon process technology by the end of this year. This revolutionary technology will further distance Intel from the competition across all segments of computing.Our projections for PC segment growth in 2011 remain in the low double-digit range based on early sell-through strength we are seeing as we begin 2011 and the great reception to Sandy Bridge in both consumer and enterprise segments. And while it's too early to call 2012, with an improving global economy, we see no reason for growth to be materially different from what we see in 2011.(Stacy J. Smith) The first quarter of 2011 had several significant milestones. It was a record quarter in terms of revenue and earnings per share. We closed both the McAfee and Infineon Wireless division acquisitions. Our customers launched their Sandy Bridge platforms, our fastest ramping product in the company's history.In addition, the company identified, fixed, and recovered from the Cougar Point chipset design issue, completely mitigating the $300 million revenue impact that was originally forecasted. The factory network executed flawlessly, lowering throughput times and significantly increasing first quarter output of Cougar Point replacement parts, fully recovering to customer demand by the end of the quarter.As a result of the acquisitions of McAfee and the Infineon Wireless division, we will be providing non-GAAP financial information in addition to GAAP for 2011 to provide additional visibility into the operational results of the company.The third quarter of last year was the first time where our revenue exceeded $11 billion. Revenue for the first quarter of 2011 was $12.8 billion, up $1.4 billion from the fourth quarter and up 25% year on year. The acquisitions of McAfee and the Infineon Wireless division contributed approximately $500 million of the $2.5 billion increase from a year ago.R&D and MG&A as a percent of revenue dropped to 28.7%. Our plan for 2011 is to sustain the progress we've made in our productivity and our efficiency while making some critical R&D investments in the core business and adjacencies such as tablets and phones and software capability and in process technology.Operating profit of $4.2 billion in the first quarter was up 21% year on year. Net income of $3.2 billion and earnings per share of $0.56 were up 29% and 30% respectively when compared to a year ago.The cash generation of our business remains strong, with cash flow from operations of $4 billion in the first quarter.As we look forward to the second quarter of 2011, we are forecasting the midpoint of the revenue range at $12.8 billion, flat to the first quarter and in line with historical seasonality. We are forecasting the midpoint of the gross margin range to be flat to the first quarter at 61%.(Q&A) Thanks, congratulations on a great quarter. First question is maybe just helping us understand the emerging markets and how big it is; and maybe, Paul, some of the characteristics of that market that are different and are sustaining the growth that we're not seeing elsewhere. (A) Yes, actually, let me take a shot and just give you - I think we've talked about this before, Glen. This is Stacy. The emerging markets now are well over 50% of our total business level. And I think the dynamic that's going on there is really one of economics. The desirability of technology is high. And the affordability of technology is now coming into the range where when we look across markets like China, Latin America, Eastern Europe, you've got a couple billion consumers that now the price point of a PC is within one to two months of income, and it's really driving our growth. And penetration rates are still pretty low, so we think this is something that has legs and will drive our growth into the future. (A) And in terms of characteristics, Glen, I'd just point out that my comment on the channel strength for Sandy Bridge is principally emerging markets. Something like a third of all the PCs sold in emerging markets are not branded machines. They're white boxes built by the channel through our distribution network worldwide. We saw strength on Sandy Bridge and even strength in the desktop business, which we haven't seen for some time, based upon that product in those markets. And of course, those markets are still surging in terms of purchasing notebooks. It's not a low end mix, I'd also add. It's a pretty average mix of products on a worldwide basis.As a follow-up, I wanted to ask something about 22-nanometer. Paul, you used the word revolutionary, and I've heard people at Intel use that before with respect to 22-nanometer. So I wonder if you can shed some light on what that exactly means. And then as part of the response, with $10.2 billion in CapEx, which is ostensibly almost all geared towards 22-nanometer, is it really Intel putting their mouth where their - or putting their money where their revolutionary mouth is? Or is it really the money is because you're trying to manage the absolute amount of capacity that you have? (A) This is Stacy. I'll start with the second part of that and then turn it back over to Paul. The CapEx number for us is really driven by a couple of things. It's driven by the unit growth in the mix that we're seeing, and it protects our ability to meet demand at 22-nanometer and 14-nanometer. You didn't say 14-nanometer, but that's an important part of this story. And it enables our strategy to integrate more features and functionality onto that leading-edge process technology, which as Paul said in his prepared remarks, it gives us performance, cost and power efficiency advantages. Let me give you an example. Probably the biggest single chunk that's happening inside of this increase in CapEx is the fact that we've made the decision that for the development fab for 14-nanometer, we're going to make that fab bigger. That gives us the ability to actually, at the early stage of the ramp, move more products to 14-nanometer, take advantage of that process technology leadership, ramp it faster. So we're going to spend some construction dollars today to have that capability in place at 14-nanometer. But over the 14-nanometer life, it should save us money by going faster on that first factory. So those are the kinds of things that we're doing to both protect the ability to respond to demand and also make sure that we have the transistors available on the leading edge to give us the competitive advantage in the marketplace.I was wondering, Stacy, if you might have been able to just give us some sense of how you're thinking about the shape of the year for the acquisitions in terms of - I think you said - you outlined that you expect McAfee and IFX to double sequentially. But how would we think about the seasonality there? And I was wondering on a broader level, how we should think about any of the seasonal trends for the second half of the year given all the different puts and takes on data center and emerging market growth? (A) Sure, I'll be happy to do that. And by the way, I understand this is your last call. So I think as a thank you for your years of following us, we'll let you ask a multi-part question this time. We're sure you're dying to do that. (A) We were a little disappointed. We thought you'd give us a seven-parter, Tim. (A) Yes, so you can think of another part to this, if you want. In terms of McAfee and Infineon, we closed Infineon at the end of January. We closed McAfee at the end of February. The combination of those two acquisitions added $0.5 billion of revenue to Q1. And based on having a full quarter in Q2, they should add another $0.5 billion in Q2. So now let me help you a little bit with Q2 math because you've got a couple of offsets. You've got this incremental $0.5 billion for McAfee and Infineon. It's offset by the fact that we don't have the 14th week. Those are roughly in line with each other. And so when you net those out, what you see is Q2 is kind of flat on an ongoing business basis to Q1, which is in line with the seasonal patterns we've seen over the last five years. Going into the second half of the year, I'm not going to get as discrete as providing a forecast for each quarter. But we're not seeing anything that would cause it to be a different year. We see through all kinds of economic climates. The second half of the year tends to be two to three points higher than the first half in terms of revenue. That's consistent with our expectations as we work through the year.