Intel Corporation (INTC)
Q3 2008 Earnings Call Transcript
October 14, 2008 5:30 p.m. ET

Executives

R. Kevin Sellers - Vice President, Investor Relations
Paul S. Otellini - President, Chief Executive Officer, Director
Stacy J. Smith - Chief Financial Officer, Vice President

Analysts

Uche Orji - UBS
John Barton - Cowen & Company
Ross Seymore - Deutsche Bank
James Covello - Goldman Sachs
Glen Yeung - Citigroup
Sean Connor - FAS
Hans Mosesmann - Raymond James
Sumit Dhanda - Banc of America
John Pitzer - Credit Suisse
Chris Danely - J.P. Morgan
Joanne Feeney - FTN Midwest
Srini Pajjuri - Merrill Lynch
Tim Luke - Barclays Capital
Auguste Richard - Piper Jaffray
Cody Acree - Stifel Nicolaus

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Intel Corporation earnings conference call. My name is Amanda and I’ll be your coordinator for today. (Operator Instructions) (Audio Break) I would now like to turn the presentation over to your host for today’s conference, Mr. Kevin Sellers, Vice President of Investor Relations, Intel. Please proceed, sir.

R. Kevin Sellers – Vice President Investor Relations

Thank you, Amanda and welcome everyone to Intel''s third quarter 2008 earnings conference call. Joining me on today’s call are Chief Executive Officer Paul Otellini and Chief Financial Officer Stacy Smith. This call is being webcast live and a replay will be posted to our website at around 5:00 p.m. Pacific Time and will remain there for approximately two months.

Paul will start with a few comments on the quarter, as well as some thoughts about the macro environment, and Stacy will follow with more detail on both our financial performance as well as our fourth quarter outlook. Two quick items as we begin, first if during this call we use any non-GAAP financial measures or references, we will post appropriate GAAP financial reconciliations to our investor website, www.intc.com after the call. And second, a reminder for everyone that today’s discussion does contain forward-looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

So with that, let me now hand it over to Paul.

Paul S. Otellini – President & Chief Executive Officer

Thanks, Kevin and thank you for joining our call today. Intel again delivered strong financial results, with Q3 marking the fifth consecutive quarter of record quarter of revenue. Our revenue grew 8% over the second quarter. Operating income grew a healthy 37%, of just over $3 billion. In Q3, we shipped an all-time record number of microprocessors, driven by strength in mobile. The Atom family is off to a very good start, with Atom microprocessor and related chipset revenues approximately $200 million this quarter. Total microprocessor ASP was lower than Q2 but was approximately flat without Atom, reflecting strength in the core business. Our chipset business also had record units and revenues in the quarter. Our disciplined execution is a critical strength to us. Our product lineup is extremely well positioned across the spectrum of computing. In particular, I am pleased to announce that we began shipments of our Nehalem product family during the third quarter and expect to formally launch these products in November. Nehalem brings a new micro architecture and new performance features. This new product family will further extend our performance leadership in microprocessors.

We also continue to see strong acceptance of our Atom microprocessor family, which was designed to enable new mobile Internet form factors at attractive system price points with healthy product margins for Intel. I want to take a minute and reflect on a number of important actions that the company undertook in 2006 and 2007. These actions put us in an excellent operating position for changing economic conditions. Our current employee base is approximately 20,000 heads lower than our peak in 2006 and we have removed over $3 billion in spending. We’ve made a large number of changes in our operations that have prepared us well for a variety of economic scenarios. Our business model generates strong cash flows with Q3 operating cash flows of over $3 billion and a current cash position of approximately $12 billion.

With very little debt, our balance sheet is in excellent condition. Turning to NAND, last week Micron announced our joint decision to shut down 200mm NAND operations. In addition the IMFF planned Singapore FAB is now on hold as we continue to take actions to reduce supply in current market conditions. On the product side, we launched our solid state drive product family in Q3, to outstanding reviews and are currently advancing those products giving us a lead in the higher margin segment of the NAND business. Now let me speak briefly about what we see in the market today and how that has shaped our outlook.

Q3 played out mostly as we expected it to when we began the quarter. We saw some softness in September in the corporate segment while consumer was more seasonal. As we head into Q4 we see some mixed signs. We expect the corporate segment to continue to show some softness as IT spending gets rationalized in this macro environment. Inventories in total seem in reasonable shape with Taiwan and channel customers cutting back and some OEMs building a bit. In general consumer traffic overall is right at this point in this quarter but we do see continued healthy interest in Notebooks and Netbooks. Our channel business began Q4 in good shape in terms of inventories and sales outs. It is clear that the financial crisis is creating some signs of stress that may impact our business but the extent of that is difficult to quantify. As a result we made two changes for this quarter. One, our outlook has a wider range than normal percepting our view of the boundaries of the risk, and two, we decided to provide a formal mid quarter update scheduled for December 4th to allow us to give you additional information about the state of Q4 business trends as the business and financial condition unfold.

Let me now turn the call over to Stacey for a more detailed look at our financial.

Stacy J. Smith – Chief Financial Officer

Thanks Paul. Intel had a strong third quarter. We had third quarter record revenue, operating income of over $3 billion, gross margin of 59% and operating margin of 30%, reflecting the strength of our product portfolio, process technology, manufacturing operations and focus on efficiency. Revenue of $10.2 billion was up 8% from the second quarter in line with our average seasonal trends. Revenue of micro processors excluding Atom was in line with seasonal patterns on flat average selling prices. Third quarter revenue for Atom-based micro processor and associated chip sets was approximately $200 million. Including Atom micro processors revenue, overall micro processor average selling prices declined. The mobility group accounted for over 45% of total revenue. This revenue of $4.7 billion was up 23% from the second quarter where micro processor strength was in Notebook segment. On a geographical basis Asia Pacific and Japan experienced better than seasonal revenue growth at approximately 12% each. Relative to seasonal patterns EMEA was at the lower end of the Americas lag due to weakness in the corporate segment.

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