英特爾 (INTC) 2002 Q3 法說會逐字稿

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  • Operator

  • Thanks for holding and welcome to the Intel Corporation's 3rd Quarter Earnings Conference Call.

  • Just a reminder that today's call is being recorded.

  • At this time, I'd like to turn the call over to the Director of Investor Relations and assistant treasurer, Doug Lusk.

  • Go ahead, sir.

  • - Director of Investor Relations and Assistant Treasurer

  • Welcome to the 3rd Quarter Earnings Conference Call.

  • Attending are Andy Bryant, Chief Financial Officer.

  • And Paul Otellini, President and Chief Operating Officer.

  • I'd like to remind everyone that the earnings release and this conference call are available on our Investor Relations website at www.intc.com.

  • For those of you who may not have seen the quarterly earnings report, revenue was $6.5 billion and earnings per share on a GAAP basis was 10 cents.

  • Earnings excluding acquisition-related costs were 11 cents per share.

  • The 3rd Quarter earnings report discusses Intel's business outlook and contains forward-looking statements.

  • These particular forward-looking statements and other statements made on the call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially.

  • Refer to our press release for more on information on the risk factors that could cause actual results to differ.

  • The specific forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rate, interest and other income, capital spending, depreciation and amortization of acquisition-related intangibles and costs.

  • These statements do not reflect the potential impact of any mergers, acquisitions, divestitures or other business combinations that may be completed after October 14th, 2002.

  • Finally, I'd like to remind everyone that Intel will be holding its executive webcast on October 22nd from 2:00 to 4:00 p.m.

  • Pacific time.

  • If you're interested in viewing the event, please register before hand at intc.com.

  • Now I want to introduce Andy Bryant who will discuss the 3rd Quarter earnings results.

  • Andy?

  • - Chief Financial Officer

  • Thank you, Doug.

  • Overall, revenues in 3rd quarter were in line with our forecast and seasonal patterns.

  • Revenue growth was at the low end of seasonal expectations for Intel architecture products.

  • Our wireless business, however, had strong quarter-to-quarter revenue growth.

  • That was essentially offset by the networking business.

  • Profitability was at the low end of our expectations because manufacturing cost savings anticipated for September did not materialize.

  • We continue to sustain our focus on investing in our core competencies and dis-investing in non-core businesses.

  • As a result, we made good progress in improving operating income.

  • Looking ahead, we see the possibility of modest growth in the 4th Quarter as the pace of economic recovery continues to define our outlook.

  • Revenues of $6.5 billion were up 3% sequentially and flat with the 3rd Quarter of 2001.

  • Unit shipments of Intel architecture micro processors and chipsets were higher in the 3rd Quarter than in the 2nd.

  • Motherboard units were approximately flat.

  • Intel architecture revenues of $5.4 billion were up 4% from the 2nd quarter and flat with last year.

  • For the nine months year to date, Intel architecture revenues are at 5% over 2001.

  • Revenues for the wireless communications business, consisting mostly of flash memory, were $586 million, up 10% on the quarter and 15% compared to last year.

  • Revenues for the networking business were $482 million, down 10% from the 2nd Quarter and 17% from 2001.

  • Gross margin percentage during the quarter was 39%, at the low end of our expectations at update.

  • We fell short on some aggressive savings targets for purchase materials and labor costs for manufacturing and had slightly higher than expected excess capacity charges. 49% is an increase of 2 points from the 2nd Quarter, which included the one-time charge of $106 million related to the decision to wind down our web-hosting business.

  • Excluding the charge, gross margin from operations was flat with the 2nd Quarter.

  • Compared to the 3rd Quarter of 2001, gross margin percentage is up three points, reflecting longer term progress on improving returns on invested capital.

  • Operating income of $1.1 billion excluding acquisition-related costs was up 22% from the 2nd Quarter, which included the one-time charge and up 7% from the 3rd Quarter of 2001.

  • In the Intel architecture business, operating profit was 26% of the group's revenues at $1.4 billion, up 3% sequentially and 6% year on year.

  • For the wireless group, operating losses were $30 million, lower than 2nd Quarter losses of $98 million.

  • For the networking group, operating losses were $177 million compared to losses in the previous quarter of $127 million.

  • GAAP earnings per share of 10 cents were up 43% from 7 cents in the 2nd Quarter. 2nd Quarter GAAP earnings per share reflected the web-hosting charge as well as a write-off of $112 million for goodwill.

  • Which was took a little more than 2 cents off earnings per share for that period.

  • Absent these one-time charges, GAAP earnings per share would be up 11% on the quarter.

  • Earnings per share excluding acquisition-related costs were 11 cents, up 22% from 9 cents in the 2nd Quarter, which included a charge of about a penny from web-hosting and up 10% from 2001.

  • Spending was on target at $2.1 billion, approximately flat with the 2nd Quarter and 5% year on year.

  • The size of the workforce continues to shrink and at the end of the quarter, 82,000, 1500 fewer people than at the end of the June.

  • The total for interest income, other income and gains and losses on equity investments was a net loss of $47 million.

  • Greater than our expectation of a loss of $25 million.

  • Within this category of the income statement, interest and other income was $49 million.

  • A net loss on equity investments was $96 million, primarily from impairment charges.

  • Average shares for calculating diluted earnings per share were $6.7 billion, down 1% from the previous quarter and 2% from a year ago.

  • During the quarter, we repurchased 56.6 million shares at a cost of $1 billion.

  • On the balance sheet, inventories of $2.5 billion were approximately flat with the 2nd Quarter.

  • An increase of $127 million and work in progress was largely related to microprocessors and flash memory.

  • While a decline of $195 million in finished goods was related to microprocessors.

  • Overall inventories at the high end of our acceptable range, we will continue to work inventories to keep inventories from growing and look for opportunities to reduce selected areas during this quarter.

  • Total receivables increased by $182 million because September sales are a large portion of the 3rd Quarter.

  • Days sales outstanding were 36 compared to 37 in the 2nd Quarter.

  • Cash, investments and fixed income trading assets entered the quarter at $10.9 billion.

  • This was an increase during the quarter of $786 million, after $950 million in capital spending and $1 billion on the stock buyback.

  • In summary, then, for the 3rd Quarter, revenues of $6.5 billion, up from the 2nd Quarter and flat with a year ago.

  • Gross margin of 49%, that's the low-end of our expectations and flat on operating basis for the 2nd Quarter.

  • And up year on year.

  • Spending on target.

  • Number of employees down.

  • GAAP earnings of 10 cents per share.

  • Earnings per share excluding acquisitions-related costs of 11 cents.

  • As we now turn to the outlook for the 4th Quarter, please keep mind that all the forecast data excludes the effect of any new acquisitions or divestitures that may be completed after October 14th.

  • We expect revenue in the 4th Quarter to be between 6.5 and $6.9 billion.

  • Revenues within this range will be flat to up 6% sequentially.

  • At the low-end of historical patterns.

  • Gross margin percentage in the 4th Quarter should be 49% plus or minus a couple of points.

  • With our revised outlook for growth in the second half, we are lowering the effective tax rate for 2002 from 28.4 to 27.4%.

  • This excludes the impact of acquisition-related costs and an expected tax benefit during the 4th Quarter of approximately $65 million related to a divestiture.

  • The adjustment is driven by lower profits than previously expected with a greater portion from loan tax rate jurisdictions.

  • Spending is expected to be about $2.1 billion, flat with the 3rd Quarter.

  • Our estimate for gains and losses from equity investments and interest netted income is a net loss of $50 million.

  • This includes a net loss of equity investments of approximately $90 million, primarily as a result of impairment charges.

  • Last week, a federal court in Texas ruled that Intel's titanium processor infringes on patents owned by [InterGraph] Corporation.

  • Under the terms of an April 2002 settlement, Intel agreed to pay liquidated damages of $115 million within 30 days of entry of filing judgment of infringement and an additional $100 million if they prevailed on the deal.

  • Intel plans to first seek reconsideration of the ruling by the trial court.

  • And is currently analyzing the accounting treatment for the payments the company may ultimately be required to make.

  • Based on a preliminary analysis, payments are expected to be capitalized and amortized over a period of years and a ruling isn't expected have a material effect on Intel's reported results of operations for the 3rd Quarter of 2002.

  • We plan to provide more information concerning the kind treatment in Intel's 3rd Quarter 10-Q to be filed in early November.

  • For the year overall, we are now looking at a possibility of a second half as flat or up slightly from the first half and a 2002, that is flat with 2001.

  • Our Q4 estimate means that gross margin for the year should be approximately 49%.

  • Until we see momentum and recovery in our business, we must remain vigilant in cutting costs and saving cash.

  • To that end, the company is on track with previously announced plans to reduce the size of its workforce by approximately 4,000 people, exclusive of acquisitions.

  • We plan to accomplish this by the end of December, primarily through attrition, voluntary separation programs and some targeted business dis-investments.

  • There will be some resulting phases in the current quarters, but most will appear in the 1st Quarter.

  • This is a continuation of the program we launched at the beginning of the downturn and should bring the size of the workforce down by 11,000 and [peak employment of] 90,000 in early 2001.

  • We continue to find savings and efficiencies in capital and again are adjusting our capital spending forecast for the year, from a previous range of 5 to $5.2 billion to approximately $4.7 billion.

  • The savings come primarily from economies and construction costs and opportunities to re-use equipment.

  • We will be able to transition to more advanced technologies.

  • We're committed to machine and equipment, where the 300 millimeter wafers remain essentially the same and comprise a greater percentage of total capital and fab capital than they did when I discussed allocation of capital it at the spring house meeting.

  • Accelerating the transition to 300 millimeters and shipping the equipment to fewer processors will lower our unit cost and strengthen our competitive position.

  • Our focus on capital extends beyond manufacturing much we're concentrating on invested capital in our core competencies and dis-investing in businesses that may distract from this objective.

  • The comparative returns on investments and technology are becoming increasingly apparent.

  • At the same time, we have preserved profits, increased cash and protected our financial conditions.

  • We continue to deliver on a financial strategy we articulated at the beginning of the downturn.

  • With that I will turn it over to Paul with additional comments on the business.

  • - President and Chief Operating Officer

  • Thanks, Andy.

  • Overall 3rd Quarter revenue came in at the low end of the seasonal pattern.

  • Despite a difficult economic environment, we continue to execute well on a number of fronts.

  • And had solid market segment share gains in our Intel architecture business.

  • Our microprocessor and chipset units were higher sequentially while motherboard units were flat.

  • Microprocessor ASPs were down slightly as market segment share gains in the desktop shifted our overall mix.

  • Our wireless group saw sequential growth led by higher flash revenues while the Intel communications group had lower revenue due to continued weakness and networking in Telco.

  • In Q3, our microprocessor volumes continued to grow.

  • Our market segment share increased by approximately 3 points, reaching a four-year high.

  • It was a strong quarter for our flash memory products, particularly for cell phone applications, where we are seeing the volume and density continue to increase as new features, such as color screens and cameras, get adopted into handsets.

  • North America had a sequentially flat quarter as the back-to-school season was at the low-end of expectations.

  • Commercial demand stayed flat in volume.

  • Latin America had a poor quarter, as the economies and currencies of Argentina and Brazil continue to be under severe pressure.

  • The Asia-Pacific region set a new revenue record during the 3rd Quarter, growing 5% over the 2nd Quarter and 20% year-over-year.

  • China alone saw a year-over-year growth of revenue of approximately 39%.

  • The trend toward manufacturing outsourcing by major manufacturers continued this quarter as more products of all types were built in Asia and has been a continuing factor on our Americas revenue growth.

  • Inmia also had a strong quarter, driven by an especially strong September.

  • Retail PC purchases were up significantly September and led to a growth of 16% quarter-over-quarter.

  • Corporate purchasing continued to be weak in the markets of Europe.

  • Russia and the eastern European countries continued to grow at a rapid pace.

  • Japan had a down-quarter as retail and commercial consumption was off expectations.

  • The weak Japanese economy and consumer confidence continued to impact sales in this region.

  • Revenue was off 12% quarter-over-quarter.

  • The highlight for the quarter was revenue through our worldwide distribution channels.

  • Sales out of microprocessors tied record unit levels, primarily driven by success in emerging markets and grew 13% above Q2 levels.

  • We expect channel growth to continue and we are expanding our sales, marketing and branding efforts in this channel.

  • Our Intel architecture business refreshed much of its product line this quarter with the introduction of 18 processors spanning mobile, desktop and server, all on .13 Micron process technology.

  • Our strategy is to continue to use the current market environment as an opportunity to accelerate the transition of our products to our industry-leading manufacturing processes and improve our overall competitiveness.

  • Our desktop business saw solid sequential growth, unit growth, in Q3, driven by the Pentium 4 processor and market segment share gains in all regions and channels.

  • During the quarter, we introduced several new Pentium 4 processors with speeds up to 2.8 gigahertz, including versions supporting the faster 533 megahertz system bus.

  • We continue to widen our frequency lead against our competition and currently are greater than 800 megahertz ahead on generally available products.

  • We remain on track to introduce a 3 gigahertz Pentium 4 processor next month that will bring the company's hyper threading technology to the desktop.

  • HT technology allows a variety of multi-credit operating systems and applications software to run as though the PC has two processors, boosting performance by as much as 25%.

  • In the value space, we launched a 2 gigahertz Celeron processor.

  • Our Celeron lineup is now effectively competing in the marketplace against the highest-performing parts of our competition.

  • Our mobile business was flat with Q2 due to continued weakness in IT spending and a modest back-to-school season.

  • During the quarter, we introduced 11 new mobile processors at speeds up to 2.2 gigahertz, including several low-voltage processors for many sub notebooks and tablet PCs.

  • Our server business was down slightly from Q2.

  • During the quarter, we introduced Xion processors at 2.8 and 2.6 gigahertz for two-way servers and work stations.

  • In Q4, we plan to launch a new multi-processor server chip, code-named Galatan.

  • Galatan is our first MP server chip built on .13 Micron process technology and has a large on-die cache and much higher frequencies than the current MP chips.

  • The Titanium 2 processor which we began shipping in the 2nd Quarter, continues to establish impressive benchmark results.

  • NEC announced that a Titanium 2 based 32-way server achieved the world's best TPCC benchmark result on a non- cluster Microsoft windows platform.

  • Doubling the previous record by delivering 306,000 transactions per minute.

  • While Hewlett-Packard announced new records on SAP performance bench marks.

  • Chipset units and revenue were higher in Q3 led by good demand for our integrated graphics chipset, the 845 G. Overall, we believe we gained market segment share during the quarter and gained our position as the number one graphics supplier.

  • In early October, we introduced four new desktop chipsets, including several that support faster integrated graphics as well as DDR 333, allowing the faster memory to ramp into the marketplace in high volume.

  • In our wireless communication group, revenues were up 10% sequentially, led by higher flash revenue.

  • Flash units, ASPs and densities were higher and we believe we gained market segment share.

  • The flash market is seeing increasing density growth driven primarily by the rollout of new phones with additional features.

  • Our x-scale processor, which was introduced in Q1, continues to gain momentum and has been designed into more than 25 shipping hand held devices, including PDAs from Fujitsu-Siemens, Hewlett-Packard, Sharp, Toshiba and the new Sony [Plie], which is the first Intel-based PDA using the palm operating system.

  • In our communications group, revenues were down 10%, due primarily to continued weakness in the Telco and networking space.

  • Ethernet units were sequentially higher, thanks in part to the rapid adoption of giganet Ethernet products into the corporate desktop market.

  • During the quarter, we began sampling to customers our dual band chipset, code-named Colexoco.

  • A key component of our upcoming [Baneas] platform for notebooks.

  • At the Intel developer's forum, we announced we would be adding new capabilities to our forthcoming 90-nanometer process technology.

  • The company will integrate high-speed silicon-germanium transistors and mixed signal circuitry for a new generation of faster, more integrated, less-costly communication chips to be introduced next year.

  • In summary, Intel continues to execute well with new products in this tough economic environment.

  • We are increasing our competitive position and achieving market segment share growth in many product areas.

  • We will continue to focus our investments onto products and technologies that will allow us to prosper when the market recovers.

  • Meanwhile, we are controlling costs and expenses to allow us to maintain solid profitability at current revenue levels.

  • With that, let me turn the meeting back over to Doug.

  • - Director of Investor Relations and Assistant Treasurer

  • Thanks, Paul.

  • We will now open the conference call for Q&A.

  • In the interest of moving along and giving other questioners a chance, please limit yourselves to one question.

  • Thank you.

  • Operator?

  • Operator

  • Thank you.

  • To ask a question, signal us using your telephone.

  • Press the star key followed by the digit 1.

  • First up in the roster is Tim Mahon, CSFB.

  • Thank you.

  • Andy, I'm trying to understand why the mid point of your range would suggest up 3 percentage points on revenues, yet your margins in the mid point are flattish.

  • Thank you.

  • - Chief Financial Officer

  • Sure.

  • If you look at the Q2 margin, a part of it was underutilized capacity on some of the older process technologies.

  • When you look at our Q4 demand, we think it is lower end seasonal.

  • We're in a situation where I think I will see higher underutilized capacity charges in the 4th Quarter.

  • I won't give you a specific answer, certainly if you saw revenue increases at Intel, you would expect to see a little bit of margin percentage uptick.

  • That's about the magnitude of what I expect the increased underloaded charges to be in the 4th Quarter.

  • Thank you.

  • Operator

  • Moving on to a question from Joe Osha, Merrill Lynch.

  • Yes, Andy, following on the previous question, can you give us some sense given your -- you know, your current take on demand when you think you will be back to your target inventory levels and I guess as a follow-on from that, once you're there, does that presumabley would take pressure off them in terms of the utilization rates that your business is seeing?

  • - Chief Financial Officer

  • Somewhat, Joe, I expect to bring inventory down a little bit this quarter.

  • Probably, you know, I can see it coming down at 1st Quarter, you don't know until you see the demand.

  • That would take a little pressure off.

  • I guess what -- what I'm trying to understand here is the extent to which the -- the lower production rates are a function of weaker demand, and the need to reduce inventory or some combination of both?

  • - Chief Financial Officer

  • It is more an effect of lower demand than a need to reduce inventory.

  • If you told me I had to live with this inventory forever, I would be okay.

  • You'd have to pull those underutilized charges down a little bit, not much.

  • We're really in a situation where Intel in general is a high-constant, when you have revenue kick, you're supposed to have a high margin kick.

  • We're close now where we start to take the reserves, if we got a demand kick, we'd probably see both, an underutilization benefit and a fixed cost benefit.

  • We're on the edge now.

  • Can if you see revenues up or down, you will see high flow through in the margin of the revenue move.

  • Okay.

  • Thank you.

  • Operator

  • A question now from Mark Edlestone, Morgan Stanley.

  • Good afternoon, thank you, Andy.

  • Do you have a better sense for what the underabsorption charges were in the 3rd Quarter?

  • And it sounds like you're going to be throttling back fabs here.

  • Can you quantify what kind of a slowdown in production we're looking at?

  • - Chief Financial Officer

  • Sure, the -- actually the underutilizing charge in Q3 was the small piece.

  • Let me do it overall as a summation of the Q3 mass personnel and we will go from there.

  • In the 3rd Quarter, what we typically do is we enter the quarter, we look at our manufacturing organization and we say we'd like to see, in these times, when we're trying to cut our dollar cost, you know, see 3 to 4% cost improvement.

  • That comes from purchased materials, putting pressure on suppliers as well as labor efficiencies, we're trying to take our head count down.

  • We've seen those types of improvements quarter after quarter after quarter in the downturn and we finally hit the wall.

  • We didn't get the expected savings and purchased materials or much of the benefit of the lower head count inside the quarter.

  • In the 3rd Quarter, very small surprise on underutilizes factories.

  • What was the question on the 4th Quarter?

  • On fab loadings, basically, what kind of a slowdown in fab ramps could we expect?

  • - Chief Financial Officer

  • If you look at loadings on the 4th Quarter, first of all recognize even though I'm talking about less growth than I would expect, it is still growth.

  • It will be better than revenue growth is my guess.

  • So, there is growth there.

  • Certainly it is in capacity growth.

  • What you don't really see is more modest trimming.

  • But my -- my fabs -- one of my fabs, various manufacturing processes have, been hovering slightly above the level at which you start to take excess capacity charge.

  • So, it is not a major change in output, but in accounting terms, I'm hitting a significant brick point.

  • Great.

  • Thanks for the complete answer, Andy.

  • Operator

  • We have a question now from John Barton, Wachovia Securities.

  • Yes, good afternoon.

  • I wondered if you could comment on the number of processors that are now out the door at .13 Micron.

  • And, in light of a lighter seasonal trend than we expected, thoughts on fab-11x and fab-24, your plans on ramping those.

  • - Chief Financial Officer

  • We will give you a specific update on the percent next week at the we can cast, John.

  • But it's about 50%.

  • And the second part of the question was on FAB 24, you said?

  • FAB 24 and FAB 11-X if you could.

  • You talked about ramping 11-X going into October here and 90 nanometer and 30 millimeter production in the first half of '04.

  • Is that still on track, or is the current environment going to push either of those out?

  • - Chief Financial Officer

  • We're still on track there.

  • In fact, when we talk about some underutilized capacity, none will be on the 300 millimeter, it is the older technologies primarily, a little bit on the newer technologies, but nothing on 300 millimeter and we continue to plan to put all the investment that we had before.

  • Great, thank you.

  • Operator

  • A question now from Nimal Vallipuram at DWK.

  • Yes, Andy, going back to the question regarding underutilization charges, what percentage of your margins, which was lower than expected, was due to the underutilization charges?

  • Vis-a-vis lower ASPs in the microprocessors?

  • - Chief Financial Officer

  • Again, very small percentage was in the underutilization charges in Q3.

  • If you look at our overall business in Q3, I'm going to diverge here a minute.

  • Think about what's happening in the company, you know, ASPs were down in the 3rd Quarter, units were up.

  • And we saw revenue growth in the Intel architecture business.

  • The two communications businesses kind of offsetting, spending dead flat.

  • Head count dropping.

  • Capital reduced some.

  • What you're seeing is a situation where operating margins, Q2 to Q3, were dead-flat.

  • This is a situation where we're not seeing a demand pick up we'd like to see and we hit a wall on the cost savings we were driving for.

  • The cost savings, what we expected get from suppliers and some of our other efficiencies is by far, you know, by far significantly the largest portion of the mess we had in the 3rd Quarter.

  • - President and Chief Operating Officer

  • Maybe I could jump in on ASP and give you more granularity there, too.

  • Thanks, Paul.

  • - President and Chief Operating Officer

  • The desktop ASP was actually up from Q2 to Q3.

  • The overall ASP was down principally because we gained significant market segment share principally in desktop.

  • So we had a mixed shift to desktop within the overall level of shipments.

  • Just a follow-up on that, Paul, you indicated going forward in the 4th Quarter, your growth will be on the low end of the seasonality.

  • Is it a fact that Intel has done a tremendous job in cutting what I would call you could cut in the last 12 months or so, to make the company more cost-effective to the -- sort of a new paradyme you're seeing where the in-market demands are somewhat anemic.

  • Just going forward, if the demand doesn't come back in the near-term, can you give us an idea, what more do you -- will you be forced to do to make the company more cost-effective?

  • And when things do turn up, to enjoy the kind of a manufacturing level rate you have enjoyed in the past?

  • - President and Chief Operating Officer

  • There are two elements to that if I got you right, one was seasonality and the other was costs.

  • And I think that one of the things you need to understand is that as our business continues to grow outside of the United States and to some extent outside of the United States and western Europe, things that we would have perceived as traditional seasonality start to change.

  • For example, historically the peak selling season in China is in our summer.

  • Not in our 4th Quarter.

  • So, it is one of the reasons you saw fairly substantial growth in China last quarter.

  • I think we need to start thinking about seasonality differently as we go forward, as various parts of the world grow faster or slower than others.

  • Number one.

  • Number two, in terms of cost, the single biggest thing we can do on costs is to get our product costs to take advantage of the benefit of moving to more advanced technologies and larger wafer sizes.

  • So, the move to 300 millimeters and 90 nanometers is focused at unit cost reduction and margin preservation.

  • That's the single biggest action we can do.

  • It gives us a competitive advantage from a technology standpoint, too.

  • So, we are keeping the fires lit on those actions as aggressively as possible.

  • Thanks, Paul.

  • Thanks, Andy.

  • Operator

  • Moving on to Tom Thornhill, UBS Warburg.

  • Thank you.

  • You've covered a lot of the history Q3 on gross margin.

  • We're looking at your future plans for process technology, where can gross margins ago?

  • I don't mean in the next couple of quarters, but over another 12 months to 24-month time period relative to where they have been historically?

  • - Chief Financial Officer

  • It's something I can't really give you a very good answer to yet, Tom.

  • The key thing to first keep in mind is more than anything it's going to be a function of what type the market becomes.

  • As a fixed cost environment business, if I get a kick in demand, the first thing that happens I have to use the fixed costs and get a low cost per increment.

  • Secondly, because I have underutilization capacity charge, I get an immediate kick for margin from that, as well.

  • So, I actually believe if we see a demand return, and see it take advantage of all new technologies, we can see a pretty good cost improvement, but it is all a part of business returning.

  • If business doesn't return, certainly you can do some scaling of your infrastructure, but it is something we will do slowly because we believe you have to have capacity in order to respond to market conditions.

  • So, you really have to make an assumption on demand if you think demand comes back relatively strongly, you have some good cost opportunity.

  • Operator

  • Now we have a question from John Low, RBC capital.

  • Yes, thank you.

  • Can you give us more color on the demand in Asia, specifically.

  • That's your fastest-growing area, with the P-4 versus the Celeron mix.

  • And strength in what type of chipsets, is that still on the 845-G versus the GL?

  • And what are the type of gross trends that you see going forward?

  • Thank you.

  • - President and Chief Operating Officer

  • I can tell you I think we believe China is now the number two single largest country market in the world for computers.

  • It is now past Japan.

  • So, you know, that is now a factor in both seasonality and in an overall view of the market.

  • The mix in China continues to be very good.

  • China was the first country market to move from Pentium 3 to Pentium 4 and on average we sell as richer mix a product there as anywhere in the world.

  • I will say on -- that in this last quarter our mix of performance versus value, microprocessors, that is Pentium 4 versus Celerons, improved in the quarter.

  • So, we didn't see -- and that was reflecting the desktop commentary I had a minute ago.

  • We can't see any degradation in mix at all.

  • In terms of chipsets, I can't give you the granularity you're asking for on G versus GL.

  • I will say there was a very rapid adoption of the new integrated graphic chipsets once we launched them and they accounted for much of the volume growth quarter-over-quarter.

  • That's interesting, but if that's the case, where was the weakest mixed degradation moving toward the Celeron, which geographical location?

  • - President and Chief Operating Officer

  • The Celeron really wasn't a factor.

  • And Celeron mixed shift wasn't a factor in the quarter.

  • The biggest factor in the overall quarter was the relative growth of the desktop versus a fly quarter in mobile and a slightly down quarter in servers.

  • And the growth in the desktop came both from our position in emerging markets and from the share that -- market segment share we were able to gain over our competition.

  • Okay.

  • Thank you.

  • - President and Chief Operating Officer

  • Sure.

  • Operator

  • A question now from Adam Parker, Sanford Bernstein.

  • Hi, what gives you more visibility into your revenues this quarter than previous quarters, sort of implied by the tighter revenue range?

  • - Chief Financial Officer

  • The -- you know, it's hard to claim a whole lot more visibility.

  • One of the things about the 4th Quarter, it is left back-end loaded.

  • So, as a -- look at September, you ship 40, 50% of your quarter in the 3rd Quarter and this quarter it shifts before Christmas.

  • You get a lot of shipments in October and November.

  • Near-term it looks like it's going to be up less than seasonal and we're pretty comfortable with a narrower range.

  • Okay, so given what you said about October and November being, you know, more of the quarter than in other quarters, what do you need to get out of the last months of the year in order to hit the mid-range of the guidance; is it more linear in the entire quarter?

  • - Chief Financial Officer

  • It depends on what happens the first two months, but in general, yes, the 4th Quarter is the most linear quarter in our year.

  • Okay.

  • Then, just as a kind of a sort of related question, you mention about versus average seasonality.

  • When you say average seasonality, are you basing that on a soft of along-term growth in the mid-teens, or have you revised your view of the long-term growth read in the industry down to something like high single digits and seasonality of 6% in the 4th Quarter now is sort of akin to what 9% was prior to that and maybe the upper end of the range implies normal seasonality with the new paradyme, or is there any factor of that at all in your thinking.

  • - Chief Financial Officer

  • No, we haven't gotten to that point.

  • We have looked at the last five years, seven years, whatever and said here's what your average growth is.

  • Certainly the range is from 0 to 13%.

  • We think most of them are about 6%.

  • Okay, thank you.

  • Operator

  • Now we go to Trustco Capital Management and Christian Coach.

  • Yes, could you please talk about your tax rate and kind of the quality of earnings implied with that, please?

  • - Chief Financial Officer

  • Can you be more specific at what you're looking at?

  • Well, it looks like you lowered your effective tax rate going forward?

  • - Chief Financial Officer

  • Yes, we lowered the tax rate from 20.4 to 27.4% for the year.

  • You can catch up by law that says you have to catch up the 1st and 2nd Quarter and 3rd Quarter, so, it is more like 25% in the 3rd Quarter.

  • That's because we now believe we'll have lesser earnings for the year, that's a lesser tax rate.

  • And those revenues and profits will be in lower tax jurisdictions.

  • The other thing I tell you it wouldn't have mattered what tax rates you got, the earnings per share would have stayed the same.

  • Thank you.

  • Operator

  • Scott Randall, SoundView Technology.

  • Great, thanks.

  • Andy, following on something you said earlier about the strategy of sort of -- can you hear me?

  • - Chief Financial Officer

  • Yes, we got you.

  • About speeding the transition to new products, I'm wondering if there's an opportunity to try to generate some better demand poll through higher promotion?

  • Or is this market environment just too tough where that isn't likely to be effective?

  • - President and Chief Operating Officer

  • I will try that one.

  • We are increasing our advertising spend in the 4th Quarter, principally in the mature markets.

  • But I -- I -- I think that it's unlikely to significantly stimulate demand, particularly if you think that corporate demand has been one of the soft spots that doesn't tend to react to advertising.

  • We believe that a lot of the new notebook products that we introduced last quarter are now being evaluated for corporate purchases and that positions us to take advantage of that.

  • So, we will put more of our advertising certainly in the first half of next year into notebooks as a result of that.

  • That might have some cause and effect on demand, but consumer advertising will be up marginally into the 4th Quarter and I would hope it has some effect.

  • Great, thanks very much.

  • Operator

  • A question from Alec Berman at Pangia.

  • Hi, can you give an explanation -- you may have said it, but I missed everything you said, about the equipment re-use and a slack economy allowing to us something, I didn't hear what you said, maybe you could repeat that and give color on what kind of equipment you were using and just more color on that.

  • - Chief Financial Officer

  • Sure, I'd be happy to.

  • Two things, first, we're taking our capital spending forecast down by about $500 million.

  • The majority of that is actually from a lower cost on construction projects.

  • So, even though I was unsuccessful getting lower costs and suppliers into the product ramp, I was successful in getting lower cost and suppliers on the construction site.

  • That's the bigger part.

  • The second -- the smaller part is I had increased in the equipment re-use.

  • So, what happens in a time when demand lowers, where we think it's going to be now, you can take your older capacity, the .18 Micron capacity offline and convert it into .13 Micron, so, I can take some equipment and instead of buying new, re-use the stuff I bought two years ago for .18.

  • Okay, I understand what you're saying.

  • Thanks.

  • Operator

  • Dan Niles at Lehman Brothers is next.

  • Thank you, Andy.

  • Not to beat this to death, but in terms of the 3rd Quarter margins, I guess I understand that, you know, the cost savings didn't come in as you anticipated.

  • What's confusing me is you had an update in early September and I can sort of understand of the accounting treatment on the warm-down charges or whatever you call it on the underutilized fabs that, sort of surprised you.

  • In terms of the cost savings in terms of procurement, et cetera, for the first 60 days, I know we spent a lot of time on that call, I think a lot of people asking questions on how the margin guidance did not change even though the top end of the revenue guidance you lowered by a couple hundred million bucks.

  • What happened in the last 30 days that forced such a big day when the first 60 wasn't enough to change guidance on the mid-quarter update?

  • - Chief Financial Officer

  • It's not an easy one to defend.

  • I should say I should have known then, but, in reality, when you're sending $3 billion in a quarter for a factory environment, you've got a billion dollars left to go, you say, look, you're not hitting targets, we want redoubled efforts.

  • They salute, say we will give it our best shot, boss.

  • And Craig says, okay, the guys can make it.

  • They've done it time after time for us.

  • I assume they're going to get there.

  • It just wasn't there to be found this time.

  • And I guess a separate question, you've talked about the fact that I think your cost as you transitioned the 300 millimeter and 90 nanometer, etcetera, you get a 20-25% cost reduction between Q4 of this year and Q1 of next year.

  • But the flip side is the underutilization charges as you continue to bring on 300 millimeter to some extent, I think you make the underutilization worse because you're increasing your die-per-wafer that by 140%.

  • How do we balance those two things in our head, you know?

  • As we're trying to think about it.

  • - Chief Financial Officer

  • It's back to the assumption on buyings again.

  • If you believe demand will stay soft for the next 12 months and the fact remains empty, we won't make our cost targets.

  • The real power of 300 millimeter comes as you start to fill those factories.

  • Certainly you always have the option of saying I can take some of the older factories with the older 8-inch processors and shut factories, which will show, again, after a one-time charge, you know, better costings and we could make the cost numbers.

  • It is not that easy.

  • It is a real complex decision.

  • Think about the underutilization charges and most of it is depreciation.

  • The cash has already been spent.

  • You don't save much cash by taking an old factory offline.

  • What you do is you limit your upside and you go to respond.

  • You actually hand your competitor sales if you don't have the capability in place.

  • So, we will tend to hang onto capacity longer because it's the capital, the cash has been spent to put it in place.

  • At some point, if it lasts long enough you know, we have to go look at the eight-inch factory network and do something with it.

  • And maybe just asking Paul one question.

  • As you open up your GAAP with AMD, you have 800 megahertz lead on them after they beat you to a gigahertz first.

  • Does pricing need to be as aggressive given the performance differential going forward?

  • You know, or is that something given the market share gains you've gained you want to keep it going?

  • I guess just more strategic thought on pricing given where you are relative to the competition now and the cash problems that they currently have.

  • - President and Chief Operating Officer

  • You're right, it is more strategic and probably more than a two-minute conversation.

  • I -- I think that what we've done in the last six months is we've essentially established our Pentium 4 product line above the product lines of our competition.

  • And I won't say is that gives us pricing immunity, the world is still very competitive out there, but it's allowed to us really use our Celeron product line to compete much more effectively with the bulk of our competition.

  • And that, I think, is reflected in the fact that we gained share and we grew or improved our performance to value mix this last quarter.

  • Those are the kinds of things we will focus on.

  • We will continue to focus on moving the mix richer over time and continue to focus the value line on gaining share over time.

  • Great, thank you.

  • Operator

  • Jeff Shriner, MS Capital Management.

  • Yes, good afternoon.

  • Paul, this is probably a follow you what Mr. Niles was kind of going to.

  • Could we see, since you have such a big lead and I mean in terms of getting -- getting ready to release the 3 gigahertz chip, price cuts in the chipset industry because it's been so aggressive, as you said, it's been really aggressive out there and maybe one more cut might get the demand going a little bit more.

  • - President and Chief Operating Officer

  • I don't think that we're at a part of the curve where incremental pricing moves from us would stimulate the weakest portions of demand and as we've said for some time now, the weakest portions of demand happen to be in mature markets, corporate IT being one of the softer spots.

  • Corporations tend to buy at relatively fixed price points, they buy the best machines they can at those price points, and they modulate their purchases based on where they are in the capital cycle and the replacement cycle.

  • They have not been purchasing a lot of machines incrementally at any price point lately.

  • I think when they snap back, they tend not to buy value processors and that's what we would be looking for.

  • Our positioning for corporate now is Pentium 4 - 2gigahertz and next year would take that same price sweet spot and move the performance up substantially.

  • Great, you walked right in my follow-up there, would be at what point, now that we positioned -- you say performance is positioned at 2 gigahertz, correct?

  • - President and Chief Operating Officer

  • In the corporate market, yes.

  • Okay.

  • At what point, possibly, does it become beneficial to Intel, being the only RD-RAM chipset processor to cut the prices on a PT800 chipset to compete against the impossibly DDR 266 inferior memory technology that you could then basically go to the Corporation and say we're giving you more for your money.

  • - President and Chief Operating Officer

  • The problem with that equation and analysis is we don't have any influence, as near as I can tell on our D-RAM pricing or supply for that matter.

  • And number two, Corporations have tended not to really be the ones buying that.

  • They tend to be more conservative and buy DDR.

  • Thank you for following up on that.

  • Operator

  • We have a question from Jonathan Joseph at Salomon Smith Barney.

  • Yeah, Paul, I know you don't comment on forward-pricing very much, but it sounds like no matter price cuts this year per the work week 40 road map?

  • - President and Chief Operating Officer

  • I don't comment on forward-pricing, Jonathan!

  • Because we have heard that there is a possibility of price cuts in a couple of weeks.

  • What I'm hearing is you don't see the elasticity there so no need to cut prices?

  • - President and Chief Operating Officer

  • I really don't want to get into pricing beyond what I talked about in the two-minute strategy question from Dan.

  • Okay, thanks.

  • Quick follow-on, with regard to the mix, now it does sound like the mix favored the lower price desktop and away from the higher-priced notebook and the higher-priced server.

  • You led it a little bit to possibly a little bit of a notebook picking up here.

  • Could we get more positive mix in the 4th Quarter?

  • Also within notebook, there is a desktop arbitrage feature which is hurting prices a little bit.

  • I would guess.

  • But is there any chance that we could get prices at least flattish in the 4th Quarter?

  • - President and Chief Operating Officer

  • Well, I think, again, the -- the majority of the notebook market tends to be corporate purchases.

  • So, you know, it's really speculative at this point as to when that will retire.

  • It tends to be the largest drivers of notebook purchases.

  • The desktop arbitrage was principally a retail phenomena.

  • Intel adjusted its mobile Pentium 4 pricing last quarter to really move -- to attempt to move much of that arbitrage market back into true mobile products.

  • And we were fairly successful in doing that.

  • That's one of the reasons you saw flat mobile quarter on quarter.

  • Okay.

  • Thank you.

  • Quick follow-on now to you, Andy it sounds like you may take some underutilization charges in the 1st Quarter as well.

  • Were you eluding to that?

  • - Chief Financial Officer

  • It's too early to call.

  • You got to make your assessment if -- if units stay flat in the 1st Quarter, then underutilization charges would follow, yes.

  • Thank you.

  • Operator

  • And a question from Doug Lee, Banc of America Securities.

  • Hi, just a quick question for Paul.

  • Paul, you mentioned that the channel or the distribution business is at record levels.

  • Was curious to know your thoughts as to what's happening out there?

  • Do you think some of the smaller or maybe tier 2, tier 3 players are gaining share or it is more emerging markets related?

  • And what's your sense of inventories out in that channel?

  • Thank you.

  • - President and Chief Operating Officer

  • Let me work backwards on the answers.

  • Inventories are in very good shape in the channel.

  • Microprocessors inventories for Intel.

  • It came down quarter on quarter and partially driven off of the record sales out.

  • So, no inventory issues, at least that I see from a channel perspective.

  • And we're -- the mix that's in the channel is in very good shape relative to where we believe purchases over the next month or so are going to be.

  • The dynamic in the channel this quarter was that we tied record unit volumes, much of that was driven in emerging markets.

  • I think in mature markets, though, where the multi-nationals tend to do very well, particularly given large enterprises, who aren't necessarily buying lots of machines right now, there probably was some share shift to the smaller manufacturers who tend to serve local businesses a little bit better.

  • Okay, so at least in the short-term, you mentioned you're going spend more emphasize on marketing and supporting that channel, at least in the short-term the share shift may continue toward some of the channel players versus some of the bigger multi-nationals.

  • - President and Chief Operating Officer

  • No, that really gets into projecting when the large purchasers -- you know, come back into the market.

  • Okay, fair enough.

  • Thank you.

  • - Chief Financial Officer

  • Operator, we will take a couple more questions.

  • Operator

  • Next is Charlie Glavine, Think Equity Partners.

  • Andy, if you take a look at the general utilization rates you have right now, with a lot of the equipment guys saying that going on to the next couple of generations to the 90 nanometer, they expect 75% synergy between equipment set, are you going to be concentrating more on upgrading the existing capacity of the .25s and thus lowering the Cap Ex?

  • And at what point in terms of a reinvigoration of the corporate IT would you start to accelerate that migration?

  • - Chief Financial Officer

  • Certainly the -- at least Intel's 90 nanometer processor is designed to have a high level of ability to use equipment from .13.

  • So, what was I like to see is the opportunity to re-use that and have the .13 generation -- you always have a -- a process left to take care of all the cards on the end on that.

  • I'd like that on be 8 inch and then move as much as my 12 inch forward as I can.

  • We will try to do that.

  • I'm not making a forecast for next year, but we will trade more capital efficient and do what we can.

  • It is also a function of when 90 nanometer comes and what price we put on it and how fast we can ramp it.

  • It is a complex formula.

  • You can expect that we will move 90 nanometer 12-inch as fast and hard as we can.

  • We will re-use as much equipment as we can.

  • Andy, if I can't inadvertently get you to do a Cap Ex number, can you give the indication, as far as the underutilization within the IA group, how much of that was processor and how much of it was the non-processor like the chipsets?

  • And was that an explanation on why the aggressive pricing with ETS was done.

  • - Chief Financial Officer

  • I don't know what the aggressive pricing with DTS is.

  • The elite group on the 845s.

  • - Chief Financial Officer

  • Again, I don't know what that is.

  • On the -- what was the first question?

  • The underutilization of say the CPUs versus the non-CPUs.

  • - Chief Financial Officer

  • In the 3rd Quarter there, were no CPU processors underutilized.

  • I expect some in the 4th Quarter.

  • I lean more heavily toward the older technology as and chipsets and memory.

  • Thanks, Andy.

  • Operator

  • And we will take your final question from Hans Mosesmann, Prudential Securities.

  • Yes, thank you.

  • Regarding the server market, can you explain the linearity this year?

  • It started pretty well, stronger in the first part of year, what's happening with the weakened outlook here in the next couple of quarters?

  • - President and Chief Operating Officer

  • Well, Hans, we ask those same questions ourselves with the 3rd Quarter and servers.

  • I think there is certainly across-the-board pressure on all of the large server vendors to be as efficient as they can in their builds and inventory for the products that -- the parts that go inside of their servers.

  • This is very expensive stuff, not just from Intel, but from other suppliers of other components.

  • And I think people have really trimmed down the -- the server build after -- on a very aggressive Q2.

  • I think there is also some anticipation of Galatan, but we're not sure yet.

  • The backlog there looks good at this point.

  • But that's not market share with losses or anything like that?

  • - President and Chief Operating Officer

  • No, I don't think it's a market share shift at all.

  • I think it is just reflecting the overall IT spend environment and the desire of our customers to really be very efficient in this area.

  • Okay.

  • Thanks a lot.

  • - Chief Financial Officer

  • Okay.

  • We'd like to thank everyone for listening to today's conference call.

  • A recording playback of the call will be available at approximately 5:00 p.m.

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  • Thank you.

  • Operator

  • That concludes today's conference call.

  • Thank you again for joining us.