Intel Corporation (INTC: chart)
Q2 2008 Earnings Call
July 15, 2008 5:30 pm 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

John Pitzer - Credit Suisse
Timothy Luke - Lehman Brothers
Glen Yeung - Citigroup
Ross Seymore - Deutsche Bank
James Covello - Goldman Sachs
Sumit Dhanda - Banc of America
David Wong – Wachovia Capital
Uche Orji - UBS
Christopher Danely - J.P. Morgan
Hans Mosesmann - Raymond James
John Barton - Cowen & Company
Cody Acree - Stifel Nicolaus
John Lau - Jefferies & Company
Srini Pajjuri - Merrill Lynch
Michael McConnell - Pacific Crest Securities
Brian Piccioni - BMO Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Intel Corporation earnings conference call. (Operator Instructions) My name is Amity (ph) and I’ll be your operator today. At this time all attendees are in a listen-only mode. We’ll conduct a question-and-answer session towards the end of today’s conference. If at any time during the call you require assistance, please press the * key followed by 0 and the operator will be happy to assist you. I would now like to turn the presentation over to your host for today’s conference, Mr. Kevin Sellers, Vice President of Investor Relations. Please proceed, sir.

R. Kevin Sellers

Thank you Amity and welcome everyone to Intel''s Q2 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 approximately 5:00 p.m. Pacific Time and will remain there for approximately two months. As usual, Paul will be discussing the highlights and progress of the quarter and Stacy will then provide details of our financial performance in Q2 as well as the outlook for both the third quarter and full year 2008. Following Stacy’s comments, we’ll be happy to take questions. A few important items before we begin. First, the press release of our earnings went out at approximately 1:15 Pacific Time and is now posted on our investor website, www.intc.com, along with updated financial statements for anyone who still needs access to that information. Also, if during this call we use any non-GAAP financial measures or references, we will post the appropriate GAAP financial reconciliations to our investor website.

As we begin, let me remind everyone that today’s discussion contains 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

Thanks, Kevin. Our second quarter results were very positive on a number of fronts. First, revenue for the quarter was a record, fourth quarter in a row that we achieved such a result. Demand for our leading edge computing products around the world continues to be strong, with revenue and unit shipments toward the high end of the seasonal norm, when factoring in the divestiture of the NOR business. We realized record unit shipments in mobile microprocessors, chipsets and wireless communication units in the second quarter. Our focus on lowering costs and improving efficiency continues to provide considerable operating leverage, with operating income growing 67% from a year ago. For the second quarter in a row, we bought back $2.5 billion worth of stock, returning cash to our stockholders.

Our 45-nanometer manufacturing process is performing superbly. We remain on track to ship over 100 million units before the end of the year on this process technology. At this stage of our process ramp, yields and throughput times are better than at the same time on our 65-nanometer ramp. These results are lowering unit costs ahead of our original plans and are providing us with increased flexibility in meeting diverse customer requirements. We will reach the 45-nanometer shipment crossover point for microprocessors during this, the third quarter.

Now let me briefly discuss a few product highlights. In servers we had record channel shipments. This demonstrates the demand for our products coming from small and medium businesses around the world continues to be healthy. We also enjoyed some noteworthy design wins at both Cray and DreamWorks, reflecting that our current and future product roadmaps are delivering the performance that meets the most demanding customer requirements. In mobile, we enjoyed very strong unit growth, both sequentially and year-over-year. As notebook computers continue to decline in price, we see demand growing in response. We saw notebook unit shipments cross over desktop in the overall client PC category in the second quarter. That’s sooner than we had expected. We launched our new Atom™ Processor during the second quarter and are exceeding our ramped up targets as demand for this new product is very robust. We expect unit shipments of Atom Processors to grow sharply in the second half.

In summary, we were very pleased with our second quarter results. The strategic direction we laid out two years ago at our investor meeting coupled with our restructuring efforts are coming together and yielding tangible results that we committed to our stockholders. Our product line is superbly positioned. Our new growth initiatives are ramping and showing promise, and our manufacturing execution is outstanding. In the third quarter we plan to bring exciting new products to market, such as our new Centrino® 2 platform launched just yesterday, as well as Dunnington, our six-core server processor targeted at high-end server workloads scheduled to launch later this quarter. These are the kinds of innovations that create real differentiation for our customers and allow us to maintain product leadership.

A final word on the economic environment; we are very aware of the global economic issues that dominate the financial markets these days. We are watching these very carefully. In the first-half of 2008, we saw order patterns play out as anticipated at the beginning of the year. Inventories remain at healthy levels and our global footprint is helping us benefit from demand for Internet computing. As we look into the third quarter, we see continued healthy demand for our products leading us to the third quarter outlook that we provided.

Let me now turn this call back over to Stacy.

Stacy J. Smith

Thanks, Paul. Intel delivered strong financial results in the second quarter. Better-than-expected demand in the microprocessor and chipset businesses led to record second quarter revenue of $9.5 billion. Compared to the second quarter of 2007, revenue grew 9%, with gross margin up more than eight points. Operating profit was up 67% year-over-year and operating income as a percentage of revenue was up eight points year-over-year, to 24%. Revenue for the second quarter was above the midpoint of the range forecasted in April and down 2% from the first quarter. Excluding the revenue associated with the NOR business, revenue was flat the first quarter at the high-end of the seasonal range. Microprocessor unit sales were above the seasonal pattern and average selling prices were lower.