Intel Corporation

Good day, ladies and gentlemen, and welcome to the first quarter 2019 Intel Corporation Earnings Conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Mark Henninger, Head of Investor Relations. Please go ahead, sir.

Thank you, Operator, and welcome, everyone, to Intel's second quarter 2018 earnings conference call. By now, you should have received a copy of our earnings release and the earnings presentation. If you've not received both documents, they're available on our investor website, intc.com. The earnings presentation is also available in the webcast window for those joining us online. I'm joined today by Bob Swan, our interim CEO and chief financial officer. Murthy Rendatantala, Group President of the Technology Systems Architecture and Client Group and Chief Engineering Officer, as well as Naveen Shenoy, Executive Vice President and General Manager of the Data Center Group. In a moment, we'll hear brief remarks from Bob, followed by Q&A. We're having technical difficulties. Let me jump back in here. I'm joined today by our CEO, Bob Swan, our CFO, George Davis, and in a moment, we'll hear brief remarks from both of them, followed by the Q&A. Before 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. A brief reminder that this quarter we have provided GAAP and non-GAAP financial measures. Today we will be speaking to the non-GAAP financial measures when we describe our consolidated results. The earnings presentation and earnings release, available on intc.com, include the full GAAP and non-GAAP reconciliations. With that, let me hand it over to Bob.

Thanks, Mark. With that introduction, I thought on our outlook I was getting demoted already. But, look, coming off a record 2018, our top-line results came in slightly higher than expectations, with upsides in the PC and IoT segments offset by incremental NAND pricing weakness. Total revenue of $16.1 billion was flat year over year, as our PC-centric business grew 4%, and our data-centric businesses were down 5%. The team executed well, though underlying trends are concerning, and as a result, we've revised our expectations down for the full year. I'll give you some insight into the customer trends informing our outlook, but first I'd like to take a few minutes to recap the progress we've made over the first quarter. It's been just under three months since I was honored with the best job in the world. At that time, I said that our leadership team would focus relentlessly on delivering for our customers to take advantage of the biggest opportunity in our company's history. We're making important progress by intensifying our focus in three key areas, expanding our TAM, accelerating innovation, and improving our execution while evolving our culture. I'd like to spend a few minutes talking about our philosophy and progress in each of those areas. First, expanding our TAM. We are transforming from a PC-centric company to a data-centric company, and our ambitions are bigger than they've ever been. Our aim is to identify and capitalize on key technology inflections that set us up to play a larger role in our customers' success, while improving returns for our owners. You can see the impact of this approach in our Q1 execution. For example, our first-ever data-centric portfolio launch marked an important milestone in our efforts to capitalize on the AI opportunity and undisputed technology inflection. Our new second-generation Xeon Scalable is the only processor in the industry with built-in artificial intelligence acceleration. Not only did we deliver a 14X generation-over-generation performance improvement, but we also showed CPU performance beating GPU performance on major AI workloads like recommendation engines. And we worked closely with the software industry ahead of the launch to deliver a great out-of-the-box experience for customers like Siemens. They're collaborating with us on a breakthrough AI-based cardiac MRI model. This application has the potential to provide real-time diagnosis using the DL Boost technology in our newest Xeon scalable processor. Another TAM expanding business that continues to gain traction is Mobileye, with eight new global ADAS designs in the first quarter alone, including our first win in India. Mobileye's real-time crowd-sourced mapping technology, road experience management, or REM, continues to build momentum with a major North American automaker adopting this breakthrough data-centric capability. Autonomous driving is a technology inflection that we're ready to lead. 2019 will be a foundational year for another disruptive technology, 5G. As you know, we recently sharpened our 5G focus. When it became apparent that we don't have a clear path to profitability in 5G smartphone modems, we acted. We are now winding down that business and conducting a strategic assessment of 5G modems for the PC and IoT sectors, while continuing to meet our current 4G customer commitments. By acting now, we focus our 5G efforts on the transformation of the wireless network and edge infrastructure where we have a clear technology advantage, market share to win, and a strategic role to play with customers. At Mobile World Congress, we demonstrated a range of 5G products under development, including the 5G-ready N3000 FPGA acceleration card and the new 10-nanometer base Snow Ridge Network SOC for use in 5G base stations. As networks qualify, Intel is in a great position to win in this base station segment, where we expect to grow to 40% market segment share by 2022. The vast majority of the 5G market opportunity and profit is in the transformation of network and edge infrastructure, where we are now laser-focused. Next, accelerating innovation. Successfully competing in a bigger TAM requires a broad range of products and technologies. Only Intel has the breadth of IP to deliver leadership products across increasingly diverse workloads for the data-centric era. Harnessing data for discovery, invention, and business value is not a one-size-fits-all computing challenge. That's why we are investing in six important pillars of innovation. process technology, architecture, memory, interconnect, security features, and software. Already this year, we've introduced incredible examples of this approach to innovation across the business. Let me take a minute to talk about a few. We are currently architecting what we expect will be the United States' first exascale supercomputer for the U.S. Department of Energy's Argonne National Laboratory. This supercomputer, called Aurora, will be delivered in 2021 and powered by Intel technologies designed specifically for the convergence of artificial intelligence and high-performance computing. These include a future generation of the Intel Xeon Scalable Processor, Intel's Xe Compute Architecture, a future generation of Optane Persistent Memory, and Intel's OneAPI software. It's a great example of how our data-centric products, architected together, can deliver technology breakthroughs for our customers. We are also accelerating innovation in our PC-centric business. For example, our team is hard at work with our OEM customers to define and deliver a stunning new class of next-generation laptops. We call this project Athena. and the first of these sleek, beautiful designs are coming in the second half of 2019. And just this week, we launched the most powerful generation of Intel Core mobile processors ever, designed for gamers and content creators. On the process technology front, our teams executed well in Q1, and our velocity is increasing. We remain on track to have volume client systems on shelves for the holiday selling season. And over the past four months, the organization drove a nearly 2X improvement in the rate at which 10-nanometer products move through our factories. Finally, execution and culture. This is about concentrating our resources on the vital few programs that will have an impact on our customers' success and our owners' return, rather than the trivial many. Over the last couple years, that focus has resulted in exiting McAfee and wearables business, shutting down Saffron, and divesting Wind River. And our spending as a percentage of revenue has gone from approximately 36% to about 30% this quarter. It has allowed us to invest more of our resources and, just as importantly, our collective attention and focus where it really counts. By doing fewer things, we'll execute better at the things that matter most. Specific areas where we need to improve execution include meeting customer demand and delivering on our 10-nanometer lineup of products. And we are making progress. Our supply constraints have had a disruptive impact on our customers and the ecosystem. We've committed never again to be a constraint on our customers' growth. We've increased capacity to improve our position in the second half, although product mix will continue to be a challenge in the third quarter as our teams align available supply with customer demand. As I shared earlier, our confidence in 10 nanometer is also improving. In addition to the manufacturing velocity improvement I described earlier, we expect to qualify our first volume 10 nanometer product, Ice Lake, this quarter. and are increasing our 10 nanometer volume goals for the year. I'll shift now to our full year outlook. Going forward, George will deliver our forecast, but given this is his third week with us, I'll share my thoughts on our full year reset, and he'll review our first quarter results and second quarter guide. Our conversations with customers and partners across our PC and data-centric businesses over the past couple months have made several trends clear. The decline in memory pricing has intensified. The data center inventory and capacity digestion that we described in January is more pronounced than we expected. And China headwinds have increased, leading to a more cautious IT spending environment. And yet those same customer conversations reinforce our confidence that demand will improve in the second half. Bill? we've reassessed our 19 expectations based on the challenges we're seeing. Our full-year outlook is now $69 billion in revenue, down 3% year-over-year, and down approximately $2.5 billion from our previous estimate. Given the magnitude of the change, we'll be somewhat more granular in explaining the drivers. We now see data-centric revenue down low single digits year-over-year, with DCG down mid-single digits year-over-year off a tough compare, continued China weakness, and inventory and capacity absorption. We are also anticipating an incrementally more challenging NAND pricing environment. Our PC-centric forecast remains unchanged at low single digits. We are forecasting operating margin to be 32%, down approximately three points year-over-year and down approximately two points from our previous guide. This outlook reflects lower full-year revenue and a year-over-year decline in gross margins as a result of the 10-nanometer ramp and NAND pricing. We continue to see good discipline on spending and expect our exit from the 5G smartphone modem segment, annualizing 2018 spending actions, and incremental spending efficiencies to reduce OPEX by approximately $1 billion year-over-year, partially offset in the impact of lower gross margins. We now forecast full-year EPS at $4.35 per share, down approximately 5% year-over-year and 25 cents from our previous guide. We now expect our full-year tax rate to be 12%, up one point year over year and down one and a half points versus our prior guide, largely as a result of lower pre-tax income. Before I hand the call over to George, I'd like to welcome him as Intel's new CFO. I've known George for a long time from his CFO days at Applied Materials while I was a board member. He brings deep industry knowledge from prior roles. He's a true team player and he cares deeply about people development and diversity. George will review our first quarter financials and second quarter guide, then we'll get to your questions. George?