Breaking

Intel (INTC) Q4 2020 Earnings Call Transcript - The Motley Fool
Jan 22, 2021 12 mins, 34 secs
Second, we'll be providing more commentary on our progress on 7-nanometer with specifics on our manufacturing plans for our 2023 products to follow after Pat joins us in mid-February.

Under Bob's leadership, Intel has made significant progress on this strategy and once again delivered record results in the past year, which Bob and George will detail shortly.

Pat Gelsinger -- Incoming Chief Executive Officer.

I've had the opportunity to personally examine progress on Intel's 7-nanometer technology over the last week.

Bob Swan -- Chief Executive OFficer.

Our Q4 results significantly exceeded our expectations capping off our fifth consecutive year of record revenue.

We generated $20 billion in revenue and $1.52 in EPS, exceeding our guidance by $2.6 billion and $0.42 respectively.

For the full year, we delivered $77.9 billion in revenue, up 8%, and $5.30 in EPS, up 9%.

Starting with improving our execution to strengthen our core business, let me start with an update on process technology and our product road map.

Over the last few years, we've been following the IDM model to ensure we can deliver a predictable cadence of leadership products, preserve our IDM advantage, continue to invest in process technology leadership, and generate attractive returns on capital.

In July, we highlighted a challenge with our 7-nanometer technology and starting a process to improve it while evaluating the best approach for our 2023 product lineup.

Since that time, we have made tremendous progress on our 7-nanometer technology.

As part of this work over the last six months, we also streamlined and simplified our 7-nanometer process architecture to better ensure we'll be able to deliver on our 2023 product road map.

Once Pat has had a chance to join, he'll further assess our analysis and drive the final manufacturing decision for our 2023 CPU products.

These products take advantage of our Enhanced SuperFin process technology in numerous architectural improvements and both are broadly sampling to customers.

Today, we are the leading network silicon provider winning in the wireless, enterprise, and cloud networks, and delivering $6 billion in revenue this year, up approximately 20% versus 2019.

Our IOTG and Mobileye businesses have combined annual revenue of $4 billion.

Since 2015, we have grown revenue by more than $22 billion and more than doubled EPS.

We've driven spending from 36% of revenue to 25% of revenue while investing in manufacturing capacity expansion, adding more than $1 billion of R&D targeted to higher growth initiatives, and focusing our product portfolio.

Q4 revenue was $20 billion, exceeding our guidance by $2.6 billion.

For full-year 2020, we achieved record revenue of $77.9 billion, $4.4 billion higher than our January guide, which reflects a one-year acceleration relative to our 2019 Investor Day target.

EPS was $5.30, up to $0.43 year over year, and $0.30 higher than our January guide.

We generated $21.1 billion of free cash flow, up 25% year on year, and returned 94% of free cash flow to shareholders.

Moving briefly to the segment performance, our data center group generated record revenue in 2020, up 11% year over year.

In Q4, DCG delivered revenue of $6.1 billion, down 16% year over year driven by enterprise and government weakness, and cloud digestion albeit lower than expected.

DCGs operating margin in Q4 was down $1.4 billion years on year on lower revenue and increased investment.

IOTG revenue was down 16% year over year, due to COVID effects on demand.

Mobileye revenue was up 39% year over year in the quarter and the operating margin was $110 million, both records as IQSoC demand continues to be strong.

NSG revenue was $1.2 billion, down 1% year on year on lower ASPs, partially offset by higher volume growth.

PSG revenue was down 16% year over year, due mostly to 5G ASIC transitions at key accounts in the communications segment.

CCG delivered a fifth straight year of record revenue, up 8% year over year.

For the quarter, revenue was up 9% year over year, driven by record notebook unit volume.

Operating income was $4.5 billion, up $420 million year over year on higher volume, partially offset by the ramp of 10-nanometer products.

We expect Q1 revenue of $17.5 billion, down 12% year over year, or down 6% excluding NAND.

The Q1 revenue estimate also includes approximately $500 million in corporate revenue that is one-time in nature and relates to a prepaid revenue arrangement.

We have strong product road maps but have anticipated a more competitive market and the continued mix shift to entry consumer PCs in our revenue plans this year.

Finally, we will see lower modem revenue this year from our exit of that business.

Will you need to make investments with your foundry partner to secure capacity and porting certain products to very different foundry design rules.

Bob Swan -- Chief Executive OFficer.

And as we highlighted, we've made tremendous progress on our 7-nanometer process technology and that gives us a lot of comforts that the No.1 priority that we set in the middle of the year, which was a predictable cadence of leadership products that we would be able to deliver our twenty -- our 2022 roadmap using i7 or -- for our next-gen technology.

So the progress that the team has made has given us the confidence that we will continue to leverage the IDM advantage and invest in technology development leadership in the future.

And the trade-offs that we make in doing that are one, the performance of products in a predictable manner: two, economics, and three, ensuring that we have the capacity and the control of the supply chain so that we can -- our customers can count on our deliveries.

We're increasing spending on 7-nanometer inside the company in preparation for the next generation of tools.

Pat Gelsinger -- Incoming Chief Executive Officer.

But overall, I think we're on a very good path now.

And I guess more importantly from the March quarter, Bob or George, can you talk about how we should think about the puts and takes to the cost sides on gross margins as 10-nanometer begins to ramp.

And actually, we think that continuing strongly into the first half and that's largely small core type devices, so we have an ASP effect there as well.

As you think about the full year, I think trying to take a comparison off of Q1 when we're impacted on ASPs both from DCG and from CCG, makes a difficult full-year extrapolation.

But in terms of headwinds and tailwinds that we see as we go into the year, obviously, we're going to have a higher 10-nanometer volume, which is going to impact gross margins overall.

On the small core, I think on data center, we think they'll continue to be competitive pressures on ASPs, but I think DCG is really going to be more of a cost story with a 10-nanometer coming in.

Although we're much further along in the maturity of 10-nanometer, so it won't be as impactful as we saw with CCG last year.

Bob Swan -- Chief Executive OFficer.

I think historically here, it is a reasonably good indicator of the commentary that George provided for '21.

And if you look at the fundamental drivers of that point and a half versus what we thought at the beginning of the year, first we generated $4 billion more revenue than we thought.

First, the demand for our 10-nanometer products was much -- was higher graded than we expected and that was -- yeah that was very positive in terms of income, but slight degradation and gross margin.

So I think in terms of the mix of more 10-nanometer, much more PC demand at the lower ends.

One of those mix dynamics of lower PC, TAM, we think is going to be relatively strong.

And we renewed our commitment to 7-nanometer process technology that in fact will have a degradation.

So, in so many ways, we generated a lot more income and revenue in 2020 as the adoption of our better -- of our 10-nanometer products and lower-end consumer where very positive impacts on earnings and those trends you'll see as we go in the first quarter and throughout 2021.

Bob Swan -- Chief Executive OFficer.

Yes, I think at the time we said that in effect given the process challenges we are dealing with that the product roadmap, we expected the shift a couple of quarters into 23.

So the expectation is in our focus on improving 7 so that we can hit that predictable cadence of leadership products in '23.

Bob Swan -- Chief Executive OFficer.

One of my questions is if you're saying Intel will get to 7-nanometer by 2023, the competitive foundry products will still be one node ahead.

So I'm just trying to think to what is kind of a conceptual state of competitive play when we get to 2023.

Bob Swan -- Chief Executive OFficer.

But first, our belief in delivering leadership products overtime is going to be dependent on a multitude of factors.

Process technology is very important, packaging technologies become increasingly important in our mind, a multitude of architectures, CPU to XPU, or including graphics and AI capabilities, memory, security, and last but not least software.

And you'll remember that we talked about those as the six pillars of technology required to deliver product leadership where the process is very important, but it's not the only thing.

But secondly, we're going to continue to invest in process technology.

So, yes, some of the progress we made on 7-nanometers over the last couple of quarters is important for the next generation of process technology.

So as we leverage our six pillars of technology to deliver leadership products, we will also continue to invest in next-generation process technology beyond 7-nanometer.

Pat Gelsinger -- Incoming Chief Executive Officer.

And clearly, we're not interested in just closing gaps, we're interested in resuming that position of the unquestioned leader in process technology and that's our commitment.

Pat Gelsinger -- Incoming Chief Executive Officer.

This company needs to be healthy for the technology industry for technology in America, and to me, it's an opportunity to help and to unquestionably put Intel and the United States in a technology leadership position.

I'm going to address the elephant in the room a little bit, and Pat I understand your initial perspective on 7-nanometer from looking at it for a short period of time, but at the same time, which I've got to say is the company was telling us for a year that 7-nanometer was on a track that it looked great and then all of the sudden, it wasn't to the point of considering potentially massive strategic shifts.

What are you seeing that gives you that confidence, and how should we think about the current process.

Pat Gelsinger -- Incoming Chief Executive Officer.

You'll be seeing we're making adjustments in the leadership of our product development teams as well as where talent is going to come into the company.

So I think the team has been doing a great job getting us to this point.

Pat Gelsinger -- Incoming Chief Executive Officer.

I think this helped to drive the 50% growth in data center adjacencies last year.

So, just given the continued build-out of 5G this year, does the team continue to see a double-digit type of growth profile for the networking compute segment this year and compute networking has been a segment where Intel I think still owns a 100% share in the x86 server CPU market.

Bob Swan -- Chief Executive OFficer.

We've made tremendous progress in migrating a custom-oriented environment to general-purpose compute and that has been a big source of growth from a $1 billion business probably five or six years ago to $5 billion last year.

So I think that maybe one other point that I would make that we've gone -- we targeted about 20% share in that radio access space by 2022, and we hit that 40% share in 2020.

Pat Gelsinger -- Incoming Chief Executive Officer.

So this was part of our regular process and we're just delighted to have Pat join us at this time, and we're confident he can take this company to the next level as he's been saying and thanks to Bob for what he's done.

Bob Swan -- Chief Executive OFficer.

government on -- or maybe just our foundry capabilities, I would just -- we've been talking about this for a couple of years and I think the implications of a couple of years ago, increased trade tariffs, now more increasing trade restrictions.

So we talked about that, and I think as a result of the incremental investments we've made, the team has made tremendous progress on our 5G space.

And then we've been working very closely because foundry services require scale, how do we make sure that we have the technology that can be both USG needs and commercial players needs, and that's a dialog that has been back and forth for a while and we think we've played a role both with ourselves and the Semiconductor Industry Association in trying to shape some of the incentives coming out of Washington that in effect do a more effective job in leveling the playing field to invest in foundry services here in the U.S

And Bob, you had an interview, I think maybe it was a month ago, maybe it was six weeks ago where you talked about licensing or the possibility to basically license a process from a foundry rather than just strictly outsourcing to a foundry and you said that, yes, that is actually possible that you could do that

I mean that would be quite a tectonic shift and I guess since Pat is also on the phone, I just wanted to ask you is this something that's remotely on the table as you sort of think about this

Bob Swan -- Chief Executive OFficer

I think what I said is that our focus is on how do you deliver a predictable cadence of leadership products, preserve IDM advantages, and invest in technology development and along the way as a company be much more open and engaging with the ecosystem to make sure we understand the inherent technologies that are out there and embrace technologies to the extent they might be better than what we have or not as critical in the determination of product performance differentiation

So that's -- I just think it goes back to how do we take this wonderful business model called IDM where we co-optimize, design, and manufacturing, we make all the money and we control the supply chain, how do we evolve that very powerful business model in an industry and an ecosystem that's made dramatic advancements over the last 10 years where we think we can be more open-minded in engaging and leveraging those

Pat Gelsinger -- Incoming Chief Executive Officer

We're committed to leadership products, but also, an innovation that fundamentally has us leading the industry on a consistent basis, and sometimes that may happen outside of the company, sometimes it will be inside of the company, but we're committed to lead innovation and delivering the best products for our customers in every category that we participate in

Pat Gelsinger -- Incoming Chief Executive Officer

You'll see me dive into details, we'll build out the partnerships with our customers, but we're going to deliver leadership products and have a development machine that consistently does that

Pat Gelsinger -- Incoming Chief Executive Officer

Bob Swan -- Chief Executive OFficer

RECENT NEWS

SUBSCRIBE

Get monthly updates and free resources.

CONNECT WITH US

© Copyright 2024 365NEWSX - All RIGHTS RESERVED