FOOL CONFERENCE CALL SYNOPSIS*
By Jeff Fischer (TMF Jeff)

Intel Corp.
(Nasdaq: INTC)
2200 Mission College Blvd. Santa Clara, CA 95052-8119 Phone: 408-765-8080 Fax: 408-765-6284
http://www.intel.com

ALEXANDRIA, VA (July 17, 1998)/FOOLWIRE/ -- Intel announced second quarter 1998 revenue of $5.9 billion and net income of $1.2 billion, or $0.66 per share. Revenue was flat with the $6.0 billion achieved in the same quarter of last year, while net income declined 29% from $1.6 billion.

Conference Call Biz Summary. PC manufacturers continue to work through inventory so unit shipments of microprocessors declined slightly from Q1. Intel's gross margin dropped to 48.9%, down from 52% last quarter, but 2 points of the gross margin loss is due to a higher than usual inventory write-down. In the future -- because internal costs are on target -- gross margins should be around 50% as projected. This quarter the company exceeded its cost projection targets on microprocessor production.

Intel completed the acquisition of Digital Equipment's semiconductor manufacturing operations during the quarter, and results included the revenue and costs of the acquisition. Overall, second quarter spending declined 12% from the first quarter due to the Chips and Technology acquisition that impacted Q1. Without special charges, expenses were flat, or lower than expectations due to tight cost control.

Inventory declined by $118 million from Q1. At the end of Q2, inventory reached levels desired for the P6 product line and for the high volume purchasing of components used in the single edge Pentium II processor. Next up, cash and short-term investments decreased by $2.9 billion to end at $7.7 billion -- capital spending slurped up $1.6 billion, and stock buybacks cost $1.7 billion. Intel repurchased 22 million shares this quarter.

Outlook. Third quarter revenue should be flat to slightly up, as projected at the end of the first quarter. Gross margins should improve by a few points, and for all of 1998 should be around 52%. Expenses are coming well under control, headcount is down 750 in the last quarter and should decline by 3,000 this year due mainly to attrition (but in a few localized areas headcount will probably decline by other means, too).

Capital spending should be around the $4.5 billion level of 1997, below the earlier estimate of $5 billion for the year. The company has pulled in its 0.18 micron process technology implementation by at least one quarter in 1999 -- meaning that it will move to 0.18 micron at least 3 months earlier than anticipated next year. Therefore, Intel is now reducing its investment this year in current 0.25 micron technology. [Author's note: It's estimated that Intel is only at 75% production capacity, which adds impetus to a cut in capital spending over the next two quarters.]

Results and Product Mix. Revenues were in-line with expectations, though microprocessor unit shipments were down slightly with the overall mix moving heavily to P6 based products -- these were 50% of unit shipments in Q2. The sub-$1000 PC Celeron chip is one of fastest ramping processors in Intel's history, and represented over 5% of unit shipments. The Xeon microprocessor that was recently announced for high-end computer applications is rolling out as planned. [Author's note: Earnings from this new higher-margin chip should be easily visible by Q1 '99, it's estimated, and could add up to $0.70 in earnings per share next year.] Intel's distinct market segmentation approach is beginning to take shape.

Chipset volume and revenues declined slightly, with Pentium based chipsets down substantially and P6 based chipsets growing faster than P6 based processors. Motherboards were flat, with the mix shifting to P6 based boards as well. In Flash memory (Intel's new strata flash technology is award winning) revenue growth continued as expected. Finally, processor shipments (Pentium II) for the PC notebook market grew significantly in Q2. The notebook market is the fastest growing segment of the volume market, and Intel's share of it is healthy.

Geographic Sales. Revenue in the Americas and Japan was higher from Q1, while Asia and the Pacific Rim was flat, and Europe was lower as per the trend, but was less of a drop than one year ago.

Q&A: Answers to Questions Follow

Inventory and Revenue. Inventory turns and revenue were as expected, and the current backlog should lead to a flat-ish Q3 as well. Especially as August is typically the slowest month of the year but for retail "back to school" sales. Revenue should be flat to slightly up in the third quarter and up in the second half of 1998.

Processor Prices. Processor prices, when compared to last quarter, were actually about flat. Of course, the new Xeon processor has a higher average selling price (ASP) and will be a higher margin sale.

PC Inventory correction. This is a downstream process that flows all the way from the early manufacturers to the PC box makers to the ocean represented by the consumer retail market. Everyone is trying to carry less inventory, something a la Dell Computer, and this will continue to be the case. So, the change in inventory practices should be seen as a sweeping change in the entire inventory process, not as a one-time event that will someday end and have everyone returning to the old model of "stocking up."

Where are you Losing Market Share? Celeron displaces the Pentium II with MMX at its price point, so it does create displacement. Most of Intel's competition in microprocessors is at the lower-end of the range -- the Celeron range. Celeron is quickly ramping, though, and Intel is making headway. It has less competition in the high end. Xeon is ramping quickly, and, as processor performance goes up, workstations and servers will move into segments of markets that Intel has been in before.

Cap Spending. As for capital expenditures, spending on the Digital Equipment manufacturing acquisition was $600 million, and $1.7 billion was spent on a share buyback (22 million shares were bought, exceeding the option issuances) because it was, at the time, a good use of the cash. That rate of spending on share buybacks isn't needed to stave off options dilution, though.<

Micron Used. All Celeron products are 0.25 micron, and all higher speed Pentium IIs are 0.25. In the second quarter Intel still shipped some older 0.35 Pentium II and Pentium with MMX chips, but it's essentially producing everything at 0.25 now. Celeron was, again, 5% this quarter and growing. The move to 0.18 micron will happen in '99, cutting costs per chip and increasing productivity again.

Related Links:

7/14/98: Q2 Detailed Press Release.
7/15/98: Fool's Drip Port on the Earnings.

(Intel is a holding in The Motley Fool's real-money Drip Portfolio and Cash-King Portfolio. Fool on!)

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

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