AccessMyLibrary provides FREE access to millions of articles from top publications available through your library.
Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Welcome to the Intel Corporation's fourth quarter earnings conference call.
Today's call is being recorded.
At this time I'd like to turn the call over to the Assistant Treasurer and Director of Investor Relations, Mr. Doug Lusk. Please go ahead, sir.
DOUG LUSK, ASSISTANT TREASURER, DIRECTOR OF INVESTOR RELATIONS, INTEL CORPORATION: Thank you, and welcome to the Intel fourth quarter earnings conference call.
Attending from Intel are CFO, Andy Bryant, and President and COO, Paul Otellini.
I'd like to remind everyone that the earnings release in this call
are available on our IR website at intc.com. For those of you who do not see the earnings release, revenue in the fourth quarter was $8.7 billion, and EPS was 33 cents per share.
The fourth quarter earnings report discusses Intel's business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our press release for more 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 made after January 13, 2004.
Lastly, if during this call we use any non-GAAP financial measure as defined by the FCC and Reg. G, you'll find on our website, intc.com, the required reconciliation to the most directly comparable GAAP financial measure.
And with that, I'll now introduce Andy Bryant. Andy?
ANDY BRYANT, EVP, CHIEF FINANCIAL AND ENTERPRISE SERVICES OFFICER, INTEL CORPORATION: Thanks, Doug.
2003 began with a question mark and ended with an exclamation point. As the economic climate improved, a robust microprocessor business led the year to a strong finish. Emerging markets were the mainstay of the growth, joined by a rally in more mature market economies that made the year a global success. Our efforts to streamline operations and improve financial health were again reflected in operating results.
Fourth quarter results were a little better than we anticipated in our October earnings release and December update, supported by sales of microprocessors, especially the server product line. Revenue of $8.74 billion was just over our forecast range of $8.5 to $8.7 billion.
This sequential growth of 12% is the highest we have achieved in the fourth quarter since 1999, and the year-to-year growth of 22% is the best for this period since the fourth quarter of 1996. For the entire year, revenue grew by 13% to $30.1 billion.
The largest portion of the dollars, and the fastest rate of growth, came from the Intel Architecture business, whose revenue of $7.7 billion led 88% of total revenue, up 12% from the third quarter, and up 29% from a year ago.
Microprocessors led the growth with revenue of $6.5 billion, an increase of 14% from the third quarter and 31% from the fourth quarter of 2002. Most of the rest of the revenue in the Intel Architecture business comes from chipsets and motherboards.
Revenue for Intel's Networking business was $592 million, up 9% in the third quarter, as well as from a year ago.
Intel's Wireless Communications group, whose revenue derives mostly from flash memory, saw a modest sequential growth of 4%, but a decline of 29% in the fourth quarter of 2002.
Intel's business progress this year is perhaps best demonstrated by gross margin. While revenues saw a strong growth in the quarter, the gains in gross margin dollars were spectacular.
Put another way: While revenue grew, the cost of sales declined. The growth rate in gross margin dollars was 22%, nearly twice the growth rate in revenue. Compared to the fourth quarter a year ago, gross margin dollars were up 50%, more than twice the growth in revenue.
On a percentage basis, gross margin was 63.6%, a little better than we expected at the update, as a result of higher than anticipated revenue. This is more than 5 points better than the third quarter, nearly 12 points better than the fourth quarter of 2002, and the highest ever for a fourth quarter. The increase from the third quarter is primarily due to higher revenue, including slightly higher ASPs due to strong server mix.
The other notable contributor was factory utilization, which was reflected through lower unit costs, lower start-up costs, and increased inventory evaluation due to the qualification of Prescott per shipment, the last of which added 1 to 2 points of gross margin increase.
The same pattern of progress is apparent in the annual results where the growth in gross margin dollars exceeded the growth in revenue. For the year, gross margin percentage was 56.7%, nearly 7 points above 2002.
Operating income of $2.6 billion was an improvement of 11% over the third quarter, and 75% over the fourth quarter of 2002. As we anticipated in the December update, the $2.6 billion includes an impairment charge of $611 million, or 9 cents per share, visiting all of the goodwill of the Wireless Communications business. Even with a charge, operating income as a percentage of revenue was 29%, which is flat with the third quarter, and 9 points better than the fourth quarter of 2002.
In the Intel Architecture business, operating income was 49% of revenue at $3.7 billion, representing sequential growth of 28%, and year-to-year growth of 87%. For the year, Intel Architecture achieved operating income of $10.4 billion, up 58% from 2002.
Intel's Networking business trimmed its losses. Its operating loss of $49 million is roughly half the loss of $94 million in the third quarter, and less than a third the loss of $168 million in the fourth quarter of 2002. For the year, the operating loss in the Networking business was $426 million, approximately 1/3 less than the loss for 2002.
In the Wireless group, the operating loss was $97 million, less than the loss of $122 million in the third quarter, but flat with the loss of $97 million a year ago. The losses in this group have been disappointing at best. We believe we have reached the point where we have both the leading technology products and manufacturing processes to allow us to begin to recover this business.
Spending on R&D marketing and G&A was on target at $2.3 billion, up 6% sequentially, and 9% year-to-year. We have held spending tight even as business improved. For the year, spending was $8.6 billion, only 3% more than 2002, primarily driven by revenues and profit-dependent costs.
The total in the fourth quarter for interest income, other income, and gains and losses on equity investments was $18 million, a little better than our forecast of zero. Within this category of income statements, interest, and other income was $53 million, impairment charges were $23 million, a little better than forecast.
Net income for the fourth quarter included tax benefits of $620 million, or 9 cents a share, largely related to two divestitures of assets due to sale of stock from the previous acquisitions of Dialogic and DSP Communications. An estimated impact of the Dialogic transaction was included in the December update at 3 cents per share.
Results for the entire year include an additional tax benefit recorded in the third quarter of $125 million from the divestiture related to Zircon. These and previous transactions are part of a longer-term program to divest non-strategic assets.
Fully diluted earnings per share, which include potential dilution attributable to employee stock options was 33 cents. Basic earnings per share, which does not include potential dilutions, was also 33 cents. Average shares for calculating diluted earnings per share were $6.7 billion, approximately flat with the third quarter. During the quarter we purchased 61 million shares at a cost of $2 billion.
Cash, short-term investments, and fixed-income trading assets ended the quarter at $15.9 billion, an increase from the third quarter of $700 million after stock repurchases of $2 billion, capital spending of $707 million, and dividend payments of $131 million.
As we now turn to the outlook for the first quarter, please keep in mind that the forecast data do not include the effect of any new acquisitions or divestitures that may be completed after January 13th. I will use the mid-point …