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INTEL CORPORATION'S SECOND QUARTER 2001 EARNINGS RESULT CONFERENCE CALL
Operator
Good day everyone and welcome to the Intel Corporation's second quarter earnings results conference call. Today's call is being recorded. At this time, I would like to turn the call over Mr. Doug Lusk, Director of Investor Relations and Assistant Treasurer. Please go ahead sir.
DOUG LUSK
Thank you. Welcome to the Intel second quarter 2001 earnings conference call. Attending from Intel are Andy Bryant, Chief Financial Officer, and Paul Otellini, General Manager, Intel Architecture Group. I would like to remind everyone that the earnings release and this conference call are available on our investor relations website at intc.com. For those of you who may not have seen the quarterly earnings report, revenue in the second quarter was $6.3 billion and earnings before acquisition related costs were ¢12 per share on a diluted basis. The second quarter earnings report discusses Intel's business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements 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. Specific forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rate, interest and other income, capital spending, depreciation, amortization of goodwill and other acquisition related intangibles, and supply. These statements do not reflect the potential impact of any mergers or acquisitions completed after June 30, 2001. I now want to introduce Andy Bryant who will discuss the second quarter earnings results. Andy?
ANDY D. BRYANT
Thanks Doug. Results for the second quarter came in at about as expected overall and were consistent with our forecast at the beginning of the quarter. The microprocessor business was a little better than anticipated while the communications businesses including flash and networking were softer than we had expected. The order pattern throughout the quarter has reinforced our belief that the Intel architecture business has returned to normal seasonal patterns though on a new lower base set in recent quarters. The environment for our flash and networking silicon businesses, however, has continued to deteriorate with no consistent ordering pattern emerging. Revenues in the second quarter, of $6.3 billion, were in line with our outlook, down 5% from the first quarter and 24% from Q2 of 2000. Intel Architecture revenues were flat with Q1. All the sequential decline in revenues came from our other businesses. Microprocessor and chipset unit shipments were higher in the first quarter. Unit shipments of nearly all other Intel products, motherboards, flash memory, and communication components, were down from first quarter level. Gross margin was $3 billion, declining 12% sequentially and 40% annually. Gross margin percentage of 48% was below the midpoint of our anticipated range of 49% plus or minus a couple of points. This is a decline of about 4 points from the first quarter. This decline is driven by a combination of lower average selling prices for microprocessors and continuing softness in the flash and networking businesses, where revenues were lower and inventory reserves higher than we anticipated.
The year-to-year decline of nearly 13 points of the second quarter of 2000 is primarily a function of the drop in revenue. Pro forma operating income was $934 million, a decline of 28% from the first quarter and 67% in the second quarter of 2000. More than 100% of the operating profit came from the Intel Architecture Group. Earnings per share of ¢12 were down from ¢16 in the first quarter, a decline of 25%. About a ¢1.5 of earnings per share came from adjustments in the tax rate. We lower the tax rate, as our expectation for profits is lower than previously assumed, and a greater portion of our earnings are generated in jurisdictions with lower than US tax rates. Earnings per share of ¢12 is down 76% from earnings per share of ¢50 in the second quarter of 2000. The year-to-year comparison is complicated not only by the change in the tax rate but also by unusually large gains and investments of $2.1 billion in the second quarter of last year, the largest portion of which came from the sale of our investment in micron. Second quarter spending of $2.1 billion was slightly below the previous quarter and somewhat lower than we anticipated in June. This largely reflects the results of progress in cash control, as well as lower profit dependent expenses. Gains on equity investments and interest and other were $129 million, slightly higher than our expectations of $115 million. The net gain on equity investments was $3 million, which included the impact of impairment charges of approximately $220 million.
Average shares for calculating diluted earnings per share was 6.9 billion shares, flat with the previous quarter. During the quarter, we repurchased 34.1 million shares at a cost of $1 billion, under an ongoing program. On the balance sheet, we had $174 million of inventory in the second quarter, most of this in finished goods, bringing total inventory to $2.8 billion, an increase of 7%. Inventory levels on some of our flash and [_______________] products are above our guidelines. Accordingly, we took higher than normal inventory reserves on these products, which contributed to a decline in gross margins. Microprocessor inventory was within our guidelines at the higher end of the range. The value of the securities in the Intel capital portfolio decreased from $3.3 billion to $2.7 billion, as a result of lower market valuation and sales of equity securities. Cash and short-term investments ended the quarter at $9.3 billion, in addition to the $1.2 billion in trading assets. After capital spending of $2.1 billion, cash used for acquisitions of $381 million and a billion dollars spent on stock buyback, cash, short-term investments, and trading assets declined a little over $1 billion from the first quarter. In summary, events for the second quarter. Revenues of $6.3 billion, gross margin of 48%, operating income of $934 million or 15% of revenues, free tax income of $1.1 billion or 17% of revenues, and earnings per share of ¢12 including a benefit of a 7.5 adjustment in tax rate.
As we turn to the outlook for the third quarter, please keep in mind that all the forecast data, excludes the effect of any new acquisitions that may be completed after June 30, 2001. We expect revenues in the third quarter to be between $6.2 and $6.8 billion. This assumes the continuation of normal seasonal patterns and unit shipments of microprocessors and chips sets, lower average selling prices for microprocessors, and continued weakness in our other businesses. Our expectation for gross margin percentage in the third quarter is 47% plus or minus a couple of points. The change from the second quarter was driven largely by lower average selling prices for microprocessors. We are making progress on microprocessor unit costs and are ahead of the targets we shared with you at the New York analyst meeting in April. Spending, excluding goodwill amortization in the third quarter, should be between $2.1 and $2.2 billion, slightly higher than second quarter spending of $2.1 billion. We do not expect any contribution to profits from interest, other income, and equity investments. Our outlook in this strategy assumes a $100 million loss on equity investments, primarily due to expected impairment charges. As we look ahead to the rest of 2001, we are comfortable that the Intel Architecture business has returned to seasonal patterns and will show more strength in the second half. Our other businesses, however, remain soft. We are working to restore profitability in these businesses and expect a lighter and slower recovery. Our outlook for gross margin percentage for 2001 is 49%, plus or minus a few points, adjusted from the previous range with a midpoint of 50%, which assumes seasonal growth in unit volumes in the second half of the year for the Intel Architecture business.
The acceleration of our processor road map and a more rapid transition to the Pentium 4 processor will cause margins in the second half to be lower than previously expected. To manage inventories, we will continue to adjust loading in our factories in accordance with demand and expect that the natural impact of these adjustments will be slight. We do not provide outlook for spending on an annual basis but carry forth our progress on a cost reduction programs. We do expect to reduce headcounts, exclusive of new requisitions, by 5000 employees by the end of the year. Our expectation for R&D spending is $4 billion revalued down from the previous goal of $4.2 billion. Reduced expenditure is primarily the results of passing discretionary spendings and the deferral of pay raises, and nonessential items. We are well on the way to meeting our 2001 target of $7.5 billion in capital spending, having deployed just under two-thirds of this in the first half. The bulk of these dollars have gone to new technologies that enable us to make products at higher volumes with lower overall unit cost and higher performance. It is a sustained investment and technology, and it's proved performance of the manufacturing group that have made it possible for us to accelerate our product roadmap. With that, I will turn over the call for additional comments on this.
PAUL OTELLINI
Thanks Andy. The second quarter was one where our core microprocessor and computing businesses strengthened and our flash and communication businesses continued to see weakness. In the microprocessor business, our Q2 volumes increased from Q1 by approximately 6%, growing by over 1 million units in the quarter. We held market segment share in the quarter, and as I will describe in a few minutes, are poised for market share growth throughout the second half of 2001. On a geographic basis, Asia Pacific turned in the strongest quarter, growing 6% from Q1. Growth was driven by microprocessors, chipsets, and flash. As an aside, Pentium 4 processor sales in China are the highest percentage of any major market, with many systems priced below $1000. Our chipset business gained share this quarter with unit growth outgrowing microprocessors, typically a positive leading indicator. Japan remains a difficult market, although we are very pleased with our performance in the Low Voltage and Ultra Low Voltage mobile market segments. Our volume in these segments continues to grow, as the Japanese market is now greater than 50% notebooks overall. The Americas came in about as expected, with our microprocessor business up quarter-to-quarter and our communications and flash businesses suffering from the decline in other telecommunications sectors. Latin America had record sales out, as Mexico and Brazil continue strong growth rates. Europe was also as expected and down sequentially and seasonally from Q1.
On a channels basis, our CPU sales out worldwide, through our distributors, were relatively strong, coming in just below Q1, with June a particularly strong month. I should note that Intel has always reported revenues and volumes as they sell out to end customers through all our channels. In the hyper-competitive US market, Intel-based PCs gained share in Q2, exiting the quarter with well over 80% market segment share. Our flash business declined in units and revenues in Q2 as customers are working through their inventory issues. We expect our customers to return to normal inventory level in the second half of 2001. Our communication business announced that it is in high volume production of the industry's first single-chip Gigabit Ethernet controller, and has begun shipping samples of third generation Gigabit Ethernet adaptors. Our computer product portfolio advanced strongly in Q2. Mobile products had a very good quarter, with units and revenues both up approximately 10% from Q1. We introduced several new products for the smallest and lightest mobile PCs, including an Ultra Low Voltage Pentium III at 600 MHz. This is the world's lowest power PC processor running at less than 1 volt and consuming an average of less than one-half of a watt. We also began shipping a 0.13-micron mobile processor code named Tualatin, in anticipation of its launch later this month, at speeds above 1 GHz. The server and workstation businesses continued weak Q2.
However, we introduced a number of new products that should enable us to rapidly grow revenue as the markets recover. The first generation Xeon processor to utilize NetBurst architecture was introduced for dual processor workstations running up to 1.7 GHz. In June, the first Itanium-based servers and workstations were introduced by our customers. We anticipate that 25 customers will introduce over 35 new products based upon Itanium, in 2001. The momentum of this product family was furthered in June, with the announcement by Compaq and Intel, of a multiyear alliance to migrate the highest performing computers manufactured by Compaq to products based upon Itanium architecture. In the desktop products, we introduced new versions of the Pentium 4 microprocessor running at speeds up to 1.8 GHz. This product remains extremely healthy with volumes almost doubling again in Q2 and on track to introduce 2 GHz later this quarter. Our SDRAM-based chipset for the Pentium 4 is completed, and we will begin volume shipments to our customers within 2 weeks, well ahead of our original schedule. We have over 250 board designs worldwide with the 845 chipset and are poised for high volume introduction to coincide with the back-to-school sales period. The combination of the health of the Pentium 4 processor, the availability of the 845 chipset, and the capacity we are bringing on line in 2001, have put us in the position of initiating a major acceleration of our desktop roadmap.
Over the course of the second half, we will be increasing the performance of the entry level Pentium 4 to 1.5 GHz while taking the highest performing versions above 2 GHz. As this roadmap is combined with a system cost reductions that the 845 chipset enables, we expect Pentium 4 systems to replace all mainstream PC system price points above $800, by the fourth quarter. These roadmap and price changes go into effect in August, in time for OEMs to take maximum advantage of the upcoming Windows XP systems build and launch. We have had a goal of accelerating the transition from Pentium III, and now have a firm plan and roadmap in place to achieve this. In the value segment, we will be utilizing our 0.13-micron capacity to enhance our Celeron line, increasing its performance to speeds well above 1 GHz, over the second half of 2001. We firmly believe that the combination of our accelerated desktop roadmap and our new mobile offerings will put us in a position to gain market segment share throughout the second half and beyond. With that, let me turn the meeting back over to Doug.
DOUG LUSK
Thanks Paul. We will now open the conference call for Q&A. In the interest of moving along and giving other questioners a chance, please limit yourselves to one question. Thanks.
Operator
Thank you gentlemen. Our question and answer session will be conducted electronically. If you would like to ask a question, please press the '*' key, followed by the digit '1' on your telephone. We will take your questions in the order that you signal us and will take as many questions as time permits. Once again, please press '*1' to ask a question. We'll pause for just a moment. Our first question will come from Mark Edelstone with Morgan Stanley.
MARK L. EDELSTONE
Thanks guys. Question relates to the Pentium 4 and the ramp. Paul I think you said the units doubled sequentially or just about doubled sequentially in Q2, just to confirm that first.
PAUL OTELLINI
Yes that's what I said.
MARK L. EDELSTONE
Okay, and then as you are accelerating the roadmap, what is your expectation for a crossover at this point in time on the desktop? I understand the comment that you're going to price this in a price points to move basically about $800. Will you expect it by the end of the year then that we will have the crossover?
PAUL OTELLINI
Oh, I think you'll see more than a crossover. I expect to be transitioned fundamentally out of Pentium III on the desktop before yearend.
MARK L. EDELSTONE
Thank you.
Operator
And now our next question will come from Mr. Joe Osha with Merrill Lynch. Mr. Osha your line is open sir. Please go ahead with your question.
JOSEPH A. OSHA
Sorry. Can you hear me?
ANDY D. BRYANT
Yeah.
PAUL OTELLINI
Yeah.
JOSEPH A. OSHA
Just looking at the very steep P4 ramp here and the fact you are using 0.13 process for Tualatin as well, how is the crossover of P4 to the P860 process going to work here? When does that really start and when is it completed? Thanks.
PAUL OTELLINI
Okay, Joe our plan has been to introduce or start shipping versions of the Pentium 4 on 0.13 micron late this year. That's still our plan. It is not a material factor in the transition or the crossover I just described though. Its real impact in volumes is in 2002.
JOSEPH A. OSHA
So I may assume that the bulk of P4 that you're going to shift this year is on 0.18.
PAUL OTELLINI
Yes.
JOSEPH A. OSHA
All right, thank you.
Operator
Moving on we will go now to Nimal Vallipuram with DKW.
NIMAL VALLIPURAM
Yeah, first of all let me congratulate on a good quarter given what the situation out there is. The actual question is for Paul. Can you give us some color on the PC market? What you are seeing in the second quarter and what you have been seeing in the third quarter so far?
PAUL OTELLINI
Well not much more than I said in my commentary. The color I'd say is that in the corporate accounts, on a worldwide basis, that is IT purchases, that still remains relatively slow, at least from our perspective, for clients. Small medium business purchases which tend to run outside of IT budgets are relatively healthy, as evidenced by sales out through channel, the distribution channels worldwide. I would categorize the consumer markets worldwide as being spotty, with places like Latin America, China, India very strong, and Japan still weak, Western Europe marginally weak, and the United States sort of flat. Going into the third quarter, I think we are all cautiously optimistic based upon the normal seasonality, based upon the backlog trends we have, based upon the product cycles that are coming in, and based upon the launch of XP.
NIMAL VALLIPURAM
All right, thanks.
Operator
And our next question now comes from Jonathan Joseph with Salomon Smith Barney.
JONATHAN J. JOSEPH
Yeah, Paul and Andy obviously your guidance of on the year 1% lower gross margin would imply possibly an uptake in gross margin in the fourth quarter. Given that that guidance incorporates your plan clearly to accelerate the Pentium 4, that also one assumes incorporates any further price declines that you are anticipating. So just to sew it up, it looks like price declines from Q2 to Q1 are going to be, at least in your estimation, more mild than from Q1 to Q2 for the impact on the gross margin. And the second is that it looks like prices could begin to firm up, or at least the acceleration of the Pentium 4 is not expected to materially negatively impact gross margins for the rest of the year.
ANDY D. BRYANT
Let me take that one John. I think I got the gist of your core comparisons, but let me give an answer. You can tell me if I get it right. We do expect, in the third quarter, the average selling price of the microprocessor to be down, which is the primary reason we're suggesting the mid point in the range for margins is 47% versus the 48% in the second quarter. Looking for the rest of the year, by providing an annual gross margin percentage of 49%, by telling you we're actually slightly ahead of the cost expectations, and if you look at all of that, the data you have it's that nothing dramatically different is happening in pricing in the fourth quarter. We are getting some benefit from an uptake in volume.
JONATHAN J. JOSEPH
Okay. So you don't, to introduce the Pentium 4, expect to further accelerate price cuts beyond from measures at which you can maintain gross margins within a 100 basis points to the current level?
ANDY D. BRYANT
Again, difficult to make a pricing forecast but I am pretty comfortable that the actions Paul was talking about are the actions we need to drive the Pentium 4 above the $800 price point for the end of the year.
JONATHAN J. JOSEPH
Okay, thank you.
Operator
And moving on, we will now go onto Terry Ragsdale with Goldman Sachs.
TERRY RAGSDALE
Yeah, hi. You went through some of the other reasons that you expect the second half to strengthen. Can you talk a little more specifically about where your order book sits today compared to where you would expect it to sit in mid July under normal circumstances?
PAUL OTELLINI
I can on the microprocessor side or at least THE computing side. It's about where we would expect, and as you know, we tend to book CPU side of the business relatively early to be able to lock down our specific bills in terms of frequency and so forth and chipsets. And I am very comfortable based upon that backlog projecting, what we've projected for the second half and third quarter here. In the other parts of the business, it's a bit more terms related.
TERRY RAGSDALE
But the range guidance is a little broader than usual right, at a revenue range? That's based not on microprocessors but on the other business?
ANDY D. BRYANT
It's really based on the environment we find ourselves in. The assets give ourselves a pretty broad range so we are comfortable. The third quarter is always the one where September makes a breakthrough. Based on the fact that price actions are taking place in August, based on the fact we're shipping the A45 and volume here in a couple of weeks in August. The XP build starts in the latter part of the quarter. More than you've seen in a long time, September's going to be the story for the third quarter. So it's giving us a little lag in case timing's a little off.
TERRY RAGSDALE
Okay, thanks.
Operator
And we will now move on and take a question from Mr. Dan Niles with Lehman Brothers.
DANIEL T. NILES
Thanks a lot. Andy if I could just touch on this tax rate for a second. It's moving down, seems like quite a bit, from 29 points to 25.7, or 4 points, and in the release it talks about due to changes in expected income, as well as various tax jurisdictions. Can you kind of talk about what each one of those pieces is doing in terms of profitability for the rest of the year, I guess, versus just better tax advantages in whatever regions, I guess, you're selling through?
ANDY D. BRYANT
Paul will give you a whole lot more guidance. You've got a previous indication though of why the profit is changed when you look at the point of margin right? Other than the point of margin, the year's unfolding pretty much as we expected. Spending is where we expected it be. Revenue won't be far from where we thought it would be. So if you look at that, it's okay. A point of margin, that's the profit change. Also recognize one of the things we are trying to do is as units have been down for a great potential of production into the locations with lower tax rates, which will make up the other piece of that. Probably what's the biggest causing leverage to be a large is frankly the amount of profit is lower right, and when you have $4-5 billion of pretax instead of $14-$15 billion of pretax, the point of margin makes a notable change in the tax rate. That's the biggest impact. If we had been at last year's overall profit levels of a point of gross margin with no change in tax rate.
DANIEL T. NILES
Okay, great, thanks.
Operator
And we will now move on and take a question for Drew Peck with SG Cowen.
DREW PECK
Good afternoon. As you replace the P-III with a P4 on the desktop, I am wondering how close you are going to have to match the pricing. In other words, is pricing going to be the primary lever to displace the P3? And given that you are building these at 0.18-micron, I am wondering what the impact on margins is going to be just spinning from that. In other words, will you be able to make up for the difference in cost with the difference in pricing?
PAUL OTELLINI
I'll let Andy speak to the margin. He's already done it once. On the pricing, we will do what we need to do to transition from the Pentium III to the Pentium 4. At the same time we are doing that, we have an objective of driving the Pentium 4 further down into the marketplace than the Pentium III did at this point in its life. I would categorize this as an aggressive transition, as Intel is driven back till the 486. The Pentium transition is that kind of very single-minded drive that we want to put behind this product line.
DREW PECK
Is it your assumption that essentially you will have to meet the P-III pricing with P4 pricing in order to do that?
PAUL OTELLINI
It is my assumption that we need to get the overall build of materials in line to hit the system price points I spoke of.
DREW PECK
Got it. Okay, thanks.
Operator
Moving ahead we will now take our next question from Mr. Eric Chen with JP Morgan.
ERIC CHEN
Thanks. Looking at the historical pattern of your unit shipment versus, as it goes to data that we have on PC unit shipment, there appears to be a trend of you over-shipping PC unit shipment into Q3 timeframe, almost happens every year. First of all, can you confirm that? And secondly do you expect that to happen again this year given that you are expecting a seasonal uptake in the Q4?
ANDY D. BRYANT
It's interesting. We don't see any over-shipment of microprocessor units in the second quarter. If you look at our, one of the things you can always tell about Intel is how much have we put into channel? You can go to our balance sheet. There is something called adjusted reserve. It will tell you whether we are building or drying down, this should be the inventory, directly down a $100 million. During the second quarter, we poured those inventories...
ERIC CHEN
Andy, I was actually referring to Q3.
ANDY D. BRYANT
You mean at the end of the quarter?
ERIC CHEN
Yeah, At the end of the third quarter.
ANDY D. BRYANT
Oh, I am sorry. At the end of the third quarter, we actually don't anticipate shipping in part that isn't required by customers. You really don't help yourself when you do that.
ERIC CHEN
Okay. So you...
ANDY D. BRYANT
We are trying to ship what our customers want.
ERIC CHEN
Okay, so you basically expect your shipment to be inline with the total shipment of PC plus workstations service?
ANDY D. BRYANT
Pretty much. Again, if our customers want to build inventories, we don't tell them they can't. So you need to ask them that question. We don't see any reason to product inventory in any channel or any customer during the third quarter.
ERIC CHEN
Okay if I may, just a really quick followup. What is the current plan for the DDR version of 845?
PAUL OTELLINI
No change to that. That is still anticipated to be introduced and released early next year.
ERIC CHEN
Okay.
Operator
Moving on, we will now go to Luther King Capital Management's Brent Clum.
BRENT W. CLUM
Can you talk about your capital spending for the second half of the year, and particularly your spend on the 300 mm? Thank you.
ANDY D. BRYANT
Sure. The capital spending is still at $7.5 Billion target for the year. We have spent just under 5 billion so far this year, almost two-thirds of the capital spending is already in place. The majority spending goes on 2 programs, which is 0.13 process ramp and the 300 mm. Probably in the neighborhood of 15-20% of the overall capital goes into 300 mm certainly. We are in the process right now of actually building cash bases on 300 mm. We will be in production April 1, 2002.
BRENT W. CLUM
Thank you.
Operator
And next up we have Doug Lee with Banc of America Securities.
DOUGLAS K. LEE
Hi. Congratulations on a real solid quarter. Just a follow on that question. Andy do you have a preliminary projection for capex for next year?
ANDY D. BRYANT
We've worked on what we think the number should be. It varies based on how we see the strength of the economy second half of the year. It is a little premature this year. We expect to get a lot better sense when we see the third quarter and the early fourth quarter unfold.
DOUGLAS K. LEE
Okay. So again just as a followup then and more of a confirmation from what you said at the analyst meeting. If we assume that you guys can grow PC units, new processor shipments next year, should we also assume at this point, under your current pricing strategy, that gross margins will continue to expand?
ANDY D. BRYANT
I don't know if we've made that relative statement. It doesn't sound like us. What I would tell you is if we ramp point 0.13 and 300 mm successfully, I do expect to see my costs and such come down.
DOUGLAS K. LEE
Okay. Fair enough. Thank you.
Operator
Moving on, we will now go to CS First Boston's Charlie Glavin.
CHARLES GLAVIN
Thanks. Andy in terms of the two things, as far as the R&D spending, it sounds like with the better yields, even though you have lowered it from 4.2 to 4.1, given the lower spending in Q2, it sounds as if the spending in the second half of the year is actually going to still stay relatively flat. Are you increasing any of the microprocessor spending? And the other, more housekeeping, RP1, the 250 million, is that included in the 2001 capex and does that include EUV?
ANDY D. BRYANT
I don't think I have followed the second half of the question. Anyway let's do the first one first and then come back. As far as spending for the fourth quarter, I gave you a third quarter up rather still slightly. We will continue the head strip down through the back half of the year. So in my mind it is not going to change through the ... on Intel employees, and I expect it will be a little higher for advertising as we'll have a pretty investment program in the fourth quarter.
CHARLES GALVIN
By then, Andy, it looks like if you are up slightly in Q3, then Q4 would not be up fairly significantly on the R&D line?
ANDY D. BRYANT
Again, the answer I guess is yes. We have several special programs such as we recently did a deal Compaq, which wired the engineering talent into the company, those will grow in the R&D line. So the answer is yes, you will see an increase in R&D in the fourth quarter.
CHARLES GALVIN
And then Andy in regards to the RP1, as far as the advance process development, the $250 million that has been allocated within RP1, is that included in the 2001 capex? And will efforts in the EUV technology be included in that?
ANDY D. BRYANT
This is a very small piece of it that's in 2001, and the bigger portion of it is in the full-year plan.
CHARLES GALVIN
Okay thanks.
ANDY D. BRYANT
It has a small facility up in Oregon, and we are just getting settled in there.
CHARLES GALVIN
But would EUV be included within that or would it be held separate within most of the other stuff including the say D2?
ANDY D. BRYANT
At this point, it is being held separate. It may end up going in there. I don't know to be honest.
CHARLES GALVIN
Okay thanks.
Operator
And moving on, we will go now to Vadim Zlotnikov with Sanford Bernstein.
VADIM ZLOTNIKOV
You have talked about how the transition to P4 is really what's driving your pricing strategy today in the lower ASP's. You have gained some clock speed advantage over AMD. As you move toward the end of the year, would you anticipate the ASP's will start to stabilize? And more importantly, what do you anticipate is going to be driving your pricing strategies? Is it share or what else?
PAUL OTELLINI
I don't think we want to get into business of projecting ASP's over the course of the year any more than characterization that Andy put out with the overall margin. In terms of the strategic intent though, our intent, as I said earlier, is to take advantage of the overall slowdown in the business, use this opportunity in terms of the Pentium 4 health, the overall capacity, the availability of a low bill of materials cost chipset, and the launch of XP to really consolidate our position and move to the next generation more rapidly than we had originally planned.
VADIM ZLOTNIKOV
So does that mean that you are continuing to drive down the low-end pricing against AMD?
PAUL OTELLINI
I don't know that I understand your question. The low-end pricing you mean Celeron?
VADIM ZLOTNIKOV
Yeah Celeron, as well as bringing the lower speed of Pentium 4 below hundred.
PAUL OTELLINI
I think I said very clearly that I intend to use the new roadmap to position ourselves to gain market segment share over the second half of this year.
VADIM ZLOTNIKOV
Great. Thank you.
Operator
We will now go to Eric Ross with Thomas Weisel Partners.
ERIC ROSS
Great quarter. When do you expect your Brookdale chipset for DDR is going to be available?
PAUL OTELLINI
For DDR?
ERIC ROSS
Yes.
PAUL OTELLINI
I answered that earlier Eric. It was early next year.
ERIC ROSS
Okay and...
PAUL OTELLINI
It's the same chipset. I wouldn't have to the validation Eric.
ERIC ROSS
Oh I see. That is January next year. And just a quick followup. Do you have any plans for dealing with the impending DDR chipset that is supposedly toward the time when Express is going to be out sort of in the fall?
PAUL OTELLINI
Well there is a rumored chipset that we haven't seen silicon on. At this point, they do not have a license to do that chipset, and when and if we see silicon, we will determine our action.
ERIC ROSS
Okay and then last piece of the question is how do you recognize customers' subsidies for the RDRAM?
PAUL OTELLINI
I am sorry, customer what?
ERIC ROSS
Subsidies.
PAUL OTELLINI
How do we recognize them?
ERIC ROSS
Yeah do you recognize them in cost of sales?
PAUL OTELLINI
We are fundamentally out of that business, but they were taken against revenue.
ERIC ROSS
Okay, great, thanks so much.
Operator
Moving on, we will now go to Quinn Bolton with CIBC World Markets.
QUINN BOLTON
Question for Andy, then one for Paul. Andy, can you give us any sense of the magnitude of the inventory reserves taken in the second quarter? Or perhaps to state it in another way, what the margins have been without the inventory reserves? And then a question for Paul, can you give us a sense of the mix of the finished good inventory? How much is Pentium III? How much is the older Pentium 4, the 423 pin device, and how much is the new 478 pin device?
ANDY D. BRYANT
As far as the margins, I won't give you very specific information. It dropped 4 points from the first quarter to the second quarter. Two things were notable. One was the average selling price of microprocessors. The second was the lower revenue and the inventories in the communications and flash businesses. Between the two, the microprocessor piece is larger, but reserves on flash and communications and the revenue reserves was notable.
PAUL OTELLINI
On the second half year question, I think you are trying to get at is there an impending reserve for, let me say, obsolete Pentium III or socket impaired Pentium 4, right? And the answer is no. I am very comfortable with the mix and inventories. I think as Andy said in his comments, the microprocessor overall inventory, in particular the finished goods inventory, is within our guidelines, perhaps at the upper end of those, but within our guidelines, and I am confident we can move all those units.
QUINN BOLTON
Okay, thank you.
Operator
And moving on, we will now go to Maneesh Goyal with Neuberger Berman.
MANEESH GOYAL
My question has been answered. Thank you.
Operator
Thank you. Now we will move on to Jack Geraghty with Gerard Klauer Mattison.
JOHN M. GERAGHTY
Is it your understanding that sort of a ballpark number of a 150 million units of the PC industry is reasonable this year? Question for Andy. I'm sorry if I said Andy, I meant Paul. Sorry. I'm really losing it here. Excuse me Paul ... I'll let Paul, if you wouldn't mind. I'm sorry, excuse me.
PAUL OTELLINI
Well, you know Jack, we're not in the business of putting those forecasts out. We're certainly planning for numbers that are not terribly far from that range.
JOHN M. GERAGHTY
Okay, that's fair enough. Thanks a lot. Sorry for the misunderstanding there.
Operator
And next with Needham & Co., we'll move onto Dan Scovel.
DANIEL K. SCOVEL
Thank you. Is the P4 still the fastest ramping product in your history and have you actually built backlog over the last quarter?
PAUL OTELLINI
Yes and yes.
DANIEL K. SCOVEL
Thank you.
Operator
Next is Eric Rothdeutsche with Robertson Stevens.
ERIC ROTHDEUTSCHE
Hi. Thank you. At this point, are you starting any more wafers of the Pentium III outside of Celeron? And just a second question, what direction are your utilization rates moving in both your MPU and non-MPU businesses?
PAUL OTELLINI
Yes, we're still doing some Pentium III wafers. Obviously, we're running them on 0.13 for the mobile, the low power, high compute density servers, and the small form packer businesses, and we will be having a, let me say, a more gentle transition on the corporate desktops. They have to go through a qualifying along the 845 chipsets still. So there is probably some wafer starts still happening for Pentium III on both technology as a result.
ANDY D. BRYANT
And fab utilization rates are down a little bit in the logic side, not much. I am certainly comfortable with the utilization rates on those factors. In the non-logic side of the business, utilization rates are down and part of the reserves we took on second quarter were for a low utilization in those factors.
ERIC ROTHDEUTCSHE
Great. Thanks.
Operator
Moving on, let's now go to Charles Boucher with Bear Stearns.
CHARLES F. BOUCHER
Just two quick questions. When do you plan to actually starting to ship product off the 300 mm process? And wondering on the P-III, if there is any inventory out there, given that you're accelerating the ramp and transition over to P4, and if so, is there some cost associated with the disposition of inventory that might be impacting markets?
PAUL OTELLINI
First half of the question is our 300 mm is going to be early 2002, and on the Pentium III inventory, there is really 3 chunks of it. There is our own inventory, which I discussed earlier. I'm comfortable there. There is our channel inventory which is in very good shape and certainly manageable because of the transition. Hence we have targeted much of this to start in August. So there is plenty of notice there, and that's also true for our OEM customers where we've taken the same actions in terms of describing the roadmap to them with enough lead time for them to not to be hung out there.
CHARLES F. BOUCHER
Okay. So the margin adjustments really, just as you indicated, just primarily related to pricing?
PAUL OTELLINI
Yes sir.
CHARLES F. BOUCHER
Okay, thanks.
Operator
Moving on, we'll now go to Paul Lehmann with ABN Amro.
PAUL LEHMANN
Capital spending question. Earlier you said that you've got some ideas on how it should shape up, but it's contingent on the economy. I was wondering if you could kind of tell us if you see a stronger economy, give us some ballparks of what it might be in a stronger economy, what it might turn out to be if we don't really see an economic pick up?
ANDY D. BRYANT
You know Paul it's really too early for me to share that. I'm just not comfortable. I might be able to start giving signals in the quarter but typically I'll wait till the January conference call.
PAUL LEHMANN
Okay, thanks very much.
Operator
Once again, if you would like to ask a question, please press the '*' key followed by the digit '1'. Moving on, we'll now go to [_______________] with Trellis Management Company.
Unknown Speaker
Yes thank you. Good afternoon gentlemen. I want to come back to the capex thing just to make sure that I'm clear on it. You said you had spent roughly two-thirds of the 7.5 billion. Is that correct?
ANDY D. BRYANT
That's correct.
Unknown Speaker
And so the assumption that would be the predominant amount of process equipment under that spending would have been for 0.13-micron and 200 mm wafer facilities for their going into production at the end of this year, is that right?
ANDY D. BRYANT
Yes, I recognize it's a broad reach. Their facility is being finished, that, well right now, fifth with a 0.13, 200 mm. So it's on facilities that can be both 200 to 300 mm, as well as there is a lot of equipment for the 0.13, 200 mm.
Unknown Speaker
Okay, so in a certain sense some of that two-thirds has been spent, some of it would have already been on 300 mm, is that correct?
ANDY D. BRYANT
That's correct.
Unknown Speaker
So then going forward in the second half of this year, would you say the predominant amount of spending will be for the launching of your full 300 mm process in January next year?
ANDY D. BRYANT
No, I'd still tell you that 0.13 is a bigger driver, as we have several factories coming up on 0.13 through the back half of the year. Certainly, 300 mm will change the total, will increase throughout the back half of the year but still 0.13-micron will be the predominant driver.
Unknown Speaker
All right, thanks a lot.
DOUG LUSK
Operator, we'll take two more questions please.
Operator
Thank you gentlemen, and we'll move on and take a question from Graham Tanaka with Tanaka Capital Management.
GRAHAM TANAKA
Yeah, hi. Good quarter guys. Just wondering if you can comment a little bit about Asia and to what extent some parts of Asia are sort of unlinked from the US slowdown, European slowdown. It being combined 41% of your business last quarter. What's the outlook, for example, for China and India? That's one question. Thanks.
PAUL OTELLINI
There is really two aspects of the Asia-Pacific sales. One is shipments into Taiwan, which principally get reshipped back to other places, and this is mostly motherboards and chipsets. And the other is the local consumption throughout the region. The sales in Taiwan actually picked up, principally driven by the chipset growth, that's why I emphasize that as part of my Asia-Pacific comments, and the fact that chipsets grew as a percent quarter-on-quarter faster than microprocessors, I think is a good leading indicator and is one of those that gives us some confidence about the second half. It also speaks to the fact that inventories have been relatively depleted in the motherboard sectors around the world. In terms of local consumption, China and India continue very, very strongly, setting records not just in terms of units but also in terms of purchasing relatively rich configurations of computers. Other places like Korea obviously are much slower.
GRAHAM TANAKA
Great. And then the other thing I just was wondering about your outlook for the mobile platform. You got some new products rolling out, and I was hoping you would comment on a little bit as to whether you'll be getting share there?
PAUL OTELLINI
Well, our mobile market segment share is substantially above our desktop market segment share and has been for a long time. I think the new products we have introduced in the last couple of quarters at the low end and now on the high end really have consolidated our position there, and I think give us a fairly unassailable product line up. We have substantially grown the volumes quarter-after-quarter on the ultra Low Voltage Products we introduced mid last year, and that's principally a Japan sub-notebook marketplace, but it's doing very well for us, and at the high end, the new platform that gets introduced with the 0.13-micron later this month is an entirely new design from the bottom up, not just the processor but the chipset, and the chipset is constructed such that it allows our customers to do one motherboard, one configuration, that supports processors from Celeron all the way through in excess of a gigahertz Pentium III processors. I think that will help lower their costs and continue to drive sales.
GRAHAM TANAKA
Great, thanks.
Operator
And gentlemen our final question will come from someone from Hotovec Pomeranz. That will be Mr. Steve Allen.
STEVE ALLEN
Yes, glad to make the cut. Last question is on market share. AMD in their call said that they got 22% and actually increased market share. Intel says that they have north of 80%. I am just trying to work the math here. Maybe you could help me out?
PAUL OTELLINI
I think I gave you all the pieces of the puzzle. I said that our shipments grew 6% quarter-on-quarter and the unit growth was over a million units. I think you can work back in terms of the numbers. I would point out that we do report and we only report sales out and customers for all our channels.
STEVE ALLEN
Okay, thank you very much.
PAUL OTELLINI
Okay.
Operator
And gentlemen that does conclude our question and answer session. Again, I'll turn the conference back over to Mr. Lusk for any addition or closing remarks.
DOUG LUSK
Okay, thank you. We'd like to thank everyone for listening to today's conference call. A recorded playback of the call will be available at approximately 5 p.m. Pacific time tonight. Those interested should call 719-457-0820 and reference pass code 599-716. Thank you.
Operator
That does conclude today's conference. Thank you everyone for your participation.