英特爾 (INTC) 2002 Q1 法說會逐字稿

Good day everyone. Thanks for holding, and welcome to the Intel Corporation's first quarter earnings conference call. A reminder that today's call is being recorded.

At this time I'd like to turn the call over to the director of investor relations and assistant treasurer, Mr. Doug Lusk.

Please go ahead, sir.

Good afternoon. Welcome to the Intel first quarter 2002 earnings conference call. Present from Intel are Andy Bryant, the Chief Financial Officer, and Paul Otellini, President and Chief Operating Officer.

I'd like to remind everyone that the earnings release and this conference call are available on our investor relations Web site at www.intc.com.

For those of you who may not have seen the quarterly earnings report, revenue in the first quarter was $6.8 billion, and earnings per share on a GAAP basis were 14 cents. Earnings excluding acquisition-related costs were 15 cents per share.

The first 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.

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 acquisition-related intangibles, and costs. These statements do not reflect the potential impact of any factors or acquisition completed after March 30, 2002.

I now want to introduce Andy Bryant. He'll discuss the first quarter earnings results.

Andy.

Bryant|Andy|Bryant|Chief Financial Officer|Intel|cm: Thanks Doug.

While overall results this quarter were consistent with the March update, results from the Intel architecture business were a little better than is seasonally typical.

Gross margins from ongoing operations were also better than we expected, although the gains were offset by a one-time charge related to a legal settlement.

Revenues turned the corner and were up slightly over last year,

by significant year-to-year growth in the Intel architecture business. Our communications business, including

and Networking, were weaker than both the prior quarter and our expectations.

Higher average selling prices for microprocessors, product mix, and improved

performance led to the operating increase in gross margins. Revenues of $6.8 billion were down 3 percent sequentially, but up 2 percent over the first quarter of 2001.

This is the first year-on-year increase in revenues we have seen in four quarters. All of the year-on-year growth came from the Intel architecture business, driven by the momentum of the Pentium 4 processor and related chipsets.

Unit shipments of Intel architecture microprocessors, including Xbox processors, were approximately flat, to

.

Intel architecture revenues of $5.8 billion were up 12 percent in the first quarter of last year, and flat with the fourth quarter.

Demand for communications products remains weak, and our business here continues to face annual and sequential revenue declines.

Revenues for the networking business were $518 million, down 12 percent from the fourth quarter.

Revenues for the wireless communications business, comprised mostly of flash memory, were $459 million, down 11 percent from the fourth quarter.

Gross margin percentage of 51.3 percent was approximately flat with the first and fourth quarters of 2001. This includes the one-time charge of $155 million related to an agreement announced yesterday with Intergraph.

Without this charge, gross margin percentage from ongoing operations is 53.6 percent, up over two points from the fourth quarter.

The operating improvement comes from higher average selling prices of processes, better product mix, and manufacturing efficiency.

53.6 percent exceeded our March estimate of higher than the mid-point of the range of 50 percent, plus or minus a couple of points, primarily due to manufacturing efficiency.

Operating income of $1.4 billion, excluding acquisition related expenses, was down eight percent from the fourth quarter and up 10 percent from the first quarter of 2001. More than 100 percent of the total came from Intel Architecture business, whose operating profit was $1.8 billion, flat sequentially, and up eight percent year on year.

Losses in the communications businesses were wider than we expected. Operating losses were $150 million for the networking group and $68 million for the wireless group.

Cap earnings per share up 14 cents were up 100 percent from seven cents in both the first and fourth quarters of 2001. These are not, however, apples to apples comparisons.

Cap earnings for 2001 reflect charges for the amortization of goodwill, which is no longer amortized under new accounting rules. Earnings per share excluding goodwill and end process R&D were 15 cents per share, flat with fourth quarter, and down six percent from first quarter of 2001. The Intergraph related charge took earnings per share this quarter down by approximately one cent.

Spending of $2 billion was within our outlook, up two percent from the fourth quarter and down four percent from the first quarter of 2001.

Headcount ended the quarter just under 83,000, slightly lower than the fourth quarter, and down more than eight percent from about 90,000 a year ago.

The total for interest income, other income, and gains and losses on equity investments was $2 million, about as expected. Within this category of income statement, interest and other income was $48 million. A net loss on equity investments was $46 million, including impairment charges of $197 million, partially offset by $120 million in gains related to equity securities transferred to trading assets that had previously been restricted.

Average shares, calculating diluted earnings per share, were $6.9 billion, flat with the previous quarter. During the quarter, we repurchased 30.9 million shares at a cost of $1 billion. Diluted shares outstanding were down 38 million from a year ago.

On the balance sheet, we made some progress in our goal to rebuild inventory during the quarter. Inventory was increased by $227 million, or 10 percent, mostly in finished goods.

In the Intel capital portfolio, the value of securities decreased six percent, from $1.7 to $1.6 billion.

Cash, short-term investments and fixed-income trading assets ended the quarter at a total of $10.3 billion. This was a decrease during the quarter of

million after $1.4 billion in capital spending and the $1 billion on stock buyback.

In summary, then, for the first quarter, revenues of $6.8 billion, up slightly year on year, and seasonally down from the fourth quarter. Gross margin of 51.3 percent, including a $155 million charge related to an agreement with Intergraph. Gross margins from ongoing operations at 53.6 percent, up year on year and sequentially.

Spending flat and headcount down. Operating income, excluding intangibles and end process R&D of $1.4 billion, or 21 percent of revenues. GAAP earnings per share of 14 cents, including the impact of one cent from the Intergraph agreement.

As we turn now to the outlook for the second quarter, please keep in mind that all the forecast data excludes the effect of any new acquisitions or divestitures that may be completed after March 30.

We expect revenue in the second quarter to be between $6.4 and $7 billion dollars. Revenues within this range would be a year on year increase of one to 10 percent. On a sequential basis, in all but one of the last five years, revenue in the second quarter has been flat to down.

Gross margin percentage in the second quarter should be 53 percent, plus or minus a couple of points. Spending should be about $2.1 billion, approximately flat with the first quarter.

Our estimate for interest and other income is zero, including a net loss of equity investments of approximately $50 million.

For the full year of 2002, we have revised our outlook for gross margin percentage to 53 percent, plus or minus a couple of points. The mid-point of this range is an increase of two points over the mid-point of our previous range, and reflects our early progress this year in improving profitability and is consistent with our view that seasons trends will continue through 2003.

The new 53 percent mid-point is four points higher than 2001 gross margins of 49 percent.

This early progress and profitability is the result of a year-long effort and a validation of Intel's conviction that profits, and not revenues, finance growth.

Our financial strategy over the last year has been to preserve profits and protect financial health while proceeding with investments that make Intel more competitive. As a result, we enter the year with a strong balance sheet, a healthy income statement, and capabilities in place that make us a more agile and effective competitor.

With that, let me turn it over to Paul for additional comments on the business.

Thanks, Andy.

The first quarter came in about as we expected, with overall revenue down seasonally and up slightly above one year ago.

Our Intel Architecture business was approximately flat from Q4, benefiting from a richer product mix and a continuing shift to the Pentium IV processor.

On a geographic basis, Asia Pacific continued to widen its lead as our largest geography with sales growing two percent over Q4 to 36 percent of total revenue. Revenues in A-Pac set another record and reported their fourth consecutive quarter of growth. We saw strength in mobile processor sales in Taiwan and increased consumption in the region, particularly in the PRC and in India. The channel had another strong quarter in A-Pac as it is the primary source of products for the two fastest growing countries.

Chip set sales were down this quarter, as is seasonally normal, and in anticipation of the 845-G integrated graphics chip set being launched soon.

Japan had its first growth quarter in over a year, with 13-percent increase in sales above Q4. The growth was primarily fueled by increased processor sales, particularly in the mobile space.

Flash sales were off during the quarter due to inventory overhang in the Japanese cell phone market. We believe that inventory has now been consumed, and we should see a return to normal sales out for flash memories.

The America's revenue was down four percent quarter on quarter. This drop reflects both the lack of a rebound in corporate sales in the U.S. and the trend towards offshore manufacturing of PCs. The Americas ended at 33 percent of overall revenue.

Europe, at 23 percent of total revenue, was down 13 percent after a very strong Q4. This level of decline is typical of Q1 in Europe. Communications products, including flash memories, were on target. The emerging markets of Eastern Europe and Russia continued to grow during the quarter.

Channel volumes fell slightly this quarter following the typical season pattern, although we were somewhat short of supply of low-end products early in the quarter, as we continued to prioritize ramping Pentium IV processors. Inventory in the channel was up during the quarter, but still well within our guidelines.

From a product perspective, shipments of Intel architecture microprocessors were approximately flat from Q4. ASPs were up slightly in the first quarter, driven primarily by a richer Pentium IV processor mix, as well as some growth in mobile and server. Overall, we believe we held market segment share for the quarter.

In the desktop, we continue to strengthen our product line up with the launch of the 2.4 gigahertz version of the Pentium IV processor, which is unquestionably the industry's highest performing desktop processor.

We also began to produce our first Pentium IV processors while on 300 millimeters and began shipments of an optical shrink version of the product, reducing the die size by approximately 10 percent over previous 0.13 micron versions.

The combination of larger wafers and smaller die size will help us to continue to lower manufacturing costs and increase output.

The health of our 0.13 micron process technology continues to exceed our expectations, with excellent yield at two gigahertz and above. We plan to take advantage of this capability to quickly move the sweet-spot of the market to two gigahertz beginning this quarter. We also plan to incorporate the NetFirst micro-architecture into the Celeron family later this quarter, significantly increasing the performance profile of the value segment.

Our mobile business grew nicely in the first quarter, driven by the launch of the mobile version of the Pentium IV processor, introduced at speeds of 1.7 gigahertz and 1.6 gigahertz, the Pentium IV M-based notebooks are the industry's highest performing mobile computers.

In April we will launch additional speeds of the mobile Pentium IV, allowing us to aggressively ramp this product into all performance and mainstream segments during the second quarter.

Lastly, we introduced seven new Intel mobile Pentium III processors and Celeron processors based upon 0.13 micron technology and have now transitioned our entire mobile processor product line to this advanced process technology.

Server revenue was up in the first quarter as we saw continuing growth for our Zeon and entry-level server products. The value proposition of Intel-based servers is increasingly compelling as IT buyers face a constrained spending environment.

Our entry-level and mid-range products offer substantial performance and price performance benefits over their risk-based competitors.

We had a number of significant server product launches in the first quarter, including the first Zeon processors based upon NetFirst micro-architecture. These processors were introduced in versions that address both the entry level and mid-range market segments.

We also introduced the Intel E-7500 chip set, marking our return to the entry and mid-range server chip set market.

PC chip sets were seasonally lower in the first quarter. We believe that this seasonality was exaggerated by our impending launch of the 845-G chip set with integrated graphics. We have sampled tens of thousands of units of this chip set. It is the industries first to bring both integrated graphics and USB 2.0 to the Pentium IV processor platform.

We plan to introduce multiple versions of this product during the quarter, featuring different levels of pricing and performance for various segments. We are planning for a steeper ramp of this product over the next few quarters than we saw with the original 845 chip set. We will position this as the standard corporate platform, as well as an excellent choice for mainstream consumer PCs.

In our wireless communication group, flash units and revenue were down, due primarily to a too-poor inventory build in Japan which impacted Q1. Average density continues to rise as the trend to more data functionality in cell phones continues to increase flash requirements.

We believe we continued to gain market segment share during the quarter, benefiting from our technology leadership. During the quarter, we began shipping flash on our 0.13 micron process, well ahead of our competition. In the wireless space, we introduced a new family of microprocessors, based upon Intel X-Scale technology that help power multimedia cell phones and PDAs.

Our communications group had a higher Ethernet units in the quarter, but continued to see weak demand from Telco and networking customers.

In February, we significantly strengthened our network processor family with the launch of three new network processors along with a specialized processor for network storage applications, all based upon our X-Scale core architecture.

We also introduced the industries first family of single-chip gigabit Ethernet components for desktop PCs, workstations and servers.

In summary, our investments in new products and leading edge wafer capabilities continued to payoff for us this quarter. We are accelerating our lead over the competition across the board, and are seeing the benefits of our focus on cost and product execution in our numbers.

We continue to improve in difficult times, and are extremely well positioned to take advantage of the inevitable market recovery.

With that, let me turn the meeting back over to Doug.

Thanks, Paul.

We will now offer the conference call for Q&A. In the interest of moving along and giving other questioners a chance, please limit yourself to one question - Operator.

Thank you. And at this time if you have any questions, please signal us using your telephone. Press the star key followed by the digit one.

First up on the roster is Mark Edelstone at Morgan Stanley. Please go ahead.

Yes, good afternoon, guys, and congratulations on a solid recovery, here.

Paul, I wonder if you could just talk about the dynamics for the second-half of the year. It certainly seems like the first-half, on balance, was fairly normal and your outlook for Q2 seems fairly normal as well. Can you talk about your outlook for the second-half of the year and maybe some thoughts going into '03 as well, relating to the prospects for a PC upgrade cycle and the timing for that to occur.

I don't think I'm prepared to forecast '03 at this point,

. But in terms of '02, we are, as Andy said, planning for a seasonal pattern in the second-half of the year, versus the first-half of the year.

Our capacity plans are built around that, and we'll just have to see what happens in terms of final demand.

Can you just give us your thoughts on the potential for an upgrade cycle to begin somewhere in the next 12 months or so?

Well, there's always the potential. If you're asking me to quantify it, no I can't. We haven't seen a sign of that to date. The installed base of PCs in Fortune 1000 type accounts is getting relatively old, and at some point that will have to be upgraded. I just don't see that process beginning in large numbers at this time.

OK. Thank you very much.

Moving on, we'll hear from

at SG Cowen.

, are you there? We're unable to hear you. You might check your mute button, if you have one,

at SG Cowen.

Hearing no response, we'll move on to Tim Mahon at CS First Boston.

Yes, Paul, can you take a stab at what your average flash density was in the quarter? How much it was up sequentially? And maybe you could just give us a little more color - you mentioned flash revenues and units were down in the first quarter. How much of that was ASP related versus unit related? Thank you.

The density was up a little bit. ASPs were about the same - down a little bit, I'm sorry. Down a little bit. And, what was the third part of the question? ASP, density and...

Well, I was trying to actually get you on the actual kind of density. I know you said it was up, but if you could give us an idea of the average density.

I don't have my finger on that number right off the top, sorry.

OK. Thank you.

We'll hear now from

at Sanford Bernstein.

Hi. Could you just articulate or summarize your overall service strategy and sort of help me with what I can look for in the next couple of quarters, to get more comfortable with where you're headed? And then I just have a quick follow-up.

Well, it's sort of a two-fold strategy,

.

On one level, Intel architecture-based servers have 88 percent of all servers that are out there, according to "Dataquest" sold day in and day out. So we want to continue that trend and refresh that product line, which is why we brought out new entry-level products this last quarter.

We also, as you know, are driving faster and larger versions of Itanium into the market place. The second generation version of Itanium, which is code-named McKinley, is on track to hit production release the first-half of this year still, so no change in that.

As we do that and drive Zeon farther up, I think we have a very compelling top to bottom argument for IT managers to consider as they look to upgrade their server infrastructure, primarily from risk-based processors.

Do you have some sort of international revenue projection or process for the server market in the next couple of years?

Yes, we certainly do.

Is it something you can share?

Sorry, can't help you there.

And just quickly, you know, in Q4 of this year, AMD is talking about launching their sort of 3400 version of their Hammer in the desktop space, and I'm just wondering if you can comment on Intel's positioning in terms of technology and pricing relative to that product. Thanks.

I don't want to comment on an unannounced product, but I think we have demonstrated we've got the most compelling desktop product line now. We are on track to meet the goal I set earlier this year, which is to ship three gigahertz in production volumes before the year is out. I think that we'll still be the fastest thing in 32-bit code out there.

For people that want a 64-bit environment, we've got a product line that's got a lot of development behind it, a lot of applications behind it, and a lot of the industry's support behind it. So I'm feeling pretty comfortable, there.

OK. Thank you.

We have a question now from

at J.P. Morgan.

Hi, it's actually

.

Question on 845-G. Could you tell us the timing that we'd be able to anticipate some volume availability in the channel for 845-G?

We'll begin shipment this quarter. I haven't set the launch date publicly yet, but I think you'll see volume this quarter - large volume this quarter.

OK. Great.

Now from Robertson Stephens, this is Eric Rothdeutsch.

Thanks. Paul, can you give an idea of what your processor units would have been, excluding the X-Box sales, say, on quarter to quarter?

And, Andy, could you also give some finer granularity on some of the efficiencies you've been achieving in the fabs that have led to the better than expected gross margins?

Without X-Box, the volume went down a little bit from Q4, but better than we expected.

OK.

As far as manufacturing efficiencies, we've been cutting spending and cutting spending in the factories now for a year. What we saw towards the end of the first quarter was improvements in yields. So you get the effect of not only having reduced your spending throughout all of 2001, you know get more units per dollar spent, and that's what we saw in the first quarter.

Great. Thank you.

Our next question will come from Hans Mosesmann at Prudential.

Yeah, a couple of questions, guys.

With the optical die shrink that you've seen, does that translate into faster than expected speeds for P-IV this quarter? And the follow-up is, what's the timing for Celerons based on the P-IV core? Thanks.

The shrink wasn't really focused on getting a net-faster high-end

, although it gives us, on average, better yield to the higher

than we had before the shrink.

So it allows us to be able to have the head room to be able to take the product up, which is why I was relatively bullish on the three gigahertz comment a few minutes ago.

In terms of Celeron products, you'll see us start bringing NetFirst micro-architecture sort of into Celeron starting later this quarter in some of the product lines, and over the course of the year, into desktop and notebook across the board.

So at the end of the year, you won't be making any of the P3 Celerons?

Any is a - I don't know if I'm in a position to say any, yet. But for the most part, we will transition to a NetFirst-based product line.

OK. Thank you.

From Merrill Lynch, this is Joe Osha.

Hi, yes. Two questions.

First, as regards 845-G, I'm wondering, based on the work you've done, if you think there may be any - I hesitate to use the word pent-up, but you know, whether you think the introduction of 845-G-based products might in fact be the impetus for some improved sales into corporate.

And then, secondly, I was wondering if we could get an update on the timing of the completion of the transition from Willamette to Northwood. Thanks.

In terms of pent-up demand, gosh, I don't know,

. We'll have to see.

We had originally thought that corporate would wait for the 845-G and not qualify the 845, and we found ourselves, obviously, on the other side of that, late last year, and that was one of the reasons we were behind the supply curve on Pentium IV in the fourth quarter. Corporations went to that platform very, very rapidly.

Will they also qualify this and use this as a means of driving it farther down into the product price points? I think so. I just can't estimate the pent-up demand.

I know that the channel demand is extremely strong for this product. That's why we're bringing out multiple versions of it.

The quality of it is very good. The performance of it is very good. So it's a solid chip set at this point.

In terms of when we'll transition from Willamette to a 100 percent Northwood, I was planning on giving a graphical update of that next week at the analyst's meeting, so if you could hold off until next Thursday, I'd appreciate it.

OK. Thanks.

This is Charles Boucher at Bear Stearns.

Yes, hi. Just wondering if you - I guess you saw channel of business for the Pentium IV relatively healthy in the first quarter. Do you expect that to continue, going into Q2? Seems like there is some conflicting data points out there now on white box channel versus OEM demand, and I'm just wondering if you could add a little color to that?

Well, the channel business was off in Q1 from Q4 peak, and I think part of that was supply driven. As I said, we were short on some of the low-end Celeron products early in the quarter, as we moved the supply line to focus to insure we could meet all Pentium IV demands.

And towards the end of the quarter, as we caught up on Pentium IV, we were able to restock inventory into the channel. So you're probably seeing a bit more P-IV on the shelves than you did, say, a quarter ago.

I think that's good news, because it sets us up for the price moves for April, allowing us to have a strong sell-through in the performance line going forward.

Paul, if you - you still haven't seen much improvement yet in the corporate desktop market. Is there any indication that things are starting to move? Or, I guess the related questions, can you see a normal second-half without a significant pickup in corporate sales?

Well, we haven't seen it starting to move in large scale. I think we can all find anecdotes and companies and so forth.

I think that it would take some corporate movement to be able to deliver the kind of seasonality we're talking about, although, quite frankly, we continue to be pleasantly surprised with the organic growth in Asia Pacific.

Actually, I'd say I think we can get seasonality, even with out an up-check. Remember, in last year, in the recession we had, we still an uptake in normal seasonal units in the second-half of the year.

So, it doesn't take a lot of growth there. What it takes is business kind of staying steady.

Thank you.

We'll move on to

at DRKW.

Yes, just a question going back to how the PC market is going to be in the year 2002 - do you see consumer market becoming a much larger part of the PC market, compared to the corporate market? The spit historically has been around consumer 40 and corporate 60. Are you seeing a permanent change in that number, Paul?

Actually, we don't look at it that way,

.

Our view is that it's about a third, a third, a third, consumer, small business/home office, and large business. A third each of those large segments, and that really hasn't changed, particularly as you look at the growth in emerging markets. It tends to be a lot of small business and consumer purchase, and some governmental or corporate kinds of spending.

I don't see that pattern changing dramatically on the horizon.

But if you look at the emerging markets, as you said, one-third and one-third from consumer and small business, I mean the strength you are seeing, especially in Asia Pacific, would that be able to offset, even if the one-third corporate demand does not comeback strongly in the second-half?

Well, that was what Andy answered a minute ago. He views it that we can have a seasonal second-half without having the Western corporate markets rebound.

All right. Thanks, Paul. Congratulations for the quarter.

Thank you.

Question comes from Graham Tanaka at Tanaka Capital.

Hello?

Hi, Graham, we've got you.

Yes, congratulations. Just wondered if you'd talk a little bit more about the mobile market, which is looking pretty promising. And congratulations on your product introductions. Just wondering if you could talk a little about the sales mix, what percent might be mobile in units of rev, and then talk a little bit more about Asia Pacific, since that also looks so promising. Thanks.

You're right, we are very excited about mobile. It has grown to be a business that is now large enough for us to develop stand-alone, dedicate products for, which is the

product line that we'll be talking about at the analyst's meeting next week.

Going forward, I think this is a very, very strong market, and we are well-positioned for it.

In terms of size, we've never given out the numbers, but I would not argue strongly with "IDC/Dataquest" numbers, which put it in the 17 to 20-percent range of total PCs.

17 to 20 percent of the units?

Yes.

Wow, great. And then...

And growing faster than the desktop, obviously.

And then how about Asia Pacific? Just wondering if that's going to peak out a little bit in the second-half, or can it keep rising.

That's a difficult one to call. It's been pretty steady growth now for a long time. We still see good markets in China. We see good markets in India. I think it's still a healthy market for a while to come.

Thank you.

From CIBC World Markets, this is

.

Hi. Congratulations.

One quick clarification on the optical shrink - was that for both the 200 millimeter wafers and 300 millimeter wafers?

It'll ultimately be on all of them. It started out at 200.

OK. And then following up on that, just sort of, Andy, the cost reductions seem to be well ahead of plan. How much more room do you have to cut costs and sort of improve yields? Is there another optical shrink planned? Can you just give us some sense as to how far you can carry these gains or continue these gains?

Well, certainly, as we continue

, we see benefits from that. 300 millimeter is now in production, the

comes into production mid-year, and you start to see real benefits, you know, in 2003.

So I think we can continue to focus on cost. We can continue to keep costs flat to even down next year. So I think there's still room to reduce cost in that space.

Our pattern is to traditionally revise the transistors a couple of times a year, and that's how you get the shrink.

OK. And then along sort of that manufacturing line, can you give us an update on the 90 nanometer process technology roll out and any update on the Ireland 300 millimeter facility?

Well, we demonstrated 90 millimeter-based S-Ram cells and talked about that few weeks ago. That is a great building block for the process. We are on track with our development of our first microprocessor that will utilize that technology. It's code-named Prescott. We talked about that in IDF. And that product is second-half '03.

And Ireland facility - any comments?

No updates to provide on that yet.

OK. Thank you.

, Salomon Smith Barney.

Yes, Andy, the guidance that you're giving mid-point is sequentially flat, which if you look over the last five years, is a little bit better than the average, at least.

How did the quarter track? Was it a little bit stronger at the end of the quarter? And then, does your outlook require a meaningful pickup following the price cuts, particularly in late May? And then, finally, last question, is Q2 seasonally the period of greatest uncertainly on a, as I said, seasonal basis for you?

Several things in there.

In the first quarter, clearly, you know, it was more front-end loaded. If you recall, at the beginning of the quarter, we were still constrained, and we were doing everything we could to product. We finally got to build inventory towards the end of the quarter.

In terms of PC consumption, we think it was pretty linear. It was our ability to ship product that was a little skewed.

The second quarter - I can't call up the

quarter. I reserve that for Q3, but clearly it's a back-end loaded quarter. It's not unusual for people to look at April and May and start wringing their hands and say, "is it going to come in"? Then you find out in June how much back-to-school business you're really going to have.

If we have normal patterns, it says in June we'll have a pretty healthy ordering pattern for back-to-school sales in the third quarter, and we should be flat, just slightly down a little bit.

One thing we have going for us in the second quarter - if you remember what Paul said in his speech. In the flash business, we were down more than we expected to be, partially because - not because of consumption of cell phones, but because of inventory overhang in Japan. We think that's behind us, so that gives us a little bit of cushion as we head into the second quarter.

And then we can assume that chip sets and possibly motherboards - any connection with the Intergraph settlement? Motherboards could be up as well?

I don't think those are related to the Intergraph settlement, but clearly, you know, if we have seen some Q1 effect of the 845-G, you would see that in motherboards as well as chip sets, and when that product springs I think you'll see some uplift in both those businesses.

OK. Thanks.

Moving on now to

at Web Bush Morgan.

Yes. Good afternoon.

Can you talk a little - since I saw Ethernet going up in the first quarter, I was wondering how would that - would the Ethernet business or the comp group attract somewhat different seasonal pattern as the PC business for the rest of this year, as far as you could see?

Yes, and no, David.

It tracks it in the aggregate. I mean, if you were to look at the total available market, it tends to look a lot like the PC market, except that there's a more robust replacement market.

Second of all, our market segment share in Ethernet is not equal to our market segment share in microprocessors, so we can gain or lose share against competition during transitions, and what you're seeing in the Ethernet shipments since last quarter is reflecting us winning share in the gigabit transition.

OK. But normally you would expect that business to also trend up in the second-half as in the first-half.

As I said, in general it will follow the client pattern.

OK. Thank you.

Now this is

at Lehman Brothers.

Great. Andy, just with regards to the cost control, the current quarter revenues went down about 200 million versus Q4, but your cost of goods sold actually went down 250 million, so it went down actually more than your revenue. How much more kind of tracking that hard can you do in Q2, Q3, et cetera?

And then, sort of tied into that a little bit, your days of inventory went from 60 days to 72 days sequentially. What's sort of your target in terms of when you're comfortable with inventory levels? Because over the last several years, they've sort of varied a little bit. So where do you kind of feel like you've gotten them kind of back to where you want them to be?

On the first question, can we drive costs as hard in the second quarter as we did in the first quarter - it'd be difficult to see more points improvement, but I think I can hang on to the gains I got in the first quarter, which is why I said originally that, you know, a year number from 51 to 53 percent.

So I think we can hang on to what we have. I'm not sure I can drive more.

In terms of days, I actually would like to build a little bit more inventory. If we were in a more certain business environment, I'd probably be satisfied with where we are. You know, maybe remix it somewhat. But recognize, you know, we're forecasting, and as Paul said, we're planning for a seasonal second-half.

What I don't want to do is be caught short of product on the shelf if indeed a recovery or uptake comes.

So I actually have every intention in the second quarter of putting a little bit more in place, just to make sure we're prepared in case we need it.

OK. And maybe tied in with this a little bit, I think another caller had asked this question, maybe I can phrase it differently.

Several of the motherboard manufacturers in Taiwan have talked about weakness in their business in terms of their planning for Q2 relative to Q1 and most of that is related to white box.

However, your business, what you're seeing is, you're seeing very strong business related to that. Where do you sort of see the disconnect, if any, because several of them have come out and reported, you know, sort of the March month numbers fairly recently.

You hate to judge other people's business models when you haven't seen what they're doing and what they said.

When we began the first quarter, the quarter was booked. We forecast seasonal. Everybody said it can't be. Everybody is screaming for product, and we said no, forecast consumption.

My belief is some of the rest of the environment got caught up in forecasting backlog and forecasting consumption, and what you're really seeing is the aberration of Intel being a little bit constrained, causing people to forecast high, pull back their forecasts, and it's now trying to settle on the right place.

If you really look at consumption, Q1 was pretty normal. Q2, you always see a weak start to Q2. The quarter is made or not in June. It's really too early to start looking at week to week changes in motherboard demand, if that gives you an answer.

Thanks a lot, Andy. Nice quarter.

Continuing now with

at UBS Warburg.

Paul, some questions on unit trends and ASP trends. You said that excluding X-Box, that units were down slightly. If we look at servers, desktop and notebook, were they down uniformly in all three? Or were units up and down depending upon which - like, up in notebooks, or up in servers?

That's probably more granular than I'm comfortable putting out, Tom.

I did say that we had a very good quarter in mobile and servers.

OK.

You can do the extrapolation.

I will.

On ASPs, you said blended ASPs were up a bit. Is that a function of the mix of notebooks and servers, or was it more a mix, let's say, within desktop, a very strong P-IV?

It's primarily driven by the Pentium-IV ramp on the desktop.

OK. Looking forward in your roadmap, you talked about moving the two gigahertz into the sweet spot. Given the shrinks you've done - the optical shrink on 0.13 and the ability to improve

and your comment about getting three gigahertz into the market, can we go through this move of moving the two gigahertz to the sweet spot and not damage the blended ASP?

Oh, yes. I mean, that's certainly our objective, in terms of the premium product line, is to not do anything dumb there.

I think that the variable, though, isn't so much the premium mix, the two gig and above. The variable is how much low-end business, Celeron class business, there is out there that we could take. That tends to be a more forceful dynamic on the ASP on the downside.

And we are quite clear. We're going to continue to grow as much market share as we can.

All right. But within the performance end of the roadmap, we'll be able to make this transition and in that segment not do anything to damage the blended ASP?

We will certainly try to make that true.

Great.

And to take advantage of 0.13. We spent a lot of money getting to this position, and we certainly want to grab it while we've got it.

Very good. Go for it. Thank you.

You're welcome.

This is Ben Lynch at Deutsche Bank.

Yes, hi. You spoke about weak flash revenues in Japan because of high inventories. Could you maybe give us a rough feel for flash revenue breakdown by region, particularly Japan and Europe?

And several companies have been talking about strong 2.5 g handset demand in Q1, which should be very good for flash megabit shipments. Could you maybe reconcile their statements with what you've been seeing, please.

I doubt if we'll be able to help you too much. I'm not prepared yet to give you flash by geography.

What Paul did say in his opening comments, he said Europe met our expectations, so we did see that market unfold as we expected. It was in Japan where, if you looked in the fourth quarter, we had an inventory build and it had to be worked off.

So basically, in terms of the cell phone market, from what I've read other companies have been saying, it feels consistent, other than the fact we had an inventory issue in Japan that had to be worked out with our customers.

And you feel your flash units are consistent with strong 2.5 g related demand in Europe?

I don't want to be imprecise. You should ask them. But we are the leading market segment share provider of flash products. That's more so in cell phones than any place else. It'll be difficult for a conversion to take place without us being a part of it.

OK. Thank you.

A question from

at Gardner Lewis.

Yes, I had a follow-up question to

last question, actually.

You guys mentioned the Intergraph lawsuit settlement, and I think what he was trying to get at was, what we understand is that you have made a settlement, purchased a use license, for your microprocessors and for your motherboards, but not for your customer's systems usage.

And we thought that might drive your motherboard sales in that your customers would end up owning the intellectual property without having to go out and purchase it directly from Intergraph. So does that potentially change the mix?

And then the last part of that question is, your competition, being AMD, I guess, are they going to be required to purchase this intellectual property also, or is that just an Intel specific proposition? Thank you.

As far as the Intergraph settlement changed the mix of motherboards we're shipping, it's way too early to know that. The settlement was just announced yesterday.

I'd be real surprised if it causes the mix of the products we ship to be different. So, I don't sense that. But again, you are asking the wrong guys. You need to go ask the guys who place orders on us, whether they're planning on doing something different or not.

And as far as what AMD is doing, you really need to ask AMD that question.

Or Intergraph.

Or Intergraph, whomever.

OK. Thank you.

We'll hear now from Doug Lee at Banc of America Securities.

Hi. Two questions.

First, with the effect of the kind of flattish outlook in the second quarter, is it your expectation at this time that the channel mix and the OEM mix should stay relatively constant?

And then, secondly, on the networking IC area, still weak in the quarter, do you expect that to recover here as we go into 2Q? Thanks.

I would expect no change in the channel OEM mix. It's been plus or minus three points for five years. I don't see it moving outside of that range. It tends to go up and down slightly, by quarter.

In terms of networking ICs, I think we've characterized our view of the tel-co and communication customers as still being relatively soft, so I don't expect a wholesale recovery there.

Thank you.

We have a question from

at Angelo Gordon and Company.

The question's been answered. Thank you.

In that case, we'll move on to

with a question. Just a moment, please.

Thank you. Can you hear me?

Yes.

Two questions.

The gross margin was obviously very good in the quarter. You mentioned a couple of areas, the high areas SPs, the product mix and manufacturing efficiency, which, obviously, I guess, was 0.13. Can you sort of give a sort of rough idea of maybe the relative contributions of some of those areas?

It's difficult to do. What I would tell you is, they're all in the same ballpark. I can't mention something, morally, unless it's notable. And if one of them clearly dominates the other two, I'd have to point that out as well.

So you can essentially think of them as three pretty evenly sized buckets that are contributing.

OK. And also, can you comment on the current visibility from your customers, either purchase order, forecast, or both?

We keep trying to say that bookings aren't what we drive the business with right now. We actually look at the historical consumption patterns. We look at what the market is doing.

Certainly, you know, we have some customers taking shares, some customers not. We have different parts of the world doing differently.

You have, you know, China has been a good market. Asia Pacific has been a good market. So it's very difficult to plan this business right now based on a few individual opinions. What we really are doing is we're looking at what has happened year after year after year, making that the basis of what we do, and then making sure we're prepared to meet what our customers ask us to provide them.

Thank you.

This question will be from

at Neuberger Berman.

Yes, I've got a few short questions.

Andy, could you please comment why the depreciation was declined in the second-half of this year compared to the first-half of this year?

Sure, what happened there, there are assets that come offline occasionally. For example, there's an assembly and test plant that is being taken offline, and as you retire those assets depreciation will go down.

It's just a quirk of the system in the second-half as it's unfolding.

And when we think about '03, should we think about on the same run rate as what we see in the first quarter of this year, or is there a big difference for '03 depreciation?

I'm not ready to give an '03 depreciation forecast yet. A lot has to happen between now and then.

Secondly, if revenues were to grow during the second-half of this year, based on seasonality, and depreciation is expected to decline, why will the gross margins stay at 52 percent if you're already doing 53.6 in the current quarter and expect 52 percent in the second-quarter? Why should gross margins be not substantially higher?

We're not doing a quarter by quarter forecast. We're doing a full year.

If you have a 51.6 in your first quarter, you have a 53, plus or minus, in the second quarter, that would tend to imply you expect your second-half to be above your 53 average.

So you are taking 51.4 instead of 53.6?

Correct. 51.3, I believe.

All right. Just one last question. In '96 - '97, you were running about 20 percent operating expenses, but today you are running about 30 percent operating expense. How should we think about op-ex over the next four to six quarters?

In general, you should think our goal is to keep that approximately flat, and as revenue grows to continue to let the percentage drift down.

So what will happen is, spending, headcount, approximately flat. If we do have some seasonal growth in the second-half and we have an economical pickup, take advantage of that to get the percentage back down.

Can you give us some percent that you are targeting?

No. To do that, we'd actually be giving a revenue forecast, since I'm going to hold dollars confident, I'm not really prepared to give revenue forecasts for the second-half, for next year.

Operator, we'll take a couple more questions, please.

All right, next up will be

at Frederick Research.

Yes, congratulations. Thank you.

Could you give us any insight - I'm sure you have somebody who works on this - to what degree does it now appear that the period in which PC sales were maybe inflated by selling in the channels, and then the shrinkage to direct, more direct, but also, you can just look around and see all these special's people have in MMX's - MMX computers. How much do you think of the current demand and the past demand are not as cyclical as they appear because of the fact that there is this hangover from earlier that's somehow come out of wherever it was, in channels, that didn't get sold and now it's being sold against newer products that - I think I've seen some at $200. Obviously, there's some issue here as to whether real demand is down or whether it was inventory that was in the channels.

That's a tough one. What we clearly believe at this point, in hindsight, is that the market was overheated in the last-half of '99 and the first-half of '00, from two drivers. One was the Y2K buy ahead, and the other was the entire Internet bubble.

When you look at overall PC consumption, by market, by geography, over a 10, 15 year period, that bubble sticks out, but nearly as acute as it does in our memory. And what Andy hinted at earlier is that what we've gone back to is looking at the long-term consumption patterns, the econometric drivers of desirability of PCs, affordability of PCs and so forth, and that's been a much better predictor of the market over the last two or three quarters than anything else we've seen. And we're going to stay with it and continue to refine it.

Last question, operator.

That'll be from Mark Edelstone at Morgan Stanley.

Thanks. You guys did a good job just talking about your own inventory, and Paul you mentioned as well, you might have as well, Andy, that we saw channel inventories move up a little bit, and certainly explainable since they got drained pretty significantly second-half of last year. But can you give us a sense as to where your comfort level is there and where you'd actually like to see the channel inventories go over the next few months?

You mean our distributor channels or our customer?

The distributor channels.

They're about where we'd like them to be. Maybe a little bit light on some of the product lines, but in terms of weeks of inventory, it's still under our guidelines, and in terms of mix, we could flush it out a bit better.

The numbers are there, about what we would want.

And then just one final question, if I could, Andy. In Q2 you suggested there was going to be another charge to the Intel capital portfolio. Do you think that we'll have that now marked to market here at the end of Q2 and be able to see real interest income in future quarters?

I can't say that for sure. The way the system works is, that portfolio is not marked to market. That portfolio is under the SEC classification of a public company. It is valued at the public market price, but it's held over a period of time. It's only written down after it's been underwater for like six months.

So what's happening is, as the market is stabilized, I think you'll see it become less and less, and you'll see it be a smaller and smaller number, but I don't think it goes away.

OK, great. Thank you very much.

You're welcome.

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