英特爾 (INTC) 2003 Q1 法說會逐字稿

Please stand by.

Good day, everyone.

Welcome to the Intel Corporation's first quarter earnings conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you.

Welcome to the Intel first quarter earnings conference call.

Attending from Intel are Andy Bryant, Chief Financial Officer and Paul Otellini, President and Chief Operating Officer.

I'd like to remind everybody that the earnings release and this conference call are available on our Website at INTC.com.

For those of you who may have not seen the quarterly earnings report revenue in the first quarter was $6.75 billion, and earnings per share were 14 cents.

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.

The specific forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rate, interest and other income, capital spending, depreciation and amortization of acquisition-related intangibles and costs.

These statements do not reflect the potential impact of any mergers, acquisitions, divestitures or other business combinations that may be completed after April 14, 2003.

Lastly, if during this conference call we use any non-GAAP financial measure as defined by the SEC in regulation G, you'll find on our Website INTC.com the required reconciliation to the most directly comparable GAAP financial measures.

I now want to introduce Andy Bryant who will discuss the first quarter earnings results.

Andy?

Thanks, Doug.

Operating results for the company's as a whole were consistent with our outlook in January and March.

While the microprocessor business was slightly stronger than expected, we encountered unexpected weakness in flash memory sales.

Gross margin exceeded our forecast to profits to circumstances that we did not forecast and do not expect to happen in the second quarter.

Revenue of $6.75 billion was down 6% from the fourth quarter in line with historical patterns and approximately flat with the first quarter of 2002.

Unit shipments of Intel architecture microprocessors were lower than the fourth quarter as were unit shipments of motherboards, flash memory and Ethernet connectivity products.

Unit shipments of chipsets were flat.

Intel architecture revenue comprised largely of sales of microprocessors, chip sets and motherboards was $5.8 billion, down 3% from the fourth quarter, and flat with the first quarter of last year.

The Intel architecture business continued to see new orders for the end of the quarter and its revenue was the high end of seasonality.

A decline in sales of flash memory products took revenue for the wireless communications business down by 29% sequentially to $473 million.

This represents a 3% year in year increase.

On top of a normal seasonal decline from the fourth quarter, sales fells some individual customers adjusted their demand for our products in response to price increases.

In the networking business, revenue was $503 million, down 8% from the fourth quarter, and 3% year on year.

Gross margin percentage of 52% compares to 51.6% in the fourth quarter and 51.3% in the first quarter of 2002.

Margins were higher than expected due to a number of factors, but the primary drivers were unanticipated events that we do not expect to recur in the second quarter.

The first of the unanticipated events was that we were able to sell some inventory primarily microprocessors and chipsets which had previously been reserved.

In addition, start costs came in less than we had forecast as the manufacturing group made progress on its cost and productivity goals.

The net result of these is that our overall gross margin was approximately 1 to 2 points higher than I expected.

Operating income of $1.4 billion was down 5% from the fourth quarter and up 6% from the first quarter of 2002.

All of the operating profit came from the Intel architecture business where operating profit was $1.9 billion, down 4% sequentially and up 6% year on year.

In the communications businesses operating losses were $140 million for the networking group and $94 million for the wireless group.

Spending on R & D and MG&A was $2 billion, down 4% from the fourth quarter and flat with the first quarter of 2002.

The size of the work force at the end of the quarter was 79,200.

Our plan for the year is to continue to reduce the size of the work force modestly by absorbing most of the attrition and redeploying people from lower to higher areas of productivity.

The total for interest income, other income and gains and losses on equity investments was a loss of $75 million, greater than the loss of $100 million we expected in March.

Within this category of income sales, interest and other income was $52 million.

The net loss on equity investments was $127 million, primarily as a result of impairment charges.

Interest income was higher than forecast, and impairments were lower.

Net income of $915 million was down 13% from the fourth quarter and down 2% from the quarter a year ago.

But comparisons with other periods are complicated by tax and litigation items.

Fourth quarter results reflected a $75 million tax benefit on two divestitures that increased earnings per share by 1 cent.

In addition, the first quarter 2002 results included a pretax charge of $155 million related to a litigation settlement agreement which had an after-tax impact of 1.5 cents per share.

For 2003, our tax rate is higher than it was last year, as we ramp our 300 millimeter capability and produce more units in the U.S.

Diluted earnings per share of 14 cents is down 13% from the fourth quarter and flat with last year, when a charge related to legal settlement took earnings per share down by 1.5 cents.

Basic earnings per share in the first quarter, which does not include potential dilution, attributable to employee stock options is also 14 cents.

We have made good progress over the last two years in reducing the number of shares outstanding.

In the seven quarters since the total peaked in the second quarter of 2001, we have reduced basic shares by 2.5%, or 169 million shares.

With the quarter just ended, average shares were calculated diluted earnings per share was 6.6 billion.

During the quarter, we repurchased 63 million shares at a cost of $1 billion.

On the balance sheet, inventories decreased by $112 million, or 5%, mostly in finished goods.

Cash, short-term investments and fixed income trading assets ended the quarter at a total of $12.2 billion, a slight decrease from the fourth quarter.

After 1 billion in capital spending and the 1 billion on stock buybacks.

In summary, then, for the first quarter, revenue of $6.75 billion, flat year to year, and seasonally down from the fourth quarter.

Gross margin of 52%, better than anticipated due to circumstances that are not expected to recur.

Spending slightly down and headcount flat with the fourth quarter.

Operating income of $1.4 billion or 21% of revenue, fully diluted and basic earnings per share of 14 cents.

As we turn now to the outlook for the second quarter, please keep in mind that all the forecast data excludes the effects of any new acquisitions or divestitures that may be completed after April 14.

Let me also remind you that with today's release we are discontinuing the practice of providing income excluding acquisition-related costs and the associated earnings per share figure in our earnings releases.

With clarity of communication, in an effort to avoid long, tortured sentences, I'll use the mid-point of forecast ranges by making comparisons to prior periods.

We expect revenue in the second quarter to be between 6.4 and $7 billion.

The mid-point of this range would be year to year increase of 6% and slightly below the first quarter.

Intel's second quarter tends to vary, but in four of the last five years , revenue has been sequentially flat to down.

Gross margin percentage in the second quarter should be 50% plus or minus a couple of points.

The 2 point sequential decrease is due to a number of factors.

Primarily higher expected startup costs and expectation that the benefit from the sale of previously reserved inventory in the first quarter will not be repeated in the second.

The 50% midpoint is 3 points higher than the second quarter of 2002, and $106 million pretax charge related to the closure of our web-hosting business took 2 points off gross margin.

Spending should be between 2 and $2.1 billion, approximately flat compared to $2 billion in the first quarter.

Our estimate for gains and losses from equity investment and interest and other income is a net loss of $20 million.

This includes a net loss on equity investments of approximately $60 million, compared to $127 million in the first quarter.

Loss was primarily the result of impairment charges.

Depreciation is expected to be approximately $1.2 billion for the second quarter.

And amortization of acquisition-related intangibles and costs should be $80 million.

In summary, this was a quarter of solid financial performance.

Inventories have come down, impairments are lower, and we continue to drive costs down.

No one can predict global events but we are convinced we're doing the right things to keep this company in the best financial condition possible.

Although we don't yet know the long-term implications, we are encouraged that in both the fourth and first quarter, the Intel arc tech business delivered results for the high end of seasonality.

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

Thanks, Andy.

As Andy mentioned, Q1 revenue was lower, but in line with normal seasonality.

With our Intel architecture business performing better than expected, helping to offset weaker flash memory sales.

Within Intel architecture, we saw very strong shipments of mobile products.

Desktop and server revenue were about as expected.

Overall microprocessor ASPs were slightly higher primarily due to a seasonal drop in Xbox processor shipments.

ASPs for the computing market were approximately flat.

Our results on a geographic basis were about as we expected, and in line with seasonal patterns.

Japan was higher sequentially, which is normal in Q1, while the Americas, Asia-Pacific and Europe were all seasonally lower.

Europe was 5% higher on a year-over-year basis despite a reduction in flash revenue, thanks to strength in small to need medium business and in emerging markets, notably Russia.

We are also seeing some corporate PC upgrades in western Europe.

The Americas region was down 11% sequentially.

Demand was in line with our expectations as channel strength partially offset our revenue shift towards Asia , which continues to grow as a global manufacturing center.

We would expect the Americas to continue to fall as a percentage of Intel's overall revenue as more of our products such as processors for the notebook segment and chipsets are directed to Asia for assembly.

Asia-Pacific was up 7% year over year, and now accounts for 39% of revenue.

We continue to see strong emerging market growth in India and China where sales rebounded following the lunar new year celebration.

Our channel sales out remained healthy, with only a modest seasonal decline following near-record levels in Q4 and up nicely from one year ago.

Channel sales were solid across the quarter and included a pickup in the month of March.

As I mentioned earlier, the Intel architecture business results were led by strength in shipments of mobile products as mobile growth continues to outpace total PC growth.

The highlight of the quarter was the Centrino launch, Intel's first product embodying the convergence of computing and communications, with product announcements from all of the world's leading mobile PC makers.

Initial demand for the product has been very good, and we expect a steep ramp into the marketplace in coming quarters.

We shipped hundreds of thousands of Centrino products in Q1, and plan to ship over a million in Q2.

Our goal is to exit the year with the majority of our mobile shipments on Centrino mobile technology.

We also announced relationships with leading Wi-Fi network providers along with airports and major hotel chains and retailers from around the world.

We have over 50 such agreements and 17 countries and more than 10,000 locations are now verified for Centrino.

In Wi-Fi, we are shipping 80211B in high volume and are working to deliver 80211A at midyear.

At the same time, we are working with our customers to accelerate our 80211G road map.

Lastly, we have silicon on our 90 nanometer mobile processor code named DOTHAN and are making excellent progress towards a second half introduction.

Our desktop business saw a seasonal decline in Q1.

Offsetting our growth in mobile.

Desktop ASP and our mix of performance versus value microprocessors were both approximately flat from Q4.

Yesterday we launched the Intel 875P chipset which includes a dedicated bus for the ether at the time technology that can double the networking bandwidth.

It also supports DDR 400 memory, HEP8X graphics, integrated serial ATA and Raid.

Later in the quarter, we will launch a chipset code named SpringDale that brings many of the features of the 875P to the corporate desktop and mainstream consumer PCs.

SpringDale includes integrated graphics and will become our new stable platform for the corporate desktop.

We have already shipped hundreds of thousands of these chipsets in Q1 and plan to make this our fastest ramping chip set family ever.

In addition, these chipsets will provide a high volume launch vehicle for Presscot, which is our next generation desktop processor based on 90 nanometer technology.

I'll have more to say about Presscot at our spring analyst meeting in New York on May 15.

For the values segment, we continue to position our Celeron processors as being equal to or better than the best products available from our competition.

We strengthened our lineup with Celeron processors at 2.3 and 2.4 gigahertz and have the ability to further accelerate our value road map during the year.

Intel's server business was down slightly in Q1 as expected coming off a very strong Q4.

We launched two new Xeon processors for DP servers and work stations at speeds above 3 gigahertz.

We also accelerated the Xeon road map and plan to launch DP versions with a one megabyte cash in Q3 with new 90 nanometer products coming later this year.

We have a number of new Itanium products on the horizon.

Our .13 micron product code named Madison is on track for launch around the middle of the year.

Madison is designed to drop into existing Itanium two system designs and deliver another 30 to 50% boost in after performance.

In the second half we plan to launch Deerfield, a lower power version of Itanium for DP work stations and servers.

Our wireless product group had steep revenue decline due to weakness in flash.

Our flash shipments are typically down in Q1 from a seasonally high Q4 driven by purchasing patterns of cell phone buyers.

Our drop in Q1 was exaggerated by lost business incurred as a result of our flash price increase at year end.

The combination of these two events likely caused us to lose market settings segment share in the quarter.

Looking forward, we continue to believe that the hand set market is moving to higher density flash, and we are well positioned to take advantage of that shift.

For more near term business, we are committed to doing what it takes to maintain our flash leadership position and to regain market segment share.

In the applications processor side of our business, we continued to gain traction with Intel X scale technology in cell phones.

During the quarter, we saw product announcements by Samsung, Hitachi , Mytak international, and Maxon telecom.

We also achieved an important milestone in our strategy to drive the convergence of computing and communications.

We announced.

The PXA 800 F formerly known as Manitoba which is the industry's first product that includes flash memory, logic and baseband functionality all in the same chip.

This product is sampling to customers today with production scheduled for Q3.

The Intel communications group performed about as we expected with a seasonal drop in revenue.

All though Ethernet connections were down sequentially, we had a number of product launches in this area including the world's first network interface card for servers.

Along with a new gigabit Ethernet controller that can double the performance of desktop PC LAN connections.

We also introduced three network processors for home and small business networking equipment.

Linksis announced it is using one of the devices in a new generation of 80211 wireless access points for small to medium-size businesses.

In summary, our microprocessor business did a bit better than expected in Q1, led by growing demand for notebook computers, paced by the introduction of Centrino mobile technology.

While our flash business results were disappointing, we are committed to growing this business and returning it to profitability.

Our X scale processors continue to gain customer support in PDAs and cell phones, and we launched several new gigabit Ethernet products for the enterprise.

Most importantly, we saw a great deal of progress on our strategy to drive the convergence of computing and communications with the launch of Centrino for mobile PCs and the sampling of Manitoba for the cell phone market.

The second half ramp of 90 nanometers will allow us to continue to this momentum and bring even more exciting and innovative products to the marketplace later this year and into 2004.

With that, let me turn it back over to Doug.

Thanks, Paul.

We will now open the call for Q and A in the interest of moving along and giving other people a chance, please limit yourselves to one question.

Thank you.

Operator?

Thank you, if you'd like to ask a question , please signal by pressing star-1 on your telephone keypad.

Again, star-1 to ask a question.

We'll pause for just a moment.

First up today will be Mark Edelstone, Morgan Stanley.

Yes, good afternoon, I guys.

I guess, Andy, for you, on the gross margin that you had in the quarter, you mentioned it was 100 to 200 basis points of unexpected upside and that came from slightly better than expected manufacturing, but mostly from the inventory recapture.

Should we assume this is like 80 to 90% comes from inventory recapture, or how should we split that out?

No, both of them are notable.

It's actually a pleasant surprise to me in the ability to contain the startup costs in manufacturing as well.

According to the rules we play by, I can't list them unless it's a noteworthy event.

What happened was, as you said, we got the recapture of inventory.

That happens periodically, but this time it happened to a pretty large extent.

On the startup costs, the one of the things we asked TMG, the manufacturing group to do at the beginning of the quarter was to see if they could attack the period costs with the same guts they were attacking the manufacturing costs.

What you do there is, they slow down hiring ramps, don't start as many test wafers, so it's event after event after event.

I would say about half of that savings is actually real savings to the company.

You know, the other half is probably appreciable in the second and third quarter.

Just as a follow-up, shouldn't we expect the better than expected performance then to continue when you move through the rest of this year?

You know, while I'd like to see it, Mark, it's -- I've actually, you know, again been pleased with, you know, the manufacturing guys focus on costs and the benefits we've seen.

So I'd like to say yes, you know I'll give you the 50% plus or minus in Q2, and I'll also tell you a lot of it's going to depend on volume.

If we see any kind of decent volume in the second half, I think we'll see good costs.

Thanks a lot, guys, on the solid quarter.

We'll be going to the next question, Adam Parker, Sanford Bernstein.

Hi, I'm just trying to reconcile the difference, what happened sort of at the end of the month there, difference between your guidance at the mid quarter call and then sort of the 24 days that followed it in terms of -- you know you just got asked this question, but you said here the gross margins were different because you had, you know, some lower than expected startup costs.

How does that change in the -- and you said there's sort of significant.

How does that change so much in the last sort of three and a half weeks of the quarter?

What you have to do, as you run through the quarter, is, again, as I said, we're trying to ask the manufacturing guys to save money and push out the costs.

So what you have is an update on March 6 which is base odd data that's a week or so before that.

And remember that manufacturing startup costs are ramping throughout this year.

So March was the biggest month in the quarter for that, it's the biggest opportunity and is the place whether you can push or attack, you have the best chance of pushing them out.

Quite frankly, we weren't sure we'd make it, how much we could deliver.

It's the same thing on the recapture of reserved inventory.

If you recognize the way the system works, we have $2 billion in inventory spread all over the world.

Once I’ve written it off, you can't but it on the books.

I can't take a recapture.

So it's not easy to forecast.

Because I have gone out on a limb and said, I'm going to get something, probably.

I could not quantify it for you at the time.

Okay.

Well, why do you think you won't be able to capture more of that inventory here in this quarter?

I don't think I have any reserve that I can go off and do anything special with.

You know, again, could I be wrong?

Of course I could be wrong.

One of the things I'm proud of is, you know, this is Intel.

We do look at assets that are reserved and say, can we make use of these?

You know, we do look at things like, you know, test wafers were for new processors and say, can we do with fewer of these?

So we'll continue to attack those.

All I can do is tell you I've given you the forecast that I think I'm going to get.

I don't see an extraordinary recover reserved inventory, I certainly see an increase in startup costs in the second quarter.

Just one more question.

When you look back at your seasonality in Q2, I think six of the last seven years it's been down Q2 versus Q1.

So you know, the mid point of your guidance on revenue implies that you think things are better than that historic seasonality.

I'm just trying to get feeling for what gives you that confidence that your top lines are going to be stronger quarters than it was in the prior, you know, years?

Sure.

It's, again, it's one of those questions that if you said defend the death forecast these days it would be tough for anybody.

But what's happened gives a little confidence.

If you recall in the fourth quarter, the Intel architecture business came in better than expected, towards the high end of seasonality.

The first quarter, again, the Intel architecture business came in at the high end of seasonality.

So we've seen something in the last two quarters we hadn't seen in almost two and a half years.

Which is instead of being at the low end, we saw it come in at the upper half of seasonality.

You talk to customers and see what's happening out there.

You look at inventories.

We don't see any sign of an inventory build.

Our own inventories aren't building.

You look at the data and say, it feels different.

Does it feel like a recovery ?

No, but it feels modestly better.

What I don't want to do is get carried away.

But yeah, we actually feel more confident.

And you feel that from any commercial, you know, any sort of fortunate fortune 1,000 guys ordering or, you know, more PCs and then you're seeing the trickledown effect or just kind of general, you know, gut feeling.

We tend not to have -- you know, that specific detail, but we do see the worldwide effect.

You know, we do see the growth in the channels.

We do see -- as Paul said, we see mobile right now being as a strong area.

Again, I don't want to oversell this.

I don't want to say, thank God, wee we see a recovery.

We have a hard day that says this is going to happen.

All we can do is give you our best feeling for what the second quarter looks like.

Okay.

Thanks, I guys.

A question from JP Morgan's Chris Stanley.

Thanks , guys.

Since gross margins appear to be better than expected, I don't think you changed your gross margin guidance for the year.

Can you give us the reasons behind that?

Sure.

You know, gross margin for the first quarter I expected 50 plus or minus a couple pointed, we were at 52%.

The second quarter pretty much the way we originally expected.

So if you take, you know, a couple points and spread it out over the year you maybe get a quarter point difference or half a point difference.

At this point, I wouldn't make a change on 51 plus or minus a few.

For what I think is a non-repeatable first quarter event.

Got it.

Can I ask a quick follow-up question?

Sure.

How's April been so far, and a couple of other semicompanies have commented on war and SARS, and you seem to have very good visibility into Asia.

Have you seen any effect from war and SARS out there?

You know, it's hard to answer that question.

What effect we've seen is certainly sort of a guidance, I don't know whether there's, you know, anything happening, and we talk to customers we see order trends, I don't know if it's already out there.

We put nothing in here that says we see a change in what is already happening.

Certainly, I believe both of those, as well as the economy, are three big uncertainties that could, you know, make a change to what we're doing here.

As of today, we don't see anything dramatic in any of those three.

So April has been as expected?

April is as expected, you know, again, I don't want to make a call in two weeks.

But nothing's happened in the first two weeks of April that cause me any concern.

Okay.

Thank you.

Joseph Osha at Merrill Lynch is next.

Hi, yeah.

Two questions.

First, as we look into the second quarter, with the sequential impact of Xbox perhaps reduced, can you comment about what your outlook for average selling prices is?

And then secondly, to what extent is the ramp of Centrino impacting the overall outlook here?

Thank you.

You're right that, Joe, that Xbox is likely to be lower, typically been lower in the second quarter than the first quarter.

So that would have on average a slightly positive impact on ASP.

But you have to remember that at this point in time it becomes a fairly small part of our shipment.

Right, I was more -- the question actually was more driven by the observation that, yeah , I mean , by 2Q it seems like Xbox does not have much of an impact, so I was trying to get insight into what the situation looks like x-Xbox, if you will.

Right.

I'm sure you're aware we don't typically give guidance on SP ASPs going forward.

I will say on the first quarter results, I'm encouraged by the overall volume we saw in our mobile business this quarter.

It approached near record volume numbers in terms of units.

I think that it is indicative of a longer term trend towards notebooks.

And we are -- we believe we're in a great position to take advantage of that.

So you know, the faster Centrino ramps, the overall impact on our pricing is positive.

Okay.

And then the second question, to what extent is the Centrino ramp?

Because you're sort of hitting the sweet spot here, perhaps distorting what would otherwise be quote, unquote, normal seasonality?

I don't think we've begun to touch the sweet spot.

I mean, it's moving into the volume segments very rapidly, but, you know, corporate cycles take quauls, and consumer cycles back to school and holiday.

So I would expect the volume to continue to pick up over the course of the year.

On that product.

Okay.

Thank you very much.

We'll continue with Nimal Vallipuram.

DRKW

Andy, you just mentioned that in the fourth and first quarter that you have seen some buyers, some, you know, positive buyers, you know, what are the indications you were getting from the corporate or the consumer customers.

I think this is probably the first time you have indicated that for a long time.

Just want to see how significant are you taking that from the PC market, and also, can you tell us what do you think of the PC market going to be doing beyond the second quarter and the second half of this year?

Okay.

In general, again, I don't want to declare a recovery.

I don't think it's that.

But to see two quarters of the Intel architecture business being at the high end of the normalcy patterns versus two and a half years of being at the low end is, I'd say, slight encouragement.

Certainly it gave us a little bit of courage to be able to forecast the second quarter.

We think that upper end of the seasonal pattern as well.

So I don't think it's ground swell, I don't think it's a big change.

It's certainly still inside seasonal patterns, but it's more pleasant being at the upper end of those ranges than the lower end of those ranges.

What was the second -- was there a second question in there?

Yeah, if you can comment on the PC market from what you're seeing beyond the second quarter in the second half of that this year?

At this point I'd really rather send you to an external source to do PC market forecasting.

We typically don't provide a forecast.

And with the all the uncertainties out there, I'd really be reluctant to right now.

All right.

Thanks, Andy.

Question from Tom Thornhill, UBS Warburg.

A question to Paul.

With regard to the mix of mobile versus desktop, the -- we've estimated the historical number roughly in the 20% range or below mobile relative to desktop.

Sounds like desktop is down and slowing, as you've suggested.

The strength of Centrino, how far to you think this can drive that mix, as you go through second quarter and then perhaps end of year or an out period of your choosing?

Well, Tom, you're right.

We haven't given a breakout between the mobile and desktop, although it tends to be most analysts would have it under 20% historically.

And the issue has been that in most emerging market growth has been desktops.

So as those markets have grown, it's kept the overall percent of the market that is notebooks a bit more constrained than you would normally think, living in the United States or western Europe.

If you look at corporate purchases or even North American or western Europe purchases, it's a much higher percentage than it is on a worldwide basis.

And part of that is disposable income have opportunities to purchase a bit more expensive of a computer.

And people used to notebooks, you know, going portable is an opportunity that once you've gone in that direction , it's seldom people go back.

So I think that part of this is driven by price points and by wireless infrastructure, both of which we're trying to address.

Some of them with building materials issues and some of them with working on things like screen costs.

Our objective long term would be to try to drive that percentage of the clients up pretty dramatically.

I'd like to see it be double what it is today.

That would put it somewhere between 35 and 40%?

That's a good range.

Thank you, Paul.

Move to the next question.

John Lau, RBC capital.

Thank you.

Following up on the Centrino question, you mentioned that the majority of mobile shipments in the second half of 2003 will be Centrino.

Would that imply, then, that you're projecting over half the notebook market will be the Centrino, and is that how fast the adoption rate is occurring for the Centrino platform?

Thank you.

Yeah.

John.

What I said was that we'd expect to exit the year, this year, with the majority of our shipments v being Centrino.

So I see the conversion happening fairly rapidly.

Because that implies that virtually all of our performance products, the Pentium class products, if you will, will convert in this time frame.

So exiting the second half being, let's say the Q4 time frame, the adoption rate is very very strong for those future sets, then?

That's our expectation.

Great.

Okay.

Thank you.

Charlie Glavin with ThinkEquity.

Andy, kind of coming back on the SARS issue, even though you guys haven't seen any direct impact, you guys did cancel IDF.

And given the 40, 45% of the Asia sales tend to come to the mom and pop channels either through gids or IPDs, is there a potential for more of a longer range as you've had to curtail some of the face-to-face development efforts with those groups, particularly on the launch of some of the new projects?

And if so have you guys taken any sort of contingencies, particularly some of the shipment channels are also curtailed, not just cap 8 Pacific but other ones you may be using for air freight?

Let me take that one, Charlie.

Working backwards from IDF to shipping, we stopped the IDFs to some extent at the request of host governments who asked us not to convene large groups of people in the multi-thousands at a time when there was -- they were concerned about the spread of the disease.

And part of which is concern for safety of all involved.

We have not stopped talking to customers, certainly not stopped our one on one conversations or our local meetings.

We've taken the IDF material, and we're making it available in smaller formats and online versions.

And for the -- for all of the dealers that you mentioned that are in the Intel network, we've always had a 100% capability to talk to them and train them online.

And so we're using all of those capabilities.

So I don't see any interruption of the information flow being at work here.

In terms of traffic, and carrier capacity, again, no issues at all.

Getting product in or out of the countries that are most affected at this time.

And you keeping mostly A FAEs and TSEs in place for the channel programs?

Oh, yeah.

Absolutely.

I think our Hong Kong office will was shut down for a couple of days.

One floor was shut down for a couple days for cleaning.

To my knowledge, that's the only impact we've had.

Our employees all have notebooks so they worked at home.

Nice plug for Centrino, Paul.

You're welcome.

Move to on to John Barton, Wachovia Securities.

Yes, good afternoon.

On the topic of flash, I don't want to put words in your mouth, but longer term you do expect the capacity to be tight at the high end, you know, out in time.

But I think the statement I heard was you'll do whatever it takes to maintain market share in the shorter term.

Am I correct that you may be moving off some of your price increases over the shorter term?

We do believe that the move towards higher density phones is inevitable.

And, you know, in hindsight we may have miscalled the rapidity of that move.

But we still believe it's inevitable and we're well positioned for it.

In terms of short-term pricing actions and product actions, we're looking at a number of alternatives including the pricing and or reengaging with low den density products more aggressively than we have in the past.

Do you think there's any, you know, vengeance, so to speak, on the buyers side in can you go out and meet pricing and get that market share back, or do you think you're actually going to have to come in below that to impact the margins in that business?

That's one of the things we're talking about right now.

We obviously want to try and keep the momentum towards our newer products intact.

Examine that's where our focus is.

Thank you.

We'll hear from Jeff Shriner, MS Capital Management.

I was wondering, Paul, if you could comment on the YMac Inc. and how this is going to benefit Intel in the formation and if this is possibly a way to get technology cheaply involved into Centrino?

You mean the 80211 --

I believe it's called YMac Inc., sir.

Yeah, the same thing we announced last week.

Right.

We're excited about that technology.

We have our own product development.

We've made some investments, which we have announced.

I think at some point in time it makes sense to have that as an option in Centrino.

The standard is not anywhere near being solidified, and we try not to ship products before the I triple E standards are endorsed.

So you know, watch that space.

Watch the space, okay.

One quick follow-up, with the strongs sales into the channel, could this be a setup for lower sells going into the back half of the year, with such strong sales as was mentioned earlier on the call?

I was referring to the distribution channel.

Is that the heart of your question ?

Basically, yes, sir.

So no, I don't think that's a setup for anything.

It just says that those channels tend to be stronger in emerging markets as a percentage of our business.

And I think it's more of an indicator that those markets continue to be pretty robust.

Pretty robust at this time for you?

Yeah.

Thank you very much.

From SoundView Technology is Hans Mosesmann.

Yes, thank you.

Question on Centrino again, in terms of the value that you have or it goes into a notebook for Intel, I assume it's going to be higher than the standard processors that use along with the chipsets.

What kind of increase in the value or ASP do you get with the Centrino solution versus a Pentium 3 mobile or Pentium 4 mobile?

Well, Hans, that's a tough one to answer because we've had a fairly good market segment share of chipsets with our microprocessors in the past.

With Centrino, a couple things are happening.

It is a top of the line set of SKUs.

It is a couple of chipsets, one with graphics, integrated and one not.

And, of course, the wireless solution.

On average, I think that will take our footprint or revenue per notebook up slightly over time from with it's been.

But it's kind of a mish mash because we've always had a communications presence on the Ethernet side.

Right.

But so a 5, 10% increase over time would be something you would expect?

I really don't want to put a number on it.

I would just like to continue to drive it upwards.

Thanks a lot.

This is Ben Lynch, Deutsche Banc.

Yeah, I'm going to move back to a couple of questions and maybe try to ask them a different way.

One for you, Paul, if we say typically Q1 is down 3 or 4% and you're guiding now to negative 1% or so how much of that would you put down to Centrino versus just maybe slightly better than normal seasonality?

And also, I'm interested to know how much of the uptake for this new device is the whole package versus just the band use processor?

And then I have a follow-up question for Andy, please.

I don't know that I can tell you how much of the midpoint of the guidance of revenue is tied to Centrino because we tend to look at the bottoms up and then overall at macro economics and take a judgment call, as Andy pointed out in terms of our best effort.

So it's very difficult to point on to any one product.

Particularly in its second quarter of production.

Okay.

If terms of the overall value prop decision, I think one of the things we bring to the party here is the weight of our advertising, and the presence we have with all the hot spots, the logo and hot spots that we've now established around the world approaching 10,000, tends to raise the lowest demon denominator in a notebook.

I think one of the lasting impacts in Centrino is that it will be very difficult to sell a notebook that doesn't have wireless going forward.

Intel's or someone else's.

We've raised the lowest common denominator.

And I think that's exciting because it changes the use model for computing, and when that has happened in the past, it drives growth.

The last time this happened was multimedia with the Pentium and with the Pentium II, the Internet boom.

So this is as fundamental a shift in usage patterns that as we've seen in those prior two booms.

So you're saying most people are going for the full Centrino package versus just the band use?

At this point the majority of our processor shipments in that family are Centrino, yes.

Okay.

Great.

And then question I had for Andy please.

Hopefully I didn't get it wrong at the time, but when I spoke to you in March, I got the impression that by the end of Q1 you guys were willing to be a bit more committal on, you know, what your flash pricing strategy was going to be.

You were going to leave Q1 and say, it's worked or it hasn't worked, and we'll do this as a result.

And now it feels like you're still sort of, you know, thinking about it and you haven't come to any firm conclusion yet.

Probably the only firm conclusion we came to that was a customer reaction was much stronger than we expected.

Revenue was down more sharply than we expected.

And we have a determination almost an obligation to fix it.

But you sort of -- it feels like you've understood that for almost two months now.

Well, I disagree.

We've had a lot of discussion inside that we knew there would be some reaction.

We were trying to get a handle on how fast the leading edge capacity of products would grow, the new products.

They've been not as much as we thought and the reaction to the what I call the sweet spot of the flash market is much stronger than we thought.

And you're right.

We're not going to pick a day and say we've done A, B, C, D and E , but we've said we'll do what it takes.

Do you think you'll make any final decision in the next month or so or we're not going to hear about it, it's just going to sort of happen in the background?

Well, the decision we make we won't share broadly.

There will be the decisions by customers, by product, by whatever, and we don't announce those things publicly.

Great.

Okay.

Thank you very much.

We have a question from Gus Richard at First Albany.

They've been answered.

Thank you.

Moving on to Grant Tenaka Speaker.

Tenaka Capital Management.

More on Centrino and mobile, what was sort of the launch costs of Centrino versus -- for the second quarter?

Is it going to be very material?

The second quarter will include more spending on Centrino than the first quarter did.

Mostly because the launch was in March.

The big cost is not in the physical launch events.

It's in the sustained advertising and working with the chain to get the hot spots enabled and so forth.

I'm wondering if it's holding down operating margins by raising SG&A and so forth?

So no, it's implicit in the flat spending that Andy talked about in terms of quarter to quarter.

Great.

The other things it appears that sensing things from quarter to quarter that mobile has been surprising, shall we say, more than desktop has been surprising at the high end of expectations.

Is that true for first quarter and fourth quarter?

For the first quarter, yes.

The fourth quarter, the story was servers.

Okay.

Great.

And then the last question related to mobile, I'm trying to make this one question

Interesting threat.

The margins would -- I would assume to be higher on mobile incrementally going forward.

Is that correct?

A tad, yes.

Okay.

Great.

Thank you.

Next up from Banc of America Securities, this is Sumit Dhand.

A couple of quick questions.

You talked about regaining some shares -- could you try to sort of quantify at least roughly over what time frame you think you might, you know, regain some of the shares given that sequential drop is almost 30% and then I had a quick follow-up.

Sure.

The answer is I think it will take some time.

As I -- someone asked a question about customer [Inaudible ] before.

Like I said, the customer reaction was sharper than we thought.

I don't think it's something that we'll recover from overnight.

I'd love to see real progress, you know, through the rest of the year.

But I think we dug ourselves a whole that we've got to get out of.

Okay.

And second question, and I apologize if this has been asked in some form earlier.

Paul, you talked about the fact that you're seeing -- or Andy I think you said you saw a little bit of traction in western Europe on the corporate side.

Would you say that's sort of spotty and isolated, or is it fair to make some kind of –make some trend of the system at this point in time?

I would say it's anecdotal.

But significant number of -- for me to point it out.

So some were between random and the trend.

Okay.

Great.

Thank you.

Question from Charles Boucher at Simpson Burns capital.

It's already been answered.

Thanks.

Operator, we'll take a couple more questions.

All right.

Very good.

Our next question will come from Andrew Root at Goldman Sachs.

Quick question.

On the flash business itself.

How much of what you're going to do now in the flash side with market share and making sure [Inaudible] stays the leader has anything to do with what happened with Fasels and the potential for slightly stronger mirror bit brand in the marketplace?

I hadn't even looked at it from that perspective, Andrew.

I mean, I think that we believe very much that our technology is substantially better than Fasels.

Our lead is pretty significant in terms of time and product quality and density.

And I don't -- I just don't think of it in that context.

I look at it much more in terms of the applications.

You know, where are we capable of selling that kind of density flash?

It tends to be higher density PDAs and phones.

That's really what we're trying to enable.

That's fair enough.

And the second question relates to you made some interesting comments about end demand, that I’m just trying to piece together in terms of topdown judgments.

What was the impact the last time you made a significant change of the chipset in terms of catalyzing enterprise demand?

Obviously there's some [Inaudible] to think about.

How much of an impact do you think that's going to be once your chipsets ramp?

The interesting thing about what we're doing with the 875P and the products that go into Centrino is that we're going to drop -- it's a program that we talked about at IDF called Granite Chief.

And this is a program that has the same stable image in terms of software, between the desktop and the notebook so that as an I.T. manager with these new chipsets you have one software load that covers all your clients.

And this is --, we think, a very powerful sales prop decision for that channel.

And we're excited about it taking off.

I'm sorry, I say Granite Chief, I've been skiing too much.

It's Granite Peak.

I remembered what it was.

Thank you.

Thanks.

Question from David Wu from Wedbush Morgan Securities.

Two questions.

Paul, can you explain sort of why we are -- with a weak economy in western Europe are we seeing an enterprise PC upgrade.

And the U.S. may not be the best, but it's certainly economically stronger.

Why haven't we seen the same thing from a random event in the U.S.?

Secondly, on the issue of your application Manitoba , when do you think you have a reasonable idea about how successful it would be in a marketplace?

Well, you know, I can't give you a good answer on the USA versus Europe, David.

I would ask you to explain that to me if I had faith in anyone who knew the answer to that.

All I can tell you is what we've seen.

We've seen -- I'll call it much more anecdotal information, instances of upgrades in the U.S. , nothing that I would have characterized in this conference call.

Europe, did not refresh its clients with the same degree of intensity that the U.S. did during the Y2K cycle.

What we may be seeing is a bit of the very old machines being upgraded along with some moves to notebooks.

That's just, you know, it's hard to explain the differences by geography.

And there's other implications in terms of, you know, wars and so forth that kind of overarch the U.S. that maybe were not impacting Europe as much.

In terms of Manitoba, the way I would measure the success at this point in time is design wins.

And not just number of design wins but the quality of design wins.

And we are doing extremely well getting the who's who of hand sets to design in Manitoba.

And we've had a very strong program with our field for over a year now.

It's kicked into high gear when we started sampling the product.

And I'm very optimistic at about it at this point in time.

Thank you.

Okay.

I'd like to thank everyone for joining us today on the call.

A playback of the call will be available at approximately 5:00 P.M. tonight.

Those interested should call 719-457-0820 and reference pass code 421332.

Thank you.

That concludes today's conference call.

Thank you again for joining us.

Have a good day.