英特爾 (INTC) 2003 Q4 法說會逐字稿

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

Today's call is being recorded.

At this time I'd like to turn the call over to the Assistant Treasurer and Director of Investor Relations, Mr. Doug Lusk.

Please go ahead, sir.

Thank you, and welcome to the Intel fourth quarter earnings conference call.

Attending from Intel are CFO, Andy Bryant, and President and COO, Paul Otellini.

I'd like to remind everyone that the earnings release in this call are available on our IR website at intc.com.

For those of you who do not see the earnings release, revenue in the fourth quarter was $8.7 billion, and EPS was 33 cents per share.

The fourth quarter earnings report discusses Intel's business outlook and contains forward-looking statements.

These particular forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially.

Please refer to our press release for more information on the risk factors that could cause actual results to differ.

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

These statements do not reflect the potential impact of any mergers, acquisitions, divestitures, or other business combinations that may be made after January 13, 2004.

Lastly, if during this call we use any non-GAAP financial measure as defined by the FCC and Reg.

G, you'll find on our website, intc.com, the required reconciliation to the most directly comparable GAAP financial measure.

And with that, I'll now introduce Andy Bryant.

Andy?

Thanks, Doug.

2003 began with a question mark and ended with an exclamation point.

As the economic climate improved, a robust microprocessor business led the year to a strong finish.

Emerging markets were the mainstay of the growth, joined by a rally in more mature market economies that made the year a global success.

Our efforts to streamline operations and improve financial health were again reflected in operating results.

Fourth quarter results were a little better than we anticipated in our October earnings release and December update, supported by sales of microprocessors, especially the server product line.

Revenue of $8.74 billion was just over our forecast range of $8.5 to $8.7 billion.

This sequential growth of 12% is the highest we have achieved in the fourth quarter since 1999, and the year-to-year growth of 22% is the best for this period since the fourth quarter of 1996.

For the entire year, revenue grew by 13% to $30.1 billion.

The largest portion of the dollars, and the fastest rate of growth, came from the Intel Architecture business, whose revenue of $7.7 billion led 88% of total revenue, up 12% from the third quarter, and up 29% from a year ago.

Microprocessors led the growth with revenue of $6.5 billion, an increase of 14% from the third quarter and 31% from the fourth quarter of 2002.

Most of the rest of the revenue in the Intel Architecture business comes from chipsets and motherboards.

Revenue for Intel's Networking business was $592 million, up 9% in the third quarter, as well as from a year ago.

Intel's Wireless Communications group, whose revenue derives mostly from flash memory, saw a modest sequential growth of 4%, but a decline of 29% in the fourth quarter of 2002.

Intel's business progress this year is perhaps best demonstrated by gross margin.

While revenues saw a strong growth in the quarter, the gains in gross margin dollars were spectacular.

Put another way: While revenue grew, the cost of sales declined.

The growth rate in gross margin dollars was 22%, nearly twice the growth rate in revenue.

Compared to the fourth quarter a year ago, gross margin dollars were up 50%, more than twice the growth in revenue.

On a percentage basis, gross margin was 63.6%, a little better than we expected at the update, as a result of higher than anticipated revenue.

This is more than 5 points better than the third quarter, nearly 12 points better than the fourth quarter of 2002, and the highest ever for a fourth quarter.

The increase from the third quarter is primarily due to higher revenue, including slightly higher ASPs due to strong server mix.

The other notable contributor was factory utilization, which was reflected through lower unit costs, lower start-up costs, and increased inventory evaluation due to the qualification of Prescott per shipment, the last of which added 1 to 2 points of gross margin increase.

The same pattern of progress is apparent in the annual results where the growth in gross margin dollars exceeded the growth in revenue.

For the year, gross margin percentage was 56.7%, nearly 7 points above 2002.

Operating income of $2.6 billion was an improvement of 11% over the third quarter, and 75% over the fourth quarter of 2002.

As we anticipated in the December update, the $2.6 billion includes an impairment charge of $611 million, or 9 cents per share, visiting all of the goodwill of the Wireless Communications business.

Even with a charge, operating income as a percentage of revenue was 29%, which is flat with the third quarter, and 9 points better than the fourth quarter of 2002.

In the Intel Architecture business, operating income was 49% of revenue at $3.7 billion, representing sequential growth of 28%, and year-to-year growth of 87%.

For the year, Intel Architecture achieved operating income of $10.4 billion, up 58% from 2002.

Intel's Networking business trimmed its losses.

Its operating loss of $49 million is roughly half the loss of $94 million in the third quarter, and less than a third the loss of $168 million in the fourth quarter of 2002.

For the year, the operating loss in the Networking business was $426 million, approximately 1/3 less than the loss for 2002.

In the Wireless group, the operating loss was $97 million, less than the loss of $122 million in the third quarter, but flat with the loss of $97 million a year ago.

The losses in this group have been disappointing at best.

We believe we have reached the point where we have both the leading technology products and manufacturing processes to allow us to begin to recover this business.

Spending on R&D marketing and G&A was on target at $2.3 billion, up 6% sequentially, and 9% year-to-year.

We have held spending tight even as business improved.

For the year, spending was $8.6 billion, only 3% more than 2002, primarily driven by revenues and profit-dependent costs.

The total in the fourth quarter for interest income, other income, and gains and losses on equity investments was $18 million, a little better than our forecast of zero.

Within this category of income statements, interest, and other income was $53 million, impairment charges were $23 million, a little better than forecast.

Net income for the fourth quarter included tax benefits of $620 million, or 9 cents a share, largely related to two divestitures of assets due to sale of stock from the previous acquisitions of Dialogic and DSP Communications.

An estimated impact of the Dialogic transaction was included in the December update at 3 cents per share.

Results for the entire year include an additional tax benefit recorded in the third quarter of $125 million from the divestiture related to Zircon.

These and previous transactions are part of a longer-term program to divest non-strategic assets.

Fully diluted earnings per share, which include potential dilution attributable to employee stock options was 33 cents.

Basic earnings per share, which does not include potential dilutions, was also 33 cents.

Average shares for calculating diluted earnings per share were $6.7 billion, approximately flat with the third quarter.

During the quarter we purchased 61 million shares at a cost of $2 billion.

Cash, short-term investments, and fixed-income trading assets ended the quarter at $15.9 billion, an increase from the third quarter of $700 million after stock repurchases of $2 billion, capital spending of $707 million, and dividend payments of $131 million.

As we now turn to the outlook for the first quarter, please keep in mind that the forecast data do not include the effect of any new acquisitions or divestitures that may be completed after January 13th.

I will use the mid-point of forecast ranges when making comparisons to prior periods.

We expect the substantial year-to-year growth of recent quarters to be sustained in the first quarter, and planning for revenues to be between $7.9 and $8.5 billion.

The mid-point of this range would be a sequential decline of 6%, consistent with historical trends from the fourth to the first quarter.

Compared to the first quarter of 2003, the mid-point of the forecast revenue range would be an increase of 21%.

Gross margin percentage in the first quarter should be 60%, plus or minus a couple of points.

This is less than the fourth quarter, reflecting our expectations for lower revenue and stable inventory levels.

The forecast is 8 points higher than gross margin in the first quarter of 2003.

Spending, R&D plus MG&A, should be approximately $2.3 billion, flat with the prior quarter.

Depreciation should be between $1.1 and $1.2 billion.

Our estimate for gains and losses from equity investments and interest and other income is $35 million of income.

Looking ahead to the entire year, we are planning for growth in annual revenue and further progress in gross profit margin.

We expect gross margin percentage for 2004 to be approximately 62%, plus or minus a few points.

The 62% mid-point is 5 points higher than 2003 gross margin of 57%.

Gross margin should benefit from the productive use of 90-nm technology and 300-mm wafers as we build more of our mainstream products with these technologies.

By the end of 2005, Intel plans to have five factories generating revenue in the production of 300-mm wafers.

Three of these will be ramping in 2004, and two more will begin production in 2005.

Most of the capital spending for 2004 will go to building or equipping these facilities.

We are targeting capital spending at $3.8 billion, plus or minus $200 million.

This is slightly higher than the $3.7 billion spent in 2003.

The efficiencies of 300-mm mean less money for more capacity.

This year Intel will spend approximately $1 billion less than we would if we were to build equivalent capability on the older 200-mm processes.

This matches the savings achieved in 2003, and will bring total savings from the 300-mm program to date to over $4 billion.

In terms of end use, about 85% of the budget is directed to manufacturing capability, the same portion as in 2003.

More than half of the total budget will go to fab manufacturing equipment, and more than 1/4 is slated for land and construction.

The remaining portion will be spent on other machinery and equipment.

In terms of technology, the emphasis in capital spending is shifting to smaller geometries.

Over 60% of the 2004 budget for fab manufacturing equipment will be invested in processes of 65-nms and smaller.

Manufacturing technologies for microprocesses, in particular 65-nm, will be the primary focus of this year's R&D budget.

We plan to spend $4.8 billion in R&D in 2004, an increase from $4.4 billion in 2003.

Most of this will go to advance technologies for the future fab processes, future microprocessor designs, and communications initiatives.

The transition to 65-nm will drive most of the increase from 2003. $4.8 billion is the highest level of R&D spending in Intel's history.

Depreciation for 2004 is expected to be approximately $4.6 billion for the year, which would be slightly below $4.7 billion in 2003.

Our estimated tax rate for 2004 is 32%.

I would like to close with a look back at 2003 and a list of what I see as some of our most significant financial accomplishments: Double-digit annual growth and total revenue of 13%.

Annual growth in microprocessor sales of 17%. 17 consecutive years and 68 consecutive quarters of profitability.

Operating income of $7.5 billion, up 72% from 2002.

Rising revenues, accompanied by declining cost of sales.

Gross margin dollars were up 28% from 2002.

Another year of progress in containing discretionary spending, which declined in dollars as revenue rose.

The number of employees held essentially flat, even as business improved.

Divestitures of non-strategic assets, that strengthened the asset base of the company, and resulted in tax savings of roughly $1 billion.

Outstanding credit controls maintained during rapid growth and emerging markets, the quarterly days outstanding range from 36 to 37 days.

Capital spending of $3.7 billion, for a total of $15.7 billion over the last three years.

R&D of $4.4 billion, for a total of $12.2 billion over the last three years.

A 25% decline since the fourth quarter of 2001 in unit production costs of microprocesses. 45 consecutive quarters of dividend payments, representing a cumulative distribution to stock holders of $3.3 billion.

$4 billion in stock repurchases, bringing the cumulative number of shares repurchased since the buy-back program began in 1990 to $1.1 billion, and resulting in fewer outstanding shares for the year.

An increase of $3.6 billion in cash, short-term investments, and fixed-income trading assets.

Cash from operations of approximately $11 billion.

For each of the preceding seven years, Intel has generated over $8 billion in cash.

And finally, progress in increasing return on invested capital.

Although the change in the economic climate played an enormous role in making some of these accomplishments possible, I believe this list represents more than a rising tide.

It is also the result of the execution of our strategy and the work of our employees over the last several years.

There are always question marks about the future, but I am confident the work we have done to make Intel stronger will help us face the challenges ahead.

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

Thanks, Andy.

The fourth quarter was a record quarter for Intel, thanks to strong seasonal results in established markets, combined with continued growth in emerging markets.

Our Intel Architecture business set numerous records, most notably surpassing the previous revenue high set over three years ago.

Overall, our Communications businesses saw modest sequential revenue growth, with good unit demand for network and application processors and wireless 802.11 products.

On a geographic basis, the Americas region revenue grew 9% sequentially and 9% year-over-year, reaching its highest level in over two years.

Strength in server volumes and U.S. retail drove revenue to the high end of historical seasonality.

EMEA sequential growth was 26%, making it the fastest growing region in Q4.

This is the strongest Q4 growth for the region since 1998.

Year-over-year revenue growth for Q4 was 20%, led by continued, strong growth from a blood range of emerging markets in EMEA, and by corporate computer purchases in Western Europe.

All market segments of the Intel Architecture business did well in Q4, with mobile revenue growing 45% year-over-year, and server revenue growing by 82% year-over-year.

Asia-Pacific had another record quarter, as revenue grew 6% sequentially.

Revenue strength was across the region, including a record in China, and with strong exports driving a record in Taiwan.

In Japan, revenue grew 9% sequentially and 61% year-over-year.

Growth was driven primarily by higher retail sales, as well as higher exports from notebook production by our Japanese OEM customers.

Our channel business set unit and revenue records in the fourth quarter and continues to be a key part of our program to help drive growth in emerging markets around the world.

Revenue for our inter-Intel Architecture business was approximately $7.7 billion, up 12% sequentially, and almost 30% year-over-year, handily beating our previous record of $7 billion set more than three years ago.

We had record microprocessor unit shipments in desktop, mobile and server, as well as chipsets and motherboards.

Our server mix was particularly strong in the fourth quarter, leading to a slightly higher overall ASP.

We also believe we had a small increase in market segment share.

In the desktop, we began shipping Prescott, our first microprocessor built on 90-nm, 300-mm silicon, in the fourth quarter, and plan to ship millions of units in the first quarter, although, as with any new product, we expect some tightness in the early part of the ramp.

We expect to officially launch Prescott in the next few weeks.

We remain on track to our goal of having Prescott represent over 50% of our performance desktop market segment in Q2, as well as a substantial portion of our value market segment.

The Prescott core gives us performance and feature head room on a much smaller die.

The 90-nm processed technology ramp will be our fastest ever, and will allow us to quickly transition our desktop products to the cost effective 300-mm wafers, lowering unit costs over the next couple of years.

In the fourth quarter we also introduced the Pentium 4 processor, Extreme Edition, at 3.20 GHz with hyper-threading technology, and with 2.5 MB of cache memory for PC gamers and computing enthusiasts.

At CES last week, we outlined new products and initiatives for the consumer electronics industry.

Fundamentally, we believe that the same dynamics that drove the PC revolution are moving to consumer electronics, and will provide Intel with exciting growth opportunities throughout the digital home.

We have created a new group to focus our efforts in addressing this market and to drive our silicon and platform initiatives into various CE devices.

Examples disclosed at CES include our development work on a device we call the Entertainment PC, that is focused on the consumption of digital content, rather than the creation of it.

We also announced our LCOS, or liquid crystal on silicon capability, which we believe will dramatically improve the quality of large screen displays at lower end user costs.

In Mobile, 2003 was clearly the year of Centrino mobile technology.

The Pentium M processor, which was launched in March, continued its steep ramp, and represented over 50% of our mobile unit shipments in Q4.

Total mobile units grew over 30% versus last Q4, leading us to a new revenue record.

Last week we announced that we extended the Banias core to the value space with the introduction of the Celeron M processor.

Although our mobile results in the fourth quarter were excellent overall, we were disappointed that we did not begin shipping Dothan as planned.

Although performance of the product is as we expected, our validation processes recently showed the need to make some circuit modifications to enable high-volume manufacturer ability.

We have redesigned the circuits, and have already seen functional silicon resulting from the fix.

We now expect Dothan to launch and ramp in Q2.

In the interim, we will continue to meet all customer needs with Banias, and use any incremental 90-nm chip capacity for Prescott until this new stepping is phased into production.

We expect no significant impact to Q1 revenue or our 90-nm ramp for the year, as a result of this change in plans.

Server revenue was up over 25% sequentially and set a new revenue record.

We had good unit growth in the Xeon and Itanium families, as well as mixed improvement in both the DP and MP market segments.

The Itanium 2 processor extended its performance leadership by achieving the industry's first TPC-C benchmark result, exceeding one million transactions per minute.

In high-performance computing, the number of Intel processor-based systems in the top 500 list grew by nearly 50% over a 6-month period, with supercomputers based upon Intel processors outnumbering those based upon RISC processors for the first time.

We also exceeded our goal of shipping over 100,000 Itanium processors in 2003.

Chipset units were up a bit, and set a revenue coming off a very strong Q3.

For the year, we grew several points of market segment share, thanks to the successful ramp of the Springdale family of chipsets.

Looking forward, we remain on track to launch Grantsdale in the second quarter, which will bring significant platform improvements to the desktop, such as support for DDR2 memory and PCI Express, as well as improved integrated graphics and audio capabilities.

Moving to our communications-related businesses, revenue for our Wireless group was up 4% versus the third quarter.

Flash units were approximately flat, but ASPs were slightly higher as average densities continued to improve.

Flash shipments on 130-nm technology grew to over 60% of our units, led by our new StrataFlash product for high-end phones, which tripled sequentially.

This product has design wins at over 30 leading handset makers around the world.

In application processing, Motorola and Samsung both announced new cellular phones based upon XScale processor in the fourth quarter.

Total apps processor units were up 50% versus Q4 of last year, making us the number one supplier for PDAs and handsets in 2003.

Our Networking group's revenue increased 9% sequentially, as we saw good revenue growth in network processing.

Ethernet connectivity unit volumes were slightly higher, led by good demand for our wireless 802.11 products included in the Centrino mobile technology.

During the fourth quarter, we expanded our Wi-Fi lineup with the launch of our dual-mode 802.11a/b product.

We also began revenue shipments of our new 802.11 b/g product, which is based entirely on Intel silicon and will appear in systems very soon.

During the quarter, we announced the combination of our communications efforts into one business group.

As communications and computing increasingly move to high-volume architectures and building blocks, and wireless land and cellular technologies come together, consolidation gives us better product planning and customer focus in these strategically critical areas.

In summary, the fourth quarter was a fitting way to put three tough years behind us.

Our strategy to invest our way through the recession and grow out of it with new, exciting products is paying off.

We enter 2004 with an outstanding product portfolio, the best silicon technology and factory network in the industry, and have made significant progress on a number of new growth initiatives, like the digital home and wireless mobile computing.

We are optimistic about our prospects in the coming year.

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

Okay, thanks, Paul.

We will now open the call for Q&A.

We will attempt to take questions from as many participants as possible.

To help in this process, we ask that you please limit yourselves to only one question and no more than one brief follow-up.

Thank you.

Operator?

Thank you, Mr. Lusk.

[OPERATOR INSTRUCTIONS]

And we'll take our question from Michael Masdea, CS First Boston.

Thanks a lot, and congratulations on a great year.

First question really is, as you start to take a look at the enterprise, presumably starting to pick up here, what's driving the CEOs to upgrade in 2004?

And if you can, comment on this Windows 98 support as having any impact on what your customers are saying.

The latter one, the 98 support change, or extension I guess is a better word, we haven't really seen any impact from -- at this point, and so it's a little premature to guess that.

In general, what we saw in 2003 is that people upgraded for strategic reasons.

In some cases they had very old equipment that was just running out, but in most cases it was because they were putting in new capabilities, deploying notebooks into their workforces, deploying eBusiness applications, those kinds of things.

And that's why we were able to track a number of accounts where you saw 10 to 100,000 PCs deployed.

Again, it was focused on new capabilities.

I think this is much more likely what the scenario that you're likely to see continue in 2004, company by company, project by project.

Great, and just a quick follow-up.

You talked about the 300-mm, 90-nm.

You said 70% of NPUs in the second half of '04, I believe.

Can you just give us an idea as you're looking into '04 where you see most of the 200-mm capacity going, and what kind of growth you need to see outside of NPUs to fill up a 200-mm capacity?

In our logic factories it'll shift over to the new generation of chipsets.

And in our flash factories that stays on 200-mm.

And also keep in mind, one of the projects we're starting later this year is converting an 8-inch fab, 200-mm fab [INAUDIBLE] 300-mm, so that will take some of the capacity offline and turn it into 300-mm next year.

Thanks a lot.

Our next question comes from Adam Parker from Bernstein.

Yeah, hi.

Andy, maybe you can help a little bit with this thought that you've kind of accomplished slightly above, to well above, normal seasonal revenue over the last four quarters now, yet the mid-point of the guidance here for Q1 implies something seasonal, or even slightly lower than seasonal.

Why do you have a bit more conservative view of conditions now than you had the last few quarters?

And can you talk about whether it's pricing our units or geography?

Well, we looked at Q1, of course we talked to customers, we've looked at sales rates, we lost [INAUDIBLE], obviously it's one of the things we rely on a lot.

We felt 6%, actually, is pretty close to the mid-point of what you'd see looking at the last five or ten years in the first quarter.

As we looked at that, we also did the year-over-year comparison.

We said the revenue with these levels will be up 20 -- we think the mid-point of our range will be up 21% year-over-year.

So what it feels like is, we had real strong second half, which has provided a new higher-level platform, and we'll look for seasonality in the near-term, and I'd love to be wrong, on the upside, of course.

Alright.

So it's just an issue of -- there's nothing about conditions that look like they're deteriorating?

We're not saying anything that causes us to be alarmed about conditions in the overall marketplace.

As Paul said, we saw strength in the markets we didn't see before, the North American market, the Western European market.

So, I'm not seeing anything out there that's causing me to be alarmed, it's just trying to consolidate the gains in the second half and see where we go in '04.

Okay.

I kind of shifted gears for another question.

You did buy back the $2 billion in stock here to make up for the fact you didn't buy any in Q3.

Do you expect to buy back the billion again here in Q?

And any comments now with a little more perspective, looking back at Q3 about why you didn't do any share repurchase in Q3?

No, I really can't add any insight into the reason we were out of the market in the third quarter, and I actually can't add much insight going forward.

We are -- we have an active buy-back program, certainly during the next few days you're out of the market, but we have no change in overall plans.

Okay.

Since I get nowhere with that, I'll try a different question.

Can you talk at all, maybe kind of higher level, about profitability goals outside of IHE, given the combination or folding of WCCG at the ICG.

And I think, Paul, you mentioned kind of better product planning and customer focus, but can you quantify some cost saving or upside here?

And do you have some sort of forecast you could share about when you think this business outside of IAG will be accretive to EPS?

This has to be the last question, Adam.

Okay.

Well I got nowhere, I thought I got a new one!

I know.

You're probably not going to get too far with this one either!

But if you look at the two different pieces, in the communications business, in Sean's business, we've seen in the last year a remarkable improvement.

We've still got a ways to go.

At $50 million a quarter, I'm not happy, but we've been on a decent vector, and inside that business, you know, Sean is dedicated towards continuing to drive that thing in the positive direction.

I'm not going to give you a forecast, but I'm going to tell you, he understands he has profit goals and responsibilities, and I won't predict a time, but I will say he understands that, and we're moving in the right direction.

The wireless communications business, we have been moving in the right direction, and we've lived this nightmare now four quarters in a row.

It's -- we think we've done some very important, good things.

You know, the [TIACS] product is an excellent product.

It's going to be in the high-end cell phones.

It's getting lots of traction.

We think that's one of the ways we earn our way back into our customers' good graces with good technology.

You know, 0.13 micron manufacturing is ramping, and ramping nicely.

So, a lot of good things are happening in that space.

You know, I'm not going to give you a profit forecast by each segment, but we have every intention of turning that business around.

Let me just pick up on Andy's technology point.

What we've found is that increasingly, our old Communications group and our old Wireless group were calling on the same customers with complimentary technologies that were increasingly being looked at to incorporate in common devices.

So we have customers building handsets that wanted to incorporate Wi-Fi technology into their handsets, along with the wireless WAN technologies.

It makes sense from us to call on those customers as one sales force, as one product planning team, to develop our product at the platform level, to be able to get the highest integration, lowest cost, etc.

So I'm looking to see a much improved process at product planning, using the technology we have available coming out of us.

Thank you.

We go next to John Lau from Banc of America.

Yes, thanks.

Andy, I was wondering if you could give us some more color on why the gross margin trend is projected to have such a large drop sequentially?

So, in other words, is the primary factor, say maybe the Prescott, since the Prescott is supposed to offset that, is it the [INAUDIBLE] or AFC trend that makes this gross margin more conservative?

Thank you.

This is going to take a few minutes to get to -- I'm going to start in a place you won't expect me to start, but let me start with the fourth quarter.

What we saw were an increase of 5 points.

The biggest driver of that increase in margin was revenue, and HP dropped a little bit in the server mix.

We had some lower costs.

We also had lower starting costs.

But there was one other factor, which is that Prescott qualified for shipment for revenue, and when that happens, spending that in previous periods have been period costs become inventoriable, so you have 1 to 2 points of unusual good news in the fourth quarter.

That doesn't repeat in the first quarter.

So when revenue drops in the first quarter in a fixed-cost environment, you would typically see a lot of that fall through to gross margin.

At the same time, you don't have the one-time inventoriable event of a new product qualifying, so you don't repeat that set of good news into the first quarter.

So in reality it's pretty simple.

Revenue's down, margin's down as you would expect, and you don't have the inventory pop you had in the fourth quarter.

Going in, following up on that -- as you ramp up on Dothan in Q2, are you going to-- are we going to anticipate, then, a similar type of reverse action?

It will be much -- it'll be lesser.

You have -- at that point you have the factory's running qualified products, so you are inventorying most of those expenses.

Remember in the fourth quarter it was the first product being ramped in there, so you had a lot of period cost spending up until that point.

So you won't see the same type of effect.

Also keep in mind, Dothan is going to be a much smaller die, cheaper product, so it won't attract as much spending in value.

Okay then, thank you.

We go next to Tom Thornhill from UBS Payne Webber.

Thank you.

One question first on the operating expenses.

Andy, you've talked about controlling expenses and keeping head count relatively flat into '04, have there been dynamic changes in the end markets that would cause you to change those goals?

I'm not changing those goals yet.

What we've said historically is, we are looking to return to peak revenue periods, so the old timeframes, and at that point we'll evaluate where we might want to make new increased investments.

Even though Q4 was a record, I'd kind of like to see how the first half unfolds before we start doing anything unusual.

So for now, you'll see spending flat in the first quarter, you'll see head count approximately flat, and we'll kind of watch and see how the year evolves before we make any increased investment decisions.

And one follow-on on the gross margin issue.

We're starting low, you've got a target of 62 for the year, implying above 62 later in the year.

Is that going to be driven more by revenue, or is the efficiencies kicking in here really going to help drive, and 300-mm going to help drive that, so that our cost of sales rates have changed relative to revenue rates of change are going to be, show the difference?

You're actually going to see it driven by revenue as well, because revenue's so key into the fixed cost environment.

But no question, we have to fill, you know, the 300-mm fab in Albuquerque, we have to begin to fill the one in Ireland, and we'll see real benefits in the cost of units out of those factories.

Thank you, Andy.

Uh-hmm.

Our next question comes from Nimal Vallipuram, CRKW.

Yeah, there's a question for Paul.

Paul, if you look at the enterprise PC market, you indicated that in Europe you saw some strength last quarter.

And you also indicated that one of the main reason was they were mostly strategic purchases.

If you look back in the last major replacement cycle for the PCs, just in Europe there was basically a PC stat, because of the Europe inversion, it happened in 1999, and in the U.S. it happened because of the Y2K in 2000.

So if you look at what is happening in Europe last year, is that a good leading indicator of what is probably going to happen in the U.S. enterprise market?

And I have a follow-up question.

Well, I think your categorization of the timing of the Europe surge in the 90s and U.S. surge in the 90s was correct, and one happened slightly before the other.

So just on an aging basis, the European machines are wearing out their 5-year kind of life, and you expect them to be replaced before some of the people that bought right immediately before the Y2K changeover.

But I was trying to imply that it wasn't just a wear out phenomenon.

What we see is that it's as a result of engagements with Intel sales force and our customer sales forces, and the I.T. investments that have happened through the recession on e-Business, people are deploying these things as new productivity tools.

I.T. is still the foremost tool for productivity in a corporation, and people have realized that, and now moving to deploy new technologies.

Thanks.

This is for Andy.

Andy, if you look at your gross margin guidance, historically, when you look at the gross margin for last five, six years, the year-end gross margin has not been significantly different from the first quarter gross margin.

I'm not quite sure what date the guidance was given at the time of the beginning of the year, but this time around, the first quarter gross margin is 60%, and you're giving it year gross margin of 62%, plus or minus a couple of basis points and a couple of percentage points.

And you have indicated right now that one of the reasons was -- you've explained that.

Can you tell us that -- is there anything more you are seeing at the beginning of the year looking out into this year that you have not seen in the past to have given you the confidence that your gross margin will improve throughout the year?

The bigger thing we have -- well, let me step back.

You saw substantial improvement in gross margin in '03, primarily as a result of fill-in factories.

What we see in [INAUDIBLE] in '04, if we have the double-digit revenue growth we hope to have, is you'll see filling two new big factories, which will lower the average unit cost a fair amount.

So what's in front of us is full 300-mm factories.

If something happens with revenues, our demand is weak, we then have expensive factories we have to expense as well.

So the key for us this year is, demand stays up, and we get those 300-mm factories full.

All right, thanks, Andy.

Again, good quarter.

We go next to Chris Danely from J.P.

Morgan Chase.

I think I'll get off the gross margin bit here.

He's talked about the strength in service and going into that, do you think that that's a by-product of enterprise corporate spending coming back, or what do you think is exactly going on out there?

I think it's exactly a result of the strategic investment trend I discussed a couple of times here.

You know, whether it's people deploying notebooks and needing servers or deploying e-Business applications, we're seeing growth across our server product line.

And I said it was in the DP and MP and Xeon and Itanium.

And to me that's an indication that people have completed their developments of these applications and are now moving them into production.

So do you think that it can continue or even strengthen this year?

I believe this is a fundamental trend that you'll see in mature market businesses throughout '04.

So just a last follow-up.

If you look at, say, the growth in laptops, which has been clearly spectacular versus the growth in servers, which are you -- which do you have a higher opinion of in '04?

You're asking me which of my children I love best.

We're fond of both of them.

We're fond of both of them.

Okay.

Thanks.

And our next question comes from Charlie Glavin from ThinkEquity.

Thanks.

Paul, you mentioned particular strength coming out within Taiwan, in addition to the strength coming out of Europe.

Given the timing of Chinese New Year this year, and talking to distributors over in Asia, they seem to have reacted to that.

Can you comment, or are there any precautions that you guys are taking, not only regarding the timing that that occurred, but also as far as some of the, let's say, uneasy political climate between Taiwan and mainland China that could cause some near-term logistic issues?

And is any of that factored into your guidance?

We haven't seen any perturbation in our business as a result of tensions or any political kinds of consideration.

The timing of Chinese New Years is different this year.

I did point out that the other noteworthy fact in Q4 in Asia-Pacific was yet another record quarter in China.

So we saw good growth for local consumption, and Taiwan, which tends to be a surrogate for worldwide purchases of things like motherboards and chipsets, tended to be very strong as well.

It's a record in fact.

Paul, let me cut it kind of a different way.

Did you see any sort of pull-ins?

And the second part of that is, normally post the Thanksgiving period, you always had a certain buffer between Thanksgiving and Chinese New Year in terms of a certain channel clearing.

Is there anything particularly within the distribution area that you saw?

One, either pulling us into Q4, a little bit more unusual than normal --

Yeah.

I -- No.

No, there were no differences in the patterns, no pull-in requests that I'm aware of, or certainly nothing that showed up in the numbers.

One indicator we track fairly closely is the relationship of our chipset sales to our microprocessor sales, in terms of those going ahead of microprocessors in a certain proportion, in a certain number of weeks.

There's really been no change in that pattern.

And that's what leads us to give the kind of guidance that we've built into Q1.

So the flattish chipsets Q4 to Q3 was expected?

It was actually slightly a little bit better than we expected.

You normally expect it to tail off, given the first quarter PC shipments tends to be below Q4.

And the Dothan delay did not cause any particular shortages within Banias exiting the quarter?

No.

Okay.

Great, thanks, Paul.

We go next to Mark Edelstone from Morgan Stanley.

Hi.

Good afternoon, guys.

Can you compare for us the relative growth you saw sequentially in total microprocessor units in both Q3 and Q4?

Working on it.

Andy had the Q4 numbers in his comments, right?

I'm not sure -- I don't think he gave the unit growth, other than to say it was solid and at record levels in terms of total units.

I can't find that number right off the top, Mark, I'm sorry.

Okay, maybe just ask it in another way, then.

If my memory serves me correctly, you guys had an ASP increase in Q3 as well.

Can you give us a sense as to what the relative difference was in ASP increases Q3 and Q4?

You said ASP's in Q4 were up slightly.

Wouldn't that be something like half the rate of increases you saw in the third quarter?

No, they were both in the range of slightly, and both driven principally by a mix shift to a higher-end products, higher priced products.

Okay, great.

Thank you very much.

We go next to David Wong from A.G. Edwards.

Thank you.

Further on the ASP question.

If we take out servers, PC-related microprocessors, were ASP's flat or were they slightly down in the fourth quarter?

You know, boy, we're getting into a level of detail on a couple, sharing, to be honest.

The reason ASPs were up was due to server mix.

Essentially that was the answer.

Okay, thank you.

Our next question comes from Graham Tanaka from Tanaka Capital Management.

Congratulations again.

Just on the capacity editions, what kind of net unit capacity additions will you be having by the end of this year versus the end of last year with all the new 300-mm capacity and some conversion over Flash?

And then for microprocessor unit capacity?

You know, it's difficult for me to answer the question that way, Graham.

If you look, though, Prescott qualified towards the end of last year.

It's going into new a 300-mm fab in Albuquerque, so we have one 300-mm to fill there.

The Ireland 300-mm fab begins production toward the middle of the year, so you have that, which starts to ramp and will have some capacity.

You have a 300-mm fab equal to you know, 2 1/2, 200-mm fab -- it's actually a fair number of units being available.

We'll take you know, the fab in Arizona down for the business retraction there.

So what you can basically see as you know, the equivalent of three or four fabs of 300-mm available.

Great.

Thanks.

Our next question comes from Joe Osha from Merrill Lynch.

Hi, gentlemen.

Yeah, back to the inventory issue, 71 days is pretty high by historic standards.

So for starters, Andy, can you comment on, you know, where this is relative to, you know, sort of your target range?

I'm also curious as to what this implies for manufacturing utilization in the first quarter?

I do have a follow-up.

Sure, it's where I expected at the end of the fourth quarter, Joe.

It's not a trick answer.

At the time you're trying to qualify a Prescott and a Dothan, you're worried that, for example, if it was the Prescott that we had decided wasn't qualified, you have to continue to build enough of the older products, the Northwoods, to make sure you can meet your customers' demands.

So any time you have a major, new product come up, we would like to do a little bit of extra build to cover that.

So, I'm actually right where I would want to be.

Then what you'll see us try to do is, as Prescott builds and ramps and it's successful, slowly get it back down a little bit.

So, we're in a situation where in the fourth quarter you see a one-time 1 to 2 point margin event.

Eventually that 1 to 2 margin point goes away, but it takes three to four quarters as we slowly ratchet down inventories as we get more comfortable with the new product.

So it will be a while before you see anything of significance.

So the implication then is that you're going to run, perhaps, fewer wafers here in the first quarter just 'cause you're not, sort of, double building, as it were?

If it were just for that issue, yes, I think the factories will actually be pretty full in the first quarter as we try to look at how we can free up the Arizona fab to be able to start the conversion.

So you'll see everything else pretty full.

Okay.

And the follow-up then, at least as I understand it, it does kind of imply then that you're, you know, at that run rate, all of the things being equal your steady state margin is 62%, right?

The additional margin has to come from the higher efficiencies from 300-mm?

Um, boy, the answer to your question is yes.

Yeah.

To put it a different way, you had about 150 basis points in the fourth quarter of kind of non-repeatable benefit, right?

So, you know, all other things being equal, you're 62%, and then on a go-forward basis, other stuff like lower costs will get you there.

The only reason I'm hesitating answering you, Joe, is because I can't refer to a margin that's a non-GAAP number, which is what you're referring to, as a steady state doesn't exist in GAAP terminology.

Ah, the lawyers are listening, huh?

Your thinking process is valid.

Okay.

Thank you very much.

And our next question comes from Quinn Bolten from Oppenheimer.

Hi.

Just one question for Andy, and a follow-on for Paul and then one for Andy.

Andy, can you just give a little bit more clarification on the server shipments, just one clarification?

Did you say revenues were up 25% sequentially?

And then sort of as a follow-up, can you talk about whether the 100,000 units of Itanium, was that pretty linear for the year, or was there a pretty steep back-end load?

And then a follow-up for Andy.

Yeah.

What I said was server revenue was up 25% sequentially from Q3 and set a record.

And Itanium was back-end loaded, it built up through the year.

It built up nicely through the year quarter by quarter as Itanium 2 systems started rolling out, and obviously Q4 was the peak.

Okay.

And then for Andy, as Ireland facility comes on-line, are there any startup costs that we need to think about in terms of modelling gross margin as that facility comes on-line?

There will be startup costs, [INAUDIBLE] in the first quarter.

What I would tell you though, is if you remember last year, we had the development fab of 300-mm coming on-line, with startup costs, then we had Albuquerque coming on-line with startup costs.

In '04, you essentially just have the Ireland fab.

So if you look at a year to year comparison, there won't really be much effect on gross margin with startup costs.

And I don't think you'll see any major changes throughout the year.

But again, I'm hesitant to forecast beyond the short-term.

In the first quarter, startup costs are approximately the same as in the fourth quarter.

In the second quarter there's a risk it could be a little higher, but not much.

Okay, thank you.

We'll go next to Clark Westmont from Smith Barney.

Hello.

Good afternoon.

Two questions.

Could you tell us if you've got -- can you give us any color on the revenue, Q1, for -- sequentially for your wireless business or networking?

We don't do forecasts by, you know, segment.

What I can give you is the historical data, which you could, you know, which is out there someplace.

Typically you see, in the Wireless Communications group, the first quarter is, you know, nine out of ten of the last years or something, has been down 10% to 15%.

What we think happens is that the Christmas season happens, you get an overbuild of devices that flash memory would go into, and then that inventory has to be bled off.

In the networking business, it's similar to the other part of our business.

So you do see some dip in the first quarter, not as sharp as you'd see in the hand-held business.

And the second question is, you know, there's a rising sense, let's say, that I.T. spending is starting to improve a bit.

I think you've made mention in particular regions.

But would -- can you just give us more color in terms of do you think this is going to be a significant effect this year, or is it just going to be something that's just in the mix that doesn't really stand out?

In terms of your opportunities for the year?

Well, I'm looking at it as one of the, you know, three or four things that we're counting on as implicit in our forecast, is that it continues in these regions as I described, and it doesn't really change one way or the other.

I don't see a dramatic move to panic buying of PCs, nor do I see a change in the other direction.

Fair enough.

There is one more sort of housekeeping thing.

For the 90-nm, you've updated us on the desktop and the mobile.

Could you give us the read on the server side and also the chipsets?

The Lindenhurst and Tumwater timing?

Uh, no -- are you asking road map questions?

Yeah.

Yeah.

Oh, I'm sorry, those are on track for mid-year.

Okay, so second quarter?

Mm-hmm.

Yeah.

Okay, thank you.

Operator, we'll take two more questions, please.

Thank you.

Our next question comes from Tim Luke from Lehman Brothers.

Thanks.

I was wondering with the strength in Europe whether you could give some sense of the extent to which currency has impacted you, or how you see that playing out as you look forward?

Thanks.

You know, you have to recognize currency has an effect.

I don't think as much on Intel as many other companies.

Keep in mind that, you know, one of the things Paul talked about earlier on was companies realizing their e-Business capabilities, their I.T. capabilities are needed to continue to drive improvements inside their own companies.

I think technology is a value, and will continue to be a value, so I really am not looking at currency as a big affect on us.

And your comments, not in the introduction, but in the Q&A, you seem to be hinting that you are seeing some modest evidence in improving I.T. trends in North America.

Would we then expect as we go through '04, for the mix to begin to favor the Americas, which has obviously been slipping of late?

I think it's too soon to call that one.

Like I said, I'm counting on what we've seen in the second half of the year in mature markets continuing, but also in emerging markets to continue to grow.

We're moving into, as I pointed out in the analyst -- as Craig pointed out in the analyst meeting in November, 200 or 300 more cities in tier 3, tier 4 cities in China, and other emerging markets.

I would expect that the -- there's still plenty of untapped growth offshore to keep that going.

Thank you very much.

And our final question comes from Andrew Root from Goldman Sachs.

Thanks, a couple questions on mix.

I think a few times you've indicated that you're expecting a continuation of the same type of year-over-year growth rates that you saw, just looking at seasonal decline, so does that imply that overall mix -- and I think the answer to this is yes -- but the overall mix will continue to shift towards servers and notebooks in Q1 and away from desktop?

Those two segments have outgrown the desktop pretty consistently the last four or five quarters.

Right.

I see nothing changing.

And if that's the case, then I would assume that ASPs kind of have to be flat to up, similar to what they've seen the last couple quarters?

Well, I think there's -- we're also -- you can't -- we're not discounting the fact in we're seeing competition in both those segments.

Right.

And the price competition has intensified in those segments in the last quarter or two?

Oh, I don't know if it's intensified, it's materialized.

Okay.

And then I guess the final question relates to just the seasonal decline.

When you look at the seasonal decline of down 6% or so, what it's been over time, has Q1 typically been a weak pricing quarter or a stronger pricing quarter or no different than what the trend has been at the time?

Q1 is not traditionally a quarter where one makes large price moves.

Okay.

Okay, thank you.

Okay, we'd like to thank everyone for listening to today's call.

A recorded play-back of this call will be available at approximately 5:00 p.m.

Pacific time tonight.

Those interested should dial 719-457-0820 and reference passcode 537597.

Thank you, and goodnight.

And that concludes today's conference.

Have a great day.