英特爾 (INTC) 2004 Q1 法說會逐字稿

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  • Operator

  • Good day, and 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 Investor Relations, Mr. Doug Lusk.

  • Please go ahead.

  • - Director of Investor Relations

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

  • Attending from Intel are our CFO Andy Bryant and President and CEO Paul Otellini.

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

  • For those of you who did not see the earnings release.

  • Revenue in the first quarter was $8.1 billion and earnings per share were 26 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 13, 2004.

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

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Thanks, Doug.

  • Operating results for the company as a whole were largely consistent with our outlook in January and March, even though an unanticipated legal settlement lowered earnings per share by a little more than a penny and a half.

  • The results were seasonally down against a backdrop of strong year to year growth.

  • The microprocessor business with higher unit volumes and firm pricing led revenues year to year to double-digit growth.

  • Profits for this period were also up substantially.

  • Driven by higher volume, advances in manufacturing, and a stronger asset base.

  • Net income was almost double the level of a year ago.

  • Revenue of $8.1 billion was down 7% from the fourth quarter, consistent with patterns typical for this period.

  • And up 20% from the first quarter of 2003.

  • Unit shipments of Intel Architecture microprocessors were lower than the fourth quarter as were chipsets, motherboards, and network connectivity products.

  • Unit shipments with flash memory were higher.

  • The largest portion of revenue came from the Intel Architecture business whose revenue of $7 billion was 87% of the total, down 9% from the fourth quarter, and up 22% from a year ago.

  • Microprocessor revenue of $6 billion declined 8% from the fourth quarter, and grew 24% from the first quarter of 2003.

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

  • As we announced in December, Intel's communications businesses have been consolidated into a single organization, the Intel Communications Group.

  • And their results are now reported in one operating segment.

  • In addition to our networking businesses, this segment includes businesses that were previously in a wireless communications and computing group, primarily flash memory.

  • Revenue in the newly constituted Intel Communications Group was $1.1 billion, 3% higher than the fourth quarter, and 11% higher than a year ago.

  • Revenue from flash memory was $417 million compared to $409 million in the first quarter of 2003.

  • As a result of the recently announced settlement with Intergraph Corporation gross margin dollars in the first quarter includes a charge of $162 million, amounting to two points of gross margin percentage.

  • From an operating perspective, we continue to make superb progress with gross margins, including the charge, gross margin dollars of 4.9 billion were down 12% sequentially but up 39% year-over-year.

  • On a percentage basis, gross margin was 60.2%.

  • This includes a reduction in margin percentage of two points for the charge from the legal settlement.

  • Gross margin is down approximately three points from the first quarter, with two points of the decline attributable to a legal charge and one point primarily to lower revenue.

  • After our March outlook is adjusted to include the legal charge gross margin is higher than the midpoint of the range for several reasons.

  • First, the yields of the Prescott product with 90-nanometer technology made of 300 millimeter process improved through the quarter allowing more spending to be inventoried than expected.

  • Second, some previously anticipated reserves on nonprocessor inventories did not materialize, and finally a little cautious in my forecast based on the uncertainty of the new product yields at the time of the update.

  • Even with the legal charge higher revenue and lower unit cost made possible by new manufacturing technologies took gross margin up over eight points from the first quarter of 2003.

  • Including the charge from the legal settlement, operating income of $2.5 billion was up 78% from the first quarter a year ago.

  • The charge from the legal settlement reduced somewhat the profitability of the Intel Architecture business whose operating income of $3 billion was 43% of its revenue.

  • Operating income declined 19% sequentially and grew 58% year to year.

  • In the communications businesses, the operating loss of $219 million was larger than the loss of $143 million in the fourth quarter and flat with the first quarter of 2003.

  • All of the sequential decline came from the flash memory and cellular handset businesses and was caused by a number of factors.

  • Ironically the most significant contributor to the larger loss was our success in ramping the 130-nanometer manufacturing process which lowered unit cost and caused us to mark inventory down to the new lower cost levels.

  • In addition, we had some inventory reserves and applications and cellular processes and we increased investment in the new 90-nanometer process.

  • The networking businesses continue to make progress in reducing their losses.

  • Our working plan for the communications business overall is to continue steady growth towards profitability.

  • Spending on R&D, marketing, and G&A was $2.3 billion consistent with our forecast and flat with the fourth quarter.

  • Although up 15% on a year-to-year basis, spending has declined as a percent of sales.

  • Most of the dollar increase comes from higher levels of R&D, and spending related to higher revenue and profits.

  • The number of employees at the end of March was 80.5,000 compared to 79.7,000 in December and 79.2,000 in March of 2003.

  • The total in the first quarter for interest income, other income, and gains and losses on equity investment was $68 million, higher than the $35 million we anticipated in January due to higher gains on equity transactions and lower impairment charges.

  • Of this, interest and other income was $49 million.

  • Diluted earnings per share, which includes potential dilution attributable to employee stock options, was 26 cents.

  • That number includes the charge of a little more than a penny and a half, or to be precise, 1.7 cents from the legal settlement.

  • Basic earnings per share which does not include potential dilution was 27 cents.

  • Average shares for calculating diluted earnings per share was 6.6 billion, approximately flat with the fourth quarter.

  • During the quarter, we repurchased 49 million shares at a cost of $1.5 billion.

  • We have made good progress in reducing shares outstanding.

  • Basic shares outstanding at the end of the quarter were 6.5 billion, down 1% from a year ago, and down from the peak in the second quarter of 1998 by 4.2%.

  • On the balance sheet, accounts receivable were up 14% reflecting a quarter more back end loaded than the prior quarter.

  • Day sales outstanding were flat at 36.

  • Inventories increased by $277 million, or 11%.

  • The largest increase came from work in process as improving yields for inventory is higher than anticipated.

  • The second quarter of wafers already under production.

  • It is unlikely that we will see a significant reduction in inventory in the second quarter.

  • Cash, short-term investments, and fixed-income trading assets ended the quarter at $15.4 billion a decrease from the fourth quarter of about $450 million after the stock repurchases of $1.5 billion, capital spending of $680 million, and dividend payments of $259 million.

  • As we now turn to the outlook for the second 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 April 13.

  • I will use the new point of forecast ranges when making comparisons to prior periods.

  • We expect revenue in the second quarter to be between 7.6 and $8.2 billion.

  • The midpoint of this range would be a sequential decline of slightly more than 2% which is consistent with the average pattern of what tends to be our most variable quarter.

  • Compared to the second quarter of 2003 the midpoint of the forecast revenue range would represent growth of 16%.

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

  • This is flat with the first quarter which included the legal charge.

  • On an operating basis, gross margin should decline as revenues decline and start-up costs increased.

  • The midpoint of the forecast is 9.5 in gross margin in the second quarter of 2003.

  • Spending.

  • R&D plus MG&A should be approximately $2.4 billion, a slight increase from first quarter spending of $2.3 billion.

  • Annual salary increases take effect at the beginning of the second quarter, and under normal business conditions drive spending a little higher.

  • Appreciation should be between 1.1 and $1.2 billion.

  • Amortization of acquisition related intangibles and cost should be approximately $40 million.

  • Our estimate for gains and losses from equity investments and interest and other income is a net gain of $60 million.

  • Looking ahead to the rest of the year, our previous outlook is unchanged.

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

  • The 62% midpoint is five points higher than 2003 gross margin at 57%.

  • Margin should expand with higher unit volume and productive use of 90-nanometer technology on 300 millimeter wafers as we build more of our mainstream product with these technologies.

  • Capital spending should be $3.8 billion, plus or minus $200 million.

  • Our budget for R&D for 2004 is approximately $4.8 billion.

  • Depreciation for this year is forecast to be approximately $4.6 billion.

  • Our estimated tax rate for 2004 is 32%.

  • Amortization of acquisition-related intangibles is expected to be $170 million for 2004.

  • Our outlook for 2004 foresees a strong unit growth in revenue made possible by an improved economic climate and outstanding products.

  • As revenue grows, as new manufacturing capabilities reduce costs, as we pay strict attention to our asset base, profits year to year should grow substantially.

  • The year is young, and the economic uncertainty is always with us, but the last three years have demonstrated our resilience in delivering value through a range of economic environments.

  • We believe we're well situated to benefit from the strength of our business model and our solid financial health during the rest of 2004.

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

  • - President, COO, Director

  • Thanks, Andy.

  • Revenue of $8.1 billion was down seasonally but showed good year on year growth across all geographies, helping us set a record for the first quarter revenue.

  • Emerging market demand continues to be an area of strength.

  • Helping our channel business set a sales out record in the quarter.

  • Our communications business grew sequentially as we saw our flash business stabilize and our Wi-Fi business continue to grow.

  • In the Americas region, revenue was down 8% sequentially but up 12% versus last year.

  • The U.S. retail channel showed healthy growth versus a year ago.

  • We also had good demand in Latin America as the macroeconomic conditions continue to improve in countries such as Brazil.

  • In Europe, revenue was down 9% sequentially and up 17% versus last year.

  • PC demand in western Europe was a bit better than we expected in the corporate and small and medium business market segment and consumer demand showed strong year to year growth.

  • Japan was down 9% sequentially and up 32% versus last year.

  • We believe first quarter results were lower than seasonally normal as Japanese OEM customers and their retail channel worked down an inventory buildup from the fourth quarter.

  • Asia Pacific was down 5% sequentially but had a healthy year-over-year growth of 24%.

  • We saw a continued good local PC consumption in emerging markets as well as more established markets such as Korea and Australia.

  • As I mentioned earlier, one of the highlights in the quarter was our channel business, which set a new sales out record.

  • Channel growth was helped by continued strong demand in emerging markets such as China, India, and southeast Asia.

  • Our plan in 2004 is to increase our investments in this channel, extending our presence to new countries and cities around the world.

  • Moving to our Intel Architecture business, revenue was down 9% versus Q4 but up nicely at 22% versus a year ago.

  • We had solid double-digit unit growth across all of our market segments, desktop, mobile, and server, compared to a year ago.

  • Excluding X-Box processors, ASPs were approximately flat versus the fourth quarter.

  • And we believe we maintained our microprocessor market segment share.

  • In the desktop, we began high-volume shipments of the industry's first 90-nanometer processors.

  • We shipped millions of Prescott units in Q1, and we expect to have Prescott shipments cross over Northwood in the performance market segment by the end of the second quarter.

  • As we indicated in January, there were some tightness in availability in the first part of the quarter.

  • During the quarter, wafer starts, yields, and bin splits all improved, and we are now at a weekly production rate of over one million units.

  • Our goal is to ship double-digit millions of Prescott core processors in Q2.

  • Including initial shipments into the value segment.

  • In mobile, although overall shipments were down sequentially, our Centrino and Pentium M processor based products continue to grow as a percent of our mobile business and we're up from the fourth quarter.

  • During the quarter we increased the performance of our low-voltage and ultra-low voltage Pentium M professor for thin and light notebook PC's.

  • We also increased the speed of the Vaniant (ph) based Celeron M processor to 1.4 gigahertz and introduced an ultra low-voltage version of this microprocessor.

  • Our 90-nanometer mobile processor code named Dothan qualified for production in the first quarter and we have begun shipments to our customers in anticipation of a May launch.

  • We plan a very steep ramp of both Dothan and Prescott this year and I will be giving you more details on this at our analyst meeting on May 13.

  • In the enterprise server units were lower sequentially but on a year to year comparison the business is doing very well with revenues up over 40%.

  • We did see a better mix in the quarter driven primarily by a shift in customer purchases to higher end DP processors.

  • In the quarter we introduced the Intel Xeon processor MP running at 3 gigahertz and featuring 4 megabytes of its level three cache memory.

  • Intel also introduced 2.2 gigahertz and 2.7 gigahertz versions of the product with 2 megabytes of level three cache along with a 3.2 gigahertz Intel Xeon processor for one and two-way servers.

  • We also broadened the Itanium 2 processor family to 1.4 gigahertz and 1.6 gigahertz processors featuring 3 megabytes of cache memory.

  • Which we expect will significantly help reduce the cost of the entry-level two-way Itanium systems.

  • Our new DP server and work station chip, code named Nocona (ph), remains on track to ship in Q2 with OEM systems set to launch beginning in July.

  • Nocona combined with our next-generation of chipsets and support for TCI Express, CDR-2 memory, as well as 64-bit memory extension technology to the one and two-way server and work station market segments.

  • Chipset units were down from Q1 due to a combination of seasonality, some inventory reductions by our customers, and increased competition at the low end of the marketplace.

  • We remain on track to launch our new desktop chipset Grantsdale in the second quarter.

  • Grantsdale will be the most significant upgrade to our desktop chipset platform in a number of years bringing support for DDR-2 memory and PCI express as well as improved graphics and audio capabilities, soft grade, and an integrated wireless access point.

  • Moving to our Communications Group, revenue for ICG was up slightly versus Q4 and up 11% versus a year ago.

  • Flash revenue was slightly higher, in what is normally a seasonally down quarter, driven by our return to the broad market through our distribution channel.

  • We saw higher units and good density growth as we moved more of our production to MLC technology on 130-nanometers.

  • We also announced the industry's first NOR memory based 90-nanometer manufacturing technology and expect to begin shipments in Q3.

  • This product reduces dye size by approximately 50% and provides the high memory performance needed by today's advanced handsets and PDAs.

  • In the wireless area we began shipments of our BG wireless LAN product during the first quarter and we maintained our overall attach rate with Pentium M processors at well above 50%.

  • Yesterday we introduced a new family of XPL application processors formerly code named Bulverde which will be used in mobile phones and PDAs.

  • Processors integrate Intel wireless MMX technology for advanced 3-D gaming and video along with Intel wireless SpeedStep power management technology.

  • In summary, our 90-nanometer process and ramp is healthy and ramping fast.

  • Prescott is moving to the mainstream in Q2.

  • Dothan is in volume production now.

  • We are ideally positioned for a strong second half with new products and platforms.

  • And with that let me turn the meeting back over to Doug.

  • - Director of Investor Relations

  • Okay, thanks, Paul, we will now open the conference 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, and with that I'll turn it back over to the operator.

  • Operator.

  • Operator

  • The question-and-answer session will be conducted electronically.

  • If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

  • If you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment.

  • We will proceed in the order that you've signaled us and we'll take as many questions as time permits.

  • Once again to ask a question please press star 1 at this time.

  • And we'll have our first question from Tim Luke, Lehman Brothers.

  • - Analyst

  • Do you foresee demand in the notebook area and how the demand preceded in terms of linearity through the quarter and how you see broadly the outlook there in terms of the inventory perhaps in the channel and then obviously your inventory moved up slightly.

  • Thank you.

  • - President, COO, Director

  • Well, as I said, I believe that our -- one of the reasons that our notebook shipments were down sequentially beyond the normal seasonality was that there was some inventory at our customers' that had to get worked off coming out of the fourth quarter year end.

  • I was particularly pleased that in spite of that, we saw unit growth in Centrino mobile technology and Pentium M, our new processors in this area, over and above Q4 numbers, which were a high water mark for us on the product before them.

  • So I don't think this indicates any kind of abnormal trend here.

  • I think there is still a mega trend towards mobile, and we are still counting on that for the year.

  • - Analyst

  • Is it fair to say that most of the inventory you feel, though, might have been in excess is now removed from the channel, or where are we in that cycle?

  • - President, COO, Director

  • I believe that's true, and I think, as I said, I think some of that had to do with consumer notebooks which tend to be flushed through the cycle after the holiday selling season.

  • - Analyst

  • Thank you very much.

  • Operator

  • We'll have our next question from Andrew Root, Goldman Sachs.

  • - Analyst

  • Hi, thanks.

  • Quick question related to your gross margin guidance, and I apologize if this sounds convoluted but the gross margin performance X Intergraph was extremely good and the Q2 guidance seems conservative.

  • Can you talk a little about the components that will go into that and what you're expecting next quarter as far as whether wafer starts will be down, or flat from managed inventory?

  • You know, what you're expecting for ASPs and the mix between the various segments?

  • I told you it was convoluted, I'm sorry.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Several questions, a real hard one.

  • How do I start?

  • Let's start first with the simple explanation of the quarter to quarter change in gross margin.

  • The revenue will be down slightly, which will cause margins to be down a bit.

  • The bigger factor is the fact that start up costs on 65 -- 300 millimeters, 65-nanometers start to kick in, so I think that's going to cost maybe a little bit of margin here as well.

  • Am I being cautious?

  • I hope not.

  • But as of how we performed in the first quarter, it would be easy to see that I might be.

  • My real belief, we'll see a little bit of deterioration due to revenue, due to start-up cost.

  • You know, you won't see a big change in wafers.

  • We are bringing the 300 millimeter fab in Albuquerque up.

  • It's running, it's getting good yields.

  • We're in production on both Dothan and Prescott now.

  • The inventory build was better yield than we expected.

  • We don't want to dial that back.

  • What we can do, it takes awhile to adjust that, obviously, you can get the fab in Arizona off line to be converted quickly, if you're having good news you can rebalance the rest of the factory.

  • So I'm not worried about having too much inventory or too much production during the year, I just think it will take me into the third quarter before I can start to pull down my inventory a little bit.

  • - Analyst

  • Okay.

  • And then finally, ASP expectations which were again flat in the quarter.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • You know, I can't give you an ASP forecast, but I have told you I think the big factors for the next quarter are revenue being down a little bit and start-up costs being up a little bit.

  • - Analyst

  • Great.

  • Thanks very much.

  • Operator

  • We'll go next to Manishe Goyle (ph), Neuberger Berman.

  • - Analyst

  • Clarification to the prior question.

  • Did you say that your inventories will increase at the end of second quarter, your internal inventories?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • No, what I said was I don't think I'll see much progress in reducing them.

  • We built $277 million in the first quarter, mostly work in process, more than I expected, because the yields in Albuquerque in the 300 millimeter fab were much better than I expected.

  • I've already started wafers that are going to produce product in the second quarter so I'm not going to go and make a major change or disruption in the factory.

  • What I'll do is I'll continue to run the factory in Q2 and work the inventories down in Q3 and Q4 if we see a seasonal second half.

  • - Analyst

  • Yes one more.

  • Could you please quantify roughly what will be the impact of the start-up cost, how much is the impact of the start-up cost?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • You know, we don't give that finite level of detail, but what you'll, you know, what I've essentially said is we'll see margin from the business side of it, you know, the business side of operations be down a point to two points, which I've mentioned two things.

  • One is revenue, and one is start-up cost.

  • Both are similar in size.

  • - Analyst

  • Thank you.

  • Operator

  • We'll go next to Chris Danely, JP Morgan.

  • - Analyst

  • Sorry to hammer on the inventory, but, I mean, if my calculations are right, this is the highest it's been since '95.

  • I'm just wondering why you wouldn't be a little bit concerned about that.

  • And I have a follow-up.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Well, I guess when you say why aren't we concerned about it, I look at it is I could have had two problems here today.

  • One is I could have had good yields and little bit more inventory, the other is I could have had 40 yields and factory write-offs and no inventory to sell.

  • So I think I have the better of the two problems.

  • What I also think is you have to run the factory smartly and not jerk them around which means I'm willing to live with a little bit extra inventory in order to do that.

  • - Analyst

  • So what would be a normal seasonal Q3 in your opinion?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Well, again you can go back and look at years and years and years and what you've seen is revenues go up about 8%.

  • - Analyst

  • Okay.

  • Thanks.

  • Operator

  • We'll go next to John Lau, Banc of America.

  • - Analyst

  • Thank you.

  • You spoke about the notebook having recovery with underlying demand pretty stable there.

  • On the desktops are you seeing also the underlying demand very stable and in terms of the Grantsdale launch is there a pause waiting for this chipset?

  • Thank you.

  • - President, COO, Director

  • Let me check my notes here.

  • On the desktop, I would say it was -- yes, I would categorize it as a stable environment.

  • It's driven by two things.

  • We saw strong growth in emerging markets.

  • Again, those tend to be a heavier mix of desktop versus notebooks.

  • We also saw good corporate demand, particularly in Europe, this last quarter.

  • So, yeah, in general, I felt pretty solid about the desktop business.

  • I don't think there is a pause waiting for Grantsdale.

  • There is -- as you know we have a dual memory strategy associated with that DDR 1 and 2, so that we've got a lot of flexibility as people start ramping those platforms.

  • I think there is some feature sets there that have an appeal to the consumer market and we've lined up the launch of Grantsdale for the back to school selling season.

  • - Analyst

  • So then the Grantsdale launch is going to go into volume production in the Q3 timeframe for the consumer area, then?

  • - President, COO, Director

  • Well, and business.

  • - Analyst

  • Great.

  • Okay.

  • Thank you.

  • Operator

  • We'll have our next question from Michael Masdea CS First Boston.

  • - Analyst

  • Yeah, thanks.

  • Andy, you talked about the 90-nanometer, 200 millimeter units improving.

  • Do you need to see better than seasonal growth not to pull back on your spending outlook?

  • And also just one more question on inventory, I assume that the profitability, the products, and inventory you're expecting to be better than what you're shipping right now and when it's in high volume.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • I'm not sure I understood the question.

  • So help me.

  • When you say spending, R&D?

  • - Analyst

  • No, capex.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • So it's difficult for me to see anything that would change my capex at this point.

  • Q1 came in almost exactly where we expected.

  • We did get better yield, so the factories are performing better than I expected.

  • What that does is give me the ability, if I can take advantage of it, to bring Arizona off line more quickly to begin that conversion to 300 millimeters.

  • So I don't think there's anything I would want to do to pull back Albuquerque or 300 millimeter.

  • What I'd really want to do is, you know, drive over to Prescott, ramp built on it more quickly, and get the Arizona factory converted more quickly, off line more quickly.

  • So this is what we would like to have happen as opposed to an issue we had to deal with.

  • - Analyst

  • Maybe a quick one for Paul.

  • Can you talk about how AMDs kind of attempts to penetrate the higher end desktops and get into the servers and the second sources, impacting your customer behaviors or discussion with them at all?

  • - President, COO, Director

  • Well, you know with don't typically talk about competition here.

  • As I said I think we're -- we probably maintained our market segment share this quarter.

  • We had year-over-year growth in all major segments.

  • I think that speaks pretty nicely to the current competitiveness of our product line and I've outlined in our road map discussions with you where we're going the rest of this year, so we've got a real solid lineup and I'm comfortable that we can prevail.

  • - Analyst

  • Thanks.

  • Operator

  • We'll have our next question from Nimal Vallipuram, DRKW.

  • - Analyst

  • The first question is for Andy.

  • Just going back to the inventory question, it looks like you're trying to fine-tune the new manufacturing process as it gives you higher yields than expected, vis-a-vis the demand and as a result you've built up some inventory in the first quarter, which otherwise you probably would not have wanted.

  • By the end of the day that does make some impact on the gross margin, and as you indicated in the next two quarters or so, I mean, you can only make the material change to the inventory starting from the third quarter into the fourth quarter.

  • Is and also you are still giving the year-end gross margin to be 62% for the whole year.

  • Can you give us an idea, are you expecting a more than seasonal second half in terms of demand, for that to happen, or can you just give us an idea how all these things are going to fall into place?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • I probably don't have the same confusion everybody else does, or I'm missing something.

  • We built $277 million extra, mostly work in process, but the factory isn't yet working at the peak I have it planned for, for the end of the year.

  • We still have yield improvement to go.

  • So I'm looking at this saying, good, I'm ahead of schedule for the year, that's a good place to be, I got a pleasant surprise in Q1, which was the first full production quarter, that's a good place to be.

  • As a result, I probably have a week's worth of inventory, maybe ten days worth of inventory to drain off some place between now and the end of the year.

  • That doesn't even require an exceptional second half.

  • Almost any second half does that.

  • I think we're positioned to be successful regardless of what comes in the second half.

  • If we have better than seasonal second half, sure, we can run the factory a little harder, I can run the Arizona fab a little longer, we have lots of choices, lots of ways to respond to that.

  • If we have what I'll call a seasonal second half it just allows us to manage the conversion of the Arizona fab more calmly and professionally, it allows us to rebalance our factories and things continue on.

  • As far as full year, the only real significant difference versus beginning, we had a little bit better operating margins in the first quarter, we had a charge that kind of matched that, and maybe I could have fine-tuned the margins by two or three-tenths of a point.

  • When you talk about full year, 62 plus or minus a few points, it just seems silly with very limited new data to start trying to fine-tune that thing.

  • - Analyst

  • All right, Andy, I think you answered the question.

  • If I may, just a follow-up question for Paul.

  • Paul, you indicated last conference call that you saw the corporate demand in Europe coming back and we had discussed the fact that having the last, you know, replacement cycle in Europe was in 1998, and in U.S. was in 1999, and, you know, Europe operating and coming back as a leading indicator for the U.S. cooperating and coming back.

  • Are you seeing anything like that?

  • Are you seeing the U.S. popular demand, are you seeing any early indication of that coming back?

  • - President, COO, Director

  • Well, that really hasn't changed, either.

  • My characterization wasn't that we weren't seeing any in the United States, it's that we're seeing a much more normal cycle.

  • I think the '98 euro conversion and the '99 Y2K conversions were exceptional.

  • What we're seeing now in the United States and in western Europe, the traditional mature corporate market is a much more traditional buying pattern when people buy things as they hit the edge of their replacement cycle.

  • There's no one reason to upgrade.

  • They're buying based on upon productivity and new application rollouts.

  • Actually, I think it's a more healthy scenario than we had with the two bubbles.

  • - Analyst

  • Do you expect the corporate demand in U.S. this year to be somewhat better than last year?

  • - President, COO, Director

  • Yes.

  • - Analyst

  • Thank you, Paul.

  • Thanks a lot.

  • Good quarter.

  • - President, COO, Director

  • Thank you.

  • Operator

  • We'll go next to Adam Parker, Sanford Bernstein.

  • - Analyst

  • Yeah, hi.

  • Could you talk a little bit more about your working plan of communications?

  • You said it's kind of moving toward profitability.

  • Is there any time frame you can share with us on when you expect break even outside of IAG?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Sure, Adam.

  • The first thing I have to say is I can't claim working towards profitability in this particular quarter.

  • What I tried to communicate is, you've seen the old Intel Communications Group, quarter by quarter, take a goal of improving itself, improving its bottom line, and we've been doing that.

  • Now we have to do the same thing with the new combined group, hopefully we've set our low baseline in this quarter and it only gets better from here.

  • That is the goal.

  • Now, how do you do that?

  • You do that the same way we've been doing it for the last few years.

  • You go through all the investments you're making, you make sure you get rid of or stop investing in the areas of low return, you make sure that you push revenue and get flash more in the marketplace, protecting the broad marketplace, you continue to invest in your manufacturing technology, so I don't think it's easy or fast.

  • I think it takes a long time.

  • I'll be disappointed, though, if we don't show consistent quarter by quarter improvement as we go towards profitability.

  • That absolutely is the goal Sean's working toward.

  • - Analyst

  • All right.

  • Just a separate question.

  • You probably won't like this question but in the last couple of quarters, I guess it's $3.5 billion of shareholders' money you've used to buy back stock and I'm just wondering if you can offer, as a CFO, any guidance on share repurchase, it was (INAUDIBLE) for a while.

  • Is it now going to fluctuate, is there a pattern, is it based on price, or is there anything you can share with your strategy there?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • It's not I don't like the question, it's just that I have -- on advice of very good friends of mine we don't make a forecast on how much we're going to buy back at what price we're going to buy back and when.

  • It's an open market transaction.

  • We have been active in the past, as you know, other than the third quarter of last year, it was a pretty consistent level.

  • We will continue to be under our ongoing program active in the marketplace

  • - Analyst

  • So it's not reset to this new level consistently?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Well, again, I can't forecast the level of buyback, I'm sorry.

  • - Analyst

  • All right.

  • So it's not that you can't legally, it's just that you don't want to?

  • I'm just trying to understand the difference.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • I'm choosing not to.

  • I don't know if I could or not, to be honest.

  • - Analyst

  • Okay.

  • Thanks.

  • Operator

  • We'll have our next question from David Wu, Wedbush Morgan Securities.

  • - Analyst

  • Yes, good afternoon.

  • Just one clarification and a question.

  • The clarification is, Andy, you mentioned that the losses jumped in the communications Group because of paradoxically a good yield on 0.13 micron which caused a write off of -- a write-down of inventory.

  • Is that right?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Yes, that's correct.

  • - Analyst

  • Okay.

  • Question for Paul, on the Centrino platform, mobile technology, you're moving to the G, in your opinion, how fast would we see a shift from your Centrino B base to a G base solution, and is there a pent up demand for ultimately the universal ABG solution for the Centrino in the corporate market?

  • - President, COO, Director

  • The first part of your question, David, is it's a very rapid transition.

  • Essentially it's not a B versus a G, it's -- we're offering a BG, and it's backward compatible, as you might imagine, so that becomes essentially the new standard offering here.

  • In terms of the dual-band trimode, which is ABG, it's not clear to me in terms of the demand, vis-a-vis the corporate market, but I do think that it's likely to be a check-off item requirement in the year end early next year time frame.

  • So we're planning on the offering moving to be our mainstream offering, just for that reason.

  • It's deminimus on cost and it allows users the choice of whatever access point is there.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • We'll go next to Mark Edelstone, Morgan Stanley.

  • - Analyst

  • Good afternoon guys.

  • First off congratulations on calling another quarter very, very well at the start of it.

  • I had a question on the gross margins, if I could Andy, I think I understand your explanation on why the inventories went up because of the better yields, but given the increase that you saw in inventories in Q4 and the better than expected yields on 90-nanometer in Q1, was there any charge to gross margins to basically write down that Q4 inventory?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • In the processor space, not really.

  • You have to recognize that filling a 300 millimeter fab, there's a big bucket to be filled, and part of what's happening is the spending in that area goes up, as the spending goes up and more of it turns good, you're allowed to -- you get to ship it, and we shipped essentially everything we had in inventory at the end of the fourth quarter.

  • So what you end up with is shifting inside the quarter, it's in your costs, you don't see a write-down, and then you get the benefit, hopefully going forward, of better yield in your cost buckets for the next quarter.

  • So, no, no real big change in valuation in the processor space from the beginning on-hand inventory.

  • What's there was essentially created inside the quarter.

  • - Analyst

  • Okay.

  • That's great.

  • And then can you give us your assessment of where you think we are -- or where you think you guys are in the discovery phase, if will you, of the better-than-expected yields?

  • Obviously in Q1 90-nanometer 300 millimeter ramped up better than you thought, yields were better.

  • How much more potential surprise do you think there could be as you go through the next couple of quarters.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • There could be some.

  • I don't want to say no.

  • We have -- you know, we did build a plan with improving yields throughout the year.

  • I would say when I -- we started, we made our first forecast for the first quarter, I thought we were going to be below our plan for the first quarter, in reality we came in a little above, so a part of the improvement was the fact I thought we were going to be behind yields, part of it is because we did better than planned.

  • So, yes, there is still room to step up in Q2 and Q3 in terms of yield.

  • It will surprise me.

  • I don't think I will get a big surprise because we're actually doing pretty well already.

  • - Analyst

  • Just one last final then.

  • Given where the inventories are then, is there a risk that if you get a continuation of this better than expected yield that at some point the inventories are in a position where you would have to actually take a charge to your cost of goods to write that inventory down to lower cost of market?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Certainly there's a risk you could have to write it down to lower cost of market.

  • If you look at the inventory pipeline at this point, some of the products I have just built in March could end up carrying over into the next quarter and being written down to a new lower level.

  • So that risk is out there.

  • I don't think it's huge, but it is out there.

  • - Analyst

  • Thanks for the complete answers.

  • Operator

  • We'll have our next question from Krishna Shankar, JMP Securities.

  • - Analyst

  • Yes in the first quarter can you characterize the mix between value and performance notebooks and just talk about the trend towards the wide box notebook market and the sub $1,000 notebook market and how you see that impacting Intel?

  • - President, COO, Director

  • Unfortunately, Krishna, I'm not going to be able to give you some numbers here, but in general the notebook market in the first quarter was a little richer than the fourth quarter, mostly because the fall-off on the consumer sales versus corporate sales, so I don't have the numbers in front of me.

  • I think the performance/value mix actually richened us slightly and that's consistent with the comments I made on Centrino and on Pentium M shipments increasing quarter over quarter.

  • - Analyst

  • Okay.

  • And as Dothan ramps up do you see the original Centrino falling off very rapidly?

  • - President, COO, Director

  • Yeah.

  • - Analyst

  • As they're buying Dothan do they have to wait for the Alviso chipset also to get the complete platform or will there be significant user benefits just with Dothan alone?

  • - President, COO, Director

  • No, we did designed Dothan to take advantage of the existing socket, motherboard infrastructure for Banius (ph) which was the first version of Centrino mobile technology.

  • So customers are able to ramp with the existing motherboards, just get essentially a speed bump into that product, they're also doing new designs around Alviso to take advantage of that feature set.

  • So you will see both in the marketplace.

  • - Analyst

  • Thank you.

  • Operator

  • We'll have our next question from Joseph Osha, Merrill Lynch.

  • - Analyst

  • Hi guys.

  • Sorry, back to the inventory thing, yet again.

  • Andy, you were kind enough in the fourth quarter to give us a sense as to how your sort of excess operating rates, if you were, had contributed to the Q4 gross margin performance.

  • Can you give us a sense -- is there a similar calculation you can do for the first quarter?

  • And I have a follow-up.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • I'm not sure.

  • What did I give you in the fourth quarter?

  • - Analyst

  • You indicated at that point that something like 150 basis points of gross margin that you reported for Q4 was as a result of sort of an operating rate benefits that would not be duplicated in subsequent quarter.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Okay.

  • So if I looked at the first quarter --.

  • - Analyst

  • Had you not built all this excess inventory what would have gross margin been?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Boy, that's an interesting one.

  • I believe if we had not had the surprise in yield we would have been very close to our original forecast.

  • - Analyst

  • Okay.

  • Thank you.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • And adjust as our original forecast for Intergraph.

  • - Analyst

  • All right.

  • So the 60%.

  • If -- you lost me there, I apologize.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • So if you take Intergraph out of everything and you take the inventory build out of everything we would have been on our forecast.

  • - Analyst

  • Gotcha.

  • Okay.

  • Then the follow-up would be, clearly there's going to be at some point here some reduction of Northwood prices, to what extent is there any of that product sitting on your balance sheet that's maybe, you know, a little problematic in terms of having to sell it through at lower prices, because, you know, clearly, if you look at -- not everything -- not all of that inventory there is Prescott and Dothan.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Remember, the -- both the Northwood dye and the Prescott dye are capable of generating either Pentium or Celeron product depending on the configuration and the cache and so forth, so we have a lot of degrees of flexibility with both products, and I said before that Prescott in general will be used as the capacity replacement initially for the Northwood dye.

  • So we are very comfortable with where we are with Northwood.

  • That is a great product to continue running in the channel as the channel ramps up to speed on the new motherboards and -- new chassis required for Prescott.

  • It also gives us a lot of flexibility at the low end of the market in terms of Celeron, particularly in emerging markets.

  • I'm not worried.

  • - Analyst

  • One just, I'm sorry, one quicky.

  • Notebook inventory problem sounds like coming to a close.

  • Why would we not, perhaps, see the revenue target a smidge better than seasonal if you're going to enjoy that sort of increased exposure to your customers' activity here in the second quarter?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • It might be.

  • You can also say, you know, at 2.5%, it's kind of more towards a smidge better already.

  • Again,.

  • - Analyst

  • We're splitting hairs here, I know.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • I'd love to be wrong, I'd love to have the revenue be higher.

  • I'm sticking with my wide range.

  • - Analyst

  • Fair enough.

  • Thank you very much.

  • Operator

  • We'll go next to Michael Mcconnell, Pacific Crest.

  • - Analyst

  • Thank you.

  • Shifting gears a bit here to the flash business, I notice your flash revenues were up about 4.5% sequentially could you give us indication on pricing and the high density flash relative to low density where you're seeing some improvement if at all and also an outlook for Q2?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • I can do some of that.

  • The revenue came in up ever so slightly versus the fourth quarter, and versus last year.

  • It's higher density, it's more parts, and lower prices, so we have seen, you know, pretty intense price pressure.

  • This is what it takes to win back the business we lost from a year ago, so it, you know, what's interesting is we don't make forecasts by groups but flash came in almost precisely where we expected it.

  • We knew we were having to lower prices, we knew to get the units to fill the factories that would be a requirement.

  • We are going into this broad market.

  • Going into the broad market means you're selling (INAUDIBLE) you'll probably again see some lower prices.

  • So what I think you'll see in this business is probably unit growth.

  • You'll probably see continued price pressure and you'll see us try to manage the mix to hopefully have improving revenues over a period of time and improving margins.

  • I can't give you more specifics over Q2.

  • I can tell you if you go year after year after year, the first quarter is typically the lowest quarter of the year.

  • - Analyst

  • Okay.

  • So Q2 usually historically speaking sees some flatness or even growth, is that it?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Typically in the second quarter you'll see some growth.

  • Again, you know, you can go back, look at WCCG in the old filings and in those days it was essentially all flash, and you will see the first quarter always low, second quarter can grow anywhere from -- the patterns will range, but anywhere from 5 to 10% is pretty common.

  • - Analyst

  • Okay.

  • One last quick question, just on SG&A, looks like that's going to be a little bit higher than original expectations for Q2.

  • Should we build that in our models if we do expect revenue growth in the second half of the year, should we build that higher off of the Q2 base, would you expect that to continue to grow up or is that a one-time kind of event in Q2?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • I don't think I did an SG&A forecast separately but I did take R&D plus SG&A up.

  • That was setting a new baseline because of the rate of -- right now, we're still working on the assumption that we're not going to start growing that spending line other than as a function of revenue.

  • So what you take is Intel inside, you take processor revenue growth, you increase the expenses for Intel inside and everything else stays pretty flat.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • We'll have our next question from Charlie Glavin, ThinkEquity Partners.

  • - Analyst

  • I know you're probably going to cover this in more detail during the analyst meeting in May but given the Dothan delay as well as your current ramp right now, Andy, with the inventory, any significant change in terms of the cross over between 130 and 90-nanometer as well as the percentage build that will be 300 millimeter in the second half of the year?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Again, I think you're right, we will cover that in the analyst meeting so you'll see more detail but I don't think you'll see a significant change.

  • - Analyst

  • Along those lines, though, if I may, Paul, you had mentioned in last quarter that as far as the performance of Dothan that you did need a validation process redesign as far as some circuit modifications and while you were getting it functionally do you believe that you've fully resolved some of the date leakages at this point or is it going to be similar to the copper mine delay that it will improve and as other yields it will come back up.

  • - President, COO, Director

  • Just to repeat what I said last quarter it was not anything to do with functionality.

  • The functionality part was and is extraordinary.

  • What we did was we wanted to get some circuit marginality to have a better and healthier yield to take advantage of the ramping process and we've done that, that product is very healthy, it's ramping at a very steep ramp.

  • - Analyst

  • Paul, if I could, as far as pressing that, functionally, it's okay but in terms of some of the process technology, as far as whether or not to go with more of the High-K dye electrics, things that Suman (ph) had mentioned even, I believe Craig had mentioned in some other comments, it sounds as if there's more work --.

  • - President, COO, Director

  • No, no, the process is ramping with the High-K dye electrics, the product is shipping within the specification that we had originally specified to our customers.

  • - Analyst

  • Okay.

  • It was more in as far as whether or not there was going to be additional yield improvement, Andy seemed to not be hedging that there would be more upside but it seems as if there could be.

  • So you would say you're fully satisfied in terms of those yields?

  • - President, COO, Director

  • I'm very happy with where it's at today.

  • It will continue to ramp over the course of the year is the plan that we've built in for both Prescott and Dothan.

  • - Analyst

  • Okay.

  • Thanks, Paul.

  • Operator

  • We'll have our next question from Graham Tenaka, Tenaka Capital Management.

  • - Analyst

  • Yeah.

  • Hi.

  • Just wanted dual clarification on the yields improvement potential.

  • Is the -- was that an expected yield, was that reflected in your Q2 guidance and full-year gross margin guidance?

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Yes, the guidance for Q2 and for the full year reflect improving yields beyond what we saw in the first quarter, quarter by quarter, on the process on both -- actually Dothan and on Prescott.

  • - Analyst

  • Great.

  • And the other was on ASPs, you said were flat roughly, excluding Xeon.

  • I was wondering what happened--

  • - President, COO, Director

  • No, excluding Xbox.

  • - Analyst

  • Oh, I'm sorry.

  • Okay.

  • I was wondering sort of what the outlook or expectations might be for ASPs the rest of the year.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Graham, we typically won't give an outlook for the rest of the year.

  • All we've said so far that would give you any help at all would be we said Q2 revenue -- or margin changes due to revenue being down and increase in start-up costs.

  • - Analyst

  • Thank you.

  • - Director of Investor Relations

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

  • Operator

  • We'll have our next question from Clark Westmont, Smith Barney.

  • - Analyst

  • Hi, I think a lot of the inventory and gross margin questions have already been asked and answered for me but just maybe complete change of topic, on the option expensing, sounds like the FASB is pretty much, you know, reaching the final parts of their decision, and looks like they'll put that in effect unless Congress stops them by the end of the year.

  • Can you just give us your stance on what you -- do you plan to do anything differently after that, presumably goes into effect, just give us an update on where you stand and I'll take the answer off line.

  • - Chief Financial and Enterprise Services Officer, Exec. V.P.

  • Sure.

  • In reality that will be decided more by Craig and the board.

  • However, Andy and Craig have always had the philosophy that we run this company to optimize cash returns.

  • The data we've seen says broad-based option program actually improves results and the return is better than the cost of the existing shareholders for being in that program.

  • So I really don't see the board or the current management team changing the overall stance, we'll account for it as FASB and FTC tell us to account for it and we'll get on with life.

  • - Director of Investor Relations

  • Okay.

  • One more question, please.

  • Operator

  • And we'll have our final question from Hans Mosesmann, Schwab SoundView.

  • - Analyst

  • Thank you.

  • Paul, a more strategic question.

  • Have you done any analysis regarding Longhorn?

  • In other words, what kind of processing power are you going to need to run that operating system come 2006 effectively or perhaps you can just give us a sense of the incremental processing power relative to the first operating systems that were Windows-based in the early '90s.

  • How would that compare?

  • - President, COO, Director

  • Well it's -- every generation of the operating system has been a pretty large jump forward, almost a Moore's law jump forward in terms of the mist requirement, and the size of the footprint and those kinds of things so I would expect that Longhorn will be equivalent.

  • We've done some modeling.

  • As you know there's a lot of discussion out there now in terms of how much of the new file system will be included in the initial shipments, how much of the security infrastructure around Paladian, Nixcup (ph), will be included, et cetera.

  • A lot of the answer to your question is really a function of which functionality shifts in the initial version versus service pack releases over time.

  • In general, we think Longhorn is very good for our processor road map relative to our processor road map.

  • It synchronizes with a lot of the Ts, or the new feature sets we've built into our processes.

  • It synchronizes with our move towards a multicore in terms of the threaded applications, and it will, I think, provide a much better user experience in terms of file structure and user interface which, again, is taking advantage of the processors.

  • So we would like to see it out as soon as it's possible.

  • - Analyst

  • Okay.

  • Thanks a lot.

  • - Director of Investor Relations

  • Okay.

  • We'd like to thank everyone for listening to today's call.

  • A recorded playback of this call will be available at approximately 5:00 p.m.

  • Pacific time tonight.

  • Those interested should dial 719-457-0820.

  • And reference pass code 775980.

  • Thank you, and good night.

  • Operator

  • That does conclude today's Intel Corporation first quarter earnings conference call.

  • You may disconnect at this time.

  • We do appreciate your participation.