英特爾 (INTC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for your patience, and welcome to the third quarter 2005 Intel corporation earnings conference call.

My name is Bill, and I will be your conference coordinator for today.

At this time, all participants are in a listen-only mode.

However, we will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's presentation Mr. Doug Lusk, Director of Investor Relations.

Please proceed, sir.

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

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

Before we begin, please bear with me a minute while I read our Safe Harbor language.

The third 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, investments, or other business combinations that may be completed after October 17, 2005.

Lastly, if during this call we use any non-GAAP financial measure as defined by the SEC and Reg G, you will find on our website, INTC.com, the required reconciliation to the most directly comparable GAAP financial measure.

With that, I will turn it over to Paul.

Thanks, Doug.

Revenue in the third quarter finished just below $10 billion, and was an all-time record for Intel. 18% year-over-year growth was driven by robust demand for our notebook platforms, and emerging market strength, with records in several countries, including China and India.

At the product level, we set new unit records for microprocessors, chipsets, flash memory, wireless LAN connections, and applications processors.

We also continue to make excellent progress with our transition to dual-core, with over 1 million units shipped so far this year, and plans to more than double that by year end.

Last week, our Digital enterprise group launched our first dual-core products for the server space.

These new Xeon processors code-named Paxville are ramping ahead of schedule, with DP system announcements from over 30 OEMs to-date, and MP systems launching later this quarter.

These systems provide industry-leading price performance, with a system from Dell breaking the $1 per TPC mark for the first time ever.

Our 65-nanometer dual-core Bensley platform remains on-track for production in Q1, and we are already providing seed units to end customers, to help in the rapid adoption of this exciting new platform, which will feature faster memory and IO, plus new virtualization and manageability technologies.

I am pleased to announce that Intel is now in commercial production of its 65-nanometer, 300-millimeter process technology, and that we recently shipped our first dual-core Presler processors for revenue, with desktop systems expected in the marketplace early next year.

Our overall dual-core ramp is also proceeding very nicely, and we plan to ship millions of dual-core units this quarter across notebook, desktop, and servers.

Moving to our Mobility Group, we had an excellent quarter with record shipments of mobile CPUs, chipsets, and wireless LAN components.

Notebook demand remains strong in all of our geographies, and we believe notebooks now represent about one-third of the PC market worldwide, with levels well over the 50% mark in the consumer segments, in Japan and Western Europe.

Our first dual-core CPU for Mobile, code-named Yonah, remains on-track for revenue shipments later this quarter, with an early first quarter launch with our NAPA platform.

In Flash, we had an all-time record in unit shipments, and grew our #1 position in NOR.

Our application processor business also had record units, and continues to grow rapidly, with units doubling versus last year.

In addition, Research In Motion announced plans to use Intel's new cellular processor code named Hermon, its its next-generation BlackBerry device.

In the Digital Home Group, we unveiled the new Intel Viiv brand name, for upcoming digital home platforms, that will deliver our best-ever consumer experience, with a variety of online services and software, such as movies, music, photos, and games.

Available in the first quarter of 2006, Intel Viiv platforms will come in a variety of shapes and sizes, and will include dual-core processors, chipsets, and platform technologies designed from the ground up, to deliver ease of use in the digital home.

We are also developing platforms to power consumer electronics devices, such as digital televisions, set-top boxes, and digital media recorders.

We announced the Oplus system-on-a-chip multimedia display processor, for flat panel displays and HDTV monitors.

We also announced plans to acquire tuner technologies and capabilities from Zarlink Semiconductor, that will allow our platforms to receive, process, store, and display digital broadcast signals.

In summary, the third quarter was a record quarter for Intel in a number of areas.

Our 65-nanometer process technology is in production, and on-track to ramp into high volume in 2006.

We are executing on our dual-core roadmap, with 15 projects underway, and expect to ship millions of dual-core units in the fourth quarter alone.

In 2006, we will aggressively ramp dual-core across all of our platforms, with plans to crossover from the single core in our performance segments by the third quarter of that year.

With that, I will turn it over to Andy for more details on the quarter.

Thanks, Paul.

For several years, we have spoken of three powerful forces shaping our business.

Growth in emerging markets, demand for mobility, and advances in manufacturing.

The third quarter was another case-in-point, as these forces combined to deliver strong financial results.

Revenue, gross margin dollars, and operating income in the third quarter, each achieved year-to-year growth rates in the double digits.

In manufacturing, we are ahead on our cost targets.

Stock repurchases and cash dividends during the quarter returned approximately $3 billion to stockholders.

And average shares outstanding are down 5% from a year ago, and 10% from the peak in 1998.

We expect a seasonal second half, our third consecutive year of double digit growth and revenue, our fourth consecutive year of progress in gross profit margins, and our tenth year with cash from operations in excess of $8 billion.

Two nonoperating items weighed heavily on profits.

Accrual of a charge related to an unexpected legal settlement, lowered gross margin percentage by 1.4 points, and earnings per share by approximately $0.02.

Estimated taxes related to repatriation of cash, lowered earnings per share by approximately $0.04.

Revenue for the third quarter was approximately $10 billion, just over the midpoint for the ranges we forecast in the July earnings release, and the September update.

The growth of 8% in the second quarter was slightly higher than we typically see for this period.

Revenue grew 18% from the third quarter a year ago.

On a geographic basis, as Paul mentioned, the leader in year-to-year growth was Asia-Pacific, where revenue growth of 28% sustained the momentum of the second quarter.

Growth in this region was fueled by continuing broad strength in demand for mobile platforms, including strong local consumption in China and India.

Japan's growth of 20% marked over 10 quarters of year-to-year growth in quarterly revenues.

In Latin America, an economic environment that appears to be more positive and stable is helping business, and government-assisted PC programs are driving revenue growth.

Europe's year-to-year growth of 6% was led by European emerging markets.

Overall revenues was also 6% higher than a year ago in the Americas region, where seasonal growth and demand was offset by movement of sales and manufacturing to Asia-Pacific.

The geography leading sequential growth was Europe, where revenues were up 11% in the second quarter, and set a record for the third quarter.

In most markets, overall demand and revenues were above seasonal patterns, offset in some cases by tightness in chipset supplies.

Channel revenues were approximately flat with the second quarter, reflecting some movement of sales to direct customers.

Gross margin dollars of approximately 5.9 billion reflects the impact of an estimated charge of $140 million related to a legal settlement.

This is part of a total of 300 million in payments.

The remainder of which we expect to amortize over 10 years.

Even so, gross margin dollars grew faster than the sequential and year-to-year growth rates of revenue.

Up 14% in the second quarter, and 26% from a year ago.

Including a reduction of 1.4 points for the charge, gross margin percentage was 59.7%.

If Intel's results were adjusted for the legal charge announced today, gross margin percentage would have been 61.1%, just over the top of the range we forecast in September.

As we anticipated in July, the improvement in margin was driven by higher revenue than in the previous quarter, lower start-up costs relating to the ramp of the 65-nanometer process technology, and lower unit costs of products offset by higher reserves.

Sales of microprocessors were a little higher than we expected in September.

In a year-to-year comparison, gross margin percentage is 4 points higher than the third quarter of 2004, and includes the reduction of 1.4 points for the legal charge.

The improvement was primarily a function of higher revenues and lower unit costs.

Spending on R&D, Marketing, and G&A was $2.8 billion, in-line with our previous forecast, and up 12% from the second quarter.

The largest part of the increase was in R&D, as we began production on 65-nanometer and transitioned resources to develop a 45 -- development of 45-nanometers.

For the year to-date, spending as a percent of revenue is nearly a point lower than the first nine months of 2004.

The number of employees rose during the quarter to 96,000 at the end of September.

The year-to-year increase of 14% is lower than the year-to-year growth in revenues, and keeping with our goal to keep the growth in annual spending, at or less than annual growth in revenue.

Before looking at nonoperating income, I will highlight results for Intel's two largest operating segments.

About two-thirds of the total revenue came from the Digital Enterprise Group, which achieved growth of 6% from the second quarter, and 9% from a year ago.

Microprocessor revenue for the group was at the high end of the seasonal patterns for all microprocessors, and up 7% from the second quarter.

The chipsets constrained by tight supply, revenue from chipsets, motherboards, and other, was up 3% sequentially.

The Digital Enterprise Group make good progress in operating profit, which was up 8% sequentially, and 20% from a year ago.

Revenue in Intel's Mobility Group accounted for one-third of total revenue.

Revenue from mobile microprocessors was up 13% from the second quarter, and 48% from a year ago.

With the success of mobile platforms, revenue from chipsets and other products was up 82% year-to-year.

Our Flash memory business shipped record units with higher ASPs in a competitive market, and revenue was up 8% from the second quarter, although down 10% from a year ago.

The Mobility Group also made good progress in operating profit, up to 23% (ph) from the second quarter, and 76% from a year ago.

And now to nonoperating items.

Intel's tax rate of 38.5% included accrual of tax expense of approximately $250 million, related to the repatriation of accumulated income earned abroad.

Fully diluted earnings per share, which includes potential dilution attributable to employee stock options was $0.32.

The charge related to the legal settlement lowered earnings per share by approximately $0.02.

On the balance sheet, inventories of $2.8 billion were up slightly from the second quarter.

Inventories have been leaner than we would like, and we expect to build to higher levels in the fourth quarter, as we produce more 65-nanometer processors.

Total cash investment comprised of cash, short-term investments, and fixed income trading assets ended the quarter at $13.6 billion, a decrease of 900 million from the second quarter, after stock repurchases of $2.5 billion, capital spending of 1.3 billion, and dividend payments of nearly 500 million.

As we turn now to the outlook for the fourth quarter, please keep in mind that the forecast data do not include the effects of any new acquisitions, divestitures, investments, or similar transactions that may be completed after October 17.

I will use the midpoint of forecast ranges when making comparisons to specific periods.

We are planning for revenue in the fourth quarter to be between 10.2 and $10.8 billion.

The midpoint of this range would mean sequential growth of 5%, which is less than the 8% five-year average for this period.

And year-to-year growth of 9%, which is lower than that in the previous three quarters.

The picture is different as you look at the second half overall.

Growth in the third quarter was a little better than usual for this time of year, while growth in the fourth quarter is projected to be a little slower.

Added together, they point to a second half with revenue that is 10% higher than the first half, and consistent with a five-year average for these periods.

While there appears to have been a small inventory build in the range of $100 million among our large OEM customers in the third quarter, demand looks healthy and seasonal.

Our expectation for growth margin percentage in the fourth quarter is 63%, plus or minus a couple points.

This is approximately 3 points higher than the third quarter including the legal charge, and 2 points higher excluding the legal charge.

We anticipate that most of this increase will be a function of the qualification of new dual-core products as we ramp 65-nanometers.

Higher revenue will also contribute to better gross margins.

Spending, R&D, plus MG&A should be approximately $3 billion, up from 2.8 billion in the third quarter.

In addition to revenue and profit-dependant items, the increase includes seasonal marketing programs.

Depreciation should be between 1 and $1.1 billion, approximately flat with the third quarter.

We expect amortization of acquisition-related intangibles for the fourth quarter to be approximately $20 million.

Our estimate for gains and losses from equity investments, and interest and other income is a net gain of $130 million.

For the entire year, we continue to target capital spending of $5.9 billion, plus or minus 200 million.

The outlook for R&D spending for the year is also unchanged at approximately $5.2 billion.

Depreciation forecast remains 4.3 to $4.4 billion.

The estimated tax rate for the fourth quarter is expected to be approximately 31%.

Our outlook combined with the results for the year-to-date, anticipate a year with revenue in the range of around $39 billion, which would be growth from 2004 of approximately 14 to 15%.

The same process points to gross margin percentage for the year in the range of around 60%, up more than 2 points from 2004.

Spending for the year is growing roughly in-line with revenues, and we anticipate that spending as a percentage of revenues will be approximately flat with 2004.

With cash from operations in the first two quarters of nearly $7 billion, we are on-track for another year of strong cash generation.

With that, let me turn it over to Doug for Q&A.

Thanks Andy, 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 the process, we ask that you please limit yourself to only one question, no more than one follow-up.

Thank you.

Operator?

Thank you very much, sir. [OPERATOR INSTRUCTIONS]

Our first question comes from the line of Apjit Walia of RBC.

Please proceed.

Thank you.

Essentially Andy for the September quarter, if you did not have the chipset strength, how much more revenues could there be?

Well, it is difficult to estimate.

If we had not had the chipset constraint, it would certainly cause us to round to the next higher, if not a little bit more.

Great.

And in terms of the inventory build with the end customer now, essentially is this -- I mean are you seeing this across the board, or is it somewhat specific?

And where do you think it comes from essentially?

I don't want to point out any specific customer or two, but there is not a lot of them who we saw the inventory build.

And what happened, I think, is we have been in a period of tightness.

Our customers do want to make sure they have the ability to respond to a fourth quarter upside, and in reality it is perfectly natural, if you can get a few extra parts, you get a few extra parts.

And lastly, if you were to relate India and China for revenues, what would they be right now?

I'm sorry?

China and India as end markets, what would they be in revenues right now?

China would be far greater than India at this point.

And I think that China is probably --

China is about to become, or if it hasn't already, the second largest consumption market in the world for PC's, after the U.S.

It is about to pass Japan.

So it is in that range.

China, what we called out specifically, because it is a big enough percentage of revenues, so you will see that.

India is much smaller at this point.

Truly just getting under way as a growth market.

Great.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Mr. Chris Caso of Friedman, Billings, Ramsey.

Please proceed.

Yes, hi, thank you.

I wonder if you could just give some more color on the gross margins and, you know, specifically the increase for the fourth quarter, if you can kind of breakdown for us where the sequential increase comes from, perhaps, you know, break it out by the different components?

By far, the vast majority of the increase in large percentage for the fourth quarter will be in the qualification of the products on 65-nanometer production.

You always get a little bit of benefit when have you increasing revenue, particularly in a quarter when you make processors will probably be the biggest driver of that revenue growth, so just due to a small amounts, because of product mix.

By far, the biggest explanation will be adding the qualification for the 65-nanometer products.

Okay.

And as a follow-up, if you can just, you know, address, obviously, a lot has been discussed about the capacity constraints that you're under right now.

How do you see that playing out perhaps into Q4 and into Q1?

Which areas do you still expect to be tight, as you exit the year and go into Q1?

Clearly, the chipset constraint will continue into the fourth quarter.

We are producing more chipsets ourselves.

We do have relationships now with a couple of other suppliers, who will be providing chipsets for the low end desktop.

It takes a while for that capacity to come online.

I still think you will hear a fair amount of noise through the first part of the quarter.

We are hopeful that as we get to the end of the quarter, we will start to get some relief from the constraints we have been seeing.

Okay.

Thanks.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Christopher Danely with JP Morgan.

Please proceed.

Thanks, guys.

Just a quick clarification, and then on to the questions.

So, Andy, you said that the reason that the Q4 sales guidance is a little less than seasonal, is basically because Q3 was better than seasonal, and there is a little bit of an inventory build out there?

Is that where we're going?

That's correct.

I said that I thought there was about $100 million of inventory build in the third quarter, which means if you look at quote 'normal consumption', it would have put us back more towards the midpoint of the third quarter season.

If you recall last year, we had a situation like that, and we overforecast the following quarter, not allowing the inventory to be used by our customers, so what we see is seasonal consumption, and we see about $100 million inventory swing for us, between the third and fourth quarter.

Okay.

And how about your own inventory?

How do you expect that to change in Q4?

Well, you saw our inventory up under $100 million, all essentially good for the third quarter, which was a pleasant surprise, to be honest.

I do think as we qualify the product for the 65-nanometer, that does then put some spending into inventory, and I would expect to see the increase in inventory levels in the hundreds of millions, you know, above 200, less than 400, something like that.

Okay.

That's fine.

Thanks a lot, guys.

Thank you very much. [OPERATOR INSTRUCTIONS] The next question comes from the line of Michael Masdea of Credit Suisse First Boston.

Please proceed.

Thanks a lot.

Continuing on the gross margin side, one of the major concerns out there is that we might be at or around peak gross margin for Intel.

Can you talk to us about the dynamics that are playing out in '06 that go into making a decision like that, or a call like that?

What are the moving parts in COGS that we should think about next year, assuming that demand is right, and ASPs don't surprise us in a big way.

You took away all the factors.

The biggest factor of gross margins next year will be demand, will be the worldwide economic health, if our factories stay full, our margins will be fine.

I think our product lineup is getting stronger and stronger as the year goes on.

I like our product lineup to this point, what it comes down to is, can I keep my factories full, and if I can, we're in pretty good shape, we'll continue to make our cost targets, we'll continue to have a decent year.

I'm not going to make that call until January.

January, we will give you an indication as to how we think the year will unfold.

Is there a structural limit that we're hitting up against here?

I guess that's what I'm getting at.

The answer is no.

But what I'm not going to tell you, if you go back through our entire history, it doesn't get much better than it does in the fourth quarter.

There are ways it could be -- margins could be higher, but it is a complex mix, that has to be how successful your chipset business are, your flash business, so you have mix involved, you have different types of processors involved, so a lot of moving parts.

It can't be higher, and quite frankly, it can't be lower.

Again, why don't you wait until January, and I will try to give you a little bit better insight.

Thank you sir.

A quick follow-up on the chipset side, I'm trying to recall a time in which Intel has been capacity-constrained consistently for a year on anything, is there something else going on here that is driving this, anything on the transition to 300-millimeter, or anything that is factoring in here?

The factories are helping, no issue there.

The chipsets are, on the 8-inch network.

We're transitioning those into the 12-inch network next year, which will certainly give a lot of relief.

I would say a year toward making a decision to try to not grow the 8-inch network.

We wanted to invest in the 12-inch, which is our future.

Demand spiked on us, and as a result we got tighter than we would like.

The investment needs to go into 300-millimeter these days.

Makes sense.

Thanks a lot.

Thank you very much, sir.

And ladies and gentlemen, our next question comes from the line of Mr. John Lau of Jefferies & Company.

Please proceed.

Thank you.

Andy, circling back to the inventory comments, I think most people are concerned about that.

So specifically, do you believe that this inventory is prudent given the current tightness?

And if so, and if you take a look at the PC demand, if that remains seasonal throughout the year, seasonally normal for the rest of the year, will that inventory sell through without any excess by year end?

Thank you.

I clearly believe the inventory build that's happening in the fourth quarter is prudent.

In fact if I could have it today, I would take it today.

And it is in a time when we have been constrained, we're doing all we can to try to make sure we have the parts available.

We've learned many times again, which you have seen over this last year, Intel is always better to have parts available ready for an upturn, and we're not constrained like we have been.

So yes, inventory is prudent.

Under normal business conditions, we are not going to have excess inventory.

It is a very controlled normal environment.

The only thing that is going to cause me a problem, will be if there is a worldwide economic problem, and demand drops more than you would see in the first and second quarter.

And those comments, I was also relating not only to your own inventory, but the inventory that you had commented with regards to your major customers.

Is that correct?

Absolutely.

Again, $100 million in the worldwide PC network is very small.

We still are in a situations today where we have customers in channels who would like to actually have more product.

So we have outlets if we have inventory right now.

Okay.

And just, I know I'm beating this again, but assuming a normal PC seasonal demand out there, this shouldn't be an issue by year end then?

Right.

Are you talking about year end '06?

No, this Q4.

Oh, absolutely not.

By year end '04 -- as I said earlier, I still think I'm going to be struggling to meet the chipset demand.

I think the demand for processors is [gone].

Thank you very much for answering that.

Thank you very much, sir.

Ladies and gentlemen, the next question comes from the line of Mr. Adam Parker of Sanford Bernstein.

Please proceed.

Yes, could you give a little more color about Q4, your guidance in revenue in particular?

Do you think it is indicative of a slowing PC market, a sense that maybe your blended ASPs are going to be down?

I think you said they're flat sequentially.

Or is it continued share loss to AMD, who has guided to more like 10% growth, that is making you, you know, coming into -- I guess it is 3 or so points below normal seasonality?

So I will choose the fourth door, and say none of the above.

What I believe is happening is there is a bit of inventory build in the third quarter, that inventory will be sold out in the fourth quarter, and quote, the extra inventory won't be replenished, but as a result it will appear to be an above seasonal third quarter for us, and a below seasonal fourth quarter consumption in PCs, and PC-type products will be perfectly seasonal for the third quarter and the fourth quarter.

I mean if you add 100 million to your midpoint, which is the number you're throwing out there, and it is still, you know, it doesn't get you to even the lower end of normal seasonality over the last five years, so it just seems like, maybe we're splitting hairs on a couple hundred million dollars, I'm just trying to figure out, do you think that anything else is going on?

I agree with that.

You also would subtract 100 out of the third quarter.

And if you take 100 out of the third quarter, you have a seasonal third quarter, and if you add 100 to the fourth quarter number from the third quarter number, you are back to your seasonal fourth quarter.

It is close enough.

All right.

The other question is, you know, you talked about, you know, trying to keep your revenue growth above your operating expense growth, and you know, are you looking at a year where SG&A growth is going to be about 20% plus or minus above your revenue growth.

You know, is there something that you can point to, in terms of why that really had to come up a lot in the last year?

Is it competitive positioning or new initiatives with dual-core?

And how should I think about, you know, the SG&A growth in particular going forward?

Are we in a new environment where that is going to have to be still pretty high, or how should I think about that?

If you look at -- we will take R&D and SG&A and look at it as a combined bucket of investment spending.

Year-over-year, the increase in that bucket will be the same as the increase in revenue for '05 versus '04.

The difference you're seeing is the front half of the year, we grew spending at a much lower rate, as we have in some prior years.

And the second half of the year spending inclined more quickly.

We have every intention now to trail off the spending growth to match revenue growth next year.

So we think where we're at for the year right now is a pretty comfortable place to be.

So I'm kind of confused.

Why do I have to think about it as combined SG&A and R&D?

I guess as a dumb Wall Street guy, sort of think R&D going toward technology, and the SG&A going toward marketing.

Is that too simplistic?

We think of them as both investments.

For example, we have to choose between whether you're going to do a new version of a processor, versus a marketing program like Centrino.

You get a return on each of those.

And what we have to do, under the guise of trying to make sure spending in total matches revenue growth, it depends, figure out which of those we think we will get the best return on, and allocate spending appropriately.

We don't separate the two buckets.

We make investment choices for the total.

Got you.

So bottom line is, long term there is no operating leverage?

I mean, in terms there is no operating expense -- ?

Our intent right now long term would be to have revenue and spending grow pretty much in line with each other.

Thanks.

Take care, guys.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Tim Luke of Lehman Brothers.

Please proceed.

Thanks.

Andy, I was wondering in your guidance of midpoint, could you give us any sense of after a quarter, in third quarter Digital Enterprise was up around 6, and Mobility up around 12 or 13, whether one would continue to expect the Mobility area to exceed the Digital Enterprise growth, or talk about maybe some of the factors influencing the differentiated growth rates of the two areas?

We certainly expect to see Mobility continue to be a driver of growth.

It is now -- a year ago, we would sit and talk about it, and talk about where it is in the U.S., it is now a worldwide phenomenon.

It is going to continue, we're seeing the price points of those products hit in places around the world where many, many more people are choosing to have the ability to have a laptop to be mobile.

In American business, you see it almost exclusively, you know, being what is being bought, same thing in Western Europe.

I don't see it changing.

The capabilities of those machines are such that they will continue to be the growth driver.

So it could be a double of the growth rate of one over the other?

I don't want to get pinned down to giving growth rate percentages off of baseline numbers, that we don't provide to being with.

I would just say, you can look at -- it is going to continue for a while.

We don't think we've begun to hit the equilibrium point yet.

And just with respect to the inventory, the 100 million is in which area?

Which of the product line?

It would be -- well, I will say in the Intel architecture product line.

I won't say, it is not flash or the communications stuff.

But it is likely to be on the service side, or how should we view that?

Or as broad --

I don't want to define it any more than that.

It is in the Intel architecture, so think of logic, silicon, and as my friend Paul is pointing out to me, $100 million equals about two days worth of shipments, so it is a small number.

Lastly, as we look at the beginning of next year, if we assume normal seasonality, just if you could give us any flavor of the factors that may influence the gross margin from this very high 63% level, as you end this calendar year?

No, I'm going to -- I have got new backbone, I will hold off answering '06 margin questions until '06.

Thanks.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Joe Osha from Merrill Lynch.

Please proceed.

Hi, folks.

Two questions.

First, just some back of the envelope math, in terms of your silicon acreage next year, if you will, would indicate to me that your capacity growth for 2006 is going to be higher than 2005.

Is that a reasonable statement?

Yes.

Okay.

All in 300-millimeter?

All in 300-millimeter.

Okay.

Second question, you've bought back now $7.5 billion worth of stock this year, a lot of it at higher levels than where the stock is now.

You got a market multiple basically, your dividend yield is half the Dow, so I guess my question is, since the market obviously isn't necessarily being all that impressed by these buybacks, why is the dividend yield on this stock not twice what it is?

That's a decision made by our Board.

It is a decision that gets debated throughout the whole timeframe, and those discussions are under way, and if they decided to change the dividend yield, we will certainly let you know within 24 hours.

Well, I mean you're a smart guy.

What's your impression of why it is the Street is not rewarding these massive stock buybacks?

Actually, that is a hard debate for us to get into.

If we hadn't done matching buybacks, the price would be the same.

Anyway, I don't really think I'm the expert, I'm not going to go there.

We will continue to look at ways to return cash to shareholders, and I'm sure we will look at whether we should increase the dividend, and do more of that versus buybacks.

And just back to the first question.

Is it fair to say that the incremental -- just confirming your incremental capacity comes from bringing the conversion of Chandler back up, and then also continuing to ramp the second phase of Ireland?

Yes.

Okay.

Thanks, much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Michael McConnell of Pacific Crest Securities.

Please proceed.

Hi.

Thank you.

A question for Paul.

Paul, with the Bensley right around the horizon, what should we expect in terms of the server market, with the competition there?

Are are you expecting to regain some share with Bensley, or do you have a higher degree of confidence, that if we look into the summer with the new micro-architecture on the server side, that that will be the time we should think about some share reversals in the server market?

I think that I'm not going to give you a specific number, Michael, but we've got three events, all of which are very positive in our server line.

One is the Paxville launch for DP -- a dual-processor, and then MP which is coming later this quarter, which are already having an impact in our volumes.

The second is the Bensley platform launch in Q1 that you referenced, which I think will give us another pop.

Implicit also in Q1 is our first very low power blade for servers, [Sauceman] that we will be shipping, and then mid year, you're right, we have the next generation 65-nanometer products Woodcrest platform shipping.

All three of those events happening over a kind of a quarter a piece, over the next year, really give us a much more competitive roadmap in '06, than we have today even.

And I would expect to be able to exploit it.

In terms of though, an inflection, should we think about it being more gradual?

I'm just trying to get a sense of your personal confidence, and when we can -- ?

We're going to ship the heck out of them when we get them.

At that point it just becomes how our customer do.

Okay.

But any sense of just feedback from the customer right now?

They're all very excited, and the feedback about pulling the product line in is very -- we're very well received.

Our customers, as you've already seen, are able to exploit it with a dollar per TPC number that Dell put out, giving them industry leadership on that platform.

Okay.

And then one last question, just on the chipset side, on the low end desktop side, you know, there's been some speculation that Intel is going to be exiting that segment.

Should we look at that as being true, or is this just a matter of you being constrained right now, as we go into Q1 you start to ramp the chipsets at 90-nanometer, are you expecting some of these third party arrangements that have you right now, to work their way back down, and then you start to obviously to ship what you want to within that particular market segment?

As you know, we backed off on the low end desktop volumes this year, because of the capacity constraints.

And we didn't get out entirely.

We backed down some.

You will see us as we get capacity over the course of the next year, reenter that part of the market again.

It is our intention to be a broad-based supplier in chipsets.

It is intrinsic to our platform strategy.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Tom Thornhill of UBS.

These proceed.

Thank you.

Question for Andy in gross margins.

You laid out a unit cost program at an analyst meeting about a year ago, Q4 '04 to Q4 '06, down 25%.

Yes.

Where are we on that plan?

How much progress have we made?

How much progress is there yet to go?

Today, I'm a little ahead on that plan.

And if my factories can stay full next year, I'm pretty comfortable with that plan.

What it comes down to, today, Tom, quite frankly it is also a give me, because the fact I'm building everything I can build.

If we have normal loadings next year with the Company on-track to make it, today with loading, I'm ahead of where I thought I would be.

Are we about halfway through this plan or -- ?

Boy, I don't want to wing it.

Sorry, I don't know the specific number we had for this particular time.

I'm not trying to be that precise.

I'm trying to estimate it, how much more there is to go?

There certainly is more to go next year.

You get the benefits of 65-nanometer coming across the product line.

You get more 300 millimeter into the product line.

You get, you know, non-processor products getting into the 300-millimeter factories.

So there is the technology is bringing more benefit through next year.

In '05, gross margins were impacted by 65-nanometer start-up costs, and I understand that their start-up costs continually on new process, but there are ramps and sort of tidal surges in those.

What has -- in '06, is there something similar in the offing that we had in '05, or not?

Not the same level of tidal surge.

As you get towards the end of next year, you will begin to start seeing the beginning efforts of getting ready for even the next manufacturing process.

But it is -- the back end of last yea,r and it will be much smaller than what we saw in '05.

Okay.

Paul, a question about enterprise.

Revenue growth quarter-to-quarter, can you differentiate at all between desktop and server?

I mean it is clear that Mobility had good growth, because we can see that, the way you report, but between server and desktop, was there a difference in the growth rates?

There was a difference.

They were both positive.

That's probably as much granularity as I can give you, Tom.

We grew units in both desktops and server processors this quarter.

Given that your servers were up, and since we know what your competitor has already reported about their sequential growth, there clearly the rate of share change slowed, what were the key factors in that in this -- in the third quarter?

That carry into Q4?

Again, a new platforms shipping, we've been -- we've been doing actually better than we expected internally this year, because our product line has been able to be pulled in over the course of the year.

Bits and pieces.

And that along with our customers being pretty aggressive, you know, you've seen Dell be aggressive, you've seen HP be aggressive, IBM with the hurricane platform has done very well with it's Intel based Xeon products.

All of those combined have given us a pretty solid year in servers.

Better than I had expected coming into the year.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Ambrish Srivastava, Harris Nesbitt.

Andy, trying to reconcile your comments on channel business, you mentioned it was flat Q-over-Q.

And then you talk about growth in emerging markets.

And what am I missing here?

Is there something going on, i.e. some market share shifts, or how should we be looking at it going forward?

The emerging markets are served more than just by the channel.

You have big local OEMs like [LaNovo], you have Dell establishing presence, and you have HP being active, so what tends to happen this quarter as we saw the large OEMs being more successful in all markets, emerging markets particularly, versus the channel, but not the management though.

Like I said, the channel is flat, so the growth happening in the OEMs happens around the world.

And this is about -- between 20 to 30% of your total business, is that correct?

It tends to be at the high end of the numbers that you just listed.

And should we expect it to be up in Q4?

It hangs around the 30%, plus or minus a couple of points for the last decade, so I wouldn't see it moving out of that range.

Okay.

Thanks.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Hans Mosesmann of Moors & Cabot.

Please proceed.

Thanks.

Quick question on Bensley.

What is the performance improvement over Paxville that we can expect to see?

Well, you know, we're not allowed to give out TPC numbers until they're in volume, but we're comfortable that this will be a very competitive platform, and it is not just in TPCs, it is as I said earlier, we've got other platform features in terms of manageability and virtualization that will be released with that platform, that we think have nice value-add for our customers.

Okay and a quick follow up. 65-nanometer, when do you expect the crossover to consider in '06, if it does occur in '06?

I think I said in my commentary, by the third quarter we will have crossed.

I think you said for the performance --

Oh, you meant for the entirety?

Right.

I don't have that number in front of me.

I'm sorry.

All right.

Thank you.

I think he said performance.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Cody Acree of Legg Mason.

Please proceed.

Thanks.

Paul, following up on the server side, not being able to give specific jumps in performance, but it does sound like Woodcrest is going to be a real step function in capability.

Do you run into an issue, maybe where there is such an anticipation in the step functioning capability, that we see some delayed purchases during the first half of next year, waiting on this new architecture to come out next year?

I have never seen that yet in my history of this industry.

So it would be remarkable for that to happen.

And I don't think so.

I think people tend to buy from their existing vendors when they need the products, and they look at the roadmaps, they have seed given it to a value, evaluate them, the one difference would be, is when they see the need for a new blade server that may have a lower power envelope into an existing data center, that might actually be something that people wait for, and you have seen us launching the [Sauceman] product early in Q1.

Okay.

And then just secondly, last year, you guys ran into an issue in excess supply, partially as 90-nanometer yields came up faster than you anticipated. 65 sounds like it is coming on pretty quickly here.

As you run into next year and you start to look at a little inventory building here internally, not knowing exactly where demand is going to fall next year, but yet it looks as though yields are progressing well, what are you doing to make sure we don't see some repeat of that upward in yield surprise last year?

Well, the difference this time is 90-nanometer factories will be a pressure relief valve for our chipset business, which as Andy indicated, are essentially built-on our 8-inch network today, and therefore constrained at the upper end of their volumes.

By having the processors move to 65-nanometers, we free up capacity for chipsets.

And that allows us to move on to a next generation, more capability, lower cost, and ultimately take the 8-inch either offline, or retrofit that.

Thanks.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Mr. Ben Lynch of Deutsche Bank.

Please proceed.

Hi there.

First question I had was, Andy, you guys have stuck to this sort of typical 600 million revenue range guidance for Q4.

Given that you're capacity constrained, you know, I would think that you might have a tighter view on attainable revenues.

You've sort of removed one degree of freedom.

I'm just wondering how much is their revenues attainable sensitive to capacity constraints?

And somebody asked specific to Q3, what did you think the dollars left on the table were, and you didn't want to get pinned down.

Could you maybe comment on that for Q4, please?

Sure.

There is a reasonable probability I could shift into the upper end of that range.

Remember we are building the inventory.

If demand is strong enough to consume that inventory, we do have upside to the current range.

So I don't think I'm capacity-limited at this point.

We do make sure we have chipsets available, that customers do have a little bit more juggling than they normally do, but I'm pretty comfortable with the inventory build I have planned, that if demand is strong, that we can find a way to meet higher levels than the midpoint we've given.

Okay.

In terms of whether Q4 constrained will be.

It is tough for me to predict.

At this time, I don't think I see chipsets constraining the business, other than the chipset business, and it's hard to know today exactly how much that will be.

It is hard to even know looking backwards how much it constrained to prior quarters.

So I think there will be some constraint.

I think there will be some lost revenue opportunity in the chipset space.

And I think the rest of the business will be about okay.

Okay.

And you're not sort of factoring in the possibility as just product availabilities for tight for chipsets that you ship a bit later in the quarter than you normally would?

It certainly is a possibility, but again the customer base is pretty resourceful in finding ways to meet demand, if demand is now.

So I think we will continue to see people scrambling, we will continue to see people doing all they can to meet customer's demands, because they're concerned that a lost shipment -- a delayed shipment is a lost shipment.

And the other phenomenon you have is that we're launching the Napa platform and the Viiv platform in Q1, so I think people will take product later in this quarter, in anticipation of the launches in the January/February timeframe.

Right.

Okay.

And then the second question I have is then for you Paul, directly was I think in September, you know, according to Current Analytics, one of the houses out there, they say that AMD for the first time ever overtook you in U.S. retail desktop for a full month.

Can you talk a bit about this in terms of, you know, to you think the data is sort of representative of what happened?

It doesn't really matter?

It is due to chipset shortages?

You guys are focusing on notebooks?

Just sort of give your perspective on that, please.

Well it is a bit of all three of those.

I did see the data just briefly, and I haven't analyzed it yet, but the first approximation, I can't argue with it.

The U.S. retail phenomena, though, have you to remember is no longer reflective of the U.S. consumer markets.

Because it excludes the direct business.

For example Dell is not in there, and Dell is the largest consumer vendor in the United States.

So you need to really add Dell's numbers into that to get a snapshot of the U.S. consumer numbers.

Number two, as we were constrained on low end desktop chipsets, much of those were retail-oriented, for companies like Hewlett Packard, and the results are what you saw as a result in U.S. retail.

On a worldwide basis, the numbers don't look anywhere near like that.

Great.

Okay.

Thank you very much.

Operator, we will take two more questions, please.

Thank you, sir.

The next question comes from the line of Charlie Glavin of Needham & Company.

Please proceed.

Thanks.

Hopefully not beating a dead horse, Andy but in terms of the last comment, when you said that the delayed shipment is potentially a lost shipment, in terms of stock-outs, when you take a look at the 100 million in the inventory, was that essentially due to a constraint?

And did some of your lower guidance for fourth quarter, based on an assumption that some of that 100 million, or what was constrained in the third quarter, won't materialize in the fourth quarter?

Well, I'm not -- I want to make sure -- I don't think I follow your entire question.

Can you do it again?

The 100 million build that occurred at some of the larger OEMs, I assume was due to constraints, and the inability of some of those OEMs being able to ship?

I don't think so.

I think it was the OEMs wanting to make sure they're prepared for an up Q4, and have inventory in place when they had a chance to have it.

I don't think it was lost orders for them.

Maybe looked at a different way, you answered earlier that you did believe that some -- that there was some upside that could have been realized in the third quarter.

And what I'm looking for is whether or not we are still somewhat tight within the fourth quarter.

Could that spill over into the first quarter as you replied to Ben, people are still scrambling to make sure a delayed shipment does not become an outright stock-out and a lost shipment?

Certainly it is possible that if we're constrained in the first couple of months, some revenue is lost that could have been had.

I think I was talking about our revenue, and I'm not speaking for our customers.

You need to get their input, their data from them.

In our case, we believe if we had more chipsets, we could have shipped more chipsets.

Andy, one other question, just in terms of the shift going on right now.

I noticed your tax rate actually coming up a little bit, even with the other issues.

And yet, your shipments to Asia are well over 50%, and seem to continue to grow fairly well.

Can you give some sort of idea as far as, is there a shift going on right now, or some of the stall-outs, and Paul, to that idea, the ESPD group, in terms of the server side, included with the OEMs, or within the channel group?

Just for a little more clarity.

Our tax rate, I will do the tax rate one first.

Our tax rate is essentially a function mostly of where the fabrication takes place.

As more is done in the United States, in Arizona, and in the development Fab out of Oregon, you see a higher percentage of the revenue, and less effectively a higher tax environment.

Your question on the servers, all of the server revenue is reported in the DEG or Enterprise Group, whether it is shipped through the channel or through the OEMs.

And when you were talking about flat channel, any progress in terms of that ESPD group, as far as enabling it up, particularly towards the high cap pace?

Yes, that continues to grow.

You know, the numbers are relatively small in that server space, but they're growing.

Okay.

Thank you very much, sir.

And ladies and gentlemen, our last question this evening comes from the line of Glen Yeung of Citigroup Investment Research.

Please proceed.

Thank you.

I guess either for Andy or Paul.

If I were to look at, let's say your guidance plays out for the fourth quarter.

Can you compare where your utilization rate would look like exiting Q4 of this year, compared to how it looked exiting Q4 of last year?

Exiting Q4 of this year would probably be a little higher than exiting Q4 of last year.

If you recall last year in the fourth quarter, we had the 12-inch factories full by the end of the fourth quarter.

We had wafers starts in 8-inch factories full.

However, we started those in the middle of the quarter.

There is a lead time to get through the factories.

At this point, everything is full.

Beginning in the first part of the quarter.

So in effect, have you a little higher utilization, but not dramatically.

In both cases, you see pretty full factories.

And one of the elements of this year's first quarter was 65-nanometer start-up charges looking better than you had anticipated.

And I think you answered this already, but just to be clear, you don't have anything like that in first quarter of next year, where it could play a factor in the way gross margins may proceed?

Again, I'm trying to stay away from next year's margin questions but there is, to my knowledge now, I see no big surprises in the first quarter, no.

And then early in the year, you had talked about ASP pressure in servers in particular.

And I wonder if we looked out into 2006, at Bensley, both with Dempsey and Woodcrest middle of the year, whether you would anticipate the pricing pressure next year would not be as intense as it was earlier this year?

Glen, I do think our products are getting stronger versus competition, but I really can't talk about pricing for next year yet.

It is way too soon.

And the last question, just to absolutely clarify this, when you look out at your guidance for the fourth quarter, recognizing that the combination between Q3 and Q4 is normally seasonal, has there in fact been any change from your customers' perspective, in terms of what they're telling you about what demand was going to look like in either quarter?

We see nothing other than business as usual, with a little bit of inventory build.

Perfect.

Thank you very much.

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