英特爾 (INTC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you, very much, for your patience, and welcome to the first quarter 2007 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 conducting 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 call over to your host for today's presentation, Mr.

Kevin Sellers, Director of Investor Relations.

Please proceed sir.

Thank you, Bill, and welcome everyone to our Q1 2007 earnings conference call.

Before I begin, I want to point you to our investor website, Intc.com, for some important information related to today's conference call.

First our earnings release and updated financial statements are available there for anyone who still needs access.

Second, a replay of today's call will be posted there at around 5:00 Pacific Time, and will remain there for about two months.

And lastly, if during this call we use any non-GAAP financial measures, we will post the appropriate GAAP financial reconciliations there as well.

Joining me on today's call are Paul Otellini, Chief Executive Officer, and Andy Bryant, Chief Financial Officer.

In a moment, Paul will review the highlights of the quarter and comment on our key strategies, products, and technologies, with Andy providing more details on our financial performance, and business outlook.

As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we see it today, and as such does include risks and uncertainties, please refer to our press release for more information on the specific risk factors that could cause actual results to differ.

So with that Paul, let me hand it over to you.

Thanks, Kevin.

The first quarter marked another solid period for our microprocessor business.

Units were in-line with seasonal patterns, and ASPs held up well despite competitive pricing in the low-price segments of the market.

In general, we saw flat quarter to quarter pricing in mobile and desktop segments, and a decline in server ASPs, driven by a shift to dual and uni processor servers.

We continue to see strong demand for our core microarchitecture processors, all of which continue to ramp nicely.

We are pleased with our operating performance, with lower microprocessor unit costs, higher margins, good inventory management, and lower spending resulting from our structural cost efforts, which are running ahead of our projections.

Flash was weaker however, driven by lower NOR units and NAND pricing.

The desktop segment was competitive this quarter, but our pricing held firm as we shipped more Conroe processors in the first quarter than in the second half of 2006.

We are very pleased with the momentum of our V-pro processor technology, which adds a number of security and manageability features for IT, and is now being deployed at over 200 companies and organizations.

In mobile, we are shipping product in preparation for next month's launch of the new Santa Rosa platform, with volume shipments of the new Crestline chipset, and continued strong demand for our Maron processor.

The platform will be branded Intel Centrino Duo for consumers, and Intel Centrino Pro for businesses that wants to deploy the benefits of our vPro technology in mobile as well.

Our server platforms also continue to shift to new technology, with another quarter of growth for Woodcrest, and a near doubling of Clovertown Quad-Core shipments.

Our belief is that maintaining scale is essential to our strategy of ramping new manufacturing and platform technologies quickly, delivering high performance and low unit costs.

Today's product leadership is built around our 65-nanometer technologies, and we are well along the path to introduce products based upon 45-nanometer technology later this year.

To that end we have announced the use of breakthrough materials in our 45-nanometer process that will allow us to introduce faster, and more power efficient microprocessors, that pack more features into smaller die.

We have disclosed this week that our Penryn family of processors will offer leadership performance with gains of 15 to well over 45%, when compared to today's best Core2 Duo and Xeon processors.

Cache sizes will be 50% larger, yet die sizes will be 25% smaller.

We have six different microprocessors already running based upon this process, and they are running a broad base of applications on five operating systems.

We also disclosed plans for Nehalem, our next generation microarchitecture for 45-nanometers, which will take our performance, power and cost leadership even further beginning in 2008.

In summary, the R&D cadence that we discussed at last April's Analyst's meeting is providing us with the very best products in the marketplace, giving us strong momentum and relatively stable pricing in a competitive business environment.

We are seeing good progress on unit cost and spending reductions, and our strong execution at 65 nanometers is being followed up by an innovative 45-nanometer technology and products.

We are planning for growth in the second half of the year, and look forward to sharing our future plans at our New York Analyst's meeting.

With that, let me turn the call over to Andy.

Thanks, Paul.

This was another quarter of progress marked by products well received by customers, major advances in process and manufacturing technologies, and comprehensive cost savings.

Gross margin for the quarter was better than we expected, and we can report excellent results over the last year in cutting spending, which is $0.5 billion lower than the first quarter of 2006.

Looking beyond the transitional second quarter, we see an improving second half as the strength of products and process technologies carry today.

We expect gross margin to improve significantly in the second half, with a percentage in the low 50s range, and we have raised our forecast for the full year.

Revenue for the first quarter was $8.9 billion, within the range forecast in January and down 9% from the fourth quarter.

The total number of microprocessor units was down and approximately seasonal.

Average selling prices for microprocessors were slightly lower overall.

Unit volumes of chipsets, motherboards and Flash memory were lower than the fourth quarter.

More than half of total revenue, $4.8 billion came from the Digital Enterprise Group.

Revenue for this group was approximately 8% lower than the fourth quarter, primarily due to lower unit buying from sales of microprocessors and chipsets.

The mobility group accounted for more than a third of total revenue.

This revenue of $3.3 billion was down 8% from the fourth quarter, primarily due to lower unit volumes of microprocessors.

Compared to a year ago, total revenue was approximately flat.

Revenue from the Digital Enterprise and Flash Memory Groups was lower, and revenue from the Mobility Group was higher.

Gross margin dollars were 4.4 billion, 378 million lower than the fourth quarter.

Gross margin percentage of 50.1% was above the midpoint of our forecast, and 0.5 point higher than the fourth quarter.

While lower revenue and higher manufacturing start-up costs reduced gross margin, this was more than offset by increases in gross margins, due to lower microprocessor unit costs and the sale of previously reserved products and inventory.

In a year to year comparison, gross margin percentage is 5 points lower than the first quarter of 2006, primarily a result of lower average selling prices for microprocessors.

R&D and MG&A were approximately $2.7 billion, in-line with the forecast and down 6% from the fourth quarter.

In addition we had restructuring and asset impairment charges of $75 million.

The progress we have made in cutting expenses is most apparent in a year to year comparison.

Spending for R&D and MG&A is down 17% from the first quarter of 2006, and as a percent of revenue spending has declined by nearly 6 points.

The number of employees is down by more than 11,000, or 11% to 92,000.

Interest and other income is significantly lower than the fourth quarter, when we realized a gain of $482 million from the sale of the Company's communications and applications processor business.

The provision for taxes in the first quarter was also significantly lower, as it included a reversal of previously accrued taxes of approximately $300 million.

Fully diluted earnings per share were $0.27.

The reversal of previously accrued taxes accounted for about $0.05 out of the $0.27.

On the balance sheet, total inventories were approximately flat with the fourth quarter, finished goods were down while works in process and raw materials were up.

Total cash investments, comprised of cash, short-term investments, and fixed-income trading assets ended the quarter at $8.6 billion, nearly 1 billion less than the fourth quarter.

Capital spending was $1.4 billion, dividend payments were 650 million, and stock repurchases were 400 million.

As we turn now to the outlook of the second quarter, please keep in mind unless otherwise specified, the forecasts do not include the effect of any new acquisitions, divestitures or similar transactions that may be completed after April 16th.

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

We are planning for revenue, which is typically lower in the second quarter, to be between 8.2 and $8.8 billion.

The midpoint of this range would be a decrease of 4% for the first quarter on a year-to-year basis, the outlook anticipates growth of 6%.

Our expectation for gross margin percentage in the second quarter is 48%, plus or minus a couple of points.

Lower revenue overall, lower sell-through and previously reserved products and higher start-up costs will reduce gross margins from the first quarter.

Partially offset by continuing progress in reducing unit costs, and lower underload charges.

Spending for R&D and MG&A in the second quarter should be approximately 2.6 to $2.7 billion, approximately flat with the first quarter.

In addition in the separate category for restructuring and asset impairment charges, we expect expenses of approximately $60 million.

While we have no full-year forecast for this category, we do expect to continue to incur charges as we restructure the Company, as part of our program to improve financial performance.

For the full year, manufacturing start-up costs will be concentrated in the first half as we discussed in January.

These start-up costs will be lower in the third quarter than in the second, and this change should contribute at least an additional 2 points to gross margin in the third quarter.

Due to lower unit costs and firmer average selling prices for microprocessors in the first and second quarters than we previously expected, we are raising the forecast for gross margin for the full year to 51%, plus or minus a few points.

The results for the first quarter combined with the outlook for the second, point to gross margin for the first half of 49%.

That would imply the margin for the second half of the year, would be between 52 and 54%, with the expectation that the fourth quarter is a bit higher than the third.

We have also addressed the outlook for spending on R&D and MG&A for the full year.

R&D spending is now forecast to be approximately $5.6 billion, $200 million higher than the prior forecast, and MG&A spending is forecast to be approximately $5.1 billion, $200 million lower than the prior forecast.

The tax rate for each of the remaining quarters in the year is now expected to be 31%.

The results for the quarter and the current outlook appear to be a good beginning for 2007.

Business remains competitive, and it is essential that we remain focused on the right priorities, deliver products that customers find compelling, execute superbly with 45-nanometers, attack costs on all fronts in the factories, in R&D, and in MG&A, the goal is steady progress and increasing returns, based on successfully bringing technology customers want to the marketplace.

With that, let me turn it back to Kevin.

Okay.

Thank you, Andy.

Bill, we would now like to open the lines for questions and answers, and let me turn it over to you for that.

Thank you very much, sir.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS].

Questions will be taken in the order they are received.

And our first question comes from the line of Uche Orji of UBS New York.

Please proceed.

Thank you very much.

Two questions, first if I look at your ASPs for the quarter, they, like you said, have held up well.

If I look further down the line with the new products you have, and decide that you raised the gross margin expectation for the second half, what is implied in the pricing environment within that guidance?

We certainly think we continue to see competitive price environment, but if you think back over the last year, starting mid-last year as the new products were introduced into the desktop server and mobile segments, we started to see our products differentiate themselves from the competitors.

As time passes and we extend those products into the product stacks, we think we have more than just price to compete on, so we find ourselves in a better position than we were a year ago.

We think it held up pretty well in the first quarter, and we raised margin percentage for the year.

Thank you very much.

One more question, on inventory, how do I think about, first of all, how much of the inventory that was reserved that was sold in the first quarter, you know, the impact it had on the margins, are you able to help us quantify that so we can get a sense of what gross margins were for the quarter?

Sure, I can.

Let me give another speech, so bear with me on that.

And I am going to answer your question.

From Q4 to Q1, margins were up slightly.

I want to break the margin changes in to some pieces, though.

Let's talk about the, what I will call the ongoing business.

You sell products, you make products, you have mix changes, you have pricing.

If you take the normal running of the business with a revenue drop of 9%, you would normally expect margins to be down.

Based on the strength of the lower cost per unit margins on the basic running of the business were up 1 percentage point, Q4 to Q1, that is step one.

Now, we have some other things we have to put in there, we sold some previously reserved inventory.

Essentially all in the microprocessor space, all in the digital equipment side, the [pack zeltinger] side, in that space we picked up 1 point of good news margins, because we sold product that had been previously reserved.

We had 1 point of good news in the first quarter on underload charges versus Q4.

So the underload charges in Q4 were higher than Q1.

So that gives you 3 points of good news from those three elements.

Then we knew that start-up costs were going to increase.

Start-up costs in the first quarter were just under 3 percentage points of bad news to gross margin in the first quarter.

So running the business a little bit better, selling previously reserved inventory a little better, Underload charges a little bit better, almost completely offset by start-up costs.

Thank you very much.

That is helpful.

Thank you very much.

Ladies and gentlemen, your next question comes from the line of Cody Acree of Stifel Nicolaus, please proceed.

Andy, could you just clarify, so the start-up costs were 3, you said you had ongoing start-up costs that you would normally have Q-to-Q, with a 3 percentage points higher than what you would say was an ongoing rolling start-up costs?

What we said in the past is you typically get about 2 percentage points of margin deterioration for start-up costs.

So this is, essentially you can think of it as 3 points on top of the normal.

Okay.

Very good.

Then into Q3 you expect that to get to about 2 percentage points, so we step up again in Q2 that's your largest, that's kind of your peek spending.

Do you have any kind of quantification there?

Sure, I will do the same walk we just did for Q1 to Q1, as a forecast, this is a forecast for Q2, so revenue steps down some, as that happens, as you put all of the things in, mix, unit cost, everything, margin would drop about 2 points with that decline in revenue.

We then don't have the benefit of the previously reserved inventory that would press margins down 1 more point, just the offset to the first quarter.

Start-up costs will be 1 point worse but in the second quarter versus the first quarter, so now I have given you about 5 points of bad news.

The offset is underload charges by 2 points better in the second quarter versus the first quarter.

So business worth 2 points, previously reserved and start-up costs worth a point each, that is 4 not 5 as I said, and then 2 points if you use underload, which is why margins are down 2 points in the second quarter.

From that point, I expect to see at least 2, maybe more, points of margin improvement in the third quarter, just for the start-up costs alone.

Perfect.

All right.

Thanks, Andy for that.

Lastly in microarchitecture percentage of revenue as you move more into the cost/benefit, can you give us about where you stand and when that crossover is, and how we can proceed in to Q2 and Q3?

You are talking about the percentage of new products on the new architecture we started shipping last year?

Yes.

With all that we are making now--

Yes.

Everything today is on 65 nanometers.

It's essentially all core based, or derivatives of the core based products that are being run through the lines now.

That is being run through the line now, what about on a percentage of revenue now?

Again, it will be the vast majority, again when I look at my inventory and I try and look at the how many of the older architecture products, it's a very small percentage.

Okay.

Santa Rosa launch, do you expect, or can we anticipate any kind of volatility of orders pre-launch, post-launch, what are you guys predicting?

We are, as I said in my commentary we are shipping product today to our OEM customers in advance of that launch, so they can build their systems for the launch in May.

This was all programmed in.

I don't, we haven't seen nor are we anticipating a stall in front of the launch, if that is what you are trying to get at.

We do think there is a lot of excitement around these products through, because particularly around the Centrino Pro version, which allows, brings vPro into the notebook segment for the first time.

When you look at how corporations deploy the vPro technology, they like to deploy it in large swaths at once.

So making sure that all of their employees, both mobile and tethered to the desktop, have access to that technology, is a pre-requisite for deployment.

All right.

Thanks, guys.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Glen Yeung of Citigroup, please proceed.

Thanks.

Nice job on the quarter, guys.

Question I want to ask, first is on the revenue outlook for the second quarter.

Down 4% it looks just slightly below normal seasonal, and wanted to get a read on why you see that, and in particular your thoughts on NOR Flash, which fell aggressively in the first quarter, I assume will fall again in Q2.

You specified down 4%, we think that is slightly on the low end of seasonal.

The average seasonal for us we think is between 3 and 4, you know, no cosmic reason.

We do believe there is still a little overhang of some competitive products out there that we have to contend with, and that could have some impact.

As far as the forecast for NOR, I don't really want to give forecasts of the sub business unit lines.

We all know it's been a struggle in the Flash business, and it continues to be a competitive business market right now.

Anything to clarify the initial statement, so obviously we know AMD is sitting on a boatload of parts that are still out there, your suggestion is you are dealing with that competitively via price, via units?

A combination of both?

Again our assumption is there is some excess inventory out to the [suppliers], and that does need to get worked off, and it does disrupt the marketplace.

Not a big one by the way remember, we're talking about 4%, versus 3-point-something percent down.

We just think it is a small disruption that we have to deal with.

Right.

My second question is on the outlook for operating expenses.

Because you made the point a quarter early on the head count reduction at a minimum, and I wonder if you have any sense, should we be thinking the 2 billion, 1 billion OpEx savings that you had told us that we would see this year and next year, might it shift a little be it earlier, given you are ahead of plan on head count.

I wouldn't go quite that far that fast.

What we have committed for the year is a combined operating expense of 10.7.

I would guess we will hold to that, if we do find a little bit of good news in efficiency, it gives Paul the ability to look at other projects to do, he might want to think about.

I would think of it holding pretty firm to the 10.7.

And Paul, just a quick follow-up on the first question.

Any thoughts on the NOR business here?

You now, losses are getting greater.

I know you have talked in the past about maybe getting out of that business.

When if you couldn't turn a profit, it doesn't look like you are doing a good job here.

Well, profit certainly eluded us in that business in the first quarter.

And a lot of that had to do with the very competitive environment in [Norville] from a pricing standpoint, and an overall state of demand standpoint.

We have the team 100% focused right now on switching products to general purpose channel products away from some of the OEM customers, to try to bring in more of that business.

That will drive us to a breakeven point faster.

Our plan right now is to get this business profitable.

Okay.

Thanks very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of John Lau of Jefferies & Company.

Please proceed.

Great.

Thank you.

I just wanted to circle back to you with regard to your estimates on gross margin.

It is certainly much higher for the full year, and your thoughts about that, I was wondering if you could give us a little insight as to your assumption of what the pricing environment would be for the second half of the year, and also what the overall growth of the PC will be by 2007.

Thank you.

I can't give you that level of granularity, John.

While we did see, as Paul said prices held up pretty well for the first quarter, a little better than we expected.

We think we are starting to see some benefit of the strength of the product line that is certainly included in our thinking as we think about the year.

But I also want to point out the good news in unit costs.

The focus of the efficiency program on improving through-put costs, on cutting overhead inside the factories is paying off.

It's a combination of the two, some things are happening at Intel right now that I think are good for us.

As a follow-up there has been some, a quite dramatic announcement from your competition with regard to what their comments were on the retail channel.

Have you seen that significant amount of pickup in market share?

Did you gain market share in still certain markets in Q1?

Well, I think we will let the market share forecasters forecast the market share when all of the numbers are in, because we haven't seen all of the data.

I will comment, though, that we had a very strong quarter in the channel in Q1, and that is in the face of what is normally a seasonally down channel quarter as well.

And I think that is not matter of just pricing, as was evidenced in our ASPs, particularly around desktop.

The channel was very, very strong in selling the Conroe, which is a Core-2 Duo desktop product.

Great.

Thank you.

Thank you very much, sir.

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

Thank you.

I wonder if you could give some detail on what impact we might expect from the introduction of the 45-nanometer products in the second half of the year.

Specifically on gross margin impact.

You talked about 25% smaller die size.

Did you expect that to have any material affect on gross margins this year, and if not maybe you could talk a little be about what we might expect in to 2008?

So it's a, when you start a new process, you typically have a little bit of variation that comes with i,t because you have the startup costs we're dealing with now, and before the product gets called, you have the pre-quality reserves, and then you end up starting at a point in time.

So when we get in to Q2, I will give you better forecast of when those products may qualify and when you might start to see inventory being valued and the compensating margin effect.

So I guess I am going to tell you I am not going to give you many specifics about that.

Yes, we think that the cost on both of those products can be very competitive.

We feel pretty good about where those are headed, but again, for this year it's more inventory valuation than it is cost of unit effect.

Right.

How about from a technical side on a performance basis.

You talked about the fact that you would increase the cache size of those 45-nanometer products.

Should we also expect to see higher clock speeds out of those as well?

Can you talk a little bit about what we can expect performance-wise from the 45-nanometer processors?

Sure.

Let me back up a bit.

You may recall on the last Analyst's meeting last April, I talked about a new cadence for development and deployment of technology, where we would continue our two-year technology deployment of silicon generations, and then have an alternative year cadence of new microarchitectures, and that we would ramp new silicon technologies with shrinks, or slight improvements of the existing microarchitecture, to be able to ramp very quickly with a high performance product with a small die size.

What you saw in '06 was that new microarchitecture coming in on 65-nanometers.

What you will see starting at the end of this year, with the beginning of the 45-nanometer shipments, are derivatives of that microarchitecture, shrunk if you will, to 45 nanometers with some new instructions, with some new feature sets, with some larger cache, and with some faster clock speed.

All of that combines to give us a nice boost in performance, and I gave you a rage of 15 to 45%, depending on the application type and the product type.

We are seeing a nice boost on the performance side, as well as a significant decrease in die size.

Okay.

And just maybe last question.

With regard to the ramp of those 45-nanometer products, I guess it is early, would you expect that to be about as fast, maybe faster or slower than the ramp of the Core2 Duo family of products?

It will be at least as fast as the 65-nanometer ramp was.

Great.

Thank you.

Thank you very much, sir.

Your next question comes from the line of Tim Luke of Lehman Brothers.

Please proceed.

Andy, just to clarify on the gross margin, so the gross margin in the first quarter was elevated by a percentage point from the sale of previously reserved inventory, is that correct?

Correct.

And for the June period, your gross margin vis-a-vis some of the prior models that is moving to 48%, perhaps a little lower, but the second half, you are now raising, could you just walk through the key things that are raising the back half gross margin vis-a-vis what you were expecting previously?

In that the first quarter gross margin, if I am not mistaken, was broadly in-line excluding the reserve, with what you had expected and maybe--?

Careful.

We knew that we were doing that when we began the forecast.

Oh, you did.

So what is happening is we are ahead on unit cost reductions.

ASPs firmed up a little bit, versus if we had done the same math for everyone last time we did this, so this time you would have seen my Q2 margins actually a little elevated to where I thought it was at the beginning of the year.

So I believe we are seeing some good news out of the operating of the business in both the first and second quarter.

In the back half of the year, we expect to see, if you assume something along the lines of seasonal revenue pickup, fixed cost, and you pick up some margin for that.

Versus our prior expectations, like I said we are ahead on unit costs, not just in the first quarter, but that we stayed ahead during the year.

We picked up a little bit of good news for that.

We think the strength of the new products are starting to help us a little bit, we pick up a little bit of good news for that, so essentially the business is working like you would hope it would be working right now, plus you get the uplift for the startup costs.

Then if I may just as a follow-up, we should think about you looking to build inventory as you move into the seasonally stronger second half, or how should we think about you managing your inventory levels as you move through the, and after the second quarter.

Again, what I would guess for the second quarter is up modestly a little bit, not much.

You do start to build some inventory for revenue uplift, and that will start to happen, so you will see some increase, in reality I would love to keep it flat again, I just don't think that I would quite consider, it won't be a big change.

Thank you very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of David Wong of A.G.

Edwards.

Please proceed.

Just a couple of clarifications on what you had said about pricing in the quarter.

For notebooks, there was some amount, was it primarily stability of pricing, or was it also a mix to the higher end, and similarly when you talked about selling more Conroes, would desktop like-for-like prices, roughly stable as well?

I'm not sure I understand the like-for-like.

What I said was that the aggregate for notebooks and desktop was approximately flat for each of them quarter to quarter.

There is a bit of a mix shift as we continue to drive Core2 Duo more rapidly and more broadly into the product line.

At the same time we are also using our cost capability right now to participate pretty broadly across the market.

The combination of that was flat ASPs in each of those segments.

What about for servers for identical products, again you talked a little bit to some about of mix shift--?

It was almost entirely a mix shift.

Okay.

Great.

And your policy going forward.

Do you anticipate needing to take any pricing actions, or are you finding you gaining share without a particular response to your competitor's prices?

We have always price moves scheduled in, right, and those are pretty well telegraphed across the industry, and the price moves are essential for us to be able to move our most advanced technology through the stack.

So you will see us continue to have price moves.

In terms of the overall average that really is a function of how well we can drive demand to the newer products.

Great.

Thank you.

Thank you very much, sir.

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

Hi, folks.

Congratulations on the solid execution.

Listen, I look at this, your revenues flat on a year ago.

Your gross margin is down by 500 bips, and you have added about $900 billion in inventory, 900 million.

And you have reduced your competitor to rubble in the process.

So I look at the second half of the year, and I guess my question is, in order to get to these numbers, do you need to have inventory continuing to grow faster than sales so you don't take any more inventory writedown charges, and capacity under absorption charges or any of these other things?

I am just trying to figure out how things get even better than they are now, such that you don't have this continuing procession of problems absorbing your demand?

I am not sure what question you asked me.

If you are asking me, do I have underload charges--

Let me rephrase that.

I guess the question would be, do you need these under absorption charges and inventory writedowns to go away, to get you to these numbers that you are talking about?

Yes, of course.

Our forecast assumes there are no underload charges, it assumes there are no unusual inventory reserves.

If that doesn't happen and you do have underload charges, then you would have lower margins.

Do you need to add another, does inventory need to go to say 100 days or so, to drive this?

No, inventory-- no.

Inventory could be dead flat and the same thing would happen, and inventory go could up and the same thing would happen.

The follow on then, is your confidence that the 65-nanometer process technology can absorb even as you ramp your 45-nanometer process technology?

Obviously we think we can, if the market is tougher than think, then we could end up with issues, but we do have, we actually do build plans out multiple years, and those build plans, our capacity is utilized.

Okay.

And then Paul maybe you can help me with this one.

I assume that the thought here is obviously you can't comment on your competition directly.

But the market share trajectory that you have enjoyed so far as a result of your excellent execution continues for the remainder of the year.

I kind of hinted at that earlier, I said that we will leave the market share forecasting to the forecasters, but I am pretty well convinced that when the data rolls in in a week or so, we will be very pleased with the answers.

One final one.

As we look at 45-nanometer, should we assume that that kind of looks like a standard Intel ramp when we think about, you know, when you hit 65 versus 45 crossover?

You bet.

Thanks very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Sumit Dhanda of Banc of America Securities please proceed.

Andy could you, you talked about better unit costs, and the fact that it will come in progressively better versus the expectations for the remainder of the year.

Can you sort of give us an idea relative to what you had indicated at your Analyst's day last April?

#1, you know, it is a material improvement versus what you [guessed it was] where your unit costs peaked in Q3 of last year sort of down, and #2, is the fashion in which it comes down the same?

In other words, it comes down in Q1, flattens out in Q2, and then comes down again in the back half?

That is my question.

I am going to deduct most of your question, because I am showing the data in two weeks in New York anyway, and I will show you where we are versus last year's forecast, and you will see that the trend is the same and a little ahead.

There was, probably the biggest quarter to quarter savings in cost unit for the year was in the first quarter.

We built on that in the second quarter, but not to the same amount.

When I talked about the overall business, all pieces in being 2 points worth in the second quarter, part of that was the good news and the unit costs versus the first quarter.

So we continue to drive costs down steadily through the year.

We got a nice big step function in the first quarter, which was somewhat expected, somewhat of a surprise.

I guess on that point, in terms of the unit cost benefiting you in Q2, I don't recollect you saying that.

And you also indicated that the underload charges going away would benefit you by 2 points on top of the 1 point benefit in Q1.

My recollection was that the total impact from those was only 2 points, so I guess I am confused, because you are suggesting a total benefit of 3 points when the underload charges were clearly-- initially--

So the charge in Q4 was more than 2 points.

The charge, the benefit in Q1 was about 1 point.

The benefit in Q2 rounds up to 2 points.

Again, I am trying not to say 1.7 margin points for that, 1.

for that, take my word for it, it goes from 2-plus points in the third quarter, to approximately zero in the second quarter.

And the unit cost benefit in Q2 is less than a point, or--?

Again, we haven't quantified that and I don't plan to, what I think I said was if you take all of the pieces of, "running the business", that includes price, that includes volume, and it includes mix then there is unit costs, it is about 2 points worse in the second quarter, but cost of units is a benefit.

Just a couple of more quick ones.

On the, you said that 65 is basically almost all of the mix at this point on a microprocessor basis.

Can you give us some sense, I think your forecast was for the 90/65 mix was to be about two-thirds/one-third by the end of last year.

Where was this in Q1?

Was it less than 10%, 90% at 90-nanometers if you are thinking about the mix of processors, or was it well above 10%?

Boy, I, actually I know the answer is sitting in front of me, we are getting in to some pretty arcane questions, so I think I am going to pass on this one, unless you give me a better idea of what you are after.

One final question, on Q2 is the forecast just basically on revenues hinging around what seasonality typically is, plus some conservatism as it relates to what the competition might do?

There is nothing you could really point out from your OEM or your channel customer base that the majority of your inventory is built at any [inaudible]?

We think our inventories in the channels are just fine.

And customers hands are just fine.

I wouldn't say concerted, I would say caution around what is happening in the competitive space.

So, yes, we are thinking of second quarter in terms of seasonal with some caution, because we think there is a little bit of excess inventory floating around the world.

Thank you very much.

Thank you very much, sir.

Your next question comes from the line of Krishna Shankar, JMP Securities, please proceed.

Yes, Paul, within the server space, is there anything unusual going on, in terms of the mix shift here, the move from NP to DP in unit processors, or is this just seasonal?

And do you see any impact from virtualization in these trends?

I think that the overall shift to DP in particular, is one which is kind of the overarching trend in the industry over the last three or four years.

That has picked up a bit, as we have shifted to dual and now quad-core products, because a quad-core DP is essentially a cheap [8-way], with much of the robustness and very good price performance, and the power metrics are exceptional.

So that's driving, I think, an overall trend away from MP towards DP in the industry, and that is going to modulate quarter by quarter, but for the most part that is the trend line that we operate on.

You know, and in MP space, I think that really gets down to specific customers, specific product lines, and so forth, and I don't know that I want to comment on our customers, except to say that this overarching trend is one that we would expect to continue over the course of the year.

And impact of virtualization, do you see any [slowing] of server demand?

Yes, I forgot to grab that one.

I don't actually think that is a problem.

We actually like that trend because it helps, in the short-term I think it helps makes sure that people have up to date hardware to be able to run those virtualized environments.

Second of all, when we look at the server demand over the next three or four years, we think the fundamental issue isn't virtualization, but rather adding sufficient capacity to do the job.

One of the things we will talk about at the Analyst meeting in a couple of weeks, is that we believe that less than 5% of the servers that need to be deployed by 2010 are operating in the market today.

So we still see significant growth in servers, despite a fairly positive trend around virtualization which helps make data centers more efficient.

My final question is on Vista, it sounds like it will eventually have any positive impact on Q1.

What is your outlook for the second half of the year?

And what the market reception is to Vista-loaded PCs.

My view hasn't changed from this call a quarter ago, which is that in the corporate space, I believe most companies will act like Intel.

They are doing some pilots and testing today, but the deployment will actually happen when the service pack gets released in the fourth quarter timeframe.

Probably the October/November timeframe.

Most companies we believe are buying machines that are Vista ready today, if you will, at the enterprise level, and we think that is one of the advantages of the vPro ramp, that we will talk more about in two weeks at the Analyst meeting.

In terms of consumers, essentially all the new consumer SKUs are Vista.

So right now that is driving the numbers.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Hans Mosesmann, Nollenberger Capital.

Thanks, my questions have been answered.

Thank you very much sir.

Our next question comes from the line of Michael Masdea of Credit Suisse, please proceed.

Thanks a lot.

Andy you mentioned the magic word, differentiation, and you are seeing it in your products and it is starting to pay off a little bit.

I guess the questions around that are what the key differentiating areas for either you or Paul, and then also does that ultimately long-term change your cadence back to a level that we saw in the past, or does this cadence that you guys have established going to stay around for good?

Let me try that one, Michael.

I think the near-term differentiation is clearly performance, performance per watt.

And the activity we have done on segmentation optimization around power envelopes, and those kinds of things at the microprocessor level.

A higher order of segmentation though, is the platform strategy.

So Centrino, as we are now going into our fourth generation of Centrino with the Santa Rosa platform, is of course about the microprocessor, but also about other technologies coming in to it.

We are refreshing other technologies at least at the rate of the microprocessor refresh, so this one has NAND technology on the motherboard for faster boot, faster application loading.

It has got a new version of the WiFi chip, a new graphics engine in it for Crestline, and so forth.

Similarly on the desktop, the vPro technology has been doing quite well in terms of driving higher end sell-up kinds of metrics in the enterprise, that we think will also now manifest themselves in the mobile marketplace.

I guess the follow on which is really what I am getting at.

If you are able to sustain this differentiation, which it looks like I believe you can do, is this should be a business where everybody thought 50 to 60% gross margin, and we are obviously at the lower end of the range on that.

Has anything structurally changed, compared to what we saw in this industry has in the past in your opinion?

Or do you think that, or do you think that we actually have seen some change in that, and we need to think about a different dynamic?

I don't think we are ready to make a long-term gross margin forecasts yet.

We do believe the key to having improving, increasing, improving healthy returns is to have the best products, clearly and unquestionably.

Which means the cadence Paul talked about, we won't go back, we will absolutely continue to drive the technology in both the architecture and in the manufacturing side.

That is very helpful, thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Gurinder Kalra, Bear Stearns, please proceed.

Thanks.

I guess in terms of your upside for the second half for margins, what are your presumptions/costs on Barcelona, and it's comparative impact, and some similar or new products AMD might launch on desktops and notebooks?

Well, we have yet to see a demo of Barcelona, so it's hard to understand the metrics here.

But everything we have seen, or if we take the early indications, or early commentary at face value, I believe that we will be able to maintain our competitive lead in servers and in high-end desktops, in the face of the introduction of that product line, and even though it is a more competitive product line than they are shipping today, I think it is still going to get down to the ramp, and you will have to ask AMD about their plans to ramp the product.

Any outlook for margins for the second half, you are assuming that the traction you are getting right now just continues to widen, despite AMD's product introductions?

I am assuming that we will be able to maintain our competitive lead in all segments all year.

Great.

Thanks very much.

Thank you very much sir.

Ladies and gentlemen, your next question comes from the line of Ross Seymore, Deutsche Bank, please proceed.

Thanks.

Paul, earlier you mentioned that the channel side of the business was kind of better than seasonal in the first quarter.

What do you think is going on on the channel side versus the OEM side, because I guess that would also imply given your overall business was seasonally a little weaker, that the OEM side was weaker than you may have expected.

The channel is obviously not terribly strong in selling notebooks.

The white book business is not a large chunk of the market today.

Where the channel excels is in selling, you know, very good value in terms of technology for the bang for the buck.

They were early to grab Woodcrest and Clovertown, which is the dual and quad-core servers, and the white box server business has been doing quite well, particularly in North America, and we see them as I said earlier, ramping Conroe on the desktop, in some cases a little bit faster than some of the OEMs, which gives them an advantage in the marketplace, because of their cost effectiveness.

So the combination of those two, is that you have got a quick-moving set of players in the channel, that are capitalizing on technology and winning business at the local level.

Is that something that you, it doesn't sound like any of those metrics would change, as you go in to the second half of this year.

Is that a fair assumption?

Well, their relative advantage over the large OEMs tends to mitigate over time, as the large ones shifts their product line, to have the same kind of profile, but other than that you start to see, the agility factor is still one that has been there historically.

You mentioned a little bit just now about Woodcrest and Clovertown again, just overall when you said the ASPs are down in your server segment, if the mix is increasingly dominated by the Woodcrests and the Clovertowns, why would the ASPs be dropping?

Why would they be dropping from quarter to quarter?

Yes, if the mixes improves I would assume by more Woodcrests and more Clovertowns--

Because the MPs which are much higher price, become less of a share of the server business.

Okay.

So it is that simple thing.

Go ahead.

Go ahead.

The final question was just on the R&D side of the equation.

I noted that popping up, of course the M&A is coming down, so the net change is zero on the OpEx, but overall, Andy, if you could go a little bit in to what is happening on the R&D side please?

So kind of the exchange from before.

What happens is we continue to believe we are a technology company, we believe that is the lifeblood of Intel, so as we find ways we can save money in the non-R&D spaces, again rather like I said before, rather than drive spending even lower, we would tend to reinvest it in the R&D side, and hold the 10.7 for the year.

With a little luck, we can see this happening again in the future.

Great.

Thank you.

Bill, we are coming close to the bottom of the hour, we will take two more questions, please.

Your next question comes from the line of David Wu of Global Crown Capital.

Please proceed.

Yes.

Good afternoon, thanks for taking my question.

On the system-integrated business, are these people very flighty, in terms of adopting the latest hard technology, and therefore, if you gain market share in Q1 in these people, and presumably Q2 as well, is there risk that that same people who are quick to adopt new technology might so-called defect back to their, to the other people, to your competitor in the second half?

And I was wondering whether the OEM business was a little weak in Q1?

Because you obviously gained a lot of market share incrementally from AMD, and I don't see it in the Digital Enterprise space.

Well, you know, the systems integrators are typically relatively small companies.

They live and die by the competitiveness of their product line.

They have, move very rapidly to our products, and as long as we can continue to give them, A) the best products, and B) the best support, and critical to that support is our terms and conditions, our ability to supply in volume the parts they need when they need them, and not constrain them, I think that they will continue to do business with Intel.

I am pretty confident about that.

In terms of the mix shift to OEM versus channel, it wasn't that big of a swing, and I will take your back to Andy's earlier comment on overall revenue, which is that the microprocessor business was about where we expected it to be.

Your only competitor had a major shortfall in the unit volume, and I find it landed in your court, so I figured that if the system integrated business was unseasonably strong, than to get to your original target, the OEM business must be unseasonably week.

The relative scale a lot different, right.

Our distribution business runs about 30% of our overall business.

Okay.

So it's not like it's 50/50.

I see.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your last question comes from the line of James Covello of Goldman Sachs.

Please proceed.

Thanks guys.

Just a quick question on the NAND Flash business, obviously it has been difficult.

We know what your guys are doing there with the Santa Rosa platform, but how do you think about the benefits from Santa Rosa versus some of the cash that is being spended out, and the returns that you could generate in the business long term, if the pricing stays kind of depressed here.

Well, we are still in the investment stage of this business, as you indicate, James.

There is a lot of factory start-up costs, as we ramp up new facilities and as we migrate to more dense products.

The NAND pricing environment in the last six months, actually the last three quarters has been particularly acute on the extreme aggressive side of the price curves.

We have actually seen some firming up in the NAND pricing, in the last six weeks or so.

I am not going to give you a forecast, but there is some cause for optimism that it has returned to more normal pricing curves.

And is there a point at which, you know, as you think about your experience that you have had in the NOR business over the last few years, is there a point at which the pricing, you know, would reaccelerate to the down side, that you guys might think about maybe scaling back on the committment a little bit, at least the level of committment?

No, we continue to look at that business quarter.

We look at it every quarter, we look at it every time we make a capital commitment with our partner, Micron, and the business continues to have the right kind of NPV model, long term for us to continue to invest in.

Great.

Thanks so much.

Okay.

Thanks, Jim.

We are going to conclude the call now.

I would like to ask Paul to give a few closing comments as we do so.

Paul?

Thanks, Kevin.

And thank you all for your questions today.

I wanted to leave you with a message that we have been highly focused on technology leadership and business efficiencies.

We are seeing very good results in these areas, and I wanted to thank our employees for working hard, and staying laser-focused on these objectives.

As you know, Intel's R&D pipeline extends many years in to the future.

And we have much to share with you on May 3rd at our Analyst meeting in New York.

Thank you very much for your attendance today.

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today's conference call.

This concludes your presentation.

You may now disconnect your lines.

Have a good day.