英特爾 (INTC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Q1 2008 Intel Corporation earnings conference call.

My name is Denise, and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Kevin Sellers, VP of Investor Relations.

Please proceed, sir.

Thank you, Denise, and welcome, everyone, to Intel's Q1 2008 earnings conference call.

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

As usual, Paul will be discussing the highlights of the quarter and then Stacy will provide more details on our financial performance in Q1 as well as the outlook for both the second quarter and full year 2008.

Following Stacy's comments, we'll be happy to take questions.

A few important items before I turn it over to Paul.

First, we posted our earnings release and updated financial statements to our investor website at intc.com for anyone who still needs access to that information.

Also, if during this call we use any non-GAAP financial measures or references, we will put up the appropriate GAAP financial reconciliations to our website, intc.com.

And last, a replay of today's call will be posted on our website around [2.00 o'clock] Pacific time and will remain there for approximately two months.

As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it 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 materially.

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

Thanks, Kevin.

The first quarter marked a very good start to 2008 driven by strong industry demand for our leading edge processors and chip sets.

Our revenues grew 9% from the first quarter of last year while operating income improved by 23%.

Our improved financial performance and strong balance sheet allowed us to pay a record dividend in the quarter, announce a dividend increase and buy back $2.5 billion worth of stock, decisions we made to increase returns for our shareholders.

There was a particularly strong demand for our 45 nanometer based products and we continue to ramp that process rapidly both in terms of volumes as well as in the breadth of product offerings.

The benefits of this new process are giving Intel a unique combination of outstanding performance with low power consumption.

In terms of the business, we saw all regions grow over last year with North America standing out, driven by strong server demand.

In looking at inventories, the overall supply and demand equation for our processors and chip sets appears to be healthy and in balance.

Our server business had a particularly strong quarter, turning in an all-time record in revenues.

This was driven by three factors.

First, we saw notable strength in the high end, multi- processor segment, particularly in North America.

This is due to the ramp of our Caneland MP platform.

Second, in the higher volume dual processor category, we saw Quad-Core shipments continue to grow and now represent a majority of our Xeon DP shipments.

And lastly, we saw our total Xeon processor shipments cross over to 45 nanometer based products during the quarter, further extending our leadership in this high volume segment.

We have previously discussed the PC market's transition to mobility and our results in Q1 show continued acceleration of this trend.

Our unit shipments were up sharply versus last year and with the introduction of the low cost Netbook category, we believe that the shipment crossover of desktop PC's to mobile PC's will now happen this year and not next year as we originally anticipated.

Our desktop business also had a solid quarter with good year-over-year growth.

Quad-Core remains a competitive strength in this segment and we are seeing two important trends in the desktop that offer good growth opportunities.

First is the growth of the all-in-one category where our power optimized 45 nanometer processors are a natural solution.

The second is the growth of vPro Technology in corporate environments driven by our unique manageability features.

Last month I committed to our investors that I would not let our Flash memory business become a long term drag on the financials of the company.

First, in our NOR business we closed the Numonyx transaction.

This is an important step for us and one that is good for Intel and its shareholders.

In our NAND business we are making some decisions on capacity to mitigate the current oversupply situation.

Recently we made a decision with Micron to push out the timing of our joint Singapore factory.

We will continue to look at other options and keep you informed.

I want to assure our shareholders that we entered this business to make money and we will continue to make the appropriate decisions necessary to that end.

Just about a month ago we hosted many of you here at our headquarters for our investor day and we talked in detail about our new growth initiatives.

I want to take just a moment to comment on some of the progress we made during the first quarter.

First, we launched our newly branded Atom Processor family, an innovative line of low power, cost optimized processors that will be used in a number of new product categories.

We began shipping Atom Processors for revenue in the quarter and are very pleased with the early acceptance and interest from a broad and diverse range of customers.

In addition to the momentum we are seeing in the Netbook category, we're also gaining momentum in the mobile internet device category, announcing at our recent Intel Developers Forum a total of 35 new designs across 25 customers for this segment.

And finally, I spoke briefly at our investor meeting about our embedded business and the opportunity this represents going forward.

I'm pleased to say that growth in this category is accelerating, showing strong double digit unit and revenue gains year-over-year.

In summary, as I look at the results of the first quarter and out into the rest of 2008 I see three important trends unfolding.

First, the competitive position of our core business is superb.

The benefits of our 45 nanometer process technology are tangible.

We expect our differentiation to grow as we aggressively ramp this new technology.

The second trend is our cost structure.

As Stacy will discuss momentarily, our product costs declined quarter by quarter over 2008, which supports gross margin expansion throughout the rest of the year.

And the final trend is momentum in our new growth initiatives where we are seeing real progress both in terms of product development and customer engagement.

Our strategy of bringing the Intel architecture to new market segments combined with the world's most advanced process technology will prove extremely valuable to our investors.

Let me now turn the call over to Stacy for a detailed look at our financial performance for the first quarter.

Stacy.

Thanks, Paul.

Q1 was a solid start to the year as micro processor business strength and strong execution overcame a challenging Flash market and a volatile macroeconomic environment.

Compared to the first quarter of 2007, revenue grew 9% with gross margin dollars up 17% and operating profit up 23% year-over-year.

Operating income as a percentage of revenue was over 21% for the first quarter and we generated over $2 billion of cash flow from operations.

Revenue for the first quarter was $9.7 billion, at the mid point of the range forecasted in January, down 10% from the fourth quarter and up 9% from a year ago.

Micro processor sales were roughly seasonal with average selling prices approximately flat while the combined revenue of NOR and NAND flash was down 15% from the fourth quarter.

More than half of total revenue, $5.3 billion, came from the Digital Enterprise group.

Revenue for this group was approximately 8% lower than the fourth quarter and up 11% from the prior year.

Server micro processors showed particular strength with units up significantly from Q1 2007.

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

This revenue of $3.7 billion was down 11% from the fourth quarter and up 11% from the prior year.

Mobile micro processor units were up significantly year-over-year and average mobile micro processor prices declined due to the growth of the lower system price segments.

Looking at a geographical break out, all geographies experienced year-over-year growth in Q1 with the Americas region seeing the strongest growth of 17%.

EMEA an APAC were both up 8% year-over-year and Japan was up 4%.

The strength in the Americas was primarily due to strong demand for our 45 nanometer server products.

Gross margin dollars were $5.2 billion, $1 billion lower than the fourth quarter.

Gross margin percentage of approximately 54% was consistent with the mid point of the revised outlook that we set at the beginning of March and two points lower than the outlook set in January.

As expected, the majority of the decline from the January outlook was due to the significantly lower pricing and higher volume in our NAND memory business.

In a quarter to quarter comparison gross margin was four points lower than the fourth quarter.

Four things contributed approximately equally.

CPU units were lower in the seasonally down quarter, chip set inventory write-offs including products built prior to qualification for sale, CPU unit costs higher as we ramp the 45 nanometer process, and non-product cost of sales primarily due to start up charges for 45 nanometer factories.

In a year to year comparison, gross margin percentage is 4 points higher than the first quarter of 2007.

R&D and MG&A were approximately $2.8 billion within the forecasted range of $2.8 to $2.9 billion and down over 4% from the fourth quarter.

In addition, we had restructuring and asset impairment charges of $329 million.

Of this, $275 million was related to the assets transferred to Numonyx.

The head count reduction associated with employees transferring to Numonyx will be reflected in the second quarter.

For the first quarter, the number of employees is down by 1700 from Q4 to approximately 85,000.

Gains, losses on equity investments and interest and other income of $109 million was lower than the fourth quarter and lower than our outlook.

Compared to the fourth quarter, it is lower primarily as a result of lower interest and other income.

The provision for taxes in the first quarter was at a 33.5% tax rate, higher than the 31% previously forecasted.

We now expect a higher proportion of profits will be generated in higher tax jurisdictions.

In addition the Q1 impairment related to assets sold to Numonyx negatively impacted our tax rate since the assets were located in lower tax jurisdictions.

A combination of these two factors resulted in the higher Q1 tax rate.

On the balance sheet, total inventories were down $98 million or 3% from the fourth quarter.

Micro processor inventories increased slightly in Q1 in line with our desire to build a bit of inventory on new micro processor products.

Total cash investments comprised of cash, short-term investments, and fixed income trading assets ended the quarter at $13.2 billion, $1.6 billion less than the fourth quarter.

Cash flow from operations was over $2 billion.

Capital spending was $900 million, dividend payments were $740 million, and stock repurchases were $2.5 billion.

As we turn now to the outlook for 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 14.

I will use the mid point of the forecasted ranges when making comparison to specific periods.

We are planning for revenue which is typically lower in the second quarter to be between $9 and $9.6 billion.

The mid point of this range would be a decrease of 4% from the first quarter.

As a result of the Numonyx transaction, we expect NOR flash revenue to decline by approximately $200 million from the first quarter to the second quarter.

Excluding that revenue decline, revenue is down approximately 1.5% at the high end of the seasonal range.

In Q2, we anticipate NOR flash revenue of approximately $100 million through a supply agreement with Numonyx, declining to approximately $50 million a quarter by year end.

On a year to year basis, the outlook anticipates revenue growth of 7%.

Excluding the decline in NOR revenue, the growth would be approximately 11% year-over-year.

Our expectation for gross margin percentage in the second quarter is 56%, plus or minus a couple of points.

Quarter to quarter, the NOR flash divestiture and lower chip set inventory write-offs contribute about 1 point each.

The gross margin impact of the CPU business is slightly positive, better than the decline typically seen in the second quarter.

Spending for R&D and MG&A in the second quarter should be between $2.8 and $2.9 billion.

Additionally, in a separate category for restructuring and asset impairment charges we expect expenses of approximately $250 million.

While we have no full-year forecast for this category, we do expect charges as a result of our restructuring program announced in 2006 to decline through the remainder of the year.

Depreciation is forecasted to be approximately $1.1 billion.

Our estimate for gains and losses from equity investments and interest and other income is a net gain of $75 million, lower than the first quarter primarily due to lower interest income.

Looking beyond the second quarter, as volume increases and costs decline, we expect gross margin to improve with second half margins significantly above the first half.

We maintain our gross, our forecast for gross margin for the full year at 57% plus or minus a few points.

Strength in the micro processor business is offsetting the weakness in the NAND pricing environment.

Spending for R&D and MG&A for the full year is forecasted to be approximately $11.5 billion, up $100 million from the prior forecast, primarily due to foreign exchange impacts of the weakened U.S.

dollar.

R&D spending is forecasted to be approximately $6 billion, up $100 million from the prior forecast and MG&A spending is forecasted to be approximately $5.5 billion, flat to the prior forecast.

The tax rate for each of the remaining quarters in the year is now expected to be 33%, two points higher than the prior forecast based on a higher concentration of profits and higher tax jurisdictions.

We enter 2008 with the strongest combination of products, silicon technology and manufacturing leadership in our history.

The first quarter results and the current outlook reflect this strength in our core business.

As we look into the second half of the year, we are planning for growth and improving financial results.

Driven by our product leadership, the ramp of the Atom processor, the build out of three 45 nanometer high volume factories, declining unit costs, and the impact of our restructuring program.

With that, let me turn it back to Kevin.

Okay, thanks, Stacy.

Denise, we would now like to have you open the line for questions and answers.

(OPERATOR INSTRUCTIONS) And from Deutsche Bank your first question comes from the line of Ross Seymore.

Please proceed.

Hi, guys.

Just looking at the demand environment in general, it appeared that the micro processor side was exactly in line with your expectations, but can you give us just a little color if there are any gyrations throughout the quarter of strengthening or weakening, just linearity I guess would be the easiest way to say it?

Sure.

The quarter came in on the micro processor side of the business.

The quarter came in as expected and we didn't see anything unusual when you look at how the quarter unfolded.

It was pretty normal.

What about on the ASP side of things, your competitor clearly had a negative pre-announcement.

It looks from our side like there's some price increases they're trying to put through.

You guys had the flat ASPs, but are you noticing any change on the pricing environment?

Our ASP was roughly flat in the first quarter relative to the fourth quarter.

If you look across last three or four quarters it's been roughly flat now; this is the fourth quarter in a row, so I characterize the pricing environment as being pretty much the same as what we've seen.

I think we really are benefiting from the strength of our product line-up.

Final question on the CapEx, looks like you underspent the annual rate even though you reiterated the full year guidance.

Anything going on there?

No.

Nothing unusual.

It's just a little bit of linearity in terms of the spins as we're ramping 45 nanometer, but we're still on track to the capital forecast for the year.

Great.

Thank you.

Your next question comes from the line of Srini Pajjuri from Merrill Lynch.

Please proceed.

Thank you.

Stacy, you said your NOR is going down to about $100 million and then it's going to go down to $50 million, so I'm just wondering should we expect a benefit to gross margins and then on the NAND front it looks like you're assuming fairly weak market.

What's the risk that that's going to come back and surprise us at some point on positive or negative side?

Surprise us on the negative side or the positive side?

Both.

Oh, I'd love a positive surprise in the memory business but I'm not banking on it.

In the NOR, the way the supply agreement is set up on the NOR side, the gross margin impact from Q1 to Q2 is about a point as the $200 million goes to Numonyx.

I don't expect that to be significant going forward, so I think that's pretty much the impact you're going to see.

What we have baked in on the NAND side for the year is an assumption of a continued oversupply in the NAND market which brings bit pricing down, although our costs get better quarter on quarter so I think it kind of isn't going to be the same magnitude that we saw from Q4 to Q1 but it continues to be a pretty weak pricing environment as I see it going forward, and it could be a little better then that could be a little worse but that's how we're calling business right now.

Okay, and then on the inventories you said your CPU inventories went up a little bit.

Just looking out to the next couple of quarters, do you think, do you feel comfortable where you are or do you need to take it up a bit from here?

In Q4, we were a little less than we liked and so I to you in the call last quarter that I wanted to put a little bit of inventory in place on some of our new CPU products.

You would typically would see us built a little bit of inventory in the second quarter an that's consistent with viewing the inventory right now.

Okay and then my final question for Paul.

Paul, it looks like you did pick up some share from AMD just based on their pre-announcement.

I'm just wondering if this is mostly from server market or just looking out to the other two as well, notebooks and desktops and also, my question is, how sustainable do you think the share gains and also if you could give us, help us understand what's driving the share gains, thank you.

Well, I think that we'll follow the practice we've used the last few quarters on share, Srini, which is we'll wait for all of the numbers to come in and have the independent parties report and then we'll absorb it.

What I can say is that as I pointed out in my comments, we had a very strong quarter in server, in the server segment this last quarter, particularly driven by our ramp of the MP Caneland platform and that allowed us to achieve record server revenues.

So I suspect there is some good news in share gain in that number set.

The other thing that was strong in this quarter was mobile.

And as we look forward in the course of the year with the cross over from the desktop to the notebook happening essentially a year sooner than we first had thought, I think that is good news for Intel given the strength of our product line both on the Centrino side and now with the Netbooks and Atom starting to show fairly good volume projections.

Thank you.

And from Banc of America Securities, your next question comes from the line of Sumit Dhanda.

Please proceed.

Yes.

Hi, Paul.

Hi, Stacy.

A couple of questions.

Stacy, your outlook for the core business in the second quarter high end of seasonal down 1.5%.

Just curious as to what's driving that expectation.

Is it the ramp of the Netbook type products, your expectations of more share gain?

Just given what is ostensively the perception that the macroeconomic backdrop is a big headwind.

Yes.

It's a variety of things but I would call out the ramp of the Netbook product as something that I see being a contributor over the course of the year and we are going to start to see the impact of that in the second quarter.

It does look to be driving some incremental unit growth beyond what I thought when I first set my forecast for the year.

Excuse me, let me come back to, let me tag on that but come back to your comment on the macroeconomics.

Just to remind you we've got 75% of our revenues are not in the U.S.

now, and much of the concern on macroeconomic debate has to do with the U.S., particularly the Manhattan portion of the U.S.

So we don't see this really impacting our business at this time and haven't seen it so far in the last couple of quarters.

And then, secondly, in my experience when there are more difficult economic times, people do two things.

They turn to information technology for productivity gains for their enterprises and they tend to buy the best of breed products that are out there.

As that happens, if it happens, Intel is in a pretty good position.

Okay.

Just a follow-up or two.

Stacy, on the OpEx line, your employee count down 1700 following the divestiture of the NOR Flash business.

Was this benefit all accounted for in your initial projections or is there a negative offset to this positive development here as we head into the back half of the year?

In other words why [has] this forecast not come down?

The divestiture of the NOR business was encompassed in our annual forecast.

As I told you last quarter, we were counting it in in Q1 and out for the rest of the year, it closed on day 2 or day 1 of Q2, so it pretty much as I anticipated when I set the guidance for the year.

The increase we're seeing in the OpEx line is the impact of foreign exchange rates being higher has caused us to raise up a hundred million.

Just one last final two-parter.

First, on the tax rate, is it possible that it reverts back to a lower figure because clearly the Americas outperformed or is the fact that NOR no longer is part of the mix, a permanent head wind so to speak, and then, secondly, what were the chip set unit inventory write-offs attributable to?

Sure.

That's not a two-part question, that's two separate questions but I'll be happy to answer it.

On the tax rate we see two effects in Q1 that are both attributable to the Numonyx transaction.

One is that transaction changes our distribution of revenue so that we have a higher proportion of our revenue in higher tax jurisdictions.

That's an underlying rate issue and then we had a one-time issue in the quarter which is the impairment on the assets we took for Numonyx, that impairment hit lower tax jurisdictions so we got less of a tax effect than you'd expect and that raises our rate for the quarter.

To your question of could it come back down?

Yes, my expectation is that when we get out in time and we've ramped the Israel factory on 45 nanometers, the third of three factories, it will start to move the distribution of our revenue back out of the U.S.

into some lower tax jurisdictions, it's likely to be more of a 2009 effect than a 2008 effect.

To your chip set question, what you see there is just a very normal process of the build that we had on chip sets prior to qualifying that product for sale, so we reserve those, we reserve that chip set product and you see that reversing in the second quarter where we don't retake that and so that's part of the one point of good news in the second quarter.

Thank you very much.

You're welcome.

Your next question comes from the line of Glen Yeung from Citi.

Please proceed.

Thanks.

Thanks.

Paul, can I just ask you to clarify about your statements of the macro?

We've been seeing some signs that the European business may be slowing down and just want to double check your views on Europe looking into the second quarter.

Well, we had I think a very, very good Q4 in Europe, as you may remember, Glen, and we had a very good Q1 in North America this time, so I'd look at the integral six months and say that from a macroeconomic standpoint the two most mature of our markets are not showing any signs of weakness.

I was just in Europe two weeks ago meeting with customers and I did not pick up anything other than what I've indicated today.

It's also notable we had 8% year-on-year growth in Europe and that's pretty close to the average on a year-on-year basis so we saw growth across every geography in Q1 on a year-on-year basis.

That good to know.

Okay.

Thanks.

Second question is on unit costs in the second quarter.

I think I heard one of the two of you say they would be down so I just want to double check that, and then I guess I'm trying to understand what's going on with 45 nanometer mix.

I know you set a target at the beginning of the year, which I don't remember if you made public or not, but I know there was a target and I wonder if that target is now more than originally thought.

And I guess an add-on question to this is what is 45 nanometer as a portion of inventories and does that sort of account for all of the, for where inventories are?

I'll take one and three and Paul will take two.

Yes, I didn't break out costs for the second quarter.

What I said was that you normally see the CPU business being slightly negative on the overall gross margin in the second quarter and we're really not seeing that in this second quarter.

That's a comment on the strength of the business.

Normally what you'd see is volumes down, costs down a bit.

It causes the overall gross margin to be down a bit and we're not seeing that effect this time as we do the forecast for the second quarter so it's roughly flat on the overall Q2 gross margin.

And on your question about 45 nanometer inventory, virtually all of the products that were put into inventory over the course of the first quarter was new micro processor products so we look at that pretty carefully in terms of the age of products and it's a very healthy inventory level and the product that's in inventory is also very healthy product.

Okay.

And lastly on the mix, I did show that slide at the investor meeting.

It shows a crossover in the third quarter and we are still on track to that.

We're ramping as fast as we can and we've, I think I said at the analyst meeting, we have shipped in excess of 4 million units, at this point in time we've shipped in excess of 8 million units so we're moving very quickly up the ramp curve.

That's great and just last question here for Stacy on the interest income line.

I wonder if you could just walk us through the decline in that number going forward and just what's driving that.

Sure.

I told you at the analyst meeting that our cash balances were a little higher than we wanted and higher than the target we set with the board, so talking through the Q1 to Q2 reduction, it really is driven by interest income and there's a couple components to that.

As you know, interest rates are down so we earn a bit less on the portfolio that we have but also I plan to bring that cash balance down a bit more in the second quarter.

All right, thanks.

And from UBS, your next question comes from the line of Uche Orji.

Please proceed.

Hi.

Thank you very much.

Paul, first question is for you.

I'm just a little bit positively surprised by the comments you made on North America, especially on servers.

If you don't mind I'd just like to probe that a little bit.

My question is how much of this could have been the pent-up demand for 45 nanometer and, of course, I know it continues into Q2, but if you were to look through your various categories of customers, is there a particular area where the strength is coming from, I mean if I look at, and you mentioned Manhattan, if I look at financial services, of course, we're not seeing IT budgets going up.

So if you can give us any more color just explain the strength, that would be very helpful.

Well, those questions may best be answered by Hewlett Packard an Dell and IBM when they come up but from our perspective as we look through I actually disagree with you on financial services.

I think that you're right on the PC side.

We have heard about some softness as the banks cut back employees and so fourth, but on the back office stuff, they're still deploying the most advanced technology they can to get for the obvious advantage of speed of transactions.

So I take issue with your assertion there.

Okay.

We saw pretty broad-based, wide customer based adoption of MP at a very strong ramp on Caneland and, as I said, the Quad-Core, especially 45 nanometer Quad-Core mix, accelerated over the quarter as our volume grew.

We are, to mix your question and Glen's together on 45 nanometer, we're filling from the top.

The bulk of our 45 nanometer output starts out in servers, moves to mobile and then moves to desktop.

Okay.

Another question, thanks for that.

That's helpful.

Another question is regarding your pricing strategy.

If I look at your strategic positioning, you are in the driver's seat.

Is your strategy with pricing still for the rest of the year to kind of keep it flattish or do you have a chance now to kind of [get people] into higher speeds or higher ASP being the way to create more volume, so if I look through the rest of the year is it possible for you to talk through what will be ideal strategy for pricing?

Of course I know it depends on what the environment looks like, but from your perspective any sense of what we should be thinking about pricing would be helpful.

I can assure you that we're always trying to sell up to the highest performing products in any of our segments so that's just standard operating procedure.

When our mix is as competitive as it is today, we have a better chance of doing that, so look to try to see us move towards MP, towards faster Xeons, towards faster notebooks as much as possible.

Offsetting that I have to say is, and this is the unknown, is the ramp of which things like the Netbook, the Atom based Netbooks start taking off which have a lower average selling price but as we've showed you in the analyst meeting awfully good margins and that segment we still think is going to, it will be net accretive to the overall TAM for notebooks.

Right.

That's helpful.

Thank you very much, Paul.

Appreciate it.

Your next question comes from the line of John Pitzer from Credit Suisse.

Please proceed.

Yes.

Thanks, guys.

Congratulations.

Paul, a couple questions.

Just getting back to the macro.

You said 75% of your business outside the U.S.

on the server front I'm assuming there's a much higher concentration within the U.S.

I'm just kind of curious, do you think market share gains or mix is a better driver because you've now had I guess three consecutive quarters Q3, Q4, and now Q1 where server demand has been extremely strong for you guys.

I think we'll let the MSS question sort itself out but I think it's probably a bit of both as it sorts out.

One of the things that we've talked about is this growth of the large internet data centers who are now consuming a very measurable part of the server output and sometimes they buy from us directly and sometimes they buy through our OEM customers.

Their growth, I mean you saw the stories about Amazon and Google in the papers in the last couple of days.

Their growth is really quite large as they try to build out their infrastructure for cloud computing and I think that is a driver that is measurably different in the last couple of quarters than in the previous few before that and on top of that you got the quality of the product line which may be helping on share.

And then, Paul, on the mobility side if you look over the last four quarters revenue growth is still very healthy but is decelerated from above 20% to now about 11.7.

Is that all pricing and mix as you get into these new end markets?

Is that the primary contributor there?

Yes.

It's the predominant driver by far.

And then, Stacy, just two quick housekeeping questions around the NAND front.

First, any money that you guys give to IMFT, does that show up in the $5.2 billion capital budget and can you give us a sense of how much capital you're planning to commit to that joint venture this year?

So it does not show up in the CapEx spending, so the $5.2 billion is what we're spending for our internal factories and as we push out the Singapore factory a bit, it's a little premature to say how much CapEx we'll do.

It's likely to come down from what we thought a few weeks ago.

And then lastly just to help us given the pricing in NAND was an issue to Q1 gross margins, how much does NAND pricing have to fall in Q2 before we need to start to worry about your gross margin guidance for the quarter?

So probably best if I talk about what I see for the rest of the year and I'll give you a little bit of color commentary on what we saw Q4 to Q1 and then over the rest of the year.

We see a continued oversupply in the NAND market.

That's pretty consistent with what most of the external analysts are saying as well.

So we do see pricing coming down on a gigabit level.

We're taking some actions to improve our mix and our financial performance but we do see pricing coming down and also our costs come down, so it should be relatively gross margin neutral from here on out to what we have modeled in.

The real difference is Q4 to Q1 our gigabit production doubled.

We had a new factory that had come on line and we now see that kind of flattening out over the rest of the year.

So even if there's a big drop in NAND pricing, it's not going to have the same magnitude on any given quarter as what we saw Q4 to Q1 because of that bit doubling that hit us the same time that the prices came down by half.

Great.

Thanks, guys.

And Jim Covello from Goldman Sachs is on the line with your next question.

Great.

Good afternoon.

Thanks so much, guys.

Stacy, first question.

Can you help us quantify how much NAND is dragging down overall gross margins for the full year 2008?

More than we thought when we originally set the forecast for the quarter, but I'm not going to break it out.

We had a big impact in Q1 and I think it's going to be pretty much gross margin neutral as we go through the year from where we are.

Again, I've got costs coming down about the same rate that I see pricing coming down.

And then we're also looking at series of other options to both improve our business on a tactical basis and if it's not going to give the kind of financial performance that we're holding it to, then we'll go take other options.

So, I think that's all I can say on NAND right now.

That's helpful.

And then relative to the margins in Q1 which were, as you said, were lower because of NAND and then the guidance for the full year gross margins remaining the same, what is helping in the back half of the year offset the weakness in the first quarter?

It's not just the back half of the year.

It's actually Q2 is up a bit from what I thought a quarter ago and what we're seeing is just some growing strength in the core business.

Specifically I see some incremental growth coming from the Atom processor.

I see costs coming down and that's offsetting the weakness that we're seeing in NAND.

Is it, I think you guys had commented on originally that some of the gross margin you had assumed for the year you were assuming a competitive product from your competitor and assuming some price competition as a result of that.

Any possibility that some of that isn't as bad as you might have expected because of your product differentiation?

I think we'll have to wait and see as we get into the second half on how their products perform and the rate at which they're able to ramp it.

Okay, and then final question, just around the competitive environment.

Obviously your product differentiation is creating a difficult situation for your competitors or your competitor.

Is there a point at which the competitive environment gets too dire for them and how do you think about strategically your actions in the face of the competitive environment given how well you're doing and how poorly they 're doing?

I think you'll have to ask them the first part of that question.

I don't think I'm qualified to answer it but in terms of the way we look at it, my job is simply to bring out the best products as possible and meet customer needs and drive dynamism in the marketplace in terms of new products and new technologies to kind of stimulate market growth.

That's been the Intel CEO's job for two decades and I don't see it changing.

It's really stark if you look at the difference in our results back a year and a half ago when we didn't have product leadership to today when we do.

It really drives a very different set of financial execution for us.

Great.

Final question and then I'll be done.

Hallum still on track?

Yes, sir.

Thanks very much.

Your next question comes from the line of Chris Danely of JP Morgan.

Thanks, guys.

Can you talk about what utilization rates did in Q1 and where you expect them to go for the rest of the year, or is it that everything is kind of running flat out right now?

It's pretty much the same that I showed you at the analyst meeting about a month ago.

Utilizations are what I would consider in the sweet spot over the course of 2008; not too hot, not too cold.

Great.

And then, Stacy, it sounds like you're also going to deploy some more cash in Q2 so we can assume another buy back?

We have an ongoing buy back program.

We did a good buy back in Q1.

It was 2.5 billion.

We paid a dividend and we actually announced an increase in our dividend.

As I told you at the investor meeting, we'll utilize both of those mechanisms to keep cash at the level agreed with the board.

Beyond that, I can't go any further in commenting on the first quarter.

That's fine.

It sounds like the NOR business is about $300 million.

Why are you guys keeping $100 million in revenue for Q2 and then $50 million for Q3 and Q4?

So it's not that we're, we're actually supplying wafers to Numonyx on a supply agreement for some products in factories that they didn't take, and so that supply agreement will run the course over 2008, maybe a little bit at the beginning of 2009 and then it will be done.

Last question just for Paul.

So, Paul, to reiterate, you've seen no troubling signs of demand either from the U.S.

or Europe or Asia?

No, we haven't.

Thanks.

And your next question comes from the line of [Tim Luke].

Please proceed.

Thanks so much.

Stacy, I was wondering with respect to the mobility business, it looked like what your outline strength in the server business in terms of the revenue and the profitability that while I think Paul was saying that your notebook business was strong relative to your expectation.

The operating margin there looked lower clearly versus the fourth quarter but lower than it's been in a while.

Do you have any color on the operating level there and what some of the issues might have been?

Sure.

And it's probably best seen, you can see the same impact year on year, so let me give you Q1 '07 to Q1 '08.

It's best seen there and it really is the price of success for the mobile business.

They pick up now a larger percentage of the allocated costs across the company.

As Paul said, we're seeing that crossover point a year earlier than we thought, so they're picking up a larger percentage of the process technology development spending that we do that we allocate to the group so that's a chunk of it.

We also made the decision to transition our advertising from the first half of last year where we're doing core 2 dual based advertising and is now Centrino business so they're picking up a much larger percentage of the overall advertising budget of the company.

It really is those kinds of things that are impacting the operating margin.

Do you have any color, in saying the ASPs were flat, maybe the server ASPs were up because you had strong revenue and new product.

How was the notebook ASP and maybe the desktop ASP?

Well, I pretty much said that notebook ASP in my speech, we saw notebook ASPs coming down some same as last quarter as the notebook form factors moving into the consumer segment in emerging markets.

We see good strong unit growth and it is partially offset by the ASP coming down as it's hitting these new price segments of the market.

That was true in Q1 as it was true in Q4.

The desktop ASP obviously lower as well?

So I'm not going to go segment by segment.

The two significant ones was we saw good growth in the server market so good growth in units and the notebook market offset a little bit by ASP.

Going forward then the operating margin for the mobility business we would think about it being more in this mid to low 30s range, is that how we should think about it?

Going forward, their allocation over the, we're not making a new advertising decision so that's kind of all in in the Q1 result.

We do the allocation methodology on a semi-annual basis so it's probably going to look a little better as the revenue grows over the course of the year would be my guess.

Separately, just with respect to the chip set revenues versus the MPE revenues, it looks like the sequential decline in chip sets was more pronounced than the sequential decline in micro processors and similarly in the prior quarter the revenue growth had lagged, what it was in micro processors.

Any color on some of the dynamics in chip sets for both enterprise and mobility versus micro processors?

Let me give an aggregate comment on chip sets and then maybe Paul wants to give color on the different segments I don't know.

Thanks.

Quarter, we had a very strong Q4 in chip sets.

What we saw in Q1 in total on chip sets was pretty much as we expected in kind of within the wide range of outcomes that you typically see from a Q4 to Q1, so we didn't see anything unusual there.

You also have to keep in mind that within that chip set and other revenue segment we had some revenue that's gone away.

We were providing some supply agreements due to our divestiture of the handheld business.

We had some other small divestitures hits that line item, so a little bit of what you're seeing is due to some of those effects and I articulated those at the beginning of the quarter.

Paul, anything on that Should we continue to expect chip sets to lag the micro processor revenue growth or is there going to be a catchup at some point?

No, they lead and they lag.

It depends on the season.

In the second half of the year they tend to build up.

There's about an 8 to 12 week, depending on the form factor, lead time of chip sets ahead of micro processors.

So as you move towards the volume parts of the year the chip sets part to pick up in advance of micro processor seasonality and then when you come into this part of the year you have the trough because Q2 is typically lower than Q1.

So I think what you're, I wouldn't read anything into that.

Our view of our competitiveness in chip sets is unchanged.

We think we have a very strong position here.

Lastly if I may, just on the NAND bit growth, I think at the analyst meeting, Stacy, you had suggested that the bit growth in NAND would be tempered or maybe even flattish going forward after a strong ramp in the first calendar quarter.

Do you have any color there, and then separately, given the industry commentary around the battery fire impacting the notebook outlook, I was just wondering if, it doesn't seem like in your guidance there is any impact there at all, but I was just wondering if you had any color there on how we should think about that.

Sure.

So on NAND consistent with what I said at the analyst meeting we saw incremental capacity coming on in Q4 and in Q1 that absolutely impacted our results.

Over the course of the rest of the year, we don't have incremental capacity coming on.

Our bits grow a little bit as yields improve but compared to what we saw last couple quarters that would be pretty minor.

And we had the next increment of capacity coming on with the Singapore factory and in conjunction with Micron we've made a decision to push that out while we watch the market.

In terms of the battery fire, our forecast encompasses what we see there.

We aren't seeing that as an impact on the quarter.

Thanks.

Good luck.

Hans Mosesmann from Raymond James is on the line with your next question.

Thanks.

Paul a quick question on the NAND situation.

What is on the table with your discussions with Micron regarding possible action and in terms of that, could you possibly consider getting out of the NAND business completely?

Well, I really don't think it's appropriate to get into that, Hans.

I mean, there's a lot of ideas that we have here and talking about them publicly before they're realized or discussed I think is inappropriate and weakens our negotiating position and our options, so I really can't comment on that prior to doing it.

We have similar questions raised on NOR a year an a half ago about what are you going to do about it and we couldn't answer those even though we were in discussions with ST.

So that's why I put the statement I made in my commentary on this has our focus and you have our commitment on the long-term non-drag on the business.

Okay, fair enough.

Thank you.

That's it.

And from Cowen And Company, your next question comes from the line of John Barton.

Please proceed.

Thank you very much.

Paul, as you start to see more design wins for the Atom roll in and you start the shipping for revenue, as you look at those wins is there anything that's changed in your view with respect to what the real adopters would be as far as either emerging economies, mature economies, MIDs, notebooks?

I think it's too soon to call that.

Certainly some of the, I think the bulk of the early sales of the Netbooks has been in either in mature markets or tier 1 cities of places like China, and most people that are buying them are buying them as a fashion accessory, as a second or third notebook in the household, or women because of the form factor, both the keyboard is more amenable to their hand size or fits in a purse and those kinds of things, but I think we're in the early stage of this still.

It's like the early days of the iPod.

And as you have different versions come out and different price points come out, I would expect this to move, in particularly, well in emerging markets.

And as you review the design wins and the competitive dynamics out there, what actually do you see as the primary competition for an alternate processor choice and how do you think that potentially evolves through the following year?

Well you've seen some already.

HP has one based upon [Via] already, so that's certainly one that's out there today, but in terms of the overall technology, in terms of performance and battery life and integration of chip sets, we think we're in a pretty good position to take advantage of the category we're creating.

With respect to overall PC demand, you were pretty adamant about your statements that the June quarter looks basically seasonal.

You're not seeing anything to make you fearful of North America.

Can I extrapolate from that that your view of 2008 really hasn't changed much since the last time you made a comment some I think you had low double digit PC unit growth shipments for '08, is that fair?

Yes.

Yes it hasn't changed and yes that was our view at the time and I haven't moved from there.

Great.

Thank you very much.

And JoAnne Feeny from FTN Midwest is next.

Folks, just one last question on the spending side of the budget.

With the restructuring that you're completing now, can we expect that to bring down in absolute terms your research and your selling budgets or is that likely to remain flat?

Thank you.

Yes, our long term goals haven't changed which is to grow spending at a rate that's slower than revenue and have an expanding operating margin.

In terms of the absolute spending level, that's going to be to a large extent dependent on the revenue environment that we're in, but the long-term goals here are the same that I communicated to you a month ago, it's grow operating margin percent and have spending grow slower than revenue.

And would you say that after the restructuring you feel like you have more [growth] when conditions change you're able to reduce those variable costs a bit more quickly than in the past?

Could you repeat that question?

There was a little bit of feedback on the line.

Sorry about that.

Yes, I was just wondering given the restructuring has the firm become a bit more nimble.

If demand goes down, can you cut out some of these expenses fairly quickly?

There's no question in my mind that we've become more nimble.

I mean, the way we went about the restructuring and one of the reasons it's taken some time to do it is we tried to address the underlying efficiency of the company, the efficiency of our manufacturing organization, the efficiency of our research and development organization, so there's no question in my mind that we've addressed some of the underlying efficiency and frankly it's a focus that we will continue over the course of time even after the restructuring program that we announced two years ago goes away.

I think it's an incredible competitive tool for us.

And that 250 million that we should expect this quarter you said it was likely to reduce over the course of the year.

Is that something you're going to wind up you think this year or should that continue into next year as well?

We will continue to focus on efficiency and productivity hopefully forever.

In terms of the restructuring program and the pretty significant charges you've been seeing hitting the restructuring line, I think they drop off pretty dramatically when we get into the second half of the year.

Okay, thanks very much.

Your next question comes from the line of Doug Freedman with American Tech Research.

Please proceed.

Thanks for taking my questions.

You've answered almost everything here but if you could, Stacy, talk a little bit about the impact of the Euro.

You mentioned that it's impacting OpEx, but are there any benefits from the exchange rates that you're seeing and not just the Euro but anything that you can offer there?

Yes, absolutely.

So, yes, the spending, as you mentioned, the weaker dollar is increasing our costs in some of the other geographies of the world.

Two jobs ago I was actually the head for Europe, Middle East and Africa and one of my rules of thumb is the best time to be in that region is when the dollar is weak and the time to leave is when the dollar becomes strong because it does lower the PC prices in the marketplace and I think that's part of the strength that Paul alluded to in Q4 as we're just seeing the price of technology coming down in Europe because a lot of components are priced in dollars.

And then can you talk about if you have seen any impact from what's happening in the commodities market and whether that is having an impact, expected to have an impact and how you're working that into your thinking?

Yes.

I'd say it's the same as what we see on the macroeconomic side of the business.

It's one of the inputs that goes into how we look at the business an how we look at our costs but, in general, what we're seeing and I think that this is a result of our technology leadership right now and the strength of our products we're seeing a pretty strong market and I see costs coming down quarter by quarter by quarter so those are kind of the two components there.

And then lastly, you talked about success of Atom happening and you talked about strength in the server market and the drivers there.

You also talked at the analyst day about the mix there being very important for gross margins going forward.

Any help you can offer on how quick you think the Atom class processors are going to ramp in comparison to sort of where we're seeing pretty strong strength in the server market now?

Is this something where the mix is going to become more of an issue for 2009?

Anything you can offer there?

Yes, sure.

Too early to call.

My view hasn't changed from what I show you a month ago.

We're pretty excited about the level of interest we're seeing on Atom.

I think it is driving some incremental strength, but we're also seeing strength in the server business.

And I think it's fair to say that the 57% gross margin for the year you're projecting includes the impact of Atom for 2008.

Yes.

If that was your question absolutely.

Okay.

Doug real quick we've got to cut it, Denise we just need to take one more question because we're running out of time and it needs to be a quick one if you can just pull the last one and we'll wind up the call.

Yes, sir.

Your next question comes from the line of John Lau from Jefferies & Company.

Great.

Thank you very much.

Much of the questions have been answered, but in terms of the underlying dynamics for the PC, Paul, much of the growth is outside the United States now.

Does the outsourcing trend and the infrastructure buildout in the emerging markets still look strong and is that really the dynamic that we're looking for to offset more of the mature markets in the United States and Europe?

Well, to the first approximation, yes, most of the growth over the next few years, five years is going to be, will be non-U.S.

but the U.S.

market has been pretty resilient based upon the transition to notebooks.

People buy them more frequently than they do desktops and there's more notebooks per person.

So, I wouldn't necessarily write it off.

I think a notebook is becoming a bit of a fashion statement and that has a cache associated with it and we're seeing some of that.

You certainly have seen that with the Apple product line growth.

But I really think the unknown dynamic is what happens when these $200 to $300 Netbooks are unleashed in India and China and Indonesia and we don't, there is no model for that at this point in time because you're dealing with something that's never existed before so we're optimistic but we just don't know at this point.

And even before the Atom hits those emerging marketings, Paul, are you seeing, what can you comment with regards to the adoption rate for the middle class and the general population with regards to notebooks in these emerging markets now?

Have you seen an uptick there?

Yes, it is.

Some of that is also back to Stacy's last question on the dollar.

As the dollar weakens against most currencies, particularly in some of these hot, emerging markets the amount of money it takes to buy a PC relative to local disposable income is less and less.

And so we're seeing PC penetration move more rapidly in some of these markets than we had seen in previous years.

And that's one of the reasons you see us pointing to a growth forecast in terms of low double digits for the units this year.

Great.

Thank you very much.

You're welcome.

We have allotted the time for Q & A.

I'll go ahead and turn the call back over to Mr.

Kevin Sellers for closing remarks.

Thank you, Denise.

I want to thank everybody for joining the call today.

As a reminder, our quiet period for the second quarter will begin at the close of business on May 30, and our second quarter earnings conference call is is scheduled for Tuesday, July 15.

Thanks again for joining and we'll talk to you soon.

Good night.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.