英特爾 (INTC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2008 Intel Corporation earnings conference call.

I'll be your operator for today.

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

We will conduct a question-and-answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's conference, Mr.

Kevin Sellers, Vice President of Investor Relations.

Please proceed, sir.

Thank you, and welcome everyone to Intel's Q2 2008 earnings conference call.

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

This call is being webcast live and a replay will be posted to our website at approximately 5:00 Pacific time and will remain there for approximately two months.

As usual, Paul will be discussing the highlights and progress of the quarter, and Stacy will then provide details of our financial performance in Q2 as well as the outlook for both the third quarter and full year 2008.

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

A few important items before we begin.

First, the press release of our earnings went out at approximately 1:15 Pacific time and is now posted on our investor website, INTC.com, along with updated financial statements 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 post the appropriate GAAP financial reconciliations to our investor website.

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.

Our second quarter results were very positive on a number of fronts.

First, revenue for the quarter was a record.

Fourth quarter in a row that we achieved such a result.

Demand for our leading edge computing products around the world continues to be strong, with revenue and unit shipments towards the high end of the seasonal norm, when factoring in the divestiture of the NOR business.

We realized record unit shipments in mobile microprocessors, chip sets and wireless communication units in the second quarter.

Our focus on lowering costs and improving efficiency continues to provide considerable operating leverage with operating income growing 67% from a year ago.

For the second quarter in a row, we bought back $2.5 billion worth of stock, returning cash to our stockholders.

Our 45-nanometer manufacturing process is performing superbly.

We remain on track to ship over 100 million units before the end of the year on this process technology.

At this stage of our process ramp, yields and through-put times are better than at the same time on our 65-nanometer ramp.

These results are lowering unit costs ahead of our original plans, and are providing us with increased flexibility in meeting diverse customer requirements.

We will reach the 45-nanometer shipment crossover point for microprocessors during this, the third quarter.

Now let me briefly discuss a few product highlights.

In servers, we had record channel shipments.

This demonstrates the demand for our products coming from small and medium businesses around the world continues to be healthy.

We also enjoyed some noteworthy design wins, at both Cray and Dreamworks, reflecting that our current and future product road maps are delivering the performance that meets the most demanding customer requirements.

In mobile, we enjoyed very strong unit growth both sequentially and year-over-year.

As notebook computers continue to decline in price, we see demand growing in response.

We saw notebook unit shipments cross over desktop in the overall client PC category in the second quarter.

That's sooner than we had expected.

We launched our new Atom Processor during the second quarter, and are exceeding our ramp targets as demand for this new product is very robust.

We expect unit shipments of Atom Processors to grow sharply in the second half.

In summary, we are very pleased with our second quarter results.

The strategic direction we laid out two years ago at our investor meeting, coupled with our restructuring efforts, are coming together and yielding tangible results that we committed to our stockholders.

Our product line is superbly positioned, our new growth initiatives are ramping and showing promise.

And our manufacturing execution is outstanding.

In the third quarter, we plan to bring exciting new products to market, such as our new Centrino 2 platform launched just yesterday as well as Dunnington, our six core server processor, targeted at high end server workloads scheduled to launch later this quarter.

These are the kinds of innovations that create real differentiation for our customers, and allow us to maintain product leadership.

A final word on the economic environment.

We are very aware of the global economic issues that dominate the financial markets these days.

We're watching these very carefully.

In the first half of 2008, we saw order patterns play out as anticipated at the beginning of the year.

Inventories remain at healthy levels and our global footprint is helping us benefit from demand for Internet computing.

As you look into the third quarter, we see continued healthy demand for our products, leading us to the third quarter outlook that we provided.

Let me now turn this call back over to Stacy.

Thanks, Paul.

Intel delivered strong financial results in the second quarter.

Better than expected demand in the microprocessor and chip set businesses led to record second quarter revenue of $9.5 billion.

Compared to the second quarter of 2007, revenue grew 9%, with gross margin up more than 8 points.

Operating profit was up 67% year-over-year, and operating income as a percentage of revenue was up 8 points year-over-year to 24%.

Revenue for the second quarter was above the midpoint of the range forecasted in April and down 2% from the first quarter.

Excluding the revenue associated with the NOR business, revenue was flat for the first quarter, at the high end of the seasonal range.

Microprocessor unit sales were above the seasonal pattern and average selling prices were lower.

More than half of total revenue, $5.4 billion, came from the Digital Enterprise Group.

Revenue from this group was flat compared to the first quarter, and up 11% from the prior year.

Microprocessor revenue in the Digital Enterprise Group showed particular strength with revenue up 14% from the second quarter of 2007.

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

This revenue of $3.8 billion was up 3% from the first quarter, and up 15% from the prior year.

Looking at a geographical breakout, all geographies experienced year-over-year growth in the second quarter.

After adjusting for the impact of the NOR Flash divestiture and supply agreement with new Numonyx, all geographies performed a little better than average seasonality.

Gross margin dollars were $5.2 billion, flat compared to the first quarter.

Gross margin percentage of 55.4% was up over 1.5 points from the first quarter and up over 8 points from the second quarter of 2007.

Versus the midpoint of the outlook range set in April, second quarter gross margin was down 0.5 point.

A little less than 1 point decline came from average selling prices being lower, primarily due to the growth in shipments and the lower price segments of the notebook market.

R&D and MG&A were approximately $2.9 billion within the forecasted range of 2.8 billion to $2.9 billion, and up 3% from the first quarter.

In addition, we had restructuring and asset impairment charges of $96 million, which was lower than the outlook that we provided of approximately $250 million.

As an assessment of capacity resulted in less restructuring and asset impairment charges.

The number of employees is down by 2700 from the first quarter to below 82,000.

Primarily due to employees transfer to Numonyx.

As we complete the second year of the restructuring program announced in 2006, the number of employees is down more than 20,000 from the second quarter of 2006.

Gains, losses, on equity investments and interest and other income of $58 million was lower than our outlook of $75 million, and lower than the first quarter of $109 million.

Relative to the first quarter, improvements in the trading asset portfolio were offset by lower interest income and impairments of marketable equity securities.

The provision for taxes in the second quarter was at a 31% effective tax rate, lower than the 33% previously forecasted due to tax settlements.

On the balance sheet, total inventories were flat to the first quarter at $3.3 billion.

Total cash investments comprised of cash, short-term investments and fixed income trading assets, ended the quarter at $11.5 billion, $1.7 billion less than the first quarter.

Cash flow from operations was over $2.5 billion.

Capital spending was $1.2 billion.

Dividend payments were $800 million.

And stock repurchases were $2.5 billion.

As we turn now to the outlook for the third quarter, please keep in mind unless otherwise specified, the forecasts do not include the effects of any new acquisitions, divestitures, or similar transactions that may be completed after July 14.

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

We are planning for revenue to be between 10 billion and $10.6 billion.

The midpoint of this range would be an increase of 9% from the second quarter.

On a year to year basis, the outlook anticipates revenue growth of 2%.

Excluding the decline in NOR revenue, the growth would be approximately 6% year-over-year.

Our expectation for gross margin percentage in the third quarter is 58%, plus or minus a couple of points.

2.5 points higher than the second quarter as microprocessor unit volume increases in the seasonally up third quarter and as unit costs decline on 45-nanometer products.

Looking beyond the third quarter, as volume increases and costs decline, we expect gross margin to improve further in the fourth quarter.

Spending for R&D and MG&A in the third quarter should be approximately $2.9 billion.

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

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 loss of $30 million.

We maintain the midpoint of our outlook for gross margin for the full year of 57% and have narrowed the outlook range to plus or minus a couple of points.

Spending for R&D and MG&A for the full year is now forecasted to be approximately $11.7 billion.

R&D spending is forecasted to be approximately $6 billion, flat to the prior forecast.

And MG&A spending is forecasted to be approximately $5.7 billion, up $200 million from the prior forecast, primarily due to legal and profit dependent expenses.

The tax rate for each of the remaining quarters in the year is expected to be 33%, unchanged from our prior outlook.

Second quarter revenue growth of 9% and operating profit growth of 67% year-over-year marked the end of a strong first half.

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 for Q&A.

Okay.

Thanks, Stacy and Paul.

Before we begin our Q&A segment I want to remind the financial community of our upcoming Intel developer forum taking place on August 19, through the 21, in San Francisco.

There will be seven keynotes during the forum covering a wide range of technology trends from the digital enterprise to ultra mobility to software.

We will also hold a number of briefings for investors and analysts as well.

For registration and other information please go to Intel.com/IDF.

We'll now be happy to take your questions.

In order to allow more of you to participate on this call we will limit each person to one question and one follow-up if you have one.

The operator will introduce you and -- will introduce each of you and prompt your question, I will then ask if you have a follow-up, the operator will then introduce the next questioner.

We are now ready for our first question.

Your first question comes from the line of Mr.

John Pitzer with Credit Suisse, please proceed.

Thank you, good afternoon, guys.

Just quickly on gross margins for the June quarter being below midpoint, pointing to the low end notebook market.

Was that all Atom driven, or were you still selling some Celeron to that market?

If it was all Atom how do we get comfortable about gross margin progression in September as Atom ramps and becomes a bigger percentage of the overall mix?

Yes, it was not Atom.

Atom launched in the second quarter.

But the units shipped on Atom were pretty small in the second quarter.

We expect it to ramp rapidly into the second half of the year.

It was what I recall the traditional notebook market as Paul said, as that is now more than 50% of the market, we're seeing a lot of unit growth in emerging markets, we're seeing growth in channels such as the retail channels.

That growth is good for us but it tends to be at a lower price point.

You're seeing TAM expansion at some of these lower price points and that brought the average price down in the second quarter from what we expected.

John, do you have something else?

Just real quick, guys.

Just given the buybacks the first half of the year, what can we expect in the back half?

You guys are going at a pretty significant clip relative to what did you in 2006 and 2007?

What's kind of the philosophy there?

I said back in Q1 that cash balance was a little higher than we were targeting.

We brought down the cash balance by about $3 billion over the course of the first half.

And we've done about -- we've done $5 billion worth of buybacks between Q1 and Q2.

Cash balance is getting more into the range of what I'm targeting.

At this point I'm not going to give a buyback forecast, nor am I going to give a cash forecast for Q3.

Thanks, guys.

Thanks, John.

Next question.

Your next question comes from the line of Mr.

Tim Luke with Lehman Brothers.

Please proceed.

Thanks so much.

Stacy, just in guiding a fairly solid revenue outlook in the 10 to 10.6, could you give us some framework for how you perceive the desktop area to be proceeding?

Again, it sounds like you are expecting a fairly robust notebook and perhaps some lower end notebook forecast.

Could you give us some color on desktop notebook server?

I guess I would point back to what we've seen so far in the first half.

We really have seen demand holding up across the different segments of the computing relating business with particular strength in the notebook growth that we spoke about at some of these price points.

And then in the server market, I think the strength of our product line really benefited us in Q1, Q2 tends to be a seasonally lower quarter for servers, but I would expect that to also be strong as we get into the second half.

I think underlying your question is demand.

We saw demand pretty normal through the second quarter across the segments of our business and across the different geographies.

And you had a follow-up?

Just as a follow-up, obviously you're holding the gross margin for the full year guidance and guiding it up fairly meaningfully in the third quarter to the 58% range.

Could you just provide a little bit more color on what gets you there, given the strength you are seeing in the lower end notebook segment and the mix there?

Thanks.

Sure.

It's a pretty simple margin reconciliation going from Q2 to Q3.

There are two elements that are worth roughly the same amount of gross margin improvement.

We see our costs improve quarter on quarter.

Pretty dramatically as we go from Q2 to Q3 and then we see volume in the CPU segment up seasonally and those two things get you up to 58%.

Thank you.

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

Please proceed.

Thanks.

A question about the outlook for revenues.

It's good in Q2.

You're guiding strongly in Q3.

To what extent is your confidence being helped by share gain and/or the Montevina launch?

Does that give you some confidence in how you look at Q3?

Glen, I think it's a -- it's Paul, I think it's a combination of things.

What we've seen from our customers is I think the over arching comment is on the notebook market.

Accelerating around the globe, at multiple price points.

And I would -- we also expect and we'll see more of Atom-based notebooks in the third and fourth quarters and that's why we will break those numbers out for you in our commentary so that you can have -- draw some trend lines around those.

But in general, we were able to cover the shipment shortfall of Montevina in Q2 with Santa Rosa.

We replaced all that volume so our customers were able to keep on shipping.

And now Montevina is ramping very rapidly in the consumer segments that are launched today or yesterday.

I won't comment on share gain but we'll let the numbers speak for themselves when they all come out.

But it would have to be pretty clear that with the kind of mobile volumes we had in the second quarter, that we did pretty well.

Okay.

Thanks.

Then you had something to follow up?

Yes, I guess maybe just going on from that, that response, you talked about the low end of notebook market short of taking some mix in Q2.

But now you've got Montevina coming forward for you in Q3.

Does that sort of stem the shift towards low end or do you think it's really more a function of emerging markets versus Western markets?

I think it's a bunch of things and a lots of this is dependent on the economy.

The prime purchaser of notebooks still remains as a segment, business, large enterprise and they tend to buy relatively high end notebooks and Montevina will start shipping into that segment later this quarter.

Or we launched the Centrino 2 Pro product line, so that is one that we've got fairly -- we're fairly bullish about for the second half as that ramps and replaces the pre-existing SKUs that are out there.

In general, I think what we're seeing is just a fundamental shift to notebooks.

We've been seeing its for years.

The crossover happened six months sooner than we thought.

Thanks.

We'll take our next questioner.

Your next question comes from the line of Ross Seymore with Deutsche Bank.

Please proceed.

Hi, guys.

Excuse me.

I have a bit of a cold here.

You talked about the pricing on the notebook side of the market.

Can you tell a little bit about what's going on in pricing in desktops and servers, please?

Sure.

Well, we aren't going to give you any ASP granularity in each of those areas, but in servers we had a very strong Q1 in MP and Q2 DP was a bit more -- a bit heavier so that tends to drive the mix a little bit to the lower priced numbers.

I would expect MP to pick up in the second half of the year as is traditional.

The fourth quarter is normally the big server quarter but as you can tell, we're being a little bit cash cautious about that, given the overall economic environment.

In terms of desktop, there's two trends.

There's a continuing trend in emerging markets with lower priced desktops, but there's also a trend in refresh rates in corporate around our V-Pro product line which happened at above average selling prices.

The combination of the two has kept the desktop pricing on average relatively constant.

Ross you had something else?

Just really quick on the ESO line, it seems like year-over-year your headcount is down a lot but the stock comp expense keeps going up.

Can you give us a little bit of the background as to why that would happen and what your expectations are for that line going forward?

I think as we run the model, I'd actually have to go back and double check this, Ross, but I think it's as we run the model as volatility goes up a bit, the stock option expense goes up a bit.

We have fewer employees and we had not expanded the stock option program in terms of number of options granted per employee so I think it's just the volatility.

We'll take our next questioner.

Your next question comes from the line of Mr.

James Covello with Goldman Sachs.

Please proceed.

Good afternoon, guys.

Thanks so much.

First question, Paul, last quarter you gave us a little bit of color around the NAND business and your thoughts about fixing it one way or the other.

I wonder if you can update us on where we are there.

I won't giving you a lot more color than you gave you last quarter, James.

But we're taking some actions to limit the amount of supply growth in this environment.

As you know, the NAND pricing continues to still be very weak so we're focusing on supply and on cost.

At the same time, we are focused on trying to get a better pricing environment for our products by shifting some of it to more innovative stacking products and to SSDs.

At he same time we're doing that, we're still looking for longer term solutions.

I have not waivered in my commitment to have this business not be a long-term drag on our P&L.

You had something else?

Yes, if I could just follow up.

On the Dreamworks win, could you just help us understand, in the competitive situation there, was that your products versus AMD's old products, before they introduced, say, the new Barcelona chip or was that decision made before AMD was able to ramp the new chip?

It was based upon our road map going forward versus their assessment of competitive road maps going forward.

They don't make one quarter or even a one year decision because the tremendous amount of the effort here is involved in software optimization and the software optimization around Intel is a relatively unique versus other vendors' products.

So I consider this a multi-year win.

It's a multi-year framework that binds it together.

It's software and hardware and it is I think reflective of very competitive road map we have.

Not just in servers but also in workstations as Larrabee comes on.

Terrific.

Thank you so much.

Thanks, Jim.

Next questioner, please.

Your next question comes from the line of Sumit Dhanda.

Please proceed.

Yes, hi.

First question for Stacy.

Stacy, you noted that part of the, call it the small miss on gross margins was because of 1 point incremental drag from lower ASPs.

Was that incremental to your expectations, because my recollection is, a couple of one-timers were disappearing, your inventory reserves in chip sets, NOR Flash was obviously contributing to better margins and you did have a better unit cost structure into the quarter so I was just curious about that?

Yes, it was slightly less than 1 point and it was to the outlook that I set.

If you look at this from a quarter on quarter basis, with the exception of the ASP, we got the good news from the two areas I was expecting.

We had articulated that we had some good news as we had chip sets that qualified for sale in the quarter and were shipping them in the second quarter, so we got good news there.

And we got good news from the NOR divestiture, the piece that was unexpected, the outlook was being a little bit down in ASP.

Tim, any follow-ups?

I just had one separate follow-up.

On Atom there's been talk about constraints with respect to supplying the existing demand.

Could you update us on what your sense is versus market expectations on your supply and is that constraining your outlook for Q3 in any way, shape or form?

Short answer is no, it's not constraining our outlook for Q3.

It's well within the bounds of the 10 to 10.6 that we gave you.

We have been increasing our production, planned production of Atom for this year and next every 40 days.

At least.

Since the beginning -- since last November.

Demand continues to roll up and not just in net book segments but also embedded and consumer electronics segments.

It looks like the design wins are really quite robust and so we continue to add more and more zeros to the numbers we're building for this year and next year.

I don't expect it to be any kind of limiter for revenue growth this year at all.

Sumit, if I could just add on that.

The supply constraints we're seeing with Atom are specifically the back end, the test constraints and things.

We have plenty of dye.

It's well contained within the revenue guidance we gave but as demand is going up kind of month by month we're jumping to keep enough test capacity in place for the demand we see.

The other part of that, Sumit, is to make sure we have enough chip sets.

At the same time that the Atom Processor growth is jumping up, we have to also be able to build a chip set for each of those which is one of the reasons you saw our factory utilization assessment go up over time this quarter, rather than down.

Thanks.

Thanks Sumit.

Next questioner, please.

Your next question comes from the line of Mr.

David Wong with Wachovia.

Please proceed.

Thank you very much.

Following up from the earlier question, as the Atom ramps in volume over the next two quarters, presumably primarily for notebooks, is the Atom neutral, below -- is the Atom gross margin, below, above or roughly equal to overall corporate gross margin?

Just to make sure it's clear, I think it is, but to make sure it's clear the ramp of Atom's encompassed in a 58% gross margin in Q3 and what I expect to be a higher gross margin in Q4.

My view of Atom hasn't changed from what I showed at the analyst meeting.

If you recall, I was showing the Atom platform, I used end of 2009 as a comparison point because at at that point we had ramped Atom volume, we had ramped Quad-Core volume to be a pretty significant part of the total.

And what I showed you at the time was inclusive of the chip set, so the CPU plus the chip set.

I expected the Atom platform to be about 10 product margin points lower than the main stream of the product line which was Dual Core.

And Quad Core to be about 10 product margin points higher than that.

So my view hasn't changed and I'll update that again in Q1 next year when we have the investor meeting.

Do you have anything else?

Great.

Yes, one other thing.

Did MP server processors and specifically Tigerton processor shipments grow sequentially in June?

I don't think I want to give you that granularity.

It probably did.

I don't have the number at my fingers.

Given that it's a relatively new product, it continues to ramp.

What I was talking about earlier was the mix between MP and DP and that was encompassing both old and new products.

Great.

Thanks.

Thanks, David.

Next questioner, please.

Your next question comes from the line of Uche Orji with UBS New York.

Please proceed.

Paul, just a quick question on Atom.

What is the relative gross margin of Atom versus Celeron?

As we ramp this product in second half, do you see this possibly replacing the low end Celeron products in notebooks and if so what will the impact be on the net gross margins?

Let me answer the second part of that and I'll throw it back to Stacy for the first part which I think he's already answered.

You can try it again.

At this point in time we do not see it replacing Celeron.

If you look at the products that are being built, the net book products that are being built around Atom, they're all lower priced, lower features, smaller screen size, notebooks aimed at first time buyers or the second, third or fourth machine in a household and I don't see it cannibalizing, at least in terms of current sales out, and I think we really have hit on a new product category here.

Over time, we're still sorting out the brand activity in our mainstream notebooks, it's clearly Centrino and Core is where the thrust is going to be and we will sort out and ultimately talk about where Pentium based notebooks and Celeron based notebooks live as these categories sort themselves out.

I think it's premature to say that except that we don't see any cannibalization.

I'm not going to go into any more granularity than I did last analyst meeting.

We expect this to be a very healthy product margin product.

What we're seeing today is demand that's exceeding our expectations and it's kind of all in for my gross margin forecast for the year and for Q3.

Do you have anything else?

Yes, I do, actually.

Let me just circle back a little bit to Montevina.

We saw a slight pushout.

Obviously that doesn't -- shouldn't have impacted this quarter but is it possible, however, that in terms of the back-to-school field that we may have missed -- you may have missed some business as a consequence from and is that something you hope to recapture in Q3, hence the gross margin that impact that we see remaining strong?

I just wanted to first of all understand -- fully understand what ever happened with that pushout.

I understand it was something to do with the radio.

If it's possible to clarify that, that would be helpful.

Thanks.

The principal reason was graphics, integrated graphics and the radio as well.

The combination of those two was about a 30 day slip on the consumer SKUs.

A couple things on back-to-school.

First of all, as the industry's gotten more efficient over the last few years, particularly in notebook manufacturing, the cycle times have come down both from a transit standpoint and assembly standpoint and our customers are all using Hobbes and so forth nowadays as manufacturing techniques.

The amount of -- the earliness that you used to see in shipping semiconductors to manufacturers to hit something like back-to-school weekends is a lot shorter than it used to be.

As a result I don't think we missed much if any of the back-to-school cycle.

Number one, some of our customers are doing multiple SKUs and will have multiple back to school refreshes and Montevina will be prominent in those second rounds.

I think the goodness of the product stands for itself.

There's still not really benchmarks coming out on our new products versus competition's new products but when they come out, given our testing internally, I suspect we'll do very, very well.

Thank you very much.

Appreciate that.

Next caller, please.

Your next question comes from the line of Chris Daniels, JPMorgan.

Please proceed.

Thanks, guys.

I guess just a question out of curiosity on the ASP trends in laptops, so it seems that the emerging markets is what's drove the downward trend in ASPs.

Seems to me the emerging markets have always been the big drivers there.

So I guess I'm wondering why now would it cause this sudden downward trend in ASPs and why wouldn't that continue?

I didn't say emerging markets.

If I did, I misspoke.

What's happening in the notebook business and we showed this graphically at the analyst meeting, is that consumer purchases of notebooks as a percent of consumer PC purchases has grown from 15, 20%, up to 50%ish.

Which is roughly where corporate is.

Corporate is a little bit higher than that.

What's happened is the consumer market on a worldwide basis for PCs is shifting to notebooks and consumer price points on notebooks are lower than enterprise price points on notebooks because of the typical configurations and the bills behind them.

So I think it's nothing more than price volume expansion of the consumer portion of the business on a worldwide basis.

As net books ramp up in the second half of this year, those I do expect to be predominantly focused on emerging markets.

We're just seeing that the beginning of that now.

Why wouldn't that continue or why wouldn't you continue to have ASP pressure going forward?

That's why we're going to give you color on Atom over time as a separate line item.

Because I don't want it to if you will cover the overall ASP of a core business.

So we'll give you some guidance on that.

As it gets to be a big number.

Okay.

Thanks.

I guess for my follow-up, Paul, could you just give us your sense on demand out there.

We all read the papers and stuff like that.

It seems like we all understand what's going on in the U.S.

What are you seeing in particular out there in China as far as demand goes?

Well, specifically in China, the quarter had an early interruption, obviously with the Chengdu earthquake.

And Intel and virtually everyone that I know that operates in China had some impact early in the quarter from the disruption of sales for essentially the big part of the country, the Western part of the country.

But that notwithstanding, the other trends in China are very good.

Olympics build-up has got a lot of excitement.

There's WiMAX trials on notebooks in China for the yachting events, a lot of excitement around that.

I would expect that as the replacement machines and rebuilding schools and so forth happen in China, that there will be some recovery from the demand that was lost earlier this quarter.

Thanks, Chris.

We'll go to our next caller, please.

Your next question comes from the line of Hans Mosesmann with Raymond James.

Paul, can you explain what the direction is going forward in terms of chip sets put by third parties?

Historically there used to be various players like VIA and ATI and even NVIDIA.

Now that some of those guys can't do that for lots of reasons, what is the strategy going forward?

Well, our overall strategy on chip sets is to continue to build the best in the world and to drive as high a percentage of our our microprocessors with chip sets as the market demands and we've done exceptionally well in notebooks, have historically done well, done well in servers and okay in desktop.

A lot of the companies you talked about in your litany there were desktop suppliers, low end desktop suppliers in particular and they made economic decisions to not participate in that marketplace.

There are some structural changes coming up in terms of the kinds of busses that will expose publicly with the Nehalem generation, much has been written about that, you'll see more about that at IDF.

I was very pleased to see this week that NVIDIA announced that it will do SLI support for Nehalem, using PCI express bus.

Which is an open non proprietary bus.

Do you have a follow-up, Hans?

Yes, can you remind us in terms of tick tock hit that you get in terms of gross margins when you ramp early next year, the 32-nanometer node in terms of -- what's the usual, kind of the gross margin hit in terms of points that you would expect because of that?

This is Stacy.

So what I showed you at the analyst meeting is still how I'm viewing this which is in the year in which we launch a new process technology, so 2009 will be the year in which we launch 32-nanometer process technology, you tend to see a couple of points of elevation and other cost of sales off of a base of a couple of points.

That's over the year.

It can spike a little bit more than that in a specific quarter.

But it tends to be a couple of points of gross margin.

Keep in mind, some of that is a classification of the research and development heads, and the year in which they're working on a process that's going in production they're classified as other cost of sales, in a year in which they're working on a process which is not going in production, that's classified as R&D.

That's one of the reasons you saw our spending this year go up, was that classification.

That was about a couple hundred million dollars worth of spending in 2008.

A couple of points basically in the first half of next year?

Couple of points on the year.

It will vary.

But front end loaded?

The graph I showed you at analyst meeting showed it will be higher in the first half of 2009.

Thanks, Hans.

Next questioner.

Your next question comes from the line of John Barton with Cowen.

Please proceed.

Thank you very much.

Paul, you talked about better than expected strength on the Atom Processor.

When I think about sources of demand I put it in basically three buckets.

Incremental first time buyers with lower price points, increased number of notebook PCs per person and thirdly potential substitution.

I think you already touched on the fact that you don't believe any substitution is happening.

The demand in those first two buckets, how would you split that out?

I wouldn't use your second category is not PCs per person, PCs per household.

Many households you're going from one PC to multiple PCs with these machines.

That was some of the early purchases and those purchases happened in actually the affluent city or the Tier 1 cities of some of the emerging market countries like China where it a became sort of a fashion item or machines for the kids.

I think that in -- who the heck knows.

But I guess is that this year, year one of net books 80 to 90% of the volume will fall in those first two categories then maybe some substitution.

In year two and year three I think it's too soon to call.

Our view is that these new price points combined with a limited amount of features which is required to enable the price points are likely to generate a new segment in the business.

John, do you have a follow-up?

I do.

If you thing about the basic metrics of semiconductors, you've got the price lever, the computing, performance lever and then the power consumption lever.

I think what I just heard you say is a major catalyst for adoption of Atom is certainly the price at a reduced computing performance.

How much is the computing performance, limited adoption and--?

This is sort of less than a third of the performance of our Centrino.

You're dealing with something which is not -- most of us wouldn't use.

All right.

You're dealing with something that is principally designed for net access, for web access, not really to run robust applications.

I think it's likely to stay that way for quite some time.

As a compare you would not want to run YouTube video on these things all day long.

You would not want to do any photo editing on these all day long.

Or even for a little bit of time.

I really think it's a first time buyer kind of thing and it will sort itself out.

Just like there's a different market for lower priced, lower performing cars than higher end cars.

Stacy Smith; I think that is specific to the PC segment where Atom plays.

When you get out into 2009 and it's playing into different segments, the power characteristics will be just as defining.

Thank you.

Thanks, John.

Appreciate.

Next questioner.

Your next question comes from the line of Cody Acree with Stifel Nicolaus.

Please proceed.

Thanks, guys for taking the questions and congratulations.

Back on the Atom acceptance, obviously coming in very strong.

Can you talk maybe Stacy about the offsets of Atom's adoption, the curve of that pricing versus what you're seeing in the upside to 45-nanometer cost cuts?

I have to admit, I'm not sure I understand your question.

So, you're getting improvement to gross margins because of cost reductions coming down, 45-nanometer ramp, Atom coming up, it's got a lesser gross margin mix impact so how do those two offset each other maybe as we look into the next few quarters?

Well, I guess the answer I would have to give to that is they're in the 58% gross margin that I have forecasted for Q3.

So even with the Atom ramp, that will bring costs down.

It's likely to ship at a lower average selling price.

But when I focus on the traditional -- what I'll call the microprocessor business without Atom, my costs come down in that segment of the business as well.

What I did was quantified for you the overall cost.

I think it's probably more on the traditional microprocessor business and less on Atom as we go across at least the second half of this year.

So even with the Atom adoption, even with the overall cost reductions coming -- priced -- ASPs coming down, you're still well outrunning those?

Let me say it a different way.

Even if I didn't have Atom in the second half of the year, my costs would be coming down nicely.

I see -- my factories are running pretty full.

My 45-nanometer process is healthy.

I'm running good yields and product characteristics.

So my costs would be coming down, even without the effect of Atom.

And then lastly, can you -- I know that you said you would start to characterize it as Atom starts to become more meaningful, just getting into a ramp, Atom is getting a lot of attention here and will likely continue.

Can you characterize even weeks ahead, months ahead of where you thought you would be percentage ahead of where you thought you would be or when you thought we might be able to get a little more data?

Well, depends on what point you start from.

Versus last November, we're 5, 6X the volume for the year we thought that we would, a month ago we're 10% above it.

Right.

Versus maybe your expectations going into the quarter?

Oh, going into the quarter, the -- for Q2 it came in about as we expected.

Remember, Q2 is a launch quarter for this thing.

We knew how much -- how the bills ramped.

That's pretty much what we sold.

When you get into the Q3, again, as Paul said, it depends on what time periods you choose but I guess from the beginning of Q2, we now look at Q3 as probably 50% higher than we expected, something in that order.

Thanks, guys.

Thanks, Cody.

Next questioner.

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

Please proceed.

Great.

Thanks.

Paul, in taking a step back, your guidance was very strong, especially in light of the uncertainty out there.

Can you give us what the normal seasonality is?

And more importantly whether that guidance is based on the feedback that you get.

How comfortable are you with the visibility this year versus the prior years, given the uncertainty?

Thank you.

We're equally on the hook this year versus other years.

So we're relatively -- we're very comfortable with the guidance we've given out.

Normal seasonality is about 9% Q2 to Q3, typically.

One of the things that gives me comfort is our chip set shipments in Q2.

We said that chip sets were a record in Q2.

Chip sets as you may know are a leading indicator of microprocessor PC assembly.

They get purchased and then soldered on the mother boards multiple weeks ahead of the microprocessor typically four to six weeks depending on the vendor.

So the fact that we had a very strong chip set shipments, record shipments and strong over the course of the quarter I think is a very good kind of a pointer for Q3 in addition to all the other data we have.

Jeff, if I could just add to that, for Q2 we would typically see the second quarter down a couple of percent and if you strip out the impact of the NOR business divestiture, we were flat and for Q3 as Paul said, normal seasonality is 8.5 to 9%, in that kind of a range, and that's consistent with our outlook.

The midpoint of our outlook is right in there.

Anything else?

Yes, and I know that there has been a lot of questions on some of the products but can you give us a quick schedule if Larrabee, is that still on track with your expectations and the same thing at the end of this year?

Is that how that's working out?

Larabee is on track.

We haven't changed any schedules there.

Thank you.

Next questioner.

Next question comes from the line of Srini Pajjuri with Merrill Lynch.

Please proceed.

Thank you.

Stacy, a couple of clarifications on the gross margin, first on the NAND side, what kind of an impact is NAND having on your gross margins now?

If you were to exit NAND today, how would that impact your gross margin?

Gross margin would be higher.

By how much is my question.

Sorry, that was tongue in cheek.

As you know I think from prior calls, we don't break out that level of granularity.

I will give you a little color commentary on what we saw on NAND in Q2.

And what I expect kind of over the course of the rest of this year.

The price environment continues to be weak.

NAND for us in Q2 came in as we expected.

The gross margin impact didn't worsen from Q1.

So it kind of stayed the same.

We have costs coming down as the pricing comes down which helps us.

And frankly that's what I expect into the second half.

I expect a continued weak pricing environment but my costs come down nicely so I think it doesn't have either a positive or negative effect on the overall corporate gross margin.

And then my follow-up is I guess pretty much all of last year and earlier this year you saw a pretty good benefit from mix shift to notebooks and now it seems like the notebook CPU pricing is close or even below the pricing of the desktop CPUs.

My question is are the margins still better in notebooks for you, compared to your desktop segment?

No, the notebook prices are still nicely above the desktop prices and I don't see them converging.

Frankly, any time on the horizon.

Simply because there is a premium associated with the power, performance characteristics on those product lines, vis-a-vis the desktop.

So while they're coming down, I think we said this in the last couple of calls, this is something we expect.

It's a natural consequence of price volume expansion of the market.

And they are not moving to intercept desktop any time soon from our perspective and one of the ways that we're going to mitigate that is with Atom and net books coming in, giving us a much lower cost structure to be able to ride this curve than we did during the equivalent expansion of the desktop cycle five, six years ago.

Thanks, Srini.

Operator, we're going to take two more questions, if you could, two questioners.

Your next question comes from the line of Michael McConnell with Pacific Crest Securities.

Please proceed.

If we look at the gross margin guidance for the year, 57% and the implied margins of 58% and then 60% in Q4, how much is built in or in those forecasts that corporate adoption of Montevina will be healthy and kind of the same level that we see with Santa Rosa?

If you're asking me am I baking in an ASP increase to get there, that would be pretty unusual.

The big drivers of gross margin as we go from Q2 to Q3 are as I said, the costs coming down and the volume and I expect my costs to come down again in Q4 and volume to be up again.

Those are really the drivers.

I'm not anticipating mix shift to the high end or anything like that.

Let me ask this one another way Stacy, so your mix on notebooks is similar to what you saw in Q2, can you still get to 57% for the year?

Sure.

Paul Otellini; In fact, I expect notebooks will continue to grow as a percent of our output.

Okay.

And then Paul, one last comment, just on the healthy chip set strength you saw in Q2.

Any comments on what you're seeing in Q3?

Not in the leading -- nothing strange.

Everything we see so far in terms of demand for chip sets is equally strong from strength we saw in Q2.

We'll know a lot more three months from now when we see what the shipments are lining up for the fourth quarter but right now in terms of the mix, particularly towards the newer chip sets, the demand is very strong.

Thank you.

Thanks, Mike.

This will be our last questioner.

Thanks.

Your last question comes from the line of Mr.

Brian Piccioni with BMO Capital Markets.

Please proceed.

Thank you for taking my question.

Obviously Atom has been a lot of the questions of this call.

We mostly focused on the net book market for Atom.

Sort of curious, what do you expect the embedded market to be relative to net book sales?

And as a follow-on, wondering if you have to make any ASP compromises for embedded applications?

Second part of the question is no, at this point in time the budgets already are putting out for embedded applications are in the same range as the desktop version, the higher power version of Atom that we're shipping in the PC space and that's because essentially they're being used as PC processors, most of these things will run Windows, or Linux their Internet connection, general purpose reprogrammable machines.

Embedded markets moving pretty rapidly in that direction.

In terms of the mix, gosh, that's hard to say.

The problem is that as you may know, the time from design win to production ramp in an embedded design, particularly some of these ones that are in regulated environments, can be one to two years.

So if we add up all the design wins, it's very strong.

I don't think that it would outship PC applications, the PC uses, but I think it will be a very strong part of the product line.

Super.

.

Thank

Thanks, Brian any thoughts?

You good?

Yes.

Thank you.

Thanks, Brian, and thank you all for joining the call today.

As a reminder, our quiet period for the third quarter will begin at the close of business on August 29, and our third quarter earnings conference call is scheduled for Tuesday, October 14.

Again, thank you all, and good night.

Thank you for your participation on today's conference.

This concludes the presentation.

You may now disconnect.

Good day.