英特爾 (INTC) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third quarter 2008 Intel Corporation earnings conference call.

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

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

We will be facilitating a question-and-answer session toward the end of this conference.

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

I would now like to turn the call over to your host today, Mr.

Kevin Sellers, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Amanda, and welcome everyone to Intel's third quarter 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 around 5:00 PM Pacific time and will remain there for approximately two months.

Paul will start with a few comments on the quarter as well as some thoughts about the macro environment, and Stacy will follow with more detail on both our financial performance as well as our fourth quarter outlook.

Two quick items as we begin.

First, if during this call we use any non-GAAP financial measures or references, we will post appropriate GAAP financial reconciliations to our investor website, INTC.com, after the call.

Second, a reminder for everyone that today's discussion does contain forward-looking statements based on the environment as we currently see it and as such does include risks and uncertainties.

Please refer to the 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, and thank you for joining us our call today.

Intel again delivered strong financial results, with Q3 marking the fifth consecutive quarter (inaudible) Amanda?

I heard it.

Amanda, can you hear us?

Sounds like we are back online.

Yes, sir, you sound fine.

Okay.

We can continue then?

Yes.

Okay.

Thanks.

First of all, let me apologize for that glitch, that system doesn't have Intel product in it.

Let me start again.

Thank you, Kevin and thank you for joining our call today.

Intel again delivered strong financial results with Q3 marking the fifth consecutive quarter of record quarterly revenue.

While revenue grew 8% over the second quarter, operating income grew a healthy 37% to just over $3 billion.

In Q3 we shipped an all time record number of microprocessors driven by strength in mobile.

The Atom family is off to a very good start with Atom microprocessor and related chip set revenues approximately $200 million this quarter.

Total microprocessor ASP was lower than Q2, but was approximately flat without Atom, reflecting strength in the core business.

Our chip set business also had record units and revenues in the quarter.

Our disciplined execution is a critical strength to us.

Our product lineup is extremely well positioned across the spectrum of computing.

In particular, I am pleased to announce that we began shipments of our Nehalem product family during the third quarter and expect to formally launch these products in November.

Nehalem brings a new microarchitecture and new performance features.

This new product family will further extend our performance leadership in microprocessors.

We also continue to see strong acceptance of our Atom microprocessor family, which was designed to enable new mobile internet form factors at attractive system price points with healthy product margins for Intel.

I want to take a minute and reflect on a number of important actions that the company undertook in 2006 and 2007.

These actions put us in an excellent operating position for changing economic conditions.

Our current employee place is approximately 20,000 heads lower than our peak in 2006 and we have removed over $3 billion in spending.

We have made a large number of changes in our operations that have prepared us well for a variety of economic scenarios.

Our business model generates strong cash flows with Q3 operating cash flows of over $3 billion and a current cash position of approximately $12 billion.

With very little debt, our balance sheet is in excellent condition.

Turning to NAND --

You lost yours.

It just disappeared.

Sorry.

I'm assuming that you can hear me.

Yes, we can.

Turning to NAND, last week Micron announced our decision to shut down 200 millimeter NAND operations.

In addition, the IMFS planned Singapore plant is now on hold as we continue to take actions to reduce supply in light of current market conditions.

On the product side, we launched our solid state drive product family in Q3 to outstanding reviews and are currently ramping those products, giving us a lead in the higher margin segment of the NAND business.

Now let me speak briefly about what we see in the market today and how that has shaped our outlook.

Q3 played out mostly as we expected it to when we began the quarter.

We saw some softness in September in the corporate segment while consumer was more seasonal.

As we head into Q4, we see some mixed signs.

We expect the corporate segment to continue to show some softness as IT spending gets rationalized in this macro environment.

Inventories in total seem in reasonable shape with Taiwan and channel customers cutting back and some OEMs building a bit.

In general, consumer traffic overall is light at this point in the quarter, but we do see continued healthy interest in notebooks and net books.

Our channel business began Q4 in good shape, in terms of inventories and sales out.

It is clear that the financial crisis is creating some signs of stress that may impact our business, but the extent of that is difficult to quantify.

As a result, we have made two changes for this quarter -- one, our outlook has a wider range than normal, reflecting our view of the boundaries of the risks, and two, we have decided to provide a formal mid quarter update scheduled for December 4th to allow us to give you additional information about the state of Q4 business trends as the business and financial conditions unfold.

Let me now turn the call over to Stacy for a more detailed look at our financials.

Thanks, Paul.

Intel had a strong third quarter.

We had third quarter record revenue, operating income of over $3 billion, gross margin of 59%, and operating margin of 30%, reflecting the strength of our product portfolio, process technology, manufacturing operations, and focus on efficiency.

Revenue of $10.2 billion was up 8% from the second quarter, in line with average seasonal trends.

Revenue of micro processors excluding Atom was in line with seasonal patterns on flat average selling prices.

Third quarter revenue for Atom based micro processors and associated chip sets was approximately $200 million, including Atom microprocessor revenue.

Overall, microprocessor average selling prices declined.

The mobility group accounted for over 45% of total revenue.

This revenue of $4.7 billion was up 23% from the second quarter with microprocessor strength in every notebook segment.

On a geographical basis, Asia Pacific and Japan experienced better than seasonal revenue growth at approximately 12% each.

Relative to seasonal patterns, EMEA was at the low end while the Americas lagged due to weakness in the corporate segment.

Gross margin of 58.9% was up 3.5 points from the second quart herb and up over 7.5 points from the third quarter of 2007.

Versus the second quarter, a couple of points of the increase came from lower microprocessor unit costs and about 1 point came from microprocessor volume increases in the third quarter.

Versus the midpoint of the outlook range set in July, third quarter gross margin was up nearly 1 point on lower than expected microprocessor unit costs.

Spending on R&D and MG&A was $2.9 billion, flat to our forecasted range and flat to the second quarter.

Gains, losses on equity investments, and interest and other income was a net loss of $265 million, higher than our outlook net loss of $30 million.

Volatile conditions in the memory market segment resulted in a $250 million impairment on our investment in mnemonics.

The provision for taxes in the third quarter was at a 29% effective tax rate, lower than the 33% previously forecasted primarily due to a tax reorganization enabling the recognition of previously unrecognized non US losses, and a provision to return trueups related to 2007.

Total cash investments, comprised of cash, short term investments, and fixed income trading assets ended the quarter at $11.8 billion, approximately $275 million higher than the second quarter.

The credit quality of our fixed income investment portfolio remains high with other than temporary losses during this tough credit environment minor at under $15 million in the third quarter.

Cash flow from operations was over $3 billion, capital spending was nearly $1.4 billion, dividend payments were nearly $800 million, and stock repurchases were $2.1 billion.

As we turn now to the outlook for the fourth quarter, please keep in mind that unless otherwise specified, the forecasts do not include the effect of any new acquisitions, divestitures, or similar transaction that may be completed after October 13th.

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

While our results in the third quarter were strong, and we have high confidence in the fundamentals of our business, the financial crisis is creating a high degree of uncertainty around fourth quarter demand.

Therefore, we believe there is a broader than normal range of possible outcomes for fourth quarter revenue, ranging from $10.1 billion to $10.9 billion.

The low end of this range is slightly down from the third quarter, while the high end of this range is at the lower end of seasonal patterns.

Our expectation for gross margin percentage in the fourth quarter is 59% plus or minus a couple of points, flat to the third quarter.

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

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

$200 million of this restructuring charge is related to the shutdown of 200-millimeter NAND manufacturing facilities that are part of the Intel/Micron joint venture.

Our estimates for gains and losses from equity investments and interest and other income is a net loss of $50 million.

Our forecast for the effective tax rate for the fourth quarter is 29%, reflecting the R&D tax credit that was recently signed into law restoring the credit to the beginning of 2008.

Spending for R&D and MG&A for the full year is now forecasted to be approximately $11.5 billion, down from our prior forecast of $11.7 billion, primarily due to revenue and profit dependent expenses and foreign exchange rate changes.

Our forecast for capital expenditures has been reduced $200 million to $5 billion plus or minus $100 million.

Year-to-date actual gross margin plus the midpoint of the forecast range for the fourth quarter leads to full year gross margin of approximately 57%, consistent with our prior forecast for an annual gross margin of 57% plus or minus a couple of points.

While the economic outlook has deteriorated over the past quarter, our competitive position has strengthened.

Our strong product portfolio continues to get better.

Our manufacturing leadership maintains us at a generation ahead of competition.

Our healthy cash flow generation, a strong balance sheet and the focus we have had on improving efficiency over the past two years has put us in an outstanding position to come out of this economic downturn even stronger.

With that, let me turn it back to Kevin for Q&A.

Okay.

Thanks, Stacy and Paul.

Our apologies to those of you on the phone for the technical difficulty there.

As we enter the Q&A section, if there's anyone that would like us to restate a portion of any script, if it didn't come through well, please do highlight that.

We'd be happy to do that for you.

Amanda, we are now moving into questions.

We would like to ask each questioner to limit themselves to one question and one follow up, and I will cue Amanda to do that.

If you need clarification of something that didn't come through clearly, please do let us know and we will not hold that against you as a question.

We'll let you keep asking questions.

Amanda, we'll now turn it over to the first first questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Uche Orji with UBS New York.

Please proceed.

Thank you very much.

First question, Paul, if I look at 3Q mobile revenue, that came across very strong.

How much of that do you think may have been pulling in from the fourth quarter?

And also if I look at fourth quarter guidance I know there's wide range of outcome, but ideally fourth quarter tends to be more front end loaded.

So what could influence this outcome, given that we have already seen some part of -- hopefully you can clarify that.

Let me correct.

For us, Q4 is not necessarily front end loaded.

Okay.

Thanks.

You have to remember two of our largest customers have quarter ends in January not in December, so they tend to ship right through quarter.

Okay.

But let me back up.

Yes, mobile was very strong in Q3 across the board, basically in all segments and I include Atom in that for the netbook segment.

To my knowledge we have not seen any evidence of any pull-ins, and in fact it wouldn't make sense for an OEM to deliberately pull in products -- to expense inventory on your assets.

We have hub inventories with a lot of our major customers now, so there is no incentive for anyone to have pulls in or ship aheads.

We don't see that.

When I talk about inventory at the OEMs, it is really quite small change that we saw.

All right.

In terms of gross margin guidance, it seems like you managing to hold up gross margins, and continue to improve it.

Question for you here, Paul, is to what extent is the gross margin guidance -- I know it is plus or minus a couple of points.

But given that this is a very challenging macro environment it seems like the gross margin guidance is fairly resilient.

Are you, this is definitely in many ways a reflection of Intel's current [company] positioning, but how bad can it get really?

What could influence any further weakness in gross margin?

And by this I am asking for clarification around things like [silicon] ramp or possibly any kind of mix change if enterprise or [weakened] gross margins get even worse.

Just try to help with that?

Okay.

Let me give you a high level answer and then Stacy can drill down, but the range of revenue that we gave you was quite broad, broader than we have ever done before.

The range of margin we gave you was plus or minus 2 points, around 59%.

So, that range we think covers all of the possible corner cases inside the revenue range that we talked about in term of mix and those kinds of things.

So we are really pretty comfortable in that margin forecast.

Thank you.

I would just reenforce the range around gross margin encompasses the range that we have around revenue.

And I think it is probably illustrative to look at Q3 gross margin if I can just go there for a second.

We anticipated a couple of points of improvement from Q2 to Q3 and we actually got 3.5 points of improvement.

They were in the elements that I anticipated.

Part of it was mix.

That was about 1 point.

And then I got a couple of points of good news and cost as our costs get better through the different factory networks we have.

So that's where I had good news to the forecast was in cost, and when I look at Q4 I am comfortable with the gross margin guidance relative to the revenue guidance.

Going to next year on --

I'll cut you off.

Amanda, I am going to get to the next questioner, please.

Thanks very much.

Thanks.

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

Please proceed.

Paul, your competitors announced their intent from the manufacturing strategy perspective.

My guess is you are not going to talk about your legal strategy to deal with that, but could you give us a view if indeed they do work toward this JV, how it potentially changes things from a competitive dynamic perspective in your view?

You are right.

I won't comment on the legal stuff.

It is a little hard for me to comment on the structure.

Specifics haven't been at least not released to us.

But from my perspective nothing has changed.

You still have someone that has to invest in capital at one end of the food chain.

They have to put CapEx in the ground and develop factories and technology and optimize that to products and get a return on that capital and then build those products and now sell it to someone else for some price who then sells it to the end customer.

So the food chain really hasn't changed in terms of the ecosystem except there's one more person perhaps looking for a return in the equation.

If I could add just competitively, we certainly believe for our business that the ability to integrate our design and manufacturing is a core asset and really leads us to be able to bring low power, low cost, new feature, high performance products to the marketplace.

When we look at our business, that integration of design and manufacturing is one of our core assets and the fact we tend to be a generation plus ahead of the rest of the industry is absolutely key.

John, do you have a follow up?

Yes, please.

You talked about the strength in mobility -- obviously it is observable in the numbers, but also observable was a significant increase in the operating margins quarter on quarter with roughly 33% to 40%.

Could you give us a breakdown of what drove that, and more importantly how you think that trends are going forward?

Sure.

I will answer the first part and probably not as much on the second part as you had hoped.

Inside of Q3, what you see in the mobility segment was nice revenue growth on the backs of this continued shift toward mobility.

As Paul said we had strength in every segment of the notebook market and we started to see the incremental revenue associated with Atom in there as well.

So between the processors and the chip sets we had a couple hundred million dollars worth of revenue in that Atom segment.

And then on the cost side, our costs came down nicely from Q2 to Q3.

So the combination of revenue growth and that cost growth led to a nice improvement in operating margin.

You can see that cost impact on the DEG segment also, they just didn't have the revenue growth.

Okay.

Thank you, John.

Thank you.

Amanda, we will take the next question.

Amanda, can you give us the next question?

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

Please proceed.

Can you hear me okay?

We have you, go ahead.

Can you give a little idea -- cannibalization has been concern with Atom moving up into the notebook stack.

Can you give us any idea of if you saw any of it that happen?

If it did happen, did it hit the notebook side or do you believe that might had hit entry level desktop more?

Let me take that one, Ross.

Almost all of the shipments today are going into netbooks versus net tops, so it's principally a mobile product by large, large numbers.

To date we have not seen any evidence of cannibalization, and believe we are looking.

This is something we watch very carefully.

We look at where these are sold, the reasons they're sold, and the price points they're sold at, and one of the best pieces of evidence we have in that is that they strengthen the core mobile business independent of Atom.

It is still very, very good.

In this times, I think that's a reassuring fact.

Great.

The follow up question on a different topic -- if the macro conditions remain challenging, are there things on the capital expenditure side of things or the technology ramp that you could adjust such as the timing of 32-nanometer, or are those set so far ahead you really don't adjust those by pulling in or pushing them out a quarter or two?

It is not a question of blindly executing to the schedule.

It is a question of process technology leadership.

It is really the core competitive advantage.

It brings us great ROI in terms of cost and also allows us to bring new feature, higher performance, lower power to the marketplace.

So for us that is the game.

You did see us reduce the capital forecast for the year.

I wouldn't want you to take from that that we are reducing the ramp rate in the quarter 45 nanometer because we are not.

Nor are we pushing out 32 nanometer.

What we are doing is taking tactical actions to some of the noncapacity related capital and you are seeing a continued focus on efficiency in the factory network.

And that's pretty consistent with where we have been the last six quarters, where we find opportunities to reduce our capital spend while we stay focused on ramping the new process technology.

Great.

Thank you.

Amanda, next question.

Next question comes from James Covello with Goldman Sachs.

Good afternoon.

Stacy, if I could stay on the CapEx issue for a second, at the meeting at the Developer forum, you had suggested that you had squeezed almost as much of the factory efficiencies out of the system as you could have.

Has that changed or do you think you are still pretty much going to need to spend in line with unit growth and die size requirements at this point?

It hasn't fundamentally changed.

We are at levels of yield and equipment utilization inside the factories that you are not going to see the same level of improvement going forward that we have seen going back.

So the way I described it in the meeting and in May was we have reset the trendline down because we now have higher utilizations and are more efficient, but as die size changes or as units grow, we will spend capital more at a trend with that.

We will just do it starting from a more efficient level.

Excellent.

That's helpful.

Then on the 32-nanometer especially on the start up cost -- to the extent you suggested that the 32-nanometer is still on track, the timing for the startup cost would still hit in the first half of 2009; is that right?

Yes.

My view hasn't fundamentally changed from the famous graph I showed you last May.

It will start to see start up costs in the first half of the year and that will probably be the peak of the start up costs associated with the new process.

Are they equally Q1 and Q2 or is it biased toward one of those quarters.

I am not getting to that level of granularity.

I will provide more insight on that when we get to January and provide a gross margin forecast and everything else.

Thank you very much.

Thanks, Jim.

Amanda, next question.

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

Please proceed.

I noticed your inventories were up 4% or so in the quarter.

Sounds a little more than normal, and you are obviously guiding for revenues a little less than normal, and yet gross margins look pretty healthy.

Is there something here that has changed between you and your customers where you are holding more of the inventory or is this something where we should be concerned about how utilization rates may trend looking into Q1?

As Paul mentioned, we have gone in some cases to situations where we will hold hub inventory on behalf of our customers, but the key thing is that's a minor impact on the overall inventory, most of what we have running through the fabs.

When I started Q3, and I think I said on the last call I expected to build a little inventory, where we ended up in the quarter is pretty much what I would have expected.

In fact I will build a little more inventory in the fourth quarter as I continue to ramp the 45-nanometer factories.

Obviously with the variability that we now see in demand it is something we are watching really carefully but we will complete the ramp of 45-nanometer because of the reasons I said before -- it's the best performing products and brings us cost advantages.

Just as a follow up, when you think about 2009 compared to other years where we've had a down cycle and making the assumption that's what is going to happen in 2009, can you talk about structurally -- and Paul, you alluded to this at the beginning, I wondered if you could be more specific with respect to gross margins, what about Intel's gross margin profile?

It is different in 2009 from say 2004 or 2001 that may give you some better protection on gross margin, if anything?

Let me give you some color and then Stacy can give you the very specific answer on gross margin.

For 2009.

I think, who knows what 2009 is going to be but I think there's some things that look like they're different.

For one this is not a post dot com kind of downturn.

And one of the things I recall vividly in that one is people stopped buying computers principally because there were so many available on eBay from companies that melted down, and that skewed demand in '99 and in '00 and '01 as a result.

I think there's some things we have going for us.

We've had continued strength in emerging markets including this last quarter.

China rebounded nicely after the earthquake and again after the Olympics.

China is on track to become our largest market in a reasonable amount of time.

And I don't see that changing.

The emerging market pattern of more people coming into computing everyday is different now in terms of the dynamic we have than any of those prior downturns you talked about, principally because the cost of computing has come down so much relative to their income levels.

And so I think this will have a different pattern coming through it on one end on the PC side.

On the other end, there's still a need for efficiency in the data center and need for new servers to handle virtualization and those things.

Right now, I am of the opinion that technology will probably do well during a downturn because of the simple fact that we sell tools and productivity.

I don't really have anything to add to that -- we are obviously have been comfortable all year with our forecast for gross margin for 2008 and and I am not yet going to provide a forecast for 2009.

But the way you started the question, you are a little ahead of us in terms of your expectation for demand.

Right now as we look at the fourth quarter, we need to see the impact of what is roiling through the credit markets and that's what is giving us the higher range of potential outcomes for revenue in the fourth quarter.

And we have got to watch that and then we will have a better sense for 2009.

Thanks.

Thanks, Glen.

Amanda, next question, please.

Your next question comes from (inaudible).

Hi guys, one or two extra quick questions, first of all -- Stacy, can you give any additional color around your expectations for '09 CapEx?

No, unfortunately, not at this time.

It is not least because we want to see how Q4 plays out and that will give us a much more indication of 2009 from a unit growth standpoint and that will obviously have implications on our capital spending.

The hint I have given so far is we still plan to do 32-nanometer as fast as we can.

We have great ROI for doing that, and we will come back in January and provide our forecast for the 2009 year.

Okay.

Thank you.

That's good.

Any follow up?

That's fine.

Thanks.

Amanda, next question.

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

Please proceed.

Most of my questions have been answered, but one question on the service side, on Dunnington since it was introduced fairly recently -- what has the competitive dynamic been since the introduction there of that product?

We were, we had been doing very well with the new Xeon line over the last year or so in gaining share.

The latest tracker numbers out of IDC tended to reflect that.

Dunnington just makes us more competitive.

It gave us a great boost in the MP arena.

You can get, there's your six core machines that scale up to 16 sockets, so it is a lot of cores and threads in there and they're pretty stunning performance.

So, I am, I am comfortable with those and then they get bumped up again as the Nehalem generation comes out in successive periods.

And Dunnington would still hold its own against -- I know (inaudible) sooner or later the Shanghai product at 45-nanometer -- would Dunnington still do well in the very high end of the market?

We are pretty comfortable we will maintain the performance lead throughout the introduction, and we haven't been able to measure anything yet from the competition.

But given what they have said, if we believe what they said, we will do fine.

Okay.

Thanks.

Amanda, next question.

Yes, your next question comes from the line of Sumit Dhanda with Banc of America.

Please proceed.

Just a couple of questions.

Stacy, if you could give us a sense of how you expect Atom contributions to progress in Q4.

I mean, not a number, but would it be up sequentially from your Q3 number?

Is that where most of the growth is going to come from on a dollar basis in terms of how you incorporate it in your guidance for Q4 versus Q3?

The second part of your question first, I will give you a little more commentary on how we see Atom.

It is impossible to say.

The issues we have been talking about -- if you just look at Q3 you would expect a strong Q4, seasonal or maybe a little better.

It was a strong quarter for us.

But with the issues we have seen over the last few weeks, there's a wide range of potential revenue outcome.

Given that, it is impossible for me to say the percent of contribution that Atom would be around an uncertain base.

The first part of your question, between the microprocessor and chip set, we had a couple hundred million dollars of revenue from Atom in the third quarter.

We do expect that to grow rapidly in the fourth quarter.

We are at the C part of the ramp on that.

Paul talked about how this product is being positioned to drive incremental growth and part of this I look at is the margin characteristics -- and I will tell you what we have seen in the third quarter, it is in healthy product margin.

I think it is, should provide some comfort to you as it does to me that with that ramp of Atom, we had 59% gross margin in Q3 and 59% in Q4.

Somebody --

Yes, I do.

I know you can't give numbers here, but Paul or Stacy, if you could just give us a sense on how much the impact on the server business was because of the enterprise weakness in Q3?

And are you assuming a similar level of weakness in the Q4 in terms of the magnitude of sequential potentially decline into the fourth quarter?

It is a level of granularity that we wouldn't give.

It was weak in September relative to what we would expect, and that's part of the wide range of outcomes for Q4 is how does that play out.

For sure the financial services industry was, was hit over the course of the quarter and what we are really watching for is these credit issues play out, what does it do to the end market?

What I can tell you though is that servers, financial services represent only about 15% to 18% of our server business.

Right.

So, even if that particular segment has continuing problems, it is not, it is not drastic.

Yes.

Okay.

Thank you.

Thanks.

Amanda, next question, please.

Yes, your next question comes from John Pitzer with Credit Suisse.

Thanks for taking my questions.

First question to Paul -- if you look ex Atom, ASPs were flat sequentially, which is reverse of the trend we have seen the last couple of quarters.

Any color as to what was driving that flat ASP and what might the outlook be going forward?

Well, we won't, we won't comment on outlook, but if you look back we had a strong quarter in mobile and mobile tends to have a higher price, higher average selling price than desktop.

One thing we have talked about in mobile though over the last couple of quarters is that as mobile grows, it is inevitable that the ASPs will come down.

They won't converge with desktop, but they will come down, because the volume price points will demand that.

But I think it is very simply a reflection of the strength in mobile this quarter.

If I could just add a couple of points.

If you look across the last four or five quarters, having approximately flat ASP in the core business has been more the rule than the exception.

I think last quarter, not having Montevina, probably hurt us more than we realized at the time.

And as it ramped, we saw stronger growth across, stronger growth across all of the segments.

Specific to Atom, our conversations are going to be really interesting going forward, because the whole point of Atom is to set new price points and bring this technology.

And so if we are successful with that product, you will see the average ASP coming down, which is why we are trying to give you the with and without Atom.

But it was interesting now that we have revenue under our belt, when I look at the product margin, it is a nice healthy product margin and it is on a dollar basis, equivalent to what we see in Celeron and on a product margin percent, it is higher.

If you look at it relative to the low end of our main stream, it is generating nice profit characteristics.

For my second question -- it's Atom related.

Can you help me understand how big the channel fill might be for Atom before we actually have to start depending upon sellthrough to continue to drive business?

Clearly you're early in the curve.

We watch that at the OEMs and we watch it at the channels.

We actually have reports coming in from the OEMs on sales out on those product for that very reason.

We have seen zero evidence of a channel back up on netbooks.

They have essentially been flying off the shelves.

So I will say we did not meet demand in Q3 for the product, we -- even though we were up substantially from the second quarter we are up again substantially in the fourth quarter.

Our expectation is we will meet demand by the end of the year, but it is -- early part of the quarter is not.

Great.

Thanks, guys.

Amanda, next question.

Your next question comes from Chris Danely with JPMorgan.

Please proceed.

Thanks, guys.

Hey Paul, can you just take us through what happened with the fallouts in demand -- has it been the last couple of weeks, what are your customers telling you?

Was it gradual, do they have zero visibility for Q4 -- can you give us just a little more color on what happened?

Well, for Q3 we didn't really see a falloff on demand, we did as we said we would do, and the principle difference in the midpoint is NAND where we didn't ship as much product.

For Q4, the business so far has been good.

What we are trying to give you though, is the interpolation of what I will call a series of very mixed inputs.

Some customers and channels are seeing a little to no impact and some are worried.

And as we add it all up, we don't know how much of that worry will manifest itself into reality and how much of it will dissipate, which is why we gave you a wider range.

Beyond that I really can't give you much more input.

Beyond what I said in terms of the color on the retail sales and so forth.

That's fine.

And then as my follow up, I mean sounds like you are fairly optimistic for next year.

If you had to guess on whether IT budgets will be up or down next year, which direction would you go?

Yes.

Well spoken.

Thank, Chris.

Amanda, next question, please.

Your next question comes from the line of JoAnne Feeney, FTN Midwest.

Please proceed.

Thanks, guys.

I have a question about the characteristics of the server.

You talked a little about it, but perhaps you can give us a clue as to what you are seeing in the third quarter and what you expect in the fourth quarter in terms of high end versus low end.

Are you seeing your customer shift toward lower end servers at this point or is, has that pattern not really changed?

Well, we have some pent-up demand that was satisfied in the third quarter with the introduction of Dunnington.

And that tended to skew the business a bit more toward the MP versus DP products.

I think looking out into Q4, I don't want to be too granular but I think that DP tends to provide pretty good value and it tends to sell in places that don't have big data centers and IT shops.

If I were to look at corporate purchases versus the rest of the world, small-medium business purposes, I would imagine DP will do better than MP this quarter, but I am just guessing at this point.

Okay.

Then if I can, a follow up on the capital spending issue.

So, you are cutting back a bit here in the second half of the year.

I guess my concern is that with AMD creating a well funded foundry through the Arab investment, that sounds like a bigger threat to me given now how well capitalized they are.

Are you contemplating backing off of capital spending because of the overcapacity situation more broadly in the world or are you going to maintain your capacity plans and also your tick tock strategy in the face of this new potential threat on the AMD side of the world?

We are not changing our strategy.

Our strategy is to provide our customers with the best technology in the world and make sure that we have enough capacity to do that in the volumes that they need.

And on top of that, Stacy implied our lowest cost position is always on the newest technology and that's our best competitive position.

So no we are not backing off, and anything that is going to be funded now is not going to be in production for some time.

Thanks, JoAnne.

Do you have a question?

Yes, your next question comes from the line of Srini Pajjuri with Merrill Lynch.

Please proceed.

Thank you.

Stacy, I have a question on gross margin, a little different one.

If I look at your Q3 you did a little better and ASPs held up well and you are guiding for revenue growth in Q3 and you're saying your inventories will be up as well.

My question is why wouldn't the gross margins go up?

Why are you just guiding for flattish?

From -- you are asking from Q3 to Q4?

Q3 to Q4, yes.

If you look across the elements of gross margin from Q3 to Q4, it is one of those quarters where there is -- the elements of gross margin, there's not a lot of variability.

The mix of the company stays pretty flat.

I'm not expecting a significant improvement in my manufacturing and factory costs nor do I expect it to get worse.

It is about flat.

And when you look at the other elements, reserves and things like that, pricing, expectation it all stays flat quarter on quarter.

It is one of those quarters where the gross margin is flat and there's not a lot of variability in the underlying issues.

Could it -- I think your question is, could it be better than that?

I will refer you back to the revenue range.

If revenue ends up being stronger, the gross margin is a it stronger, if it is at the low end of the range, gross margin is probably at the lower end of the outlook that we set.

Okay.

A follow up?

Yes, just a quick one.

You are launching new products with Nehalem, and given the macro backdrop, do you anticipate any change to the timing -- if macro gets weaker should we expect these products to launch as expected?

Thank you.

We would, we are trying to pull them in as fast as possible.

So no, I think having those products simply makes us even more competitive and I think may generate some demand in some segments where we haven't been participating.

That's one where I feel good about the product line, and the sooner we get to it the better across the board.

Thank you.

Thanks.

Amanda, next question.

Your next question comes from the line of Tim Luke with Barclays Capital.

Please proceed.

Thanks so much.

I was wondering with respect to, as you plan for to raise the inventory a little moving into the fourth quarter, as you build 45-nanometer, do you have a range, Stacy, of where you feel that you are trying to target in terms of days and turns for inventory?

Thanks.

Probably not at that level of granularity and it will obviously depend a lot on what demand looks like in the fourth quarter.

But just based on the ramp of my 45-nanometer factories, I would expect to build a little inventory in the quarter.

Secondly, for Paul, maybe you provided some sort of helpful color in how you perceive broadly the end markets in terms of consumer and corporate, and how you see Taiwan versus OEM today.

Do you have any color further there with respect to regional inputs and as you see any OEM versus channel and the consumer arena?

Sure.

I will try.

As I said, China continues to be a strong driver.

We all had worries about the third quarter, not just because of the Olympics but the Chengdu earthquake, and it bounced back on both of those and continues to be a strong driver of demand across all segments and notebooks and desktops and servers and consumer end business.

So that one is a good geography for us.

If you look at the geographies that outperformed seasonality for us in Q3, it was Asia Pacific principally China and Japan, which is principally notebooks, where a lot of those notebooks are not necessarily consumed there but built there and exported.

And the US and Europe are slower than seasonality, which I think is consistent with the macro economic conditions we have seen the last six to eight weeks.

Lastly, on Atom, you had an incremental jump from the second to the third quarter.

Do you frame in the same kind of range or should the acceleration be more significant from the third to the fourth as you get more availability?

I don't think I want to get that granular.

It is a nice jump from Q3 to Q4.

Thank you, guys.

Thanks, Tim.

Amanda, we are going to take a couple more questions if you could, please.

Next question is from Gus Richard with Piper Jaffray, please proceed.

Yes.

Thanks for taking my question.

Paul, could you talk a little bit about -- you have got a clear manufacturing lead, how you can turn that into gross margin performance, will you ultimately move chip sets but not into the leading edge or how else to drive the gross margin line?

Great question.

It's a couple of things.

The obvious one is the faster we get to 45 nanometers across the board, the better the products and the cheaper.

We're doing that.

That allows us to do a couple of things -- it gets all of our chip sets in on to 65-nanometer factories, which are more efficient and cost effective than the older in some cases 8-inch factories you still have running.

So we can sort of move everything up the food chain, number one.

Number two, as we look forward to future generations of products, we are doing much more(inaudible) onto the chip with technology.

So both the high end products and low end products will have more and more integration, which allows us to take advantage of the transistor budgets that Moore's Law gives us each generation and not necessarily drive only for performance, but for cost effectiveness at the platform level, so we can integrate platform functions [at the bottom into things like] system on chip.

You can only do that cost effectively at 32 nanometers and above.

Do you have a follow up?

Then just as a follow up, do you guys run into as you integrate the chip set and graphics, do you run into issues with having enough pins or will you have to do a multichip type of strategy or is that too high level of detail?

We are already doing, we already know how to do multiple chips in a package and we have done stacking before in our cell phone business.

So no, that's not a form/factor issue.

In fact, some of the work we are doing for MIDs, we are now working on the XY and Z heights to deliver these things in something that fits in your pocket and doesn't catch it on fire.

Thanks, guys.

Thanks.

Appreciate it.

Amanda, one more question, thanks.

Your last question comes from Cody Acree, Stifel Nicolaus, please proceed.

Thanks for putting me in here.

Stacy, I think it was the last analysts day that you showed the slide breaking down the differential between gross margins, desktop server to the Atom.

Now with Atom's volumes coming in it sounds like you are a bit more encouraged about the gross margin contribution.

Would you say that slide is a bit conservative today, especially as it, as it demand seems to be pretty strong?

Well, that slide was a projection prior to shipping any Atom, and really understanding the dynamics of the market in term of the pricing and cost and everything else.

You also have to keep in mind, what that slide shows was second half of '09, and it was a comparison of platform costs, so processor and chip set, comparing with quad core generation products with dual core generation products with the Atom generation products at the time of the single core Atom generation products.

I will update that when we get to the next investor meeting, which has now been scheduled for Q2 of next year.

The point I wanted to make with my earlier comment is if we look inside the quarter where we now have significant volume of Atom and I compare Atom relative to what a entry level mobile product would be for the notebook market, which is our seller-end brand, that on a product margin dollar basis, it is pretty equivalent and from a product margin percent basis, it is actually better.

The other slide was more of an average of dual core, average of quad core.

This is comparing Atom to the entry level of the notebook market and it is very healthy profitability relative to that.

So you're saying cannibalization isn't necessarily a bad thing.

Certainly our goal is that Atom is enabling these new form factors and growing the market.

But if there is some cannibalization and it come from that segment of the market, it is a nice healthy product margin.

Lastly, Paul I, think in the beginning you talked about channel inventories especially out of Taiwan -- do you think that the stoppage has been enough to get those inventories down to where we are ready to, we are ready for whatever the holidays are going to bring?

Well, a mixture of things in that sentence.

When I talk about channel inventories, I meant our distributor channels.

Taiwan is Taiwan.

I think if you go back to an earlier comment I made about our chip set business in Q3, it was record revenue and record unit volumes in the third quarter.

Chip sets always lead computers, they go into Taiwan, they get soldered to motherboards, and eventually a microprocessor finds its way to those and it becomes a computer some six to eight weeks later.

What you are seeing is a reflection of chip set purchases for fourth quarter that may have been a little bit more robust than people have thought and now they're just tacking that down to where the reality of production is.

I don't really see anything unnatural with this at all.

Great.

Thanks, guys.

Thanks.

So Amanda, I will just close here.

I want to thank everyone for joining our call today.

As a reminder, our client period for the fourth quarter will begin at the close of business on November 28th until December 4th, when we will have our mid quarter update as Paul mentioned.

We will then reinitiate the client period at the close of business December 12th, and our fourth quarter earnings conference call is scheduled for January 15th 2009.

Again, thanks for joining us this evening and good night.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may disconnect.

Have a great day.