英特爾 (INTC) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2009 Intel Corporation earnings conference call.

I'll be your coordinator for today.

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

We will facilitate a question-and-answer session towards 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 presentation over to your host for today's call, Mr.

Kevin Sellers, Vice President of investor relations.

Please proceed, sir.

Thank you, Amatee, and welcome everyone to Intel's first quarter 2009 earnings conference call.

I'm here with Paul Otellini, our President and CEO, and Stacy Smith, our CFO.

As we begin our call 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.

Following some brief prepared remarks from both Paul and Stacy we'll be happy to take questions.

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

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

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

And lastly, we have scheduled our annual investor day on May 12 and 13 at the Intel headquarters in Santa Clara.

We look forward to seeing many of you there.

If any of you need additional information about this event, please contact Intel investor relations directly.

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

Thanks, Kevin.

Our first quarter results clearly reflected the depth of the efficiency work in which we've been engaged over the past three years.

While the global economy continues to be weak and uncertain, our execution this quarter was outstanding.

We have adjusted quickly to this new environment, where demand remains difficult to predict and order lead times have contracted.

As we indicated in our last earnings call, we made significant reductions in our wafer starts to bring inventory in line with the new demand environment.

These actions resulted in an inventory reduction of 19%, below the fourth quarter levels.

Our spending is being controlled and the number of employees declined by 1,400 from Q4 levels.

Almost all of the headcount reductions in Q1 and in 2009 will be focused on aligning our factory network to the new demand levels while accelerating our conversion to newer silicon technologies.

Our product development machine is in high gear, delivering a new generation of products in all segments.

We believe that these products extend our lead in our core businesses and position us for significant growth in the new markets we are targeting.

In terms of demand, we saw a few important trends play out this quarter.

First, we are seeing signs that a bottom in the PC market segment has been reached.

I believe the worst is now behind us from an inventory correction and demand level adjustment perspective.

We saw order patterns strengthen throughout the quarter.

Desktop sales appear to have hit bottom first and have followed a normal -- more normal patterns since early February.

In notebooks the length of the supply chain and higher levels of inventory took longer to work through but now have returned to normal levels.

In terms of end-user consumption, the consumer segment has held up much better than the enterprise.

This is particularly true in consumer notebooks, which continue to be the volume driver in this segment.

Netbook sales continue to grow as anticipated, and are clearly incremental volume for us in a difficult market.

In the enterprise segment, the server portion is in reasonable shape, partially reflecting demand for our newly-released dual-processor products.

The client portion remains weak, reflecting constrained budgets and redeployment of older equipment.

The installed base of enterprise notebooks is now over three years average age and will need to be upgraded as capital budgets free up.

Lastly, in terms of end markets, we saw the US and China demonstrate relative strength while Europe, Japan and the emerging markets showed continuing weakness.

Looking forward, I want to comment on our product and technology direction.

First, we recently launched the dual-processor server versions of our Nehalem family of products and the market reception has been remarkable.

Nehalem is no ordinary upgrade.

These products reflect the single largest increase in server performance we have ever delivered, generation to generation, and enable revolutionary advances in performance and performance per watt metrics.

At launch we had over 230 designs using the new Intel Xeon 5500 across all of our OEMs, with a fully-stocked distribution channel ready to support a fast ramp.

This family offers enterprises the opportunity to improve their capability while lowering their cost of computing.

I expect that value proposition to be extremely important during these challenging economic times.

If you combine the core i7 and the Intel Xeon 5500 processors this week Intel expects to ship its one millionth Nehalem-based microprocessor, demonstrating the that the market still responds to to the best performing products.

Our 32-nanometer process is very healthy and shows great promise for us.

This is the reason we recently announced a $7 billion investment in plants and equipment to accelerate high-volume deployment of this technology.

We have pulled in Westmere, our first 32-nanometer product family, and will now be shipping those products later this year.

We have shipped thousands of Westmere samples to over 30 OEM customers already.

We also look forward to the launch of our new consumer ultra-low voltage products, which will enable many new sleek, thin-and-light notebooks at very compelling price points.

In closing, while it is clear that our end markets are still impacted by the global financial conditions, we are comfortable with our investment levels and capacity profile.

We expect business conditions in Q2 to mirror those of Q1, with some gradual recovering of demand and replenishment of inventories occurring as the industry sees increasing signs of stabilization and a return to more normal seasonal trends.

With that let me now turn the meeting back over to Stacy.

Thanks, Paul.

Our first -- operator, I don't know if you can hear that.

Amatee, are we okay?

Yes, sir, you're all set.

Okay.

Am I all right on the bridge, Amatee?

Yes, sir, you're fine.

You're still on the main call.

Great, thank you.

I'll just start it again.

Our first quarter results were stronger than anticipated despite the significant impact of the weakened worldwide economy, reduced PC demand and supply chain inventory correction.

As we begin the second quarter we're on track to reduce our 2009 spending by $700 million from 2008.

We have brought inventories down by approximately $700 million from last quarter, and the strength of our business model and balance sheet are allowing us to make investments in 32-nanometer factory capacity that is planned to begin production in the fourth quarter.

Revenue for the first quarter was $7.1 billion, down 13% from the fourth quarter and down 26% from a year ago.

Revenue of microprocessors, including Atom, was below seasonal patterns on lower volume and approximately flat average selling prices.

First quarter revenue for Atom-based microprocessors and associated chip sets was $219 million, down 27% from the fourth quarter as a result of reductions in downstream inventory.

Excluding Atom microprocessors, overall microprocessor average selling prices were also approximately flat to the fourth quarter.

Revenue was down sequentially and year over year in every geography and in both the Digital Enterprise Group and the Mobility Group.

The Digital Enterprise Group revenue was down 11% sequentially to $4 billion and there were clear signs that the shorter inventory pipeline resulted in more normal order patterns for much of the quarter.

The longer inventory pipeline in mobile products contributed to the Mobility Group revenue down more than the Digital Enterprise Group, with a 17% sequential decline.

However, even in mobile, our shipment patterns returned to more normal levels by the end of the quarter.

In the factories we accomplished our objective for the first quarter of reducing inventory levels by lowering builds and executing to the startup of our 32-nanometer process technology.

Gross margin dollars were $3.3 billion, $1.1 billion lower than the fourth quarter.

Gross margin percentage of 45.6% was 7.5 points lower than the fourth quarter and better than the low 40s outlook that we provided in January.

Approximately six points of the sequential decline came from underutilization charges and about two points came from higher start-up charges as we began the ramp of 32-nanometer.

Versus our expectations, underutilization charges were better by two points, as we increased factory utilization earlier than anticipated.

Additionally, the NAND business performed a little better than forecasted, lending some gross margin improvement.

Spending for R&D and MG&A was approximately $2.5 billion, consistent with the forecast and down slightly from the fourth quarter.

In addition, we had restructuring and asset impairment charges of $74 million.

For the first quarter the number of employees is down by 1,400 from the fourth quarter to less than 83,000, a reduction of 20,000 employees from the start of our restructuring program in 2006.

Gains/losses on equity investments and interest and other income was a net loss of $18 million, a smaller loss than both the fourth quarter and our outlook.

Compared to the fourth quarter, the loss is primarily lower as a result of the fourth quarter reduction in the carrying value of the Company's investments in Clearwire.

Relative to outlook, it was better based on positive fair value adjustments on mark-to-market trading assets, as the market for certain debt instruments strengthened during the first quarter.

The provision for taxes in the first quarter was at a 1% tax rate, lower than the 27% previously forecasted, driven primarily by the settlement of various federal and state tax matters related to prior years, and a higher percentage of profits in lower tax jurisdictions.

Total inventories were down $699 million, or 19% from the fourth quarter.

Total cash investments, comprised of cash, short-term investments and debt security trading assets, ended the quarter at $10.3 billion, $1.2 billion less than the fourth quarter.

Capital spending was $1.5 billion.

We paid nearly $800 million in dividends and did not repurchase stock in the quarter.

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

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

The worldwide economic situation continues to create a high degree of uncertainty around demand.

Therefore, we believe there remains a broader-than-normal range of possible outcomes for the second quarter.

In light of the uncertainty in the current environment, rather than provide precise ranges for typical outlook items we will provide business drivers for some items and wider-than-typical ranges for others.

Intel is not providing a revenue outlook at this time.

For internal purposes, we are currently planning our business for revenue, which is typically lower in the second quarter, to be about flat to the first quarter.

Our expectation for gross margin percentage in the second quarter is it will be in the mid-40s.

Quarter to quarter lower ut -- underutilization charges are expected to improve gross margin by about five points, and be offset by lower average selling prices, higher unit costs and higher 32-nanometer start-up charges.

Spending for R&D, and MG&A in the second quarter should be approximately $2.5 billion.

Additionally, in the separate category for restructuring and asset impairment charges, we expect expenses of approximately $115 million.

Depreciation is forecasted to be approximately $1.2 billion.

Our estimate for gains and losses from equity investments and interest and other income is a net loss of $150 million.

The loss is higher than the first quarter for a few reasons.

First, we had mark-to-market good news in our trading assets in the first quarter that we do not expect in the second quarter.

Additionally, we expect lower gains in our portfolio of equity securities, and lower interest income.

Our forecast for full-year spending on R&D and MG&A is between $10.4 billion and $10.6 billion, unchanged from the prior forecasts.

Our expectation for capital -- annual capital spending, is now that it will be slightly down from 2008.

The tax rate for each of the remaining quarters in the year is now expected to be 24%, three points lower than the prior forecast, based on a higher concentration of profits in lower tax jurisdictions.

The impact of the global recession on the PC supply chain was significant and can clearly be seen in our first quarter results.

Despite this weak market, our execution was excellent and we entered the second quarter with healthy inventory levels, a great product portfolio, and the benefit of having driven our cost structure down over the past three years.

While in-demand levels are still unclear, the investments we are making in 32-nanometer and in new products will provide us significant financial and competitive advantage.

With that, let me turn it back to Kevin.

Okay, thanks, Stacy and Paul.

We'll now be happy to take questions and as has been a practice recently we would like to limit each participant to one question and a follow up.

The operator will introduce each of you and prompt your question, and then I'll ask if you have follow up.

So with that, Amatee, we are ready for our first question.

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

Please proceed.

Hi, guys.

Stacy, could you walk us through the gross margin tradeoffs into the second quarter and specifically why the assumption on ASPs going down to offset the underutilization charge is also dropping?

Sure, I'd be happy to, Ross.

Yes, we're forecasting a gross margin that's in the mid-40s, You can think of that as being approximately flat to where we were in Q1.

What you see is a couple of things that offset.

So we'll get about five points better in excess capacity.

We started reloading the factories in Q1, a little earlier than expected, so we'll see some significant increases to utilization that drives some gross margin good news.

Offsetting that, then we have a few smaller items.

One, as you said, is average selling prices.

That really is a mix issue.

As Paul said in his speech, we expect the enterprise market to continue to be relatively weaker.

A higher percentage of our shipments are going to go into consumer, which is a more price-sensitive segment of the market, so we'll see a mix down in average selling prices in the second quarter.

That's our prediction.

The second item is we expect our costs to increase a bit in the second quarter.

What we'll be shipping in the second quarter are products that we built in Q4 and Q1.

We built those products in factories that were underloaded.

They carry a higher cost in inventory and so that'll cause our shipment costs to go up a bit in the second quarter.

And then we're going to see our 32-nanometer start-up costs peak in the second quarter and that's pretty consistent with what we've seen in prior generations and what we showed you in last year's analyst meeting.

We see a significant increase from Q4 to Q1, that's in our gross margin.

It'll go up a bit more in Q2 and then we expect to start coming down pretty rapidly when we get into the second half of the year.

Great.

And then kind of a follow on on that, what do you expect your internal inventory to do and any commentary on the end-market inventory that's been burnt more on the channel side of things?

Those two things are obviously related.

As we look -- I'll start with the channel inventory question first.

As we look and do our checks of channel inventory levels we saw a significant burn-off of the overhang of inventory that we had seen in Q4 and in the beginning of Q1.

If anything that burned off a little more quickly than we thought.

That's what allowed us to start loading our factories.

And then you can see that in our inventory levels we dropped significantly from Q4 to Q1.

And actually I'd say for our inventory levels, we're probably a little lower than we'd like.

In general, when we look at channel inventories, they look generally lean across the supply chain.

If anything, as we think about a seasonal second half on the back of a pretty weak first quarter, we'll probably grow inventories a little bit as we get into Q2.

I don't think it'll be significant but I think it will be up a little bit.

Thank you.

Your next question comes from the line of Gus Richard with Piper Jaffray.

Please proceed.

Yes, thanks for taking my question.

I noticed that the op margins for the Mobility Group was down significantly in the current quarter and I was just wondering if you could explain the variances.

Is that a mix issue or is it just that in combination with underabsorption of that group?

Yes, it's -- there's really two things that are driving it.

I think Paul and I both talked about it in our prepared remarks.

In effect, we talked about it at the end of last quarter.

The inventory pipeline for mobile products is quite a bit longer than the inventory pipeline is for desktop products and so what we see is revenue is down more in mobile because it just took longer to burn through that overhang of inventory and it wasn't until we got to the end of the quarter that I'd say those inventory levels looked a little bit more normal.

So percentage wise on revenue based on the length of that inventory pipeline, mobile is down more than desktop.

And then secondly, mobile is the majority of what we run in our factories now.

We had that crossover for our internal business last year so they pick up well over half of the excess capacity charges and it's the combination of those two things that impacted the operating margin for MG in Q1.

Okay.

And was there a mix related to that in terms of consumer notebooks versus enterprise notebooks also pushing down operating margins, or was that just not a factor in Q1?

I would say that was not a significant factor in the first quarter.

It was just -- it was really just the revenue being down based on the length of that inventory pipeline and the excess capacity charges.

Perfect.

Thanks so much.

Thanks, Gus.

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

Please proceed.

Thanks, I had a quick questions.

You didn't mention [Larabee].

It was highlighted at the IDS in Beijing.

Could you give us an update in terms of the timing of this product and the wafer that was shown -- or Pat showed it.

It looked like the chips are pretty large.

Can you give us a sense of the size of the chip, is that within expectations?

And that's it.

Thanks.

Well, let me cover the second question first.

Yes, the size of the process is within expectations.

It's a multi-core device.

What you saw on that wafer was the high-end version of it.

There's obviously other versions of it that have far fewer cores for different price points, so what you saw was the extreme version, I'll put it that way.

In terms of the product, we have first silicon; it's in debug now and we're marching towards production of that product.

The silicon will get ready -- or get better over the course of the year.

The software gets finished over the course of the year.

I would expect volume introduction of this product to be early next year.

Great.

Thank you very much.

Your next question comes from the line of Uche Orji.

Please proceed.

Paul, given the visibility you have, how much of what you're seeing at the moment is (inaudible) restocking and when do you think that process will end?

I know you mentioned (inaudible) to Q2, but just to scale it, when do you think -- how much of that is restocking now versus there is [masking] weak underlying demand and to what extent do you think -- when do you think that process will be done?

I think there was some replenishment of Intel chips at our OEM's customers in the first quarter but certainly not a number that I think would reflect full inventory levels.

I think everyone's still running very lean.

We actually have seen some expedites towards the -- in the March timeframe of can you get us product real fast, we're running out of end-user built (inaudible) products, et cetera.

So I think you're still seeing that and it's going to be -- my sense is it'll stay that way until the second half of this year when you start seeing normal seasonal growth return into the business.

Right.

And just looking back onto the gross margin question that was asked earlier, from a product standpoint there are two questions I have.

The first is CULV.

You talked about that in your opening remark.

What do you think is the potential for that to upsell netbooks and where will that come in in terms of margins?

And then Nehalem, I understand that enterprise still remains fairly weak but one would expect that a product like that should have some pent-up demand.

How much are you going to see in Q2 or should we expect the bulk of that to come in in Q3 and Q4?

Well, we do think -- and we've been saying this for about a quarter now -- that the big trend in notebooks this year, starting mid-year, is likely to be very well-designed, thin-and-light notebooks using the CULV, your ultra-low voltage products that you referenced, and I think you'll see those at very attractive price points.

Up to this point in time those machines have been sort of executive jewelry and I think they'll hit main stream consumer price points, so we're expecting that to be -- that in itself will be a clear more distinguishing set of characteristics between netbooks and notebooks.

In terms of netbooks, you probably -- you heard Stacy talk about the Atom revenue from Q4 to Q1 and that clearly dropped more than Intel, so what we saw in the first quarter was continuing good sales of netbooks in terms of sales out, but they were living off some inventory that was built in the fourth quarter.

My sense is that has approached equilibrium at this point in time, as well.

On Nehalem, on the core i7, which is the workstation and high-end desktop product, that's been shipping since November.

It's in very good volume now for that segment of the market, although it is a fairly high-end segment of the market.

The real interesting thing is what happens on the dual-processor server product.

About half of the volume that I referenced was in servers, about half of it was in the desktop machine, so that gives you some idea of the slope of this product.

We see this as a premium product.

It is the best product in the marketplace.

So you'll see us maintain a premium pricing profile for this product for a while.

Okay.

Thanks, Uche.

Your next question comes from the line of David Wong with Wachovia.

Please proceed.

Thank you very much.

A little further on Uche's question.

Given that Nehalem's ramping in two-way servers in the second quarter -- beginning in the second quarter, would you expect sequential sales in your overall server -- two-way server processors in the second quarter?

Would we expect them?

I think (inaudible) --

In sequential sales growth for two-way servers overall.

Do we expect two way to grow?

Yes.

I don't know that I want to give that level of granularity on guidance, David.

I think that what I said is that the server segment of the enterprise has maintained resilience in this and we're actually seeing that there's a very good value proposition buying a new Nehalem DP server and for consolidation, for space and for virtualization, and eliminating older equipment.

so it's a total cost of ownership benefit.

I think that's the metric you're going to have to watch over the next quarter.

My sense is enterprise budgets of all type are going to be constrained for a while.

I think you have to separate the two things, David.

Nehalem will clearly ramp as a percent of the total.

The question mark we would have is the overall strength of the enterprise market going forward, and what we're seeing is that enterprise budgets are locked down pretty tight and CIOs are going to let their fleets age a bit until they get a little more clarity on what the economy looks like.

Okay, great.

And just a clarification of Paul's comment on Westmere.

First it's shipments this year.

So are we going to see systems with Westmere ramping this year or is it Intel starts shipping and we'll see the first system with Westmere beginning of next year?

Well, I'm not going to speak to system launch.

What I'll just -- I'll reiterate what I said, which is Intel will ship its rods this products this year.

Okay, great.

Thanks.

Thanks, David.

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

Please proceed.

Thanks.

Paul, this is a question for you and oddly enough it's actually a longer-term question.

When you think about a baseline of PC growth -- and we can argue about what it is but let's for arguments sake say somewhere between 6% and 8% long-term growth -- and then you layer on that your opportunity on netbooks, in CULV and imbedded, how do you think about how that may enhance -- or may not -- Intel's growth relative to the baseline PC growth rate?

Well, you said CULV.

I just want to clarify, I think you meant hand held for that third bucket.

But Glen, that's something I intend to talk quite a bit about at the analyst meeting so I'm going to duck it a little bit now, but I think that it's appropriate to say that we would expect in units those three new markets to be at least as big as the PC market for us in the not too distant future and that's the goal we have as a Company.

Okay, Paul, maybe -- well, the second question follows in that line so hopefully you can kind of answer this one too.

When you think about where Intel is on physical capacity, right -- forget about where human capacity is but just the amount of chips that you're able to build and I recognize you shut some older fabs down -- do you feel comfortable now that you have the right amount of capacity?

And I'm not actually suggesting that you have too little, I wonder if you thing think you have too much for the growth that you may see in the next one to three years, for example?

Well, in that timeframe the bulk of the capacity is going to be 32-nanometer, so that reflects back to the announcement we made in February on the $7 billion of plant and equipment to bring three factories -- four factories online for that technology.

We modeled that out pretty carefully.

If anything, that's a little bit more capacity than we would normally have for that kind of generation for two reasons.

One, these growth opportunities that you asked about earlier.

And the other is that in that generation that's when we start incorporating much of the chip set, including graphics, onto the microprocessor.

So I don't see that being a situation where we're long on it.

If anything, we could be a little tight on it.

In the short term, we do worry about opportunity costs of not being able to satisfy an unforecasted snapback or uptick and we're being very careful about that.

We do not want to not have the ability to satisfy all the demand that comes our way.

If I could -- maybe that leads into a kind of comment on the second half from an excess capacity standpoint.

When we look at the existing capacity we have in place, I think utilizations will continue to grow into the second half.

It'll take our utilization rates back into what I call historically normal range as we get to the end of the year so I'm not -- even with modest seasonal growth patterns, I'm not worried that we have too much capacity on 45-nanometer generation products.

And then when we get out to next year the balancing act that will play is if overall demand is less we can roll forward some of that 45-nanometer investment to fund part of the 32-nanometer ramp.

That's one of the levers we have that we could play in that kind of a time period.

That's helpful.

Thanks.

Sure.

Your next question comes from the line of Doug Freedman with Broadpoint.

Please proceed.

Thanks.

Thanks for taking my question.

Paul, can you talk a little bit about things that you need.

You've talked a bit about acquisition strategy here.

In the quarter you've increased your shelf filing.

Can you give us an idea of where and what type of activities you're looking at over the next three months or even longer term?

Well, they're really two different things.

The shelf filing was done just to give us the flexibility.

We've had one in the past.

It had expired and we decided to renew it just so we have the capability to utilize stock if we had that -- the choice.

What you've seen us do in the last two years is a series of relatively-small acquisitions, something in the nine to ten range of companies.

None of them more than a few hundred million dollars and I think that tends to be our pattern at this point in time.

I'm looking -- we're looking at companies where we can -- that have great technology, that can utilize our silicon capability or our channels, and fill holes in our product portfolio to flush out our platform strategy and we've been very successful with that kind of acquisition strategy.

That's the one that I like at this point.

All right.

Can you talk a little bit -- you mentioned that you have pulled in Westmere in your 32-nanometer launch, have you done similar things with some of the chip set products and trying to move them onto advance nodes.

How are those programs moving along and is there any accelerated progress there?

Well, the chip sets actually go through a transition here.

As we bring the memory controller and some of the other functions onto the microprocessor we can have a more benign process profile relative to some of the remaining functions that would go into what we now call chip sets and that's one of the reasons that we're bringing on the factory in Dalian.

I would expect that -- that factory in China, by the way -- Dalian, China.

That factory is likely to be our long-term chip set factory and that will be two generations off the leading edge and it's aimed at low-cost, stable products that will run for a number of years.

Great.

Thank you.

Thanks, Doug.

Your next question comes from the line of Sumit Dhanda with Banc of America.

Please proceed.

Yes, hi.

A couple of questions.

Stacy, the first one, just trying to understand your comment about higher unit costs, where you indicated that some inventory from -- or some build from Q4 and Q1 will flow through to Q2.

I guess my question is, given the big reduction you've seen in through-put times, why is that necessarily the case that inventory from two quarters ago would hit your P&L next -- or in this quarter?

Well, remember, we grew a lot of inventory in Q4, which is why we were so aggressive they trying to bring down our inventory in Q1.

And even with the reductions that we've made through through-put time, you tend to see the time through the factory and then the time where product sits in inventory tends to be a little greater than a quarter.

So the stuff I'll be selling in Q2 are products that were built at the end of Q4 and into Q1 where my utilization rate was higher.

And then over time, as the factory's get reloaded, the cost that sits in inventory will be less.

I'd also point out that the inventory we have in microprocessors is all leading-edge technology.

It's all 45-nanometer product.

The second question -- basically a question and a clarification.

So just as I'm thinking about the underloading charges here, you had a three-point hit in Q4, an additional six-point hit in Q1 and you're getting five points back so you've gotten -- is it fair to think that you're getting five out of the total of about nine points back by Q2?

And then I guess the second question along those same lines was, between higher unit costs, higher start-up costs and lower ASPs, could you bucket which one's contributing more to the drag and which one's less into Q2?

Yes, let me answer those in the order you asked them.

So, yes, you're thinking about the start-up costs in roughly the right numbers.

The other way to look at this is if you look at -- I'm sorry, excess capacity costs.

The other way to look at it is if you look at it relative to a year ago, so Q1 '09 versus Q1 '08, there's close to about ten points of gross margin hit based on excess capacity.

It's right in that range and we're going to get about half of that back in Q2 and then I expect to get the rest of it back some time in the second half.

And then the -- your question on the bucketing of the different charges, think of them as all being between one and two points of gross margin so no one of those is nearly as significant at the improvement in excess capacity charges.

They just all happen to move the other way and offset some of that good news.

Okay.

Thank you very much.

You're welcome.

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

Please proceed.

Yes, good afternoon, guys.

Real quick, Stacy.

Just on the Q2 gross margin guidance, the 500 basis point hit you get from the improvement in utilization, the three factors you talked about, how does that break out between each?

Is it a third, a third, a third or could you specifically talk about 32-nanometer start-up costs and how they trend from Q1 into Q2.

Yes, they're -- as I just said they're all between one and two points.

Neither one is usually significant relative to the others.

In terms of the start-up cost piece, in particular, you should think about that in terms of the trend that we have shown you in prior generations and the trend we showed you more or less a year ago for this year.

A significant increase in Q1.

They go up a bit more in Q2 and then they start coming down pretty rapidly in Q3.

We except -- we expect the same trend on 32-nanometer that we saw with 45 and the generations prior to that.

And then Stacy, that's a good lead into my second question.

Off the December quarter conference call you talked about second half margins returning to more healthy levels and I don't think you -- you've formally endorsed something above 50 but I'm just wondering if you could talk about in the context of what you said in January, what your expectations are for second half margins?

Yes, the same and I think I did pretty much formally endorse it.

I said I look at a normal gross margin for us of being between 50% and 60% and there's not a ton of science behind that.

That's just if you look at the last ten years, 75% or so of our gross margin readings are between those two points.

With the improvement in the excess capacity charges and the improvement in the start-up costs, over the course of the second half I expect to get back into that normal range.

I expected that a quarter ago.

I still expect that today.

Thanks, guys.

Your next question comes from the line of Edwin Mok with Needham & Company.

Please proceed.

Hi.

I have a question on the CapEx.

Based on wording seems like you guys might have to moderate your CapEx a little bit.

Can you talk a little bit about that?

Yes, I'll be happy to.

So we did bring down our view a little bit of CapEx this year.

We now expect to be slightly down from 2008.

2008 it was $5.2 billion.

You should think of that as -- as has been our history over the last few years we were able to find some efficiencies that brought the capital spending down a bit.

Does not change our overall strategy.

What I articulated last quarter is that the majority of our capital spending in 2009 is to get to the first production set on 32-nanometer.

Still absolutely moving to that.

We're not slowing down that ramp at all.

But the factories were able to find some efficiencies that brought some confidence to the fact that we'll be down a bit as opposed to flat.

And in truth we're still looking hard for those efficiencies across the business in capital and across the operational spending line and I'm hopeful that we'll have some success in finding them.

Great.

And just a follow-up question on the ASP.

You mentioned that mix was the reason why you expect ASP to be down sequentially because of more consumer product.

What about pricing for your product?

Any reason that you might want to adjust the pricing?

There's some talk that you guys might be considering raising price on Atom.

No, our price moves are fairly well telegraphed to our customers a number of months in advance and there are new versions of Atom coming out.

In particular we talked about a dual core version that'll cost more than the single core version, but other than that, no.

We're not looking at raising prices.

What we're trying to drive and what we always try to drive is try to sell the richest mix possible.

That's a little more taxing in this environment, particularly when you have things like the enterprise, which tend to buy a relatively higher mix of product, keeping their wallets shut for a while.

Great.

Thanks.

Thanks, Edwin.

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

Please proceed.

Thanks so much.

Paul, I was wondering if you might have been able to give some color on how you perceive broader visibility and how you might have compared that to the conversation from January.

You talked about a bottom in the PC market and possibly some month-over-month improvement as you went through the quarter.

On the other side of that, your guidance was flat or somewhat similar, although it's not formal, but just general color on how you see the marketplace and to what extent there is any visibility?

I can try, Tim.

I think that, first of all, when we said that we're planning our business flat in this environment, you have to remember that traditionally the second quarter is seasonally below the first quarter so that alone is -- at least internally is a sign of how we view the world.

In terms of visibility, three months ago we were sitting in a fragile global economic environment and we'd just come off of a horrendous Q4 and we weren't sure where sales out were of PCs.

Three months later we're still sitting in a fragile global economic environment but we've got three or four months of fairly good trending in terms of where the business is, what the inventory levels are, what geographies are still buying product, what segments are still buying product and so the global environment hasn't changed.

But our ability to look and plot some points -- historical points, has given us the confidence to essentially say that we've seen the bottom, the industry's seen the bottom, and I feel pretty comfortable in that, having done this for more than a few years.

Do you feel, then that the seasonality is likely to be somewhat similar to broader seasonal patterns in the second half, do you have any color there?

And as part of that I noticed in the past you've talked about chip sets being directionally sometimes helpful.

The mobility chip sets were down 21% and maybe that's just because they were weak at the beginning of the first quarter, but any color there?

Well, that goes back to the pipeline.

In general, mo -- let me back up a little bit.

Desktops are a business which is very, very quick.

It's a -- most of them are assembled to order.

40% of our desktop chips go through our industrial distribution channel.

They're sold in white boxes for the most part so there is essentially no inventory on those and that's why when we saw that stabilizing in the early part of the quarter that was the first stake in the ground in terms of trying to figure out where the business was.

The notebook business -- we talked about this last time -- not only has a longer supply chain and most of it is branded, much of it was put on boats in the third and fourth quarter to save fuel costs and there was a lot of inventory built ahead of the holiday season in Q4 that had to burn off.

We now believe that the vast majority of that has burned off.

All the patterns we've seen on chip sets for mobile and on microprocessors for mobile are consistent with that in terms of our customers and the Taiwanese motherboard manufacturers now beginning to buy again for product that is reflecting end-user consumption.

Thanks, guys.

Thanks.

Your next question comes from the line of Chris Stanley with JPMorgan.

Please proceed.

Hey, thanks, guys.

You talked about your gross margin trends in the second half of the year assuming some normal seasonal patterns, why not throw out a full-year gross margin guidance and then which quarter do you expect to have higher incremental gross margins, in Q3 or Q4?

It's relatively straightforward to look at the trend of what's happening.

It's quite difficult until we get a sense of the underlying business level to put a point around gross margin, which is why we're not putting a point estimate out there for gross margin.

I can say with some confidence our inventory level came down dramatically in Q1.

Actually I can say that with complete confidence.

We can say with some confidence that the overhang of inventory in the industry has come down to normal levels.

That's allowing us to start refilling our factories.

On a trend basis we're going to start seeing less excess capacity charges now continue into the second half.

In terms of where the gross margin ends up is really going to be a function of what does demand look like in the second half and I think Paul did a great job of articulating.

We're just a lack of visibility.

We've hit bottom, lots of indications of that, but still a lack of crisp variability of what does in-demand look like, particularly as we get into the second half.

And then for my follow up, your operating margins in the "other category" went up a lot, was that all due to NAND or was there anything else in there?

NAND did get a bit better but you should also look at our restructuring cost dropped quarter on quarter, that's a piece of it, as well.

Okay.

Thanks.

You're welcome.

Your next question comes from the line of JoAnne Feeney with FTN Equity Capital.

Please proceed.

Yes, good evening, folks.

Congratulations on a relatively good quarter given the environment.

One question.

Again, hopefully to clarify the -- what you view as normal and what -- why you're saying you think things have returned to more normal seasonal patterns, so just a follow up.

So you're confident that you're seeing normal seasonal patterns return but not sure to what degree, perhaps, is that the main issue that you think that in the second half we do get that uptick but we just don't know how big it is yet and that's why you're being conservative about guidance?

JoAnne, I think you have it exactly right.

Everything I've seen suggested that we are -- the industry's at a new baseline.

We're starting to see the normal seasonality adjusted a little bit for the inventory.

Replenishment we talked about earlier for Q2.

And then every sign we see in terms of markets recovering -- and here's the time-phase deal -- suggests that we're likely to see typical seasonality in the second half.

I talked about Europe being weak.

My sense is everything we've seen is that Europe was like the United States except two or three months later.

And so Europe is sitting today where we all were two or three months ago, which was still a bit more frozen than we are today, and our recent channel checks in Europe suggest that consumers are now starting to open their wallets for notebooks again.

And so if we are at a new baseline and we're not quite sure how high the seasonal uptick is going to be in the second half -- going back to that gross margin question -- so we're on a line that's considerably lower than we were a year ago, would it be reasonable then to expect that gross margin in the second half is more likely to end up in the lower half of that 50% to 60% range because we are starting from a lower baseline and is that a reasonable way to think about this?

It's all going to depend on your view of what the unit strength looks like in the second half.

Again, I can -- the similar answer to Chris' question.

I can say with some confidence we're going to see an improving gross margin as we get into the second half, based on the drivers that I've articulated; excess capacity charges and start-up costs abating.

Where it ends up in that normal range, to a first approximation, is going to be based on the strength of the unit demand that we see in the second half.

Over time we can adjust our capacity but that's something that is more of a 2010 issue than a 2009 issue.

JoAnne, you have you a follow up?

I do, yes.

I was actually hoping -- in the past you've talked about Atom and margins and we've all tried to understand the relative impact on gross margins to operating.

Do you still feel like Atom has a greater potential to contribute to the operating margin level relative to the gross margin level, and is that something that's going to become more of an issue as the year progresses?

Yes, I'll talk about that in some detail in the upcoming investor meeting.

My view of Atom hasn't changed and as we look at the Q1 results, from an overall product margin standpoint dollars are equivalent to what we see at the low end of our stack today.

Product margin percent is significantly better than the low end of that stack, so from that perspective it's a-- it ships at a very healthy product margin for us.

It also does a good job of leveraging investments we already make and so I think you're going to see it being a top-line driver.

I'm not expecting it to be dilutive at the gross margin level and it should drive operating profit expansion.

And I'll try to share more specifics in the investor meeting so that you can see some of the data of the nine-plus months we've been shipping the product.

Great.

Thanks.

That's all from me.

Thanks.

Thanks, JoAnne.

Your next question comes from the line of Kevin Cassidy with Thomas Weisel Partners.

Please proceed.

Thanks.

Just to ask a few more questions about the Atom.

I guess I was surprised at the decline in revenue in the first quarter and you say there was inventory in that book.

Do you know if -- where the inventory was geographically?

Well, a lot of it was still in warehouses in China at the end of fourth quarter because people didn't sell as many as they thought and a lot of the units were being sold in Asia.

As I said, at this point in time we believe that most of this quarter's activity on Atom was our customers selling off that in -- that overhang of inventory from Q4 and Atom was still fairly strong.

Even though it was down 26%, it was down from a number that had doubled from Q3 to Q4 so you're still talking about a fairly strong clip and I think we would still expect netbooks as a category to be approximately 2X in 2009 versus 2008.

This is still one of the hot categories out there and one of the great stories of technology this year.

It shouldn't be -- it wasn't a surprise to us, Kevin.

In fact, I think we said it on the last call that we expected a pretty significant inventory reduction.

Just has to do with where the economic uncertainty hit relative to the ramp.

The channels were filling rapidly.

The economic uncertainty that inventory needed to clear out.

We expected it in Q1 and we saw it in Q1.

Okay.

Maybe it's an obvious question but any speculation of a shortage of Atoms?

I guess that's purely speculation, no truth to that.

Of Atom microprocessors?

Right.

No, these are products that we can build by the millions, not a problem.

Okay.

Thank you.

Thanks, Kevin.

Just send in your orders.

Amatee, we're going to have two more questioners, please.

Okay.

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

Please proceed.

You there, John?

I think we lost John.

Can you hear me okay?

Yes, we got you.

I'm sorry.

Paul, can you provide any update on the engagement with TSMC for Atom obviously for embedded applications.

How has that progressed, any feedback from customers, the end markets that you see people gravitating towards such an engagement in?

Sure, I can give you a little bit, not a lot.

We announced that engagement about a month ago.

It's beginning with Intel doing the port of movement of Atom over to their process technologies, take advantage of the collaterals and so forth.

We announced it well ahead of the availability of the core, partially to get at your second question, which is to see the level of interest that's out there.

Our intent by doing this was to help move Intel architecture more aggressively into new markets.

We are not looking at this as an outsourcing of Intel factories by any stretch.

This is really an architectural play to be able to take advantage of the different customer base that TSMC has, as well as the (inaudible) and collaterals that they have in their libraries.

And there have been a lot -- a good number of interesting phone calls subsequent to that announcement where people want to know the specifics and what can they do and how can they use this product to go into such and such market.

And it's premature to announce those but right now it looks like the strategy to put it there in terms of widening the architectural acceptance looks pretty good.

Okay.

And as a follow-up, Stacy, maybe -- you kind of reiterated your view that the back half of this year is probably a 50% to 60% gross margin range.

Obviously, nothing's changed in your view of the 32-nanometer.

Nothing's changed in the fact that you should have flushed through the Q1, Q4 higher-cost inventory.

But one of the drags -- if I can call it that -- on Q2 gross margins is the mix issue, towards consumer, away from enterprise.

and I did hear some hesitancy with respect to when enterprise will rebound.

Can I read into your statements that you expect enterprise to rebound by the end of the year, or is it just the fact that 50% to 60% is such a range you could absorb that 2% hit and it just doesn't matter to you?

I think I get into that range based on the abatement of excess capacity charges and start-up costs, even if the enterprise market stays weak.

We could see other changes in the marketplace that could put that in jeopardy but I don't need a big recovery in the enterprise market.

In fact, it's not something I'm projecting for Q2.

I think the enterprise market will continue to be weak for a while.

Thank you.

Thanks, John, and this will be our last question.

Thanks, Amatee.

Your final question comes from the line of Tristan Gerra with Robert Baird.

Please proceed.

Hi, good afternoon.

Given the positioning of IM flash as potentially becoming the cost leader in NAND flash this year and other suppliers cutting capacity, does this provide you with an incentive to further invest in sub 30-nanometer chip (inaudible) node and if you could give us a world map or timeline in that regard?

I hate to end the call on a NAND flash question but I guess we will.

Let me take you in a couple of different places on that.

So first, our strategy is unchanged.

We're continuing to try to drive cost improvements based on.

in general.

weak market dynamics out there.

We're trying to minimize incremental capacity coming online.

To that end we've taken, in conjunction with Micron, the older-generation 200-millimeter factory offline.

We did that in Q4.

We're delaying the start up of the Singapore factory in order to avoid having new capacity come on, so I'd say this is not a change to our strategy.

What you saw in the gross margin was the impact of some of those tactical changes having a positive impact on our business.

We are ramping the 34-nanometer factories that gave us improvement in cost.

We expected cost to get better but it actually got a little bit better than we thought and frankly the pricing environment in Q1 was a little better than we anticipated, as well, and that helped gross margin be a bit better than expectations.

If I think about the year, though, I think we'll continue to see good news associated with cost but I also think just based on overall weakness in the consumer marketplaces around the world we're going to continue see this being a pricing-challenged environment and so you're going to see us keep executing to our strategy of trying to drive cost improvements and efficiencies and avoiding taking new capacity online.

And then secondly, the strategy of trying to move as fast as possible into new form factors like SSDs, absolutely critical to our strategy.

Those are areas where we believe we can get paid better for our technology and I think we're having some success in terms of design wins in the first quarter.

Okay.

And then finally, given the increasing bundling of baseband with Atom inside netbooks, do you see having a baseband architecture as strategic to netbooks strategy going forward?

Well, we're certainly have plans -- announced plans for WiMAX into those boxes.

Our customers are designing a number of netbooks with 3G in them and they're able to do that without Intel 3G silicon.

At some point in time, though, as we move to system on chip and into smaller form factors -- handheld, in particular -- having a 3G capability would be strategic for us.

Thanks, Tristan, appreciate it.

Amatee, we'll close.

I just want to close by saying -- first of all, thank everyone for joining on the call and remind you that the quiet period for our second quarter begins at the close of business on Friday, May 29, and our second quarter earnings conference call is scheduled for July 14, 2009.

Thanks again and good night.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.