英特爾 (INTC) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Q3 2009 Intel Corporation earnings conference call.

I'll be your coordinator for today.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would you now like to turn the presentation over to your host, Mr.

Kevin Sellers, VP of Investor Relations.

Please proceed, sir.

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

I'm joined today by our Chief Executive Officer, Paul Otellini, and Chief Financial Officer, Stacy Smith.

Our earnings release and updated financial statements were released today at approximately 1:15 Pacific Daylight time and can be found on our investor website, INTC.com.

This quarter we introduced a change to our earnings process by posting earlier today to our investor website additional management commentary and context about our quarterly results.

This was done in an effort to create better understanding of the results prior to the call, something we felt would improve the interactive dialogue with management during this meeting.

We hope this change is helpful and as always we would love to hear your feedback so we can continue to try and improve our disclosure practices.

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.

If during our call today there are any non-GAAP financial references made, we will post the appropriate GAAP financial reconciliations on our investor website.

So with that let me hand it over to Paul for some comments followed by brief remarks from Stacy.

Paul?

Thanks, Kevin.

We are very pleased with the Company's third quarter.

The strong financial performance is a result of having the right products at the right cost at the right time for a recovering global economy.

The strength in our business remains primarily consumer driven with broad based demand across all geographies.

Our mobile business had a particularly strong quarter.

In fact, we saw the sequential unit growth rate of notebook processors and chip sets actually exceed the growth rate of Atom processors and chipsets.

While Atom and netbooks are important growth drivers for us, our traditional notebook business remains one of the primary drivers of revenue growth and we expect that to continue in the future.

In the server segment, we are pleased with the acceptance of Nehalem and the enterprise.

While overall enterprise spending remains weak, the compelling value proposition of Nehalem is generating growth opportunities even in a down economy and will be a strong profit driver for Intel in the coming quarters.

On a regional basis, China had a particularly strong quarter and continued to show strength during the just completed golden week.

The US continued to ride strong consumer sales with the back-to-school cycle exceeding our expectations.

Sequentially, Japan showed very healthy growth and Europe growth was slightly above seasonal trends.

I know that many of you listening today are concerned about inventory levels and the state of sell-through around the world.

Let me share just a couple of important data points.

First, our channel sales out have shown healthy sequential growth for three quarters in a row with channel sales out this quarter actually exceeding the activity we saw in Q3 of 2008.

Inventory in the channel remains slightly below normal levels, reflecting both good sell-through as well as disciplined inventory management.

At our large OEM customers, component inventories are roughly half the peak level of late last year and have been approximately flat throughout 2009.

Much of this is due to our implementation of inventory hubs where we hold the inventory for our large OEM customers who then pull inventory only as needed.

This helps our customers better manage their inventory levels while giving us increased visibility into real-time system production levels.

We watch supply chain inventory very carefully and believe the pipeline has been appropriately rebuilt to support increased end demand and yet remains well below the peak we saw at the end of 2008.

I also want to highlight the excellent performance of our factory network.

Our internal inventories continue to run quite lean with factory throughput improvements providing us with the ability to respond to demand changes far more quickly and effectively than ever before.

Our product cost declines are significant and are a reflection of improved loadings, better equipment reuse, and exceptional yields.

All of this leads to better than expected costs across our newer technologies, allowing us to expand margins in a difficult economic environment.

In closing, let me briefly mention the biggest driver of our product differentiation in the marketplace and that is our process technology leadership.

At our IDF event last month in San Francisco, I shared that we had shipped over 200 million, 45-nanometer processors to date.

I'm very pleased to note that this quarter, we begin volume production of our newest process technology, at 32-nanometers.

Our 32-nanometer process is stunning technology that incorporates second generation of high K metal gate transistors.

As we ramp this new technology we will be refreshing our entire product line, providing better performance, lower costs and lower power consumption for all of our platforms.

Importantly, 32-nanometer process technology also allows us to accelerate system on chip implementations on the Intel architecture, providing Intel with new growth opportunities in the coming years.

With that, let me turn it over to Stacy for a few brief remarks.

Thanks, Paul.

The combination of strong execution and a strengthening market led to exceptional financial results.

Better than expected demand in the microprocessor and chip set businesses led to the largest sequential third quarter revenue growth in over 30 years.

Gross margin percent at 58% was up nearly 7 points from the second quarter.

Operating profit was up 80% and net income was up 77%, excluding the impact of the $1.45 billion EC fine taken in the second quarter.

The PC market segment is recovering nicely with our microprocessor revenue excluding Atom growing 23% since the market bottomed in the first quarter.

At the same time period, Atom microprocessors and associated chipsets have grown to $450 million(Sic-see press release) in revenue in the third quarter and $1 billion year-to-date.

Gross margin benefited from exceptional execution in the third quarter.

We responded to our customers' upside requests and achieved a significant reduction in costs, resulting in a 58% gross margin, a nearly 7 point increase from the third quarter.

As a result of capital reuse and achieving efficiencies, our capital forecast of $4.5 billion is now less than the annual depreciation run rate.

Operating expenses are in tight control.

This is most clearly seen in spending as a percent of revenue.

In the third quarter, spending for R&D and MG&A as a percent of revenue improved 2.5 percentage points to 29%.

We achieved this result inclusive of the biannual shift of process engineers moving from cost of sales to R&D.

The number of employees increased less than 300 people in the third quarter including the completion of the Wind River acquisition.

Our business model is generating both profits and cash.

Third quarter operating profit was $2.6 billion, up 80% from $1.4 billion excluding the EC find and as a percent of revenue grew 9.6 points to 27%.

Total cash investments comprised of cash, short-term investments and debt security trading assets, ended the quarter at $12.9 billion, $1.6 billion higher than the second quarter.

Cash flow from operations was approximately $4 billion.

During the quarter, we paid the EC fine, purchased Wind River, bought back $1.7 billion in stock, paid nearly $800 million in dividends, and purchased $944 million in capital assets.

Additionally, we issued $2 billion of convertible debt.

For the fourth quarter we are forecasting a seasonal increase in revenue, taking the midpoint of our forecast range to $10.1 billion, a 23% increase from the fourth quarter of 2008.

We are forecasting the midpoint of the gross margin range to increase another 4.5 points to 62%.

The third quarter results and the forecast for the fourth quarter show the superior financial results that can be generated by the combination of a recovering market, strong execution, and a leadership product portfolio that serves markets spanning from servers to notebooks to netbooks.

The factories are executing superbly and we are showing good financial discipline.

These attributes are leading to the financial results we are seeing today and they serve as a strong foundation from which we can build in the future.

With that, let me turn it back to Kevin.

Okay, thanks, Stacy and Paul.

We'll now be happy to take your questions.

In another slight change to our process, we would like to limit each questioner to one question only, with will allow for more people that would like to ask a question the opportunity to do so.

We're now ready for our first questioner.

Your first question is from the line of Uche Orji with UBS.

Thank you very much.

Let me just ask about inventories.

There's a lot of talk, Paul, about double ordering in the channel.

Let me just ask you, your in house inventory is well below your historical levels.

Is this a new normal given reduced cycle times or should we expect a rebuild through the rest of Q4 into first half of 2010?

And related to that can you just also talk about what you're seeing in terms of corporate spending, was there a little bit of corporate spending embedded in Q4 guidance or should we expect more from corporate in 2010?

Hey, Uche.

We're going to pick the first question, kind of keep it to one question if we could.

I have to try.

It was a run on sentence approach to one question.

I got it.

Let me take -- since it's an internal inventory question, let me take it.

I'm sure Paul will take the other question is on channel inventory as well as we go forward here.

From an internal inventory standpoint we're lower than I would like right now.

We want to get some inventory in place in Q4, part of that is we're just running a little leaner.

We were surprised by some of the unit upsides we saw over the course of the third quarter and we want to replenish and we're also, as we're on the cusp of the transition to 32-nanometer, if you look historically it's a time when we put a little more inventory in place to buffer both sides of the demand, supply equation so I plan to grow inventories a bit in the fourth quarter.

Thank you.

Go ahead, next questioner.

Your next question is from the line of Sumit Dhanda with Bank of America.

Stacy, question for you on the fourth quarter gross margin outlook, obviously very strong.

My only question was you've indicated in your transcript that there's a point from higher CPU volumes in terms of a benefit.

I guess my question was is mix assumed flat and then along the same lines, given that your excess capacity charges are dropping off, and your fab loadings are increasing as you build inventory, why not a higher bump just from volumes into Q4?

Yes, thanks.

On the first question of mix, we'll likely see a slightly richer mix of CPU shipments in the fourth quarter than we do in the third.

Remember the way the supply chain works and we think the supply chain's looking pretty normal right now, they put some chipset inventory in place in the third quarter and then they couple it with a CPU in the fourth quarter.

So probably a little richer mix to CPUs in the fourth, that coupled with an increase in volume is about a point of the gross margin.

To your excess capacity question, the answer is we'll be out of excess capacity charges by the end of the fourth quarter.

So we kind of took some significant charges in -- end of Q4, Q1.

We saw some improvement in Q2 and Q3 with the further improvement that we're forecasting for Q4, those will be zero, in essence, as we leave the quarter.

Thanks.

Next question.

Your next question is from the line of Craig Berger with BBR Capital Markets.

Hey, guys, congratulations on the strong results and kudos on the conference call process improvement.

I guess on the gross margin, can you help us understand where capacity utilizations are at and what kind of capacity you have for 2010 growth?

And then also, as part of that, if you look at the last time your revenues were about at this level--?

Craig?

We lost Craig.

Are you still there?

Yes, sir.

--why that happened.

We lost you, Craig.

We got the first part of your question but you went out for a minute.

You'll have to restate that.

Utilizations and the last time you guys were at $10.1 billion in Q3 '08, your gross margins were about 3 to 4 points lower.

Can you talk about some of the structural improvements that have happened over the last year?

Yes.

To your utilization question, I showed a chart at the investor meeting that showed my expectations for the year.

We're a little ahead of that.

So in Q4, from a factory utilization standpoint, we're right in what I call the optimal range.

We're kind of between 80 and 90%, gives us the ability to achieve really good cost and also have some capability to deal with upsides on specific products so that's where we're at.

And then to the -- to your gross margin question, it's really the work we've been doing over the last three years.

We're in a situation where we're able to reuse a significant amount of capacity from 45 to 32.

That's going to be helpful to us.

You can see that in our CapEx line.

You can see our costs coming down, our through-put times are coming down, our output per piece of equipment is going up.

Our yields are going up.

So it's just a variety of work there that's leading to really good performance from the factory network that's helping us in the gross margin line.

I think the other part of Craig's question was 2010 capacity so let me just share that.

The significant increase in our capacity going into next year, Craig, is to continue to ramp the 32-nanometer factories.

We've got two factories sort of ramping now against a planned four.

That remains on track.

That technology will provide the significant new product portfolio and capacity expansion we think we need for the 2010 environment.

Thank you so much.

Thanks, Craig.

Go ahead.

Your next question is from the line of Daniel Berenbaum with Auriga USA.

Thanks very much for taking the call.

You guys have done a great job managing OpEx and maybe along the lines of the last question, when you look at the last time if you look at Q4 guidance, midpoint the last time you were at that revenue level you were around the same OpEx level as you guided to and that's with the shift of startup costs into the R&D line.

So as you look forward into 2010, assuming you continue to see some of this strength, do you need to add anything back to the R&D or SG&A lines or do the cuts continue as we roll into 2010?

Is there more money to take out of those lines?

Yes, I'm not going to provide a point forecast for 2010.

Let me, though, answer a couple things we told you before.

I want to just reinforce.

First off, we do believe that through our work on efficiency, we can continue to improve spending as a percent of revenue.

And so that's an area where Paul and I continue to be very focused.

We believe that there's potential benefit there as revenue grows where we can thank some of those efficiencies.

It's different from a are we going to be smaller next year.

I would say we're through the cutting phase of our efficiency effort and now we're hopefully in the growth phase of that efficiency effort.

I think that was it.

Yes.

That's great.

Thanks.

Thanks, Dan.

Next question.

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

Yes, good afternoon, guys, congratulations.

Paul, in your opening comments you talked about Nehalem being a profit driver over the next couple quarters.

There's been a lot of conversations about the PC upgrade cycle within the corporate market.

Can you help me understand how you guys are looking at sort of the potential for server replacement cycle and I guess with the EX coming out, help me understand to what extent that helps you grow market share and/or go after some of the proprietary solutions that X86 has not addressed and what could happen to TAM there as you do that?

Okay.

Well, the Nehalem product line you're right, John, is now ramping through the bulk of our products.

We've launched the high end desktop, mid-range desktop and notebook and now you'll start seeing more volume start shipping this quarter in addition to the -- in anticipation of a January launch so we'll have a full-fledged client portfolio and the MP servers all shipping by year-end.

Around Nehalem.

In terms of a server upgrade cycle, what we're seeing on the Nehalem DP is that it's not so much an upgrade cycle that's driving the volume right now.

It's economics of the data center.

People are looking at swapping out eight to nine older generation servers for a single Nehalem server on a ratio basis.

That has the same performance, same or better performance, much better power consumption so it lowers their electricity bill and gives them a little bit more flexibility in their data center footprint.

I think that's just going to get accelerated MPs start shipping because you have those same dynamics applying in there against an older generation of machines.

I do think that if there is opportunity with the MP machines to start encroaching on what has traditionally been the risk portion of the market or even some of the low end of the mainframe portions of the market with this product line.

As you look at some of the very high end machines our customers are working on that are well above eight-way machines.

The bad news about that is that that part of the market is very small in units so when I look at the overall TAM expansion, there's good margin there.

There's good numbers.

But it's not anywhere near what we would get by, say, replacing the existing Xeon machines both MP and DP and the existing data frame, data center configurations.

Thanks, guys.

Thanks, John.

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

Paul, maybe just your insight here.

To the extent that Intel's growing above the industry growth rate, to what extent do you think that's attributable to, one, share gain?

Two, market creation from Atom?

And three, any pent-up demand that you may be seeing for Nehalem?

Which industry are you referring to?

Well, PCs.

Oh, I don't think that we can grow much both the PC growth rate at the end of the day.

There has been some share gain over the course of this year.

We'll see what this quarter maps out to but I would think that trend was -- could continue this quarter.

But at the end of the day, we need the volume.

The PC market has to grow.

Our current view of the PC market as I said at IDF is that the volume year on year, '09 versus '08 will be flat to up slightly which is a significant change from the industry view six months ago and I think you're seeing inside of the that Intel do well because of the shift to notebooks where we enjoy a higher market segment share than we do in desktops.

Thanks.

Thanks.

Your next question is from the line of Chris Danely with JPMorgan.

Thanks, Stacy.

You said you wanted to grow your inventory a little bit in Q4.

Can you give us a sense of if there was any sort of target you have in mind and then what would be the thoughts on Q1 assuming some sort of normal seasonal quarter, would you look to take inventory up, down or keep it flat in Q1?

Yes, I'm not going to put a forecast out there for Q1.

I'd like to grow inventory modestly this quarter and keep in mind, we're also going to have the phenomenon that you can see in the gross margin line where we will, as we qualify the first products on 32-nanometer for sale, we will value that inventory.

So that was stuff that was written off in the third quarter and then we'll value the material in the line in the fourth quarter.

So that's a piece of it.

But I would expect to put modest amount of inventory in place in the fourth quarter just to build the inventory level back up and to make sure I have the right mix of products as I go through the product transitions.

Thanks, Chris.

Next question.

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

Thanks for taking my question.

Real short one.

What is -- what was the sale of Atom related products and that was at--?

In the quarter, so Atom and the associated chipsets were a bit above $400 million, I think $415 million was the exact number and year-to-date we've sold over or right at $1 billion worth of Atom and associated chipsets.

Is that what you needed, Gus?

Can I ask another one?

Sure, follow-up, go ahead.

Real quick.

On Win 7, it's obviously a significant product launch for Microsoft, has that had any peturbation at all in the supply chain and how are you guys seeing that?

Not that we've seen.

I think there's a lot of excitement about Win 7 but again, the trend we saw for the bulk of this year including the current quarter, third quarter, was driven by consumer sales, particularly in notebooks and netbooks.

If you go into retail now, you're seeing that OEMs and retail channels are offering coupons for machines, for an upgrade, a free upgrade to Win 7 when it comes out which has been done by Microsoft in prior generations so that tends to reduce any wait for the launch kind of anticipation for people that really want it and get the upgrade that way in a seamless, no cost basis.

The Corporate side is a bit different.

The Corporate needs to do a qualification in their environment and that process has begun on a worldwide basis.

We see a lot of interest in corporations around Win 7 and the new Nehalem based SKUs which are sort of made for each other in terms of the performance and power management and security characteristics of the products that go together there.

I would expect that that evaluation process will happen over the rest of this year and we'll start seeing corporate purchases on a refresh basis begin in 2010.

Great.

Thank you.

Thanks, Gus.

Go ahead.

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

Great, thanks, guys, for taking my question.

Paul, you you've been spending a lot of effort on growing sort of non-core revenues.

You've got a whole bunch of pieces you've assembled now.

Is there any sort of guidance you would like to offer us on how much impact that could have to incremental revs in 2010?

Oh, in 2010, no, I won't give you a lot guidance, I can't give you a lot of guidance there except to point out the trends that we did in the analyst meeting, Doug, which is that of those four businesses that we really aimed at with the Atom system on chip products, the one that's shipping in high volume today is the embedded business and that's converting to Atom and growing around that and that side of the business which is well north of $1 billion on a very nice growth rate so that's the one you'll see the revenue appear first in in terms of measurable amounts.

The consumer electronics and ultra mobile activities are proceeding nicely in terms of design wins and product development but the volume there is really out in time a bit.

If I could add to that, if you look at the clip we're on with Atom where we're seeing nice growth, Atom and netbooks, exiting this year, that's at a clip that should be a pretty significant growth driver for us next year.

Thanks, Doug.

Thank you.

Next question.

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

Thank you very much.

Paul, could you provide us an update on how you're thinking about the NAND Flash business?

It's been a little while since we've really focused on that because prices have stabilized, headed the right direction.

What are you thinking about the importance to Intel, are solid state drives something that's going to drive processor growth, you want to be there to enable it, those types of thoughts, please.

The job one for the NAND group is to drive themselves towards profitability and they've done a very good job this year and albeit a rising market for NAND in doing that but the losses continue to get -- to reduce substantially and they're on a path towards I think a sustainable business here.

At the end of the day, that's the ultimate test for this business.

We love the fact that it has a strategic nature but it must make profits for us.

We are increasing the amount of our NAND that goes into solid state drives, both at the enterprise and client level and we think that is important for our platforms and we think we have pretty good value there in terms of the technology, both the quality of the parts and the algorithms that we use around drives.

So that allows us to get a slightly better than commodity margin on most of the NAND business.

We've got a couple of other platform ideas that you'll see unfolding from us over the next couple of years using this technology.

Thank you.

Thanks, John.

Your next question is from the line of Manish Goyal with TIAA-CREF.

Yes, hi, thank you.

I was wondering if you can give some view on PC unit growth for 2010 in light of the corporate refresh, potential for corporate refresh and do you think consumer is likely to stay as strong in 2010?

Well, we certainly have a set of numbers we're looking at inside for capacity planning, Manish, but we're not prepared to share them with you.

I think if you look at what's happened with the third party forecasts for 2010, they're now all inching above 10% unit growth and we wouldn't argue with that and some of them may be more bullish than that as the year gets closer so let me just leave it there.

The other part of your question was?

Consumer related.

Oh, consumer.

Where I was heading was that is if we do get an enterprise-led recovery next year, do you think your ASPs could be more stable?

Well, in general, one of -- the pressures of our selling price this year has been the absence of the normal mix of enterprise SKUs which tend to be a higher, richer mix using V-pro and things like that so if -- when that market recovers, their buying characteristics don't change, that will be some relief on the ASP pressure that we've seen through the growth on the consumer side.

Thank you.

Thanks.

Good to have you in the queue.

Your next question is from the line of Mark Lipacis with Morgan Stanley.

Mark, are you there?

I think we'll go to the next question.

Your next question is from the line of Brendan Furlong with Miller Tabak.

Thank you for putting me in the queue.

Quick question on your richer product mix, CPU mix for Q4.

Could you address how in general CULV is impacting the CPU mix in terms of ASPs and gross margins, et cetera?

Thank you.

Sure.

Well, remember, the CULV stands for consumer ultra low voltage so for every CULV SKU that we have a consumer non-ultra low voltage SKU.

From that perspective, when we ship a ULV product we get a premium for that versus the non-ULV part.

We've looked at this as being a premium product, taking advantage of the technology since day one.

The bulk of the units that have been shipped in that category to date were single core versions of the products.

Late last quarter, we introduced a dual core version of those products.

I think you'll start seeing a number of laptops show up in retail channels with the dual core versions for the holiday season that are more ergonomically designed, thinner, lighter, more attractive chassis and those kinds of things which really starts moving to where the sweet spot of the, I think the market is moving.

Brendan, this is Stacy.

Based on how you asked that question I want to come back and just clarify one thing and make sure you didn't misinterpret my words.

I was not predicting a richer mix in the CPU market.

What I was articulating is you tend to see more chipsets sold in Q3 and more CPUs sold in Q4.

So we'll see a mix shift towards CPUs.

We're not anticipating a richer mix inside those CPUs to Paul's earlier answer.

Our best guess is that the enterprise market continues to be relatively weak in Q4 and this continues to be more of a consumer-led year.

Thank you very much.

Thanks.

Next question, go ahead.

Your next question is from the line of Tristan Gerra with Robert Baird.

Hi, good afternoon.

How do we view Atom strategically in your PC mix next year?

We've seen some constraints of Atom in China and also a little bit of a slowdown in netbooks in Q3.

If you could give us an idea of the growth that you see for Atom and netbooks in 2010?

I don't know what you mean by a slowdown.

If you mean a slowdown in the rate of growth given that we started with relatively large -- very large growth rates in the early days, the law of large numbers kicks in.

Netbooks continue to grow.

They grew nicely from Q2 to Q3.

Both at the component level and sales through levels as near as we can tell and I believe they'll grow again in Q4.

And Stacy points out, even if you take a simplistic Q4 times four model for 2010, that gives you significant growth over 2009 in netbooks.

So we're still bullish on it.

What we've seen this quarter, though, is that the notebook market is alive and well and that netbooks as we have been believing for quite some time are market additive for Intel in the industry.

Great.

Thank you.

Thanks, Tristan.

Go ahead, next question.

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

Thanks, guys.

Just a question on the gross margin in the beginning of next year, mainly from a fab startup perspective.

Remind us where we stand in the cost for ramping the China fab and then if there's any impact from the 32-nanometer startup occurring in the second half of this year rather than the original expectation of the first half of next?

So I'll answer your question directly but I'll also refer you back to the chart that is still on our website from the investor meeting that shows that.

The expectations haven't changed.

Next year will be a year where startup costs are reduced over this year.

At the big picture level what you had is this year there were significant startup costs associated with 32-nanometer.

We won't be starting with significant start up costs for 22-nanometer next year.

We do have a little bit of startup cost associated with the fab in China but that was included in the graph I showed you and even with that we'll be down and my expectations are roughly unchanged in terms of the shape of this year and the shape of next year.

And what was the quantity of the China one if you gave a precise number, a point, half a point, et cetera?

You can eye ball it but it's well less than a point of gross margin.

Thank you.

Thanks, Ross.

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

Thanks, first, well done on your quarter in execution.

Just with respect to the gross margin outlook, Stacy, in guiding it up, your variance of 3 points is a little bit wider than sometimes and also in the guidance you mentioned that there are three points related to qualification of the sale of 32-nanometer products and the sale of previously written off product.

I guess the question is to what -- how much of it is the sale of previously written off product?

And then I guess going forward, if you could give us some color on how you feel about the sustainability of the elevated 62% gross margin and what some of the key variables might be and I guess in the prior two questions you had some allusion to the first quarter, if you're continuing to build inventory, does that help, what are some of the key variables baked in this quarter's guidance and maybe some of the variables for next year?

Thanks.

Did we say we're going to cover one question or four.

We got Uche with two.

Tim, I lost count.

I'll turn it over to Stacy.

I'm not sure how to start with that one.

Let me take a shot.

And I'll just preface this up front by saying I'm probably going to disappoint you because I'm not going to give you a point estimate for next year or a shape of the year but I'll talk about some of the drivers.

Q4, your first question was how much of that 3 points of qualification for sale of the 32-nanometer product, how much of it is sale of previously written off product.

They're both significant drivers within that 3 points.

I'm not going to get more precise than that.

They're both multi point, more than a point kinds of impact there.

In terms of the sustainability of 62%, I have to point out by historical standards that 62% is pretty rare.

It really does show the financial performance that we can generate when we have a strengthening market and we're executing well.

I think it really underscores for us that the strategy, how important the strategy is of having a segmented product line as Paul said in his prepared remarks, having the right products at the right cost to satisfy the growth in consumer and emerging markets and Internet consumption devices with Atom and refreshing the high end of the product line with our 32-nanometer product, that helps a lot.

But I wouldn't try to argue for you that that's the new normal.

I still believe that over a long period of time our gross margin even inclusive of all the growth businesses is kind of between 50 and 60% and we're executing well and we're at the high end now and some day we'll be at the low end.

When I think about 2010, I'll refer you back to a couple of the things we showed at the investor meeting.

I would expect startup costs next year to be lower than they are this year, per the question we had earlier.

And -- so that will be one of the drivers and I think that we're likely to see 2010 as we progress through the year, we'll see the costs coming down on our 32-nanometer products and we showed a graph that showed that by the end of next year, we expect to be lower costs than ending 2009.

I still expect that to be the case as we come up the learning curve on 32-nanometer and bring those costs down.

So I think those two things give us a little bit of tailwind.

The three point spread, any sense there?

The wider range.

Sorry, I knew I would forget one of your four.

That one was just matching the topline growth.

If we have -- if we end up at the top end of the revenue range, then we'll be pushing the top end of the gross margin range.

If we end up at the bottom end of the revenue range we're at the bottom end of the gross margin range, so really make those symmetrical.

Thanks, guys.

Thanks, Tim.

Next question.

Your next question is from the line of Jim Covello with Goldman Sachs.

Thanks so much.

Congratulations on the great results.

This has been sort of kicked around but I want to ask it a little bit of a different way.

The supply chain hasn't really been able to catch up with end demand this year because we entered the year undershipping demand by so much.

And so much of your growth this year has been a function of that.

Plus, the better than expected demand relative to six months ago.

As we exit this year, do you think you'll still be undershipping demand, shipping in line with demand or shipping a little bit more than demand on sort of a quarterly basis?

Thanks.

I guess I have to pick a bone with your assertion, Jim.

I don't think the industry undershipped demand in the first part of this year.

People could buy a computer any day, any place on earth they wanted.

I don't know of any system level shortages throughout, nor any component level shortages except for some spot stuff here and there.

It never really constrained demand.

Well, what I mean, just, I'm sorry if I wasn't more clear.

I go back to the fourth quarter of last year, PC units were down a couple percent.

Your product -- Intel's microprocessor units were down 18.

You were undershipping demand as the supply chain was liquidating inventory then.

There's been some of your tremendous growth this year, obviously great execution and demand has been better than expected earlier in the year but some of it has been a catch-up from that undershipment towards the latter part of last year and do we think that on a quarterly basis, what I'm really trying to get at is for 2010, do we think Intel's microprocessor unit shipments should equal PC unit shipments?

Over the course of the year, ours plus our competition do, yes.

I don't think that the pipeline will expand -- needs to expand much more to accommodate the growth numbers that are likely to happen in 2010.

That's exactly what I was getting at.

You could conceive of a corner case that by Q4 of next year at the very upper bound of people's forecasts, that the numbers get to be pretty large.

But we've been here before.

Terrific.

Really helpful.

Thanks so much for everything.

I think we'll take a couple more questions, if we could.

Yes, sir.

Your next question Fridays the line of David Wong with Wells Fargo Securities.

Thanks very much.

Could you tell us what percent of your DP server sales were Nehalem in the September quarter and did the MP server revenues grow sequentially or decline sequentially in September.

It was well over half of the DP sales were Nehalem and I don't have the MP number, relative growth number in my head, I'm sorry.

Thanks.

All right, David.

Go ahead.

Actually, we'll take two more from here.

We have two more that we know, so go ahead.

Next question is from the line of Mark Lipacis with Morgan Stanley.

Did we get you back, Mark?

Your line is open.

Can you hear me?

We got you.

Yes, Mark.

Okay.

From what I can tell, server microprocessor revenues have been an increasing part of your microprocessor revenues over the last five years, been a pretty steady growth trend as a percentage of your microprocessor revenues.

My question is is there any reason that that trend should stop or have we reached some kind of saturation point and does Nehalem impact that one way or another?

Thank you.

If you look at a five-year look back, Mark, it wasn't consistent.

There was a period in the '06, '07 time frame when Intel lost some share in servers and now we've come roaring back.

So it wasn't always a consistent adder to our numbers over the course of -- over the five-year period.

If you take, say, a two to three year period I hope that's a fair assumption.

Did we answer your question, Mark?

Yes.

So is it fair to assume, then, that microprocess -- server microprocessors as a percent of your total is, it kind of stays steady state over time or it does not grow?

As a percent of the total business, the server business is running about the same as the PC unit growth numbers, to a first order there's some things moving in and out in terms of DP and MP and how many chips per system and those kinds of things.

The thing that could change that dramatically is if, coming out of this recession, the Internet data centers start deploying and move towards some of the cloud based services.

That could drive pretty healthy demand for rack-mounted servers and blade servers for a while.

Okay.

Thanks very much.

Thanks, Mark.

We'll take -- this will be our final question.

Your final question is from the line of Alex Gauna with JMP Securities.

Thanks for getting me in and let me also say I appreciate the new format.

Can I ask ask you, Paul, you mentioned that right now, and, Stacy, I believe you also said this, that enterprise has not been a part of the strength.

With the Pro, how do you look at when that might step in in 2010 and is there any risk to that?

You mentioned Cloud computing here with virtualization, do we perhaps not see enterprise come back on the client side but stay more concentrated in the server side and what would that mean to gross margins?

Thank you.

The last part of your question actually gave a clarification I was going to put out which is we are seeing pretty good strength in the enterprise relative to the server part of the business.

It's the client part, the desktop and notebook part where the lights have been out for quite a while and now we're starting to see some people doing evaluation of our new platforms with Win 7.

I can't give you a curve for that for 2010.

It really gets down to when CEOs and CFOs set the budgets in the next couple of months for 2010 in terms of CapEx and do they want to open the checkbooks again.

The compelling value for a refresh is there.

Machines that are four and five years old which is the average fleet age right now are costing more to keep than to buy a new machine.

Just the maintenance, the out of warranty expenses, the security upgrades, et cetera, et cetera, are problematic and you all know the situation with XP support so people are going to want to move to Win 7.

And it's just a matter of I think you how fast they do that next year.

In terms of cloud and virtualization, our focus has been bring it on.

The data center -- the amount of data in the worldwide data centers is growing much faster than people can supply servers or deploy servers.

The only solution to that any time soon is virtualization.

Virtualization typically requires new server configurations.

We've been benefiting by this and we're not iconoclast in terms of thinking the cloud is not good for us or will not happen.

Well, just real quickly, you mentioned that the valuations are happening.

Are there any encouraging signs that we will get on the client side and enterprise uplift for V-Pro or other hooks that go into virtualization or cloud computing or will we be able to get by with some of these other more elegant ULV or CLV platforms?

The V-Pro is a client hook, not a server hook.

Right.

They're really apples and oranges in terms of cloud.

I just tell you that Intel's evaluating and we're going to be buying a significant number of PCs next year for our employees because we've been out of the market for a while and our fleet's aging.

I suspect a lot of other companies are coming to that same conclusion.

Okay.

Thanks, very much, and congratulations on the powerful results.

Thank you.

Thanks, Alex.

Hey, thank you all for joining the call today.

As a reminder, our quiet period for the fourth quarter will begin at the close of business on Wednesday, November 25.

Our fourth quarter earnings conference call is scheduled for Thursday, January 14, 2010.

Thank you, again, and good night.

Thank you for joining today's conference call.

You may now disconnect.