英特爾 (INTC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Q1 2010 Intel Corporation earnings conference call.

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

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

Kevin Sellers, VP of Investor Relations.

Please proceed, sir.

Thanks.

Sounds like we had background noise.

Hopefully that was taken care of.

Thank you, Chanel, Welcome everyone to Intel's First Quarter 2010 earnings Conference Call.

I'm here with Paul Otellini, our President and CEO, and Stacy Smith our Chief Financial Officer.

A few important items before we begin.

First, we've posted our Earnings Release, CFO commentary 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 as well.

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

As we begin let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties.

Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

One final note, we've scheduled our annual Investor Day on May 11 at the Intel headquarters here in Santa Clara.

We look forward to seeing many of you here.

If any of you need additional information about that event, please contact Intel Investor Relations directly.

With that let me now hand it over to Paul.

Thanks, Kevin.

A year ago at this time, the industry was in the midst of a sharp correction with many expecting it to continue for an extended period, but we saw signals of it bottoming then, and now a year later the industry is nearly fully recovered.

At Intel, we focused on expanding our Nehalem architecture, getting our 32-nanometer process technology ready, and designing alternatives and derivatives of our new Atom processor for many new market segments.

As a result of that focus, we've started this year with the best product lineup we've ever had with leadership in all segments and categories.

Demand for these new products has been incredible and as a result, Intel achieved a record first quarter in revenue and in operating income.

It was notable this quarter that demand for our higher end PC products was particularly strong, which helped improve margins and profitability.

Our mobile business set a new revenue record, as demand for notebooks continues to be excellent.

We're also seeing signs of corporate demand returning, which we believe will continue to improve, given the age of the corporate PC fleet and the compelling ROI that our new generation of servers presents.

Looking at the Supply Chain, we continue to see aggregate inventories operating within normal healthy ranges.

Intel's own inventory remains lean.

OEM inventories are flat quarter on quarter, and downstream channel inventories are also within normal ranges.

We watch inventory levels and sell-through activity very carefully, and we remain comfortable with the supply chain conditions.

In our manufacturing environment, our factory teams have executed the ramp of our 32-nanometer process superbly.

We exceeded output expectations with lower costs than originally anticipated and are currently shipping over 50 SKUs on 32-nanometers.

32-nanometers is our fastest ramping process ever, and I'm pleased to note we are accelerating the ramp of our third and fourth 32-nanometer factories faster than our original plan, such that by early Q4, we will have four factories in production on 32-nanometers.

Lastly, we are excited about our next generation of processors code-named Sandy Bridge.

We began volume sampling in Q1, shipping thousands of samples to a broad range of customers, and are planning for volume production later this year.

As we look forward, we are optimistic about the prospects of our business for the rest of 2010 and beyond.

Our product portfolio, combined with our excellent execution and the ongoing benefits from restructuring have us positioned for continued profitable growth.

This is a great way to begin 2010, and I look forward to seeing many of you here in May for our investor meeting, where we will talk in more detail about how we plan to build on this momentum and further exploit the growth opportunities before us.

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

Thanks, Paul.

The strength in our business model can be seen in the first quarter results.

Record first quarter revenue of $10.3 billion resulted in record first quarter operating profit of $3.4 billion and cash flow from operations of approximately $4 billion.

These better than expected financials resulted from strong sales of our new products.

Micro processor unit sales declined slightly less than seasonal, and average selling prices for micro processors were up slightly quarter on quarter.

Supply chain inventory levels appear to be healthy after several quarters of replenishment.

The mobile computing segment was particularly strong, with customer demand for our new products leading to an increase in mobile micro processor average selling prices and record mobile micro processor revenue.

First quarter gross margin of 63.4% was higher than our expectation.

The factory network performed well in the first quarter, ramping 32-nanometer process technology, controlling cost, and reacting quickly to meet customer demand.

The first quarter demonstrates the impact of our work in improving our cost structure.

Spending was 30% of revenue, and operating profit of $3.4 billion was 33% of revenue.

The number of employees was approximately flat in the first quarter with revenue per employee of $129,000, the third highest in our history.

Moving to the balance sheet, total cash investments comprised of cash, short-term investments and trading assets ended the quarter at $16.3 billion, $2.4 billion higher than the fourth quarter.

Cash flow from operations was approximately $4 billion.

During the first quarter we paid nearly $900 million in dividends and purchased over $900 million in capital assets.

We are forecasting a revenue decrease for the second quarter that is slightly less than our average seasonal decline, taking the mid point of our forecast range to $10.2 billion, a 27% increase from the second quarter of 2009.

We are forecasting the mid point of the gross margin range to increase one point from the first quarter to 64%.

For 2010, we are now forecasting a record annual gross margin with the mid point of our annual forecast increasing from 61 to 64%.

The investments we are making in leading edge process technology, the strength of our product line, a continued focus on our cost structure, and strong worldwide demand led to the record results we saw in the first quarter and the record financial results we are forecasting for the second quarter and the year.

With that, let me turn it back to Kevin.

Okay, thanks.

We're now going to move to Q & A.

We would like to limit each of you to one question and a follow-up if you have one, so with that, Chanel, please introduce our first questioner.

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

Yes, good afternoon guys, and congratulations.

I guess Stacy, my first question, Q2 gross margins and full year gross margins both being guided to about the same level at 64%, help me understand the puts and takes from the back half of the year that prevents you from getting better margin leverage.

Sure, let me start, John, by giving you a bit of detail about the puts and takes.

So first off, first half gross margin a little bit below 64%.

We have 64% for the year, so the math gets you to some modest increase in gross margins in the second half over and above the record gross margin levels that we're achieving in the first half.

As I think about the second half, let's first focus on the core business, and I expect that to be slightly positive to gross margin.

I think that we'll see increase in volume, that helps a bit.

We're going to see a decrease in cost, that helps a bit, offset a little bit by a decrease in average selling prices, kind of a less than what you normally see decrease in selling prices, a combination of that makes that slightly positive.

I also expect in the second half of this year to have a little bit lower start up cost environment, so those two things are positive, and then offsetting some of that is an increase in write-offs.

We'll be building, as Paul said, the Sandy Bridge product.

That's the new microarchitecture that lands on 32-nanometers, so in the context of tick-tock that would be the tock, and as you saw with Westmere, the product we build prior to qualification for sale will be written off so we'll see increase in write-off in the second half of the year and that offsets some of the positives that I mentioned.

And then I guess guys, Paul as my follow-up question, you talked about signs of corporate coming back.

Is that just in the server business where you guys have had strengths for a couple quarters or are you starting to see on the client side you give us more detail, that would be helpful, thank you.

Yes, we saw it on the first quarter where we've seen real signs of PC purchases, corporate SKUs picking back up again.

Some of that was wrapped around our new products, the Arondale notebook products but some of that was also just even some of our older SKUs that are kind of classic running corporate SKUs also picked up and to me that suggests that the average fleet of notebooks is four years old out there.

The average fleet of desktops is five years old.

You're getting to the point whereas CIOs are feeling a little bit better about their business, it makes economic sense to swap these out just from an ongoing cost of ownership standpoint.

Thanks, John.

Next question?

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

Thank you.

Could you address a little bit the supply condition that you face both front end and in back end particularly as we move into the back half of the year and demand normally picks up?

The Intel supply?

Yes.

Well, we're ramping the 32-nanometer factories as fast as we can and faster than we first expected, in fact in the first quarter we ended up shipping more 32-nanometer micro processors than we first planned principally driven by demand for those products and I guess the overall health of the business environment in general which was not planned a quarter ago.

Looking forward, we'll use a combination of the four 32-nanometer factories and our existing 45-nanometer factories to be able to satisfy almost any demand scenario you could imagine out there.

In terms of other people's supply, which is what I thought you were hinting at at first, I really don't see any fundamental constraints.

If I look at all of the pieces, the components that go together in terms of memory and screens and batteries and so forth, that would retard the industry's ability to meet most any demand scenario.

Okay, and as my follow-up question, Stacy maybe for you.

The cash levels that you're at now, you're not that far off of your records which I think were set back in 2004.

Particularly with no change in CapEx, any thoughts and I assume cash is going to keep on growing, any thoughts about uses of cash?

Yes.

You're absolutely right.

The strength of our business, as Paul said, surprises the strength of cash generation was also surprising, but what you should take from the fact that we've been doing minimal buybacks over the last year, is that we're growing our cash balance, frankly we're looking at some strategic investments and evaluating those in that context, we're growing the cash balances and we're comfortable with the levels of cash we have.

The priority in terms of capital structure in terms of returning cash to the shareholders is the dividend, you saw us increase that in Q4 and we've had multiple years where we've increased the dividend without fail, and just putting it in context from 2006 I think our dividend per share was about $0.40 per share, based on the increase we just did we're at $0.63 per share so a nice increase in the dividend over time and that continues to be the priority.

Thanks.

Next question?

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

Thanks, guys.

Great quarter by the way.

Paul, just a question on the end markets and demand trends.

It sounds like consumer was very strong in Q4 and then corporate kind of kicked in in Q1.

When you talk to your customers, what do you expect, what do they expect in terms of demand trends between corporate versus consumer for the rest of the year and what will be the implications for your business?

Well, you're right, consumer had been the driver I think throughout the cycle, not just in the fourth quarter of last year but I think I talked last year about China in particular in the early part of last year and then the United States and Europe in the second half of last year.

I think the overall shift to mobility is one of the megatrends that's out there, both in the consumer standpoint and in the corporate standpoint.

The first quarter and even our first half numbers I think are buoyed by a combination of things.

It's very healthy China and Chinese New Year scenario.

I think the new products we've launched have pretty compelling pull at the end market level, simplified branding, lots of really good features, et cetera, and lastly now you're starting to see some corporate PC purchases reemerge.

I'm still not going to go out on a limb and our customers aren't going to go out on a limb and say there's a corporate refresh snapback coming.

I think we see this cycle as people are buying things to replace older machines because it's just cheaper and they are doing that on their budgets as they free up a bit more money here and there and they will also make the tradeoff between PC's and servers and software as they go forward and right now hardware seems to be doing pretty well in that tradeoff.

Great, and then for my follow-up, for Stacy, so Stacy, if we plug in the gross margin guidance, it sounds like your gross margin in the second half of this year is going to get back to the peak of last year in Q4.

Should we consider that 65% a peak number, and if you guys have some more higher write-offs at the end of this year, is that a good thing for next year, would the write-offs below next year in the tick-tock model?

Two very different questions, so we're, in terms of the gross margin forecast for this year at 64%, that's an annual record.

You're right.

We're likely to have some quarters above that.

I think you're really asking, does it change my long term view of the kind of gross margin profile of the Company, if you hearken back to a year ago, as Paul said the depth of the recession when we were down in the mid 40s I articulated this normal range of between 50 and 60% and we spent one quarter in the normal range and we've been above it every quarter since, and this year looks like we'll be above it every quarter.

On that question, I think we'll defer answering it until we get to the investor meeting, and it's a much better platform about how we're looking at longer term gross margin trends, so the more tactical part of that, there will be lots of puts and takes to the H1-11 gross margin but yes you would expect to see that the inventory that we write-off prior to qualification for sale assuming that that ends up being sellable inventory will be a benefit to gross margin where we get into the subsequent quarters and now that's one of many elements, but that element would likely be positive, assuming that that qualification goes as we expect it to and as prior qualifications have gone.

Great.

Thanks.

Thanks, Chris.

Next question?

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

Thanks so much and congratulations on a strong quarter.

Paul, sort of the environment you had several very strong fourth quarter, very strong first quarter and you're now guiding for a slightly firmer than seasonal second calendar quarter off a pretty high base.

Could you just give us your sense of your visibility on that, sort of slightly better than seasonal guide for the second calendar quarter and what elements are likely to contribute to that?

Is it the PCs still leading, is it the servers, is it all of the above?

Thank you.

Well, I think it's certainly PC driven, Tim, but I think there's other things that are woven into it.

We're still in the very steep part of the ramp on 32-nanometers, bringing that into the product line, there is still as I said earlier a lot of pull for that product.

We were slightly behind quite frankly satisfying all of the demand that our customers wanted on 32 in the first quarter even though we were producing much more than we first thought.

We expect to catch up to that demand in the second quarter on 32-nanometers over the course of the quarter, so I think part of that is just the excitement around the new products on the PC side, number one and number two, the Nehalem EX product which is our new multi platform product began shipping in the last two weeks of the quarter.

I think that will have a full quarter effect.

So far there's something like 30 systems that have been announced, and the receptivity and the pent-up demand for that I think is very good so you got a combination of those things all driven by new products that I think will give us that better than seasonality picture that we're painting.

And if I may for my follow-up, Paul as you go into the second half of the year, do you think that you'll be able, given the stronger first half, to sustain what you might frame as normal seasonality broadly for the second half of the year, or do you think look, it's been first round since the beginning of the year we should be modeling a slightly lower than seasonal uptick, and or not given that it sounds like you think corporate is going to come back, thank you.

Well, I kind of thought you'd go there on your third round, and as you can imagine I'm going to duck it.

I don't think we will talk about the second half at this point in time, except to say we're putting in place sufficient capacity to handle any demands we could imagine.

We're assuming continued growth in units over the course of the year.

We're going to be ramping 32-nanometers as fast as possible so the only question we have from a supply standpoint is how much 45 we keep on, and what's our assembly test loading capabilities, and we'll put buffer in those to make sure we've got sufficient capacity.

A bit better than seasonal possibly just given your focus on capacity rather than--

I didn't go there, Tim.

Okay, thank you.

Thanks, Tim.

Next question?

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

Thank you for taking my question.

Could you describe the mix in the servers, was it a richer mix and just lower units?

In Q1?

Yes.

The mix is a little less rich than Q4 and I think there's a couple of things going on there.

First is, that we saw a pick up in what we call the transactional business.

This is to the Uni-processor servers based on the Nehalem parts that are sold by both the channel and our OEM customers, typically into a small and medium business environment, so I think that's a good sign and we hadn't seen that kind of demand profile before in the transactional volume, at least not in the last half of 2009.

The fact of that came back was one of the positive signs and is leading us to the guidance we gave for Q2.

And we also I think there was some, as people move towards the transition of the older multi processing line to the newer multi processing line ,they basically thinned down their inventory in anticipation of the launch of the EX, and now we'll have a full quarter to ship in Q2 with that product line.

Okay, great and as a follow-up, you'd mentioned the corporate demand coming back on the client side.

Do you see that as a lagging from the server strength you saw in fourth quarter or are they not related?

Well, I'd like to think that people are looking at these things with a clear economic eye, and if you look at it with a clear economic eye you'd refresh the servers first, that builds your infrastructure up, gives you the fastest return on investment and you can probably squeak out another quarter or so with your PC fleet, and I also think that corporations are likely to deploy Win 7 so that people have to qualify that and get the SKUs ready and I think that's what's happening now so I don't think it was really a lag effect.

I think it was much, I tend to think it was much more of a clear view of what the return on investment was versus the cost savings of replacing the PCs that you're now seeing a bit more latitude on.

Okay thank you, and congratulations on a great quarter.

Next question?

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

Thanks.

A question on notebook mix.

Has the netbook dynamic kind of slowed down or saturated as a percentage of total mobile?

Well, it depends on the granularity of the question.

If you look in terms of the total year last year and our view for the total year this year, we really don't see a change.

I think we suggested that netbooks seem to be settling out at about 20% of the mobile form factors and on an annual basis that looks to be about right, and I would expect pretty significant year on year growth in the netbook business.

I think that netbooks in general have become, well they are by definition a consumer purchase.

There is no corporate netbook market that we found, and it was pretty robust in the fourth quarter.

You had a lot of new entrants come into the marketplace, large companies really coming in for the first time and I think that seasonality plus maybe a bit of the overhang from a number of players coming in in the fourth quarter is what we saw in Q1 where Atom was down a bit more than what we would normally see as seasonal.

Okay, and as a follow-up, what's the Company position with tablets?

It seems to be a big category, emerging category.

What's your strategy there, thanks?

Well that's a great question and I think at this point, I view tablets much like I viewed netbooks two years ago which is that was a new category then that was market expansive.

I think tablets will also be a new category that will likely be market expansive.

If I look forward over the course of the year, particularly at Computex coming up in the first week of June, we have a lot of our customers announcing new tablet form factors around Atom, around Moorestown version of Atom, and there's support for a multitude of operating environments.

You'll see products on Android, on Windows 7 and on Migo.

Thank you very much.

Yes.

Next question?

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

Thanks for taking my question.

The client business was flat and I think if you look at at least a couple of the larger North American PC OEMs it seems the forecast for their emphasis is to decline a bit in the first calendar quarter.

So I guess there is different ways to potentially explain that.

Maybe they see upside like you did, maybe they are building or replenishing inventories or there's another set of OEMs that are perhaps benefiting from the growth dynamics.

Can you share with us your thoughts about how we might think about that difference in expectations?

Thanks.

Well, I don't know that I can help you a lot except to say we were down, so I'm not sure that I followed how much their client business is forecasted to be down versus what you guys are doing, but our business was down.

It was better than seasonal but down.

But if I could just interject, on a unit basis market it was probably closer, slightly better than seasonal but not dramatically better.

The benefit we really saw in the first quarter was in the mix in the pricing.

Okay, that's helpful, thank you.

And then on the data center business, you gave some answers to that but what would be a normal Q1 for that business?

What you saw was pretty in line with what we would normally expect in terms of Data Center Group normal seasonality.

It's typically down about 8%.

Yes, and 8% to 9% is right where we were.

Fantastic.

Thank you very much.

Thanks Mark.

Next question, Chanel?

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

Hi guys, congratulations on a terrific quarter.

Thanks so much for taking the question.

First question, last quarter you were good enough to break out for us the change in unit inventory versus the change in dollar inventory.

I was wondering if you could do that again for us this quarter.

You said you wanted to build inventory but you weren't able to build much.

Yes, I'll be happy to help there, Jim.

And yes, the way you characterized it is the way I see it.

Because of the increases we saw over the course of the quarter in demand on the new mobile platform, I wasn't able to get as much inventory in place as I hoped.

If you look at it between dollars and units, what you see is units are up a bit more than dollars, but still not as much as I'd want as we kind of move into the second quarter and based on the strength that we're seeing and ramp of these new products.

If you deconstruct the inventory between the processes what we saw is more than 100% of the increase in inventory and more than 100% of the increase in units was on 32-nanometer so we got a little bit in place there and everything else was down, and as I think about Q2, my hope is that I can build some inventory into the second quarter in anticipation of a second half that's higher.

Great, and for my follow-up, I guess you guys kind of started out the year believing we were looking at a midteens PC kind of year.

If I put any kind of close to normal seasonality in your revenue in the back half of the year, you'd be up well into the 20s.

It certainly doesn't seem like you're outshipping demand because there's know where in the supply chain building any inventory so is it safe to say your expectations then for the full year PC number have just come up a bit?

I think so.

Again, everyone is still wonders what the shape of this year looks like, and I said earlier when I ducked Tim's question that I would reserve judgment on that, but I think versus a month ago, a quarter ago, how could we not have taken our expectations up a bit for the year.

Sounds great.

Thanks and congratulations again.

Thanks, Jim.

Your next question is from the line of Patrick Wang with Wedbush.

Great.

Thanks so much and congrats on a great quarter again.

Just the first question, you talked about accelerating the ramp of the third and fourth 32-nanometer factories.

Can you talk a little bit about the impact to capacity, to your overall capacity there, and when we can expect that to be online?

Well, all four factories will be online by early Q4 and there's a ramp schedule that we're not making public on any specific factory and we pulled up the schedule a bit on the last two of the network.

There's really no change in our spending, our CapEx spending as a result of that and these things are all being planned to be equipped and so fourth.

What we've done here is based upon the learning and the yields we're seeing in the first two factories have had higher confidence to be able to ramp to high volume faster on the next two.

Got you, okay.

That's helpful.

And then for my follow-up, I just wanted to talk real quick about mix and ASPs here.

In the first quarter, it looks like that we saw some good news surprise just on higher ASPs and the second quarter, you're guiding a little bit of a negative impact on lower platform ASPs.

Can you talk about what's going on there and perhaps maybe factor in the mix of the core I3, I5 and I7 that we see today?

Sure, I'll take a shot at it.

Yes, the surprise for us in Q1 was the strength of the new products as we had articulated a quarter ago.

The way that we're lowering the factories is we're bringing out the high end of the product line first so what we saw in Q1 was a pretty rich mix, and I expect as we go through the year it will be a more normal mix but also you have to keep I guess the contextual background of, I'm now expecting 2010 to be a year where ASPs come down some, but less than what long term model would suggest, so a fairly benign pricing environment overall but they will come down some from where we were in the first quarter is my prediction.

Okay, just care to offer any comment just in terms of maybe a mix up in terms of core I 3, I5 and I7?

Well, in general, as I said earlier, we're seeing great reception to the new core products and even within them, certainly the first quarter to the mix up of core I5 versus I3 was very solid and as we bring on more capacity you get a more natural mix and also you'll see our customers move toward taking those processors into lower price points, price points where you'd see Pentium notebooks today, over the course of the year by tweaking the configurations a bit.

Maybe not using discrete graphics as much because the graphics on the platform are so good.

Maybe I think less memory as Win 7 runs pretty well on 2 gig, et cetera, and that will allow them to mix the SKUs, keep the processor mix pretty good and hit a higher volume set of price points.

Great.

Thanks so much.

Thanks, Patrick.

Go ahead, Chanel.

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

Thank you very much.

Stacy, can I just go back to the inventory?

I know you say you want to do inventory again in Q2, but earlier in your remarks you described channel inventory as healthy.

Is it possible for you to quantify what that means and also put it in a bit of context, so that we can get a handle on what you mean as healthy channel inventory?

Yes.

Well, we don't mix the two things.

My answer to, I think it was Jim's question was, in regards to our inventory, our component inventory, the channel inventory comments that Paul and I both made were in regards to the inventory that we see downstream from us.

It's the inventory held at the multi-nationals, the retailers, the ODMs that manufacture, our own distributors, so that downstream inventory when we look at it, it looks healthy, appropriate to demand levels.

Our internal inventories are lower than I'd like, particularly on the new 32-nanometer products.

We were tight in Q1.

We would normally want to buffer that transition a bit by having some inventory in place, particularly if we're going into the higher selling season than the back half, it's prudent to get inventory in place.

And in terms of the channel, what I really wanted to know was if there's a way to quantify that so in terms of weeks or days.

Is there any way possible we can get a handle on the operation?

Well, we don't have insight into everything, which is why you see us hesitating here.

Sure.

In terms of the micro processor inventories that are in our channel and in our OEM customers that we have visibility into, we see nothing out of line and everything is consistent with the kind of bill plans and transition plans over the next couple of quarters.

We also monitor the shipping lanes, those kinds of things and what comes out of Taiwan on boats versus air.

Again we don't really see any fundamental shift there nor do we see anything that's out of line.

On the assumption that there's growth in units over the course of the year.

Okay, that's helpful and my follow-up question is on service.

I wanted to ask you, when I look at service, the one key thing if you look at the value you're delivering with Westmore and LMEX and the fact that some CIOs are replacing maybe not all servers but one, what is your sense of the size of this market going forward?

You're delivering so much ROI to your customers.

Do we have a situation where the market itself will shrink and Intel doesn't get enough in their own way for growth in this business given the volume delivered to your customers so any sense of how we can specialize?

No, we haven't even gotten close to finding a fundamental limit on that.

There's a number of things going on.

The move to cloud we think is very good.

Not everything will go to cloud but the shift to cloud based services is good to Intel, the shift to virtualization is good to Intel.

If you look, we'll plot out and we'll do this at the analyst meeting in much more detail but if you plot out the growth in data traffic and network traffic, and the kinds of things that modern servers are doing, that growth curve is faster than the refresh rate for old versus new equipment, and we see a very robust scenario for servers going forward.

Great.

Thank you very much.

Thanks, Uche.

Go ahead.

Your next question is from line of Stacy Rasgon with Sanford Bernstein.

Hi guys.

Thanks for making my question.

Just one more on the ASPs for full year.

You basically cut the ASP impact from gross margins from your previous guidance by about half.

Before it was two to three points to the negative and now about one and a half points.

Can you give just a little more color on what's driving that differential?

Is it just continued uptake of 32-nanometers faster than you thought?

Is it more servers, more corporate NAND flash, less Atom?

Yes, you got the math exactly right.

In the margin recon I gave you a quarter ago--

Sorry.

Okay, yes, a quarter ago I was articulating that I expected two to three points from 2009 and 2010 based on ASPs coming down.

Based on the strength we saw in Q1 and the take up of new products, we've cut that impact in half, and it's really those two things.

It's the strength we saw in Q1 and the take up of the new products has exceeded my expectations, and some of that strength will continue through the year.

Got it, and for my follow-up one quick question on OpEx.

So I know you took that up a little bit.

Looks like you took R & D up about $200 million, SG&A up about $400 million at the mid point of your guidance.

Can you give us more color on what's driving the increases in both of those, particularly the greater increase in SG&A versus R & D?

Yes, let me take a different shot at the explanation I think it gets you there.

If you look at it from the prior forecast we're up about $600 million cycle on cycle.

About half of that is profit and revenue dependent spending and as you take from that is that, as we've seen the Q1 results and now have increased our expectations for the year, I'm expecting more revenue, more profits that's driving those two line items.

The revenue dependent spending is almost all marketing.

It's Intel Inside so it gets categorized as marketing spending and the profit dependent spending gets split across the different groups of the Company.

Behind that ,so that's about half of the increase.

Behind that we have incremental investments we're making predominantly R & D projects as our confidence in the year has gone up there's some projects that we're launching there, and then the third element behind that, is again an increase to marketing and we've gone through and redesigned some of our customer programs and in the process of redesigning those programs, they will be categorized going forward as marketing expense, and so that's the other element there.

Got it.

Thank you, guys.

You're welcome.

Thanks.

Go ahead, Chanel.

Your next question is from the line of David Wong with Wells Fargo.

Thank you very much.

For the new product launches, you've brought up Nehalem EX.

Are you seeing signs that MP server chip volumes are picking up?

Would you expect these to grow faster than the dual processor server in the next couple of quarters for the Nehalem?

No, I don't think so.

I mean, I think that the value proposition is in different markets, right, so I would expect that the dual processor products will continue to be let me say topography of choice for data center buildout for the big internet portal guys and you can imagine who I'm talking about.

The MP servers configurations tend to be much more for I think you'll see that much more prevalent in corporate environment and SAP configurations and people that want to run multiple applications in a virtual mode so I really think they are addressing different market segments as they ramp up but we love both of our children here and I don't think I see a difference in the curves between the two of them.

Great.

Thanks, and my follow-up question, completely different topic.

Intel capital.

You've got an improving overall environment.

Should we start to see gains from equity investments in the next couple years or can you give us any idea of the timeline of private investments?

Well, for obvious reasons I won't answer the second part of that question.

That's their job to tell you when they're thinking about an IPO, but yes, I'd say generally to answer your question is yes, I think the improvement we've seen over the last few quarters has really been a decrease in the rate at which investments are being impaired, as I think forward over the next year, I'd expect to start to see some gains and some exits coming in, nothing on the radar for Q2 but looking out longer term that would be my expectation.

We invest in Intel capital portfolio companies for two reasons.

One is to get strategic benefit to the overall business and the other is to get a return and the expectation is that we're doing both of those things.

Great.

Thanks.

Thanks, David.

Go ahead, Chanel.

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

Hi guys.

Congrats on a strong quarter.

Earlier you were kind of give us normal seasonality in the data center business for the first quarter.

Can you legal us know what it is for the remainder of the year on a normal basis and how Nehalem might impact that?

Ross I don't have that number at my fingertips so let's put this in the category of taking a wild guess.

Having run until IT's cringing, I think you probably see the way IT budgets work you likely see spending on server infrastructure that's probably stronger in Q4 than it is any other quarter.

You kind of see the reduction we saw this quarter where it's down some, so it's going to be somewhat back end loaded, so to get to the quarter by quarter number split I don't have that number.

And shifting gears a little bit over to the inventory side, now that your manufacturing cycle times are half of what they were and the hubbed amount of your business is larger than it's been, what impact does that have on the amount of inventory you actually need to have to service demand and can you frankly operate leaner than you've ever done in the past?

Yes, keep in mind the two things you mentioned will move in opposite directions, right?

So the hub, what it does is you will tend to see less overall inventory through the supply chain but more of that inventory on my books because I'm holding that at the customer location.

The reduction in cycle times obviously allows us to operate at leaner levels and net of those two things I think you're going to continue to see us like we have been over the last four, five quarters, operating at pretty efficient inventory levels.

I want to caution you though that won't preclude the need to get inventory in place, where we're going through big product transitions.

It's the prudent thing to do to get inventory in place and that's what we tried to do in Q1 and what we will try to do again in Q2.

Great.

Thank you.

Thanks, Ross.

Go ahead, Chanel.

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

Yes, hi.

A couple of questions Stacy or Paul.

You've done a great job with the ASPs the last couple of quarters, but at the same time, you're expecting some kind of a modest decline in the back half of the year.

I guess I'm curious as to why you think that will be the case given your comments, Paul, of signs of a corporate recovery, servers should be seasonally strong in the back half of the year.

Is it just core I-3 being a bigger part of the mix?

Can you help us understand what the thought process there is?

So it's really is the function of we had a very rich mix in Q4 and Q1 as we were launching the first products on 32-nanometer.

I expect that to be a more normal mix as we progress through the year, and it's against a back drop against an ASP that's down some but less than it's normally down, so it is as simple as that.

If you zoom way out on this, what we see over time is that Moore's law allows us to bring new features, bring our cost down, prices down over time driving elasticity of demand, you see it in the consumer segment of the market, you see it in emerging markets, it ends up being an important growth driver for the business so against that back drop we're having a benign pricing environment on the strength of our product portfolio, is how I'd characterize it.

And then Stacy if I can follow-up with you, any chance you could take a shot at quantifying the impact of the inventory write-offs you expect ahead of Sandy Bridges at that time two or three point impact you see for example, when you transition to 32-nanometers last year or is it some different amount we should be thinking about?

Yes, I'm not going to get to that level of granularity because we haven't given specific quarter by quarter forecasts.

It will be I expect it to be a little bit of a negative impact in the back half of this year, but frankly none of the elements that I was articulating were in the magnitude of three to four points so I'm not expecting it to be that big.

And you think it's a Q3 as opposed to Q4 phenomenon or you can't tell us that yet?

It's a back half phenomenon and it actually probably will be across both quarters based on where we are in the cycle for that product.

Thank you very much.

Thanks.

Go ahead, Chanel.

We're going to take two more questions if we could, thanks.

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

Great.

Thanks guys for getting me in and I'll see if I can follow instructions here.

So Stacy, a year ago you talked about in the mix of product really being important to margins.

Can you talk about Atom and Atom chipset margins compared with request core and if that whole ratio of calculation you put up for us, if that's played out the way you expected or if there's been any derivations from that?

Yeah, on that one I'll show you in much more detail next month when we're together for the investor meeting, but directionally it's played out exactly as I anticipated.

Costs came down, it's a very healthy product margin.

I showed a comparison of Atom to the core of existing core business excluding Atom and to the embedded business and showed it got into a fairly similar range, that's how it has played out.

From a product margin percent standpoint, which I think is how you asked the question right?

And then as my follow-up sticking with Atom as the theme, there is some concern in the marketplace and is relevant from your numbers in Q1 that atom didn't really sell as well in the quarter.

Earlier in the call you guys mentioned that it was related to just seasonality and the overexuberance in the marketplace to many new entrants.

Is there something you can do with atom pricing to reinvigorate those sales?

Is that something you would look to do or what is your strategy should Atom not sell as well as expected throughout the balance of the year?

Well, there's Atom in netbooks and atom going into other products and other products is design cycle and you'll see other kinds of products with Atom in it over the course of this year, someone asked a question earlier about tablets and there's rumor out there about certain consumer electronics equipments and phones, and that's not the heart of the question, but the heart of the question is netbooks and there will still be significant growth in the netbook business year-over-year, and I think there are, rather than pricing, we would look to features and integration as the technical knobs we would twist here, and the next innovation coming out on Atom is dual core which comes out in the second quarter which will ramp in the holiday season and that will be a very attractive product and in early Q1 we have another innovation at much lower power, integration at much lower power product coming out that's a derivative for fanless netbook business so you'll see us use technology to make the platform a bit better each time or to integrate more features and make it cheaper.

Great, thanks and I do have a CapEx question but I will ask it at the analyst day.

Congrats on a great quarter.

You're a good man, Doug.

We'll take this as our last question.

Yes, sir, your final question is from the line of Srini Pajjuri with CLSA.

Are you on?

I think we lost Srini.

We'll take one more if there's another one in the queue.

Your final question is from the line of Mahesh Sanganeria with RBC Capital Markets.

Thanks, I'll just ask one long question instead of two questions, and if you can give us an update on wireless display, how the adoption has been I think the current price point for the SKUs is 900, do you see that coming to 600 by the back-to-school and also what the competitive response has been from Nvidia on this product?

Well, I can't comment on the price points as our customers set those price points and what I can say is that the amount of design activity, first of all the product has been very well received, selling through the channel nicely at Best Buy which is where it really is semi-exclusive right now.

Over the course of the year you'll see many more SKUs and many more distributors picking up the product and I think it will be a must have feature for holiday time frame.

It may come down in price a bit but generally speaking it's going to get broader before it gets a lot cheaper.

In terms of other vendors, trying to do similar technology, I'd say good luck.

This took us quite a while to be able to develop, to be able to get this done.

We have a road map of features that take wi-di in better over time that add more content protection, blu-ray support, etc., so this is one where being out early, doing a lot of work at the platform level, software level and having a feature road map is really what makes it compelling.

Okay, thank you.

Thanks, Mahesh.

I want to thank everyone for joining our call today.

As a reminder our quiet period for the second quarter will begin at the close of business on Friday, May 28th.

Our second quarter earnings conference call is scheduled for July 13, 2010.

Thank you all and goodnight.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.