Intel Corporation (INTC) Q1 2010 Earnings Report, Transcript and Summary

Welcome to the Q1 2010 Intel Corporation earnings conference call. (Operator Instructions) 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. It sounds like we had some background noise and I hope that was taken care of. Thank you, operator. Welcome everyone to Intel's first quarter 2010 earnings conference call. I am here with Paul Otellini, our President and CEO and Stacy Smith, our Chief Financial Officer. A few important items before we begin. First, we 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 will be happy to take questions. As we begin, let me remind everyone that 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 have scheduled our annual Investor Day on May 11th 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. So with that, let me 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. We saw signals of a bottoming then and now a year later the industry has nearly fully recovered. At Intel we focused on expanding our Nehalem architecture, getting our 32nm processor technology ready and in designing alternatives and derivatives of our new Atom processor for many new market segments. As a result of that focus we started this year with the best product line up we have ever had with leadership in all segments and categories. Demand for these new products has been incredible and as a result Intel achieved record first quarter revenue and in operating income. It was notable this quarter the 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 are 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-over-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 32nm process superbly. We exceeded output expectations with lower costs than originally anticipated and are currently shipping over SKU’s on 32nm. 32nm is our fastest ramping process ever and I am pleased to note we are accelerating the ramp of our third and fourth 32nm factories faster than our original plan such that by early Q4 we will have four factories in production on 32nm. 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 for 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 processing unit sales declined slightly less than seasonal and average selling prices for microprocessors were up slightly quarter-over-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 microprocessor average selling prices and record mobile microprocessor revenue. First quarter gross margin of 63.4% was higher than our expectation. The factory network performed well in the first quarter ramping 32nm process technology, controlling costs 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 midpoint of our forecast range to $10.2 billion, a 27% increase from the second quarter of 2009. We are forecasting the midpoint of the gross margin range to increase 1 point from the first quarter to 64%. For 2010 we are now forecasting a record annual gross margin with the midpoint 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.

Thanks. We are now going to move to Q&A. We would like to limit each of you to one question and then a follow-up if you have one. With that, please go ahead and introduce our first question.

(Operator Instructions) The first question comes from the line of John Pitzer - Credit Suisse.

My first question, Q2 gross margins and full-year gross margins both being down about the same level of 64%. Help me understand the puts and takes in the back half of the year that prevent you from getting better margin leverage.

Sure. Let me start by giving, as you say, a bit of detail about the puts and takes. 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 margin in the second half over and above the kind of record gross margin levels we are achieving in the first half. As I think about the second half let’s first focus on the Core business. I expect that to be slightly positive to gross margin. I think we will see increasing volume that helps a bit. We are going to see a decrease in costs. That helps a bit. Offset a little bit by a decrease in average selling prices kind of a less than what you would normally see decrease in selling prices. The combination of that makes that slightly positive. I also expect in the second half of this year to have a little bit of a lower startup cost environment so those two things are positive. Then offsetting some of that is an increase in write offs. We will be building, as Paul said, the Sandy Bridge product. That is the new micro-architecture that lands on 32nm. So in the context of Tick/Tock that would be the Tock. As you saw with Westmere, the product we built prior to qualification for sale will be written off. So we will see a little bit of an increase in the second half of the year and that offsets some of the positives that I mentioned.

You talked about signs of corporate coming back. Is that just in the server business where you have had some strength for a couple of quarters now or are you starting to see it on the client side? Can you give us a bit more detail there. That would be helpful.

It is the first quarter where we have seen some real signs of PC purchases, corporate SKU’s picking back up again. Some of that was wrapped around our new products, the Arrandale notebook products, but some of that was also even just some of our older SKU’s that are classic running corporate SKU’s also picked up. To me that suggests the average fleet of notebooks is four years old out there. The average fleet of desktops is five years old. You are getting to the point where as CIO’s are feeling a bit better about their business it makes economic sense to swap these out just from an ongoing cost of ownership standpoint.

The next question comes from the line of Glen Young – Citi. Glen Young – Citi : Can you address a little bit, you said supply conditions you face both in front and back-end, particularly moving into the back half of the year and demand picks up?

The Intel supply? Glen Young – Citi : Yes.

We are ramping the 32nm factories as fast as we can and faster than we first expected. In fact, in the first quarter we ended up shipping more 32nm microprocessors 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 will use a combination of the four 32nm factories and our existing 45nm factories to be able to satisfy I think any demand scenario you could imagine out there. In terms of other’s peoples supply which is what I thought you were hinting at first, I really don’t see any fundamental constraints. If I look at all of the pieces and the components that go together in terms of the memory, screens, batteries and so forth, that would retard the industry’s ability to meet most any demand scenario. Glen Young – Citi : Cash levels you are at now, you are not that far off of your records which I think were set back in 2004. Particularly with no change in CapEx, any thoughts about and I assume cash is going to keep growing, any thoughts about uses of cash?

You are absolutely right. The strength of our business, as Paul said, surprised us the strength of cash generation was also surprising. What you should take from the fact we have been doing minimal buybacks over the last year is we are growing our cash balance. Frankly we are looking at some strategic investments and evaluating those and in that context we are growing the cash balances and we are 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. We have had multiple years where we have increased the dividend without fail. Just putting it into context I think from 2006 I think our dividend per share was about $0.40 per share. Based on the increase we just did we are at $0.63 per share so a nice increase in the dividend over time and that continues to be the priority.

The next question comes from the line of Chris Stanley [ph] – JP Morgan. Chris Stanley – JP Morgan: On the end markets and demand trends it sounds like consumer was very strong in Q4 and then corporate kind of kicked in Q1. When you talk to your customers what do you expect and what do they expect in terms of demand trends between corporate versus consumer for the rest of the year? What would be the implications for your business?

You are right, consumer has been the driver I think throughout this 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 is out there both from a consumer standpoint and from the corporate standpoint. The first quarter and even our first half numbers I think are buoyed by a combination of things. A very healthy China and Chinese New Year scenario. I think the new products we have launched have pretty compelling pull at the end market level. Simplified branding, lots of really good features, etc. and lastly now you are starting to see some corporate PC purchases re-emerge. I am still not going to go out on a limb and our customers certainly aren’t going to go out on a limb and say there is a corporate refresh snapback coming. I think what we see this cycle is much more people are buying things to replace older machines because it is just cheaper. They are doing that on their budgets as they free up a bit more money here and there. I think they will also make the tradeoffs between PCs and Servers and software as they go forward and right now hardware seems to be doing pretty well in that tradeoff. Chris Stanley – JP Morgan: 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? If you have some more higher write offs at the end of this year is that a good thing for next year? Will the write offs be lower next year because [inaudible].

Two very different questions. In terms of the gross margin forecast this year of 64% that is an annual record. You are right. We will likely have some quarters above that. I think you are really asking does it change my long-term view of the gross margin profile of the company. If you harkens back to a year ago as Paul said, the depth of the recession when we were down in the mid 40’s I articulated the normal range of being between 50-60%. I think we spent one quarter in that normal range and we have been above it every quarter since. This year it looks like we will be above it every quarter. On that question I think I will defer answering it until we get to the Investor Meeting. I think that is a much better platform for talking about how we are looking at longer term gross margin trends. To the more tactical part of that there will be lots of puts and takes to the H111 [ph] gross margin but yes you would expect to see the inventory we write off prior to qualification for sale assuming that ends up being sellable inventory will be a benefit to gross margin when we get into the subsequent quarters. Now that is one of many elements. That element would likely be positive assuming that qualification goes as we expect it to and as prior qualifications have gone.

The next question comes from the line of Tim Luke - Barclays Capital.

Framing the environment you had several very quarters. A very strong fourth quarter and strong first quarter. You are now guiding for a slightly firmer than seasonal second calendar quarter off a pretty high base. Can you give us your sense of your visibility on that, slightly better than seasonal guide for the second calendar quarter and what elements are likely to contribute to that? Is it the PCs still that are leading? Is it the servers? Is it all of the above?

I think it is certainly PC driven but I think there are other things woven into it. We are still in the very steep part of the ramp on the 32nm. Bringing it 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 the demand our customers wanted on 32nm 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 32nm over the course of the quarter. I think part of that is just the excitement around the new products on the PC side. Number one. Number two, the Nehalem EX product which is our new multi-processing product began shipping in the last two weeks of the quarter. I think that will have a full quarter effect. So far there are something like 30 systems that have been announced and the receptivity and pent up demand for that I think is very good. So you get a combination of those things all driven by new products that I think will give us that better than seasonality picture we are painting.

As you go into the second half of the year do you think you will 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 like with it so strong at the beginning of the year we should be modeling a slightly lower than seasonal uptick or not given it sounds like you think corporate is going to come back?

I kind of thought you would go there on your third round. As you can imagine I am going to duck it. I think we won’t talk about the second half at this point in time except to say we are putting in place sufficient capacity to handle, as I said earlier, any demand scenario you could imagine. We are assuming continued growth and units over the course of the year. We are going to be ramping 32nm as fast as possible. So the only question we have from a supply standpoint is how much 45 we keep on and what is our assembly test loading capabilities. We will put some bucks around those to make sure we have sufficient capacity.

Better than seasonal possibly even given your focus on capacity rather than…

I didn’t go there.

The next question comes from the line of Kevin Cassidy – Thomas Weisel Partners. Kevin Cassidy – Thomas Weisel Partners: Could you describe the mix in the servers? Was it a richer mix and just slower units?

In Q1 the mix is a little less rich than Q4. I think there are a couple of things going on there. First is what we saw a pickup in what we call the transactional business. This has tends to be unit processor servers 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 is a good sign we haven’t seen that kind of demand profile before in the transactional volume. Not in the last half of 2009. The fact that came back was one of the positive signs leading us to the guidance we gave for Q2. I think we also I think there was as people moved towards the transition from the older multi-processing line to the newer multi-processing line they basically thinned down their inventories in anticipation of the launch of the EX. Now we will have a full quarter to ship in Q2 with that product line. Kevin Cassidy – Thomas Weisel Partners: You had mentioned corporate demand coming back on the client side. Do you see that as lagging from the server strength you saw in fourth quarter or are they not related?

I would like to think people are looking at these things with a clear economic eye. If you look at it with a clear economic eye you would refresh the servers first. That builds your infrastructure up. It gives you the fastest return on investment. You probably can squeak out another quarter or so with your PC fleet and I also think that corporations are likely to deploy Win7 so people have to qualify that and get the SKU’s ready and I think that is what is happening now. I don’t think it was really a lag effect. I tend to think of it as much more of a clear view of what the return on investment was versus the cost savings of replacing the PC that you are now seeing a bit more latitude on.

The next question comes from the line of Hans Mosesmann – Raymond James. Hans Mosesmann – Raymond James : A question on notebook mix. Has the netbook dynamic slowed down or saturated as a percentage of total mobile?

It depends on the granularity of the question. If you look at it 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. I would expect pretty significant year-over-year growth in the netbook business. I think netbooks in general have become, though they are by definition a consumer purchase, there is no corporate netbook market we have found. 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. I think seasonality plus maybe a bit of the overhang from a number of the players coming in the fourth quarter as what we saw in Q1 where Atom was down a bit more than what we would normally see as seasonal. Hans Mosesmann – Raymond James : What is the company position with tablets? It seems to be a big emerging category. What is your strategy there?

I think that is 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 also likely be market expansive. If I look forward over the course of the year particularly at Computex coming up the first week of June. We have a lot of our customers announcing new tablet form factors around Morristown versions of Atom and in their support for a multitude of operating environments. You will see products on Android, on Windows 7 and on MiGO.

The next question comes from the line of Mark Lipacis - Morgan Stanley.

The client business was flat and I think if you look at least a couple of the larger North American PC OEM’s it seems like the forecast is for their client business is to decline a bit in the first calendar quarter. So I guess there are different ways to potentially that. Maybe they see upside like you guys did. Maybe they are building or replenishing inventories or there is 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?

I don’t know I can help you a lot there except to say we were down. I am not sure that I followed how much their client business is forecasted to be down versus what you guys were doing but our business was down. It was better than seasonal but down.

On a unit basis it was slightly better than seasonal but not dramatically better. The benefit we really saw in the first quarter was in the mix and the price.

On the data center business you gave some answers to that. What would be a normal 1Q for that business?

What you saw was pretty in line with what we would normally expect in terms of data center normal seasonality.

It is typically down about 8%.

8-9% is right where we were.

The next question comes from the line of James Covello - Goldman Sachs.

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 some inventory but you weren’t able to really build much.

I would be happy to help there. 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 Arrandale I wasn’t as able to get as much inventory in place as I had 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 would want as we kind of move into the second quarter and based on the strength we are seeing and the ramp of these new products. If you deconstruct the inventory between the processes what we saw was more than 100% of the increase in inventory and more than 100% of the increase in units was on 32nm. So we got a little bit in place there. Everything else was down. As I think about Q2 my hope is I can build some inventory into the second quarter in anticipation of a second half that is higher.

You have started off the year believing that we were looking at sort of a mid-teens PC kind of year. If I put any kind of close to normal seasonality in your revenue for the back half of the year you would be up well into the 20’s. It certainly doesn’t seem like you are out-shipping demand because there is no wire [ph] in the supply chain that is putting in inventory. Is it safe to say your expectations then for the full-year PC number have come up a bit?

I think so. Everyone still wonders what the shape of this year looks like. I said earlier when I ducked Tim’s question I would reserve judgment on that. I think versus a quarter ago how could we have not taken our expectations up a bit for the year?

The next question comes from the line of Patrick Wang – Wedbush Morgan. Patrick Wang – Wedbush Morgan : You talked about accelerating the ramp of the third and fourth 32nm factories. Can you talk a little bit about the impact to your overall capacity there and when we can expect SBLI [ph]?

All four factories will be online by early Q4. There is a ramp schedule that we are not making public on each specific factory. We pulled up the schedule a bit on the last two of the network. There is really no change in our CapEx spending as a result of that. These things are all being planned to be equipped and so forth. What we have done here is based upon the learnings and the yields we are seeing in the first two factories we have had higher confidence to be able to ramp to high volume faster on the next two. Patrick Wang – Wedbush Morgan : I wanted to talk real quick about mix and ASP here. In the first quarter it looks like we saw some good news, a surprise just on higher ASPs. The second quarter you are guiding a little bit of a negative impact on lower platform ASP. Can you talk about what is going on there and perhaps maybe factor in the mix of the Core I3, I5 and I7?

I will take a shot at it. The surprise for us in Q1 was the strength of the new products as we had articulated a quarter ago. The way we are loading the factories is we are bringing out the high end of the product line first. I think 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. I guess that is the contextual background of I am now expecting 2010 to be a year where ASPs come down some but less than what the long-term model would suggest. A fairly benign pricing environment overall but they will come down some from where we were in the first quarter is my prediction. Patrick Wang – Wedbush Morgan : Care to offer any comment in terms of a mix up in Core, I3 and I5 and I7?

In general we are seeing great reception to the new Core products. Even within them certainly the first quarter the mix up to Core I5 versus I3 was very solid. Now as we bring on more capacity you get a more natural mix. I think you also will see our customers move towards taking those processors into lower price points. Price points where you would see Pentium products 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 Arrandale platform are so good. Maybe having less memory as Win7 runs pretty well on 2G etc. That will allow them to mix the SKU’s and keep the processor mix pretty good and keep a higher volume set of price points.

The next question comes from the line of Uche Orji – UBS.

Can I just go back to the PC inventory. I know you say you want to review the 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 maybe put a bit of context around that so we can get a handle on what you mean as healthy channel inventory?

I want to be careful we don’t mix the two things. My answer I think was in regard to our component inventory the channel inventory comments that Paul and I both made were in regards to the inventory we see downstream from us. It is the inventory held at the multinationals, the retailers, the ODMs, our own distributors. So that downstream inventory when we look at it, it looks healthy and it looks appropriate to demand levels. Our internal inventories are lower than I would like particularly on the new 32nm 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 are going into a higher selling season in the back half it is prudent to get some inventory in place.

In terms of the channel, what I really wanted to know was if there was a way to quantify that in terms of weeks or days [inaudible] handle on it?

We don’t have insight into everything. That is why you see us hesitating here. In terms of the microprocessor 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 build plans and transition plans over the next couple of quarters. We also monitor the shipping lanes and 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 is out of line on the assumption there is growth in units over the course of the year.

On service, I wanted to ask you when I look at service the one key thing if you look at the value [inaudible] LMEX, and CIO’s are talking about replacing many of their old servers with one. What is your sense of the size of this market going forward? You are delivering so much ROI to your customers. Do we have a situation where the market itself will shrink and Intel doesn’t get enough runway or growth in this business given the value you are delivering to your customers? Any sense on how we can [inaudible].

We haven’t even gotten close to finding a fundamental limiter on that. There are 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 base services is good for Intel. The shift to virtualization is good for Intel. If you look and plot out, and we will 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 modern servers are doing that growth curve is faster than the refresh rate for old versus new equipment. We see a very robust scenario for servers going forward.

The next question comes from the line of Stacy Rasgon – Sanford Bernstein. Stacy Rasgon – Sanford Bernstein : One more on ASPs for the full-year. You basically have cut the ASP impact on gross margin from your previous guidance by about half. I think before it was thought 2-3 points and now it is about 1.5 points. Can you give a little more color on what is driving that differential? Is it just continued uptick of 32nm faster than you thought? Is it more servers? More corporate? Less Atom?

You have the math exactly right. The margin recon [ph] I gave you a quarter ago…I was articulating that I expected 2-3 points from 2009 to 2010 based on ASP coming down. Based on the strength we saw in Q1 and the take up of new products we have cut that impact in half. It is really those two things. The strength we saw in Q1 and the take up of the new products has exceeded my expectations and I think some of that strength will continue through the year. Stacy Rasgon – Sanford Bernstein : A quick question on OpEx. I know you took that up a little bit. It looks like you took up R&D about $200 million and SG&A up about $400 million at the midpoint of your guidance. Can you give us a little more color on what is driving the increases in both of those and in particular the greater increase in SG&A versus R&D?

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 are up about $600 million cycle on cycle. About half of that is profit and revenue dependent spending. What you take from that is as we have seen the Q1 results and have increased our expectations for the year I am expecting more revenue, more profit that is driving those two line items. The revenue dependent spending is almost all marketing. It is Intel Inside so it gets categorized as marketing spending. The product dependent spending gets split across the different groups of the company. So that is about half of the increase. Behind that we have some incremental investments we are making. Those are predominately R&D projects. Again as our confidence in the year has gone up there are some projects we are launching there. Then the third element behind that is again an increase to marketing. We have 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. So that is the other element there.

The next question comes from the line of David Wong – Wells Fargo. David Wong – Wells Fargo : You brought up Nehalem EX. Are you seeing signs that MP server chip volumes are picking up? Would you expect those to grow faster than the dual processor does over the next couple of quarters?

No I don’t think so. I think the value proposition is different in different markets. Right? So I would expect the dual processor products will continue to be, let me say the topography of choice for data center build out for the big internet portal guys. You can imagine who I am talking about. The MP Server configurations tend to be much more I think you will see them much more prevalent in the corporate environment and SAP configurations and people don’t want to run multiple applications in a virtual mode there. I really think they are addressing different market segments as they ramp up. We love both of our children here and I don’t think I see a difference in the curves between the two of them. David Wong – Wells Fargo : Intel Capital. You have an improving overall environment. Should we start to see gains from equity investments over the coming year as we [inaudible] pipeline of private investments that might be getting ready for IPO?

For obvious reasons I won’t answer the second part of the question. It is their job to tell you about when they are thinking about an IPO. I would say generally the answer to your question is yes. I think the improvement we have seen over the last few quarters has really been a decrease in the rate in which investments were being impaired. As I think forward over the next year I would expect to start to see some gains and some exits coming in. Nothing on the radar for Q2 but look 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. The other is to get a return. The expectation is we are doing both of those things.

The next question comes from the line of Ross Seymore – Deutsche Bank. Ross Seymore – Deutsche Bank : Earlier you were kind enough to give us what normal seasonality is in the data center business for the first quarter. Can you let us know what it is for the remainder of the year on a normal basis and how Nehalem might impact that?

I don’t have that number at my fingertips. Let’s put this in the category of taking a wild ass guess. Having run Intel IT, Paul is cringing, I think we probably see the way that IT budgets work if you likely see spending on server infrastructure that is probably stronger in Q4 than it is in any other quarter. You probably saw the kind of reduction we saw this quarter where it is down some. So it is going to be somewhat back-end loaded. To get to the quarter by quarter split I don’t have that number at my finger. Ross Seymore – Deutsche Bank : Shifting gears a little to the inventory side, now that your manufacturing cycle times are about half of what they were in the hubbed amount of your business is larger than it has been, what impact does that have on the amount of inventory you actually need to have to service demand and can you frankly just operate leaner than you have ever done in the past?

Keep in mind the two things you mentioned will move in opposite directions. 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 am holding that at the customer location. The reduction in cycle times obviously allows us to operate at leaner levels. Net of those two things I think you are going to continue to see us like we have been over the last 4-5 quarters, operating at pretty efficient inventory levels. I want to caution you though that won’t preclude the need to get inventory in place when we are going through big product transitions or process technology transitions. It is the prudent thing to do to get inventory in place and that is what we tried to do in Q1 and what we will try again to do in Q2.

The next question comes from the line of Sumit Dhanda - Banc of America Merrill Lynch.

You have done a great job with the ASPs the last couple of quarters but at the same time you are expecting some kind of a modest decline in the back half of the year. I am curious as to why you think that will be the case given your comments of signs of a corporate recovery, servers should be seasonally strong in the back half of the year. Is it just Core I3 being a bigger part of the mix? Can you help us understand what is the thought process there is?

It really is the function of we had a very rich mix in Q4 and Q1 as we were launching the first products on 32nm. I expect that to be a more normal mix as we progress through the year. Again that is against the backdrop of an ASP that is down some but less than it is normally down. So it is as simple as that. If you zoom way out on this what we see over time is Moore’s law allows us to bring in new features, bring our costs down. We also bring prices down over time. That drives the elasticity in demand. You see it in the consumer segment of the market. You see it in emerging markets. That ends up being an important growth driver for the business. Against that backdrop we are having a pretty benign pricing environment this year based on the strength of our product portfolio is how I would characterize it.

Any chance you could take a shot at quantifying the impact of the inventory write offs you expect to have? Sandy Bridge is that same 2-3 point impact you typically see, for example as when you transition to 32nm last year? Or was it some different amount we should be thinking about?

I am not going to get to that level of granularity because we haven’t given specific quarter by quarter forecasts. 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 I was articulating were in the magnitude of 3-4 points. I am not expecting it to be that big.

You think it is a Q3 as opposed to Q4 phenomenon or you can’t tell us that yet?

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

The next question comes from the line of Doug Freedman – Broadpoint.

A year ago you talked about the mix of products really being important to margins. Can you talk about Atom and Atom chipset margins compared with Quad Core and if that whole ratio calculation you put up for us if that is played out the way you expected or if there has been any derivations from that?

On that one I will show you in much more detail next month when we are together for the investor meeting. Directionally it has played out exactly as I anticipated. Costs came down. It is a very healthy product margin. I showed a comparison of Atom to the Core business excluding Atom and to the embedded business and got into a fairly similar range. That is how it is played out from a product margin percent standpoint which is how I think you asked the question, right?

Yes. 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 mentioned it was related to seasonality and the over exuberance of the marketplace to many new entrants. Is there something you can do with Atom pricing to re-invigorate 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?

There is Atom in netbooks and then there is Atom going into other products. Atom going into other products is design cycle and you will see other kinds of products with Atom in it over the course of this year. Someone asked a question earlier about tablets and there is rumor out there about certain consumer electronics equipment, phones and things like that. That is not really the heart of the question. The heart of the question is netbooks. As I said earlier I still think there will be significant growth in the netbook business year-over-year. I think that there are rather than pricing I think we would look to features and integration as a technical novelty or twist here. The next innovation coming out on Atom is Dual Core which comes out in the second quarter. So that will ramp for the holiday season this year and I think that will be a very attractive product. Then in early Q1 we have another integration at much lower power product coming out that is a derivative of it for fanless netbook business. You will see us use technology to make the platform a bit better each time or to integrate more features and make it cheaper.

The next question comes from the line of Mahesh Sanganeria – RBC Capital Markets. Mahesh Sanganeria – RBC Capital Markets : I will just ask one long question instead of two questions. If you could give us an update on wireless display how the adoption has been? I think the current price point for the SKU’s is $900. Do you see that coming to $600-700 range by back to school? Also what the competitive response has been from AMD and Invidia on this product?

I can’t comment on the price points as our customers set those price points. What I can say is first WiDi products have been very well received. It is selling through the channel nicely at Best Buy which is where it is semi-exclusive right now. Over the course of the year you will see many more SKUs and many more distributors picking up the product. I think it will be a must-have feature for holiday timeframe. It may come down in price a bit but generally speaking I think it is going to get broader before it gets a lot cheaper. In terms of other vendors trying to do similar technology I would say good luck. This took us quite awhile to be able to develop and to be able to get this done. We have a roadmap of features that take WiDi in a better over time that adds more content protection, Blue Ray support, etc., etc. So this is one where being out early and doing a lot of the work at the platform level and the software level and then having a feature roadmap I think really is what makes us compelling.

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 good night.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.