Doug Lusk - Director, IR Paul Otellini - President, CEO Andy Bryant - CFO

Glen Yeung - Citigroup Michael Masdea - Credit Suisse Adam Parker - Sanford Bernstein Ambrish Srivastava - Harris Nesbitt Charlie Glavin - Needham and Company Cody Acree - Stifel Nicolaus John Lau - Jefferies Jim Covello - Goldman Sachs Mark Edelstone - Morgan Stanley David Wu - Global Crown Capital Chris Danely - JP Morgan Tom Thornhill - UBS Ben Lynch - Deutsche Bank Apjit Walia - RBC Capital Markets Tim Luke - Lehman Brothers Chris Caso - Friedman, Billings, Ramsey

Welcome to the first quarter 2006 Intel Corporation earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today's presentation, Mr. Doug Lusk, Director of Investor Relations. Please proceed, sir.

Thank you and welcome to the Intel first quarter earnings conference call. Attending from Intel are CEO, Paul Otellini and CFO, Andy Bryant. Before we begin, please bear with me while I read our Safe Harbor language. The first quarter earnings report discusses Intel's business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our press release for more information on the risk factors that could cause actual results to differ. The specific forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rate, interest and other income, capital spending, depreciation, and amortization of acquisition-related intangibles and costs. These statements do not reflect the potential impact of any mergers, acquisitions, divestitures, investments, or other business combinations that may be completed after April 18, 2006. Lastly, if during this call we use any non-GAAP financial measure as defined by the SEC in Reg G, you'll find on our website, intc.com the required reconciliation to the most directly comparable GAAP financial measure. With that, let me turn it over to Paul.

Thanks, Paul. As Paul stated, we have begun the year competing for orders and holding share, adapting to lower expectations for the overall year by trimming spending and continuing to push forward to ensure we have new products to support a stronger second half. Revenue for the first quarter was $8.9 billion, down over 12% from the fourth quarter. Most of the change in revenue came from lower unit volumes in microprocessors and chipsets, concentrated in the desktop and server segments. Among the geographies, the changes in revenue were unusual for the first quarter. In the Europe region revenue decreased 26% and in Asia Pacific, revenue was down 16%; both geos substantially lower than typical seasonality. The Americas region grew 4%. Japan was up 10%, and achieved its first $1 billion quarter. In a year-to-year comparison, revenue was down approximately $500 million or 5%. Revenue in the digital enterprise group was down 19% from a year ago, while the mobility group grew 22%. Among the geographies, most of the decrease was in the greater Europe region where revenue was down 19%. The first quarter of 2005 was 14 weeks compared to 13 weeks in the recent quarter. Gross margin of $4.9 billion, including share-based compensation of $86 million, were down 22% from the fourth quarter. Gross margin percentage was 55.1% on a GAAP basis. Without share-based compensation of about 1 point, gross margin percentage was 56.1% down 5.7 points from the fourth quarter, due to lower revenue from logic products, a consequent change in overall product mix, and higher reserves and write-downs of logic products. In January, our quarterly forecast for growth margin percentage was 59%, plus or minus a few points. The difference of 3.9 points between the midpoint of the forecast and actual results was a function of lower microprocessor unit volume and a consequent change in overall product mix and higher write-downs of inventory. In a year-to-year comparison, gross margin percentage, excluding share-based compensation, is approximately 4 points lower than the first quarter of 2005, primarily as a result of lower revenue offset somewhat by lower start-up costs. Spending, R&D and MG&A, was $3.2 billion, slightly below our forecast in January. Excluding share-based compensation of approximately $300 million, spending decreased approximately 2% from the fourth quarter and is up more than 15% from a year ago. Despite the cuts, spending has grown as a percentage of revenue and there is much work yet to be done. Now to non-operating items. The effective tax rate in the first quarter was 27.5%, lower than our January forecast of approximately 32% as a result of higher concentration of profits in lower tax jurisdictions and tax credits. The change added approximately $0.014 to EPS. Fully diluted EPS were $0.23. Excluding share-based compensation, EPS would have been $0.27. Quarterly average shares outstanding are down nearly 6% from a year ago and fell below 6 billion for the first time in more than 10 years. On the balance sheet, inventories of $3.6 billion were up over $400 million from the fourth quarter as we ramped production of microprocessors on a 65 nanometer process and produced associated chipsets. The increase in the first quarter includes approximately $85 million of capitalized share-based compensation. Capacity utilization on the 65 and 90 nanometer processes is high and we expect to continue to build inventories in the second quarter. We substantially reduced total cash investments comprised of cash, short-term investments, and fixed income trading assets, ending the quarter at $8.7 billion, down by $3.7 billion from the fourth quarter. Other long-term assets increased by $1.7 billion, largely as a result of investments in IM flash technology. Stock repurchases were $2.9 billion, capital spending was $1.8 billion, and dividend payments were nearly $600 million. We expect to reduce the level of our stock repurchases over the coming quarters to less than half of the first quarter rate as we continue to manage our cash flow. As we turn now to the outlook for the second quarter, please keep in mind that the forecast data does not include the effect of any new acquisitions, divestitures, or similar transactions that may be completed after April 18. I will use the midpoint of forecast ranges when making comparisons to specific periods. We are planning for revenue in the second quarter to be between $8 billion and $8.6 billion, a sequential decrease of approximately 7%. That is a higher decline than we would typically see for this period. This forecast assumes lower unit volume in logic products as customers work through inventories. The projected year-to-year decrease of 10% anticipates lower unit volume and prices of microprocessors. Our expectation for gross margin percentage in the second quarter is 49% plus or minus a couple points. Without share-based compensation of approximately 1 point of margin, the forecast gross margin percentage is 50% plus or minus a couple points. Lower revenue for microprocessors and a consequent change in overall product mix will lower gross margin for the first quarter as will higher microprocessor unit costs as we ramp production of the dual core products. Spending, R&D plus MG&A, should be approximately $3 billion to $3.1 billion. The forecast includes approximately $300 million of share-based compensation. Without the impact of these charges, spending should be between $2.7 billion and $2.8 billion, down approximately 6% from the comparable number in the first quarter. Looking ahead to the full year, we have revised our January forecast for revenue growth of 6% to 9% from 2005 and are now planning for the revenue to be down approximately 3% primarily as a result of lower unit volumes. This forecast is subject to a wide range of potential variability. For the second half, the forecast assumes seasonal revenue growth and gains in market segment share. We believe Intel's revenue in the second quarter will be several hundred million dollars lower than PC consumption rates would typically suggest and we are planning for a second half growth that is seasonal off of our first half base adjusted for this difference. We expect gross margin percentage for the year to be 53% plus or minus a few points. Without share-based compensation of approximately 1 point of margin the forecast is 54% plus or minus a few points, down more than 5 points from gross margin in 2005. Lower start-up costs and manufacturing will help 2006 margins but this will be more than offset by higher unit costs for logic products and slightly lower average selling prices for microprocessors. As a result of several cost-saving actions we have lowered the forecast for R&D and capital spending for the year. The forecast for R&D is now about $400 million lower at approximately $6.1 billion. Without share-based compensation of approximately $500 million, the forecast for R&D spending is approximately $5.6 billion. Capital spending forecast is now $300 million lower at $6.6 billion plus or minus $200 million. Cost-saving actions have also lowered the forecast for total spending for the year, including not only R&D, but also marketing and G&A by over $1 billion. The current forecast of approximately $12.1 billion includes the impact of share-based compensation of $1.1 billion. Excluding this impact, total spending is forecasted as $11 billion, essentially flat with 2005. This includes spending for the IM flash technology joint venture. The estimated tax rate for the second, third, and fourth quarters of 2006 is approximately 30.5%, lower than the previous estimate of 32%. In summary, this is a year for resolute determination. We are determined to compete now, determined to deliver better products with superior manufacturing capabilities, and determined to control spending. This will require disciplined, methodical focus, but we believe that with Intel's products and manufacturing capabilities, we are more than up to the task. With that, let me turn it over to Doug.

Thanks, Andy. We will now open the conference call for Q&A. We will attempt to take questions from as many participants as possible. To help in this process, we ask that you please limit yourselves to only one question and no more than one brief follow-up. Thank you.

Thank you very much, sir. (Operator Instructions) Our first question comes from the line of Glen Yeung from Citigroup. Glen Yeung - Citigroup: Maybe just a point of clarification; I'll say it the way I think I heard it and then you tell me if I'm wrong. You're basically saying that your second quarter guidance for revenues is being impacted by inventories. If I were to normalize that for normal seasonality and then grow Q3 and Q4 out for normal seasonality, I get you're down 3% for the year. Is that the right interpretation?

Essentially so. We also think there's some share gain in the back half of the year because of the better product lineup. But the bulk of it is adjusting the second quarter to the consumption levels and then doing seasonal Q3 and Q4. Glen Yeung - Citigroup: What gives you the confidence about the ability for the supply chain to clean up the inventory situation in the second quarter? And then oddly enough, what then gives you confidence that we're actually looking at a seasonal year when you guys have said that the end market may not be as strong?

Well, two things in there. First, as far as confidence in cleaning up the supply chain, when you look at the extra few million units that we think are out there, that equates to one to two weeks of inventory, no more than that. There's a fairly high turnover among our customers. It's pretty easy to moderate our shipments into our customers, in cooperation with them, of course, to get anywhere between 3 and 4 million units of inventory burned off through a quarter. That is just careful, disciplined planning. As far as expectation for the second half, yes, we do believe the growth rate of PCs for the year moderated. Last time we talked to you, we believed low double digits, 10% to 12%. Now, if you look at most of the market forecasters, they'll tell you high single digits, 7% to 9% which we think is consistent. We also think that's a baseline that's in the second quarter. So I'm not counting on an increasing growth rate in the back half of the year consumption, I'm counting on a growth rate consistent with what people generally think today. Glen Yeung - Citigroup: As you look into the second half, we see this revenue ramp and then we look at what you got it for in terms of gross margins, which also implies a reasonably significant ramp of margins in the second half, are we really just seeing the margins track where revenues are? Or are there other things that Intel is doing specifically to manage margins higher in the second half? Just any clarity you can provide on the details.

Sure. I'll try to give a little more detail now about Q2 which hopefully will help later on because I think the question will come. So in the second quarter I'm saying the midpoint of my margin percentage expectation is down 6 points. If you look at that, it's a combination of things. The biggest factor is the fact that most of the revenue drop comes in high margin microprocessor-type products. So even though my microprocessor product mix stays about the same, because my other lower margin products don't drop, you see a mix change. Of my 6 point drop, that's about half of it. So in the third quarter when microprocessor returns to normal because the inventory correction has been adjusted for, you'll see a pretty good kick just because you get that mix improvement back. I'd like to see more progress in the back half of the year. One of the things I'll show you next week is I'll show you costs of microprocessors. The second biggest element in my margins going down in the second quarter is my cost per unit as we ramp the dual-core hard. Remember, as I get in the third and fourth quarter I'm getting the new dual-core products, I'm getting smaller die so we'll start seeing some benefits from the cost per units out there. It takes a bit to get to, but it's going to help in that place, as well. So I think I got a couple things going for me that should help me in the back half of the year. Glen Yeung - Citigroup: Great, thanks a lot.

Your next question comes from the line of Michael Masdea of Credit Suisse. Michael Masdea - Credit Suisse: I guess what's interesting is the last few quarters we've seen your competitor seemed to outgrow you but market share loss hasn't been something in your vocabulary. Is there some math that we're doing wrong? What gives you the confidence that there's not more share loss going on, that we've seen the last few quarters and it's not going to continue?

It's simple. When we talked to you in January, it was before we saw our competitors' shipment data. When you looked at it, it clearly said in the fourth quarter of last year we lost more market segment share than we thought we did. I think we probably lost a little more in the third quarter than we thought we did as well. If you look at the fourth quarter, again, we've seen their unit shipments, we know what our unit shipments are. On a unit shipment basis, we held -- in the first quarter, I mean. So we've seen that. There could be some adjustment in the second quarter again, as I clean up my inventory. I don't know what their position is so I can't really tell you yet how the points will move back and forth. The first quarter was a noticeable change from what we saw in the back half of '05. Michael Masdea - Credit Suisse: Does that imply that your ASPs were down in the ballpark of 5% to 8%, somewhere in that range? It seems like their unit market share wasn't down quite as much. Their units weren't down as much as yours were.

ASPs only dropped slightly which wouldn't be quite that much to be honest. Michael Masdea - Credit Suisse: I'll work on the math. The other question is on that second-half ramp, the math I'm getting is a little bit different, too. It looks like you have almost about $1.2 billion to make up in the second half and it sounds like you're saying $300 million or $400 million is more the right ballpark in terms of revenue. When you start to think about the delta of seasonality versus what you need to do, is that the right ballpark or am I missing something?

Again, if you take Q2 as we've given you an estimate, start with Q1 and a normal seasonal drop is somewhere in the 2% to 3% range. So take your Q2 baseline down 2% to 3% from Q1 and then add your normal seasonality in Q3 and Q4. It doesn't quite account for all of the revenue because we do expect to take some share in the second half of the year. Michael Masdea - Credit Suisse: It might be worth just to remind us what your view of seasonality is for each quarter just so we'll make sure we're all using the same math. Thanks a lot.

Historical seasonality in the third quarter has been 7%, 8%. In the fourth quarter, it was a little bit better than that. Michael Masdea - Credit Suisse: Thanks a lot.

Thank you very much. Ladies and gentlemen, our next question comes from the line of Adam Parker of Sanford Bernstein. Please proceed. Adam Parker - Sanford Bernstein: The inventory reserves during the quarter, how much more will you take in Q2 and Q3 and how do you expect that to impact your margins in the coming quarters, please?

Sure. There were some inventory reserves in the first quarter, Adam, not a big number. So if I were trying to explain the 6 point margin drop versus the prior quarter, reserves were a small portion of it. Essentially some of the older product that we think as we ramp the new products, we won't end up selling. Same thing in Q2; it's a pretty small number, that inventory reserve calculation effect. Adam Parker - Sanford Bernstein: Paul, just a question for you. You referenced I think, you said it quickly so I didn't catch it, sort of a plan to improving efficiencies in 2007 and beyond. I was wondering if you'd comment more on this. Should we see some head count reductions? Obviously headcount grew again here, or some structurally lower capital R&D intensity? Or what are you referencing with that improved efficiency, please?

Well, first of all, I think it's a bit premature to give you any specifics. We're just undertaking a look at the Company now in a fairly comprehensive fashion. The idea would be to look at every aspect of our operations from capital efficiency to our facilities to our resourcing to our various business units to underperforming businesses, et cetera. This is a wholesale look at the Company over the next couple of months; to take a look at where we want to be for '07 and beyond. At the same time we're doing that, we're taking the other actions we've talked about in terms of trimming the spending for this year, but not taking our eye off the ball and getting the new products out. That is the most important thing for us at this point. Adam Parker - Sanford Bernstein: So you'll give some more color on that in the future, is what you're saying?

As soon as we get some, yes.

To reinforce what Paul said, we took the forecasted spending for the year down $1 billion. It had nothing to do with that, it's old-fashioned let's go cut some spending. I'm hoping that by the end of the year we're starting to see some results from this program and I can actually get a little below $11 billion. Adam Parker - Sanford Bernstein: Paul, this is the first time in how many years you've undertaken this sort of thorough analysis? Ever?

It's probably the first time since the mid '80s. Adam Parker - Sanford Bernstein: Cool, all right. Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Ambrish Srivastava of Harris Nesbitt. Ambrish Srivastava - Harris Nesbitt: Hi, Andy. Just a clarification. I don't get it, so please help me understand this. Your customers have excess inventory, you build inventory again. You are alluding to some minimal reserves next quarter, but yet you're going to be building inventory. What areas do you think you'll be building inventory in and what is the risk that there won't be another larger write down in the second quarter? Thanks.

There is some risk. I don't want to tell you there's none. Remember what Paul said, though, about the way we're using our factory right now. The 65 nanometer is building the new microprocessors that are going to be shipped in the back half. I don't want to slow those down. I think that's our future. The 90 nanometers transitioning into the chipsets, the Broadwater chipsets, are being used heavily there when again is our future. So we're building the products, we're certain are going to be there for the future. Some of the stuff in the line today is some of the older products that have to be there in case you have a product slip or something happens and you need to ship product. So there is some risk that in a transition, you build a bit of a bubble and you don't need to ship that stuff. It's a small risk. There are lots of places in this world you ship some product -- essentially as good as most people's in the world. So there's, the task for us is to find places to put those. As I said earlier, we did take modest reserves -- and by modest, it's believe me, it's not a big number -- in the first quarter because there were some products I looked at and said it's likely these won't be shippable. If demand slowed down and we had a choice between still shipping the old or the new, we'll ship the new. So if you saw another step down in demand it might become an issue. If demand, if the market grows in the high single digits, you won't see much change to the reserve portion. Ambrish Srivastava - Harris Nesbitt: Andy just so that we're clear, modest means what? Tens of millions of dollars? $100 million?

Modest means under $100 million. We have $3.6 million in inventory, we're talking -- modest is under $100 million. Ambrish Srivastava - Harris Nesbitt: One last question and I'll go. On the cost side, is the increase in cost that you are anticipating in the next quarter, is that what you would typically expect when you ramp a lower geometric product or is that something atypical that you're experiencing?

This is atypical. We're ramping the current larger die dual-core product because we have the capacity to, it's a higher performing product and we think we can take advantage of it. As a result of that, the cost will be higher than I expected, in fact, higher than I expected as little as six months ago. What I've got to do is get to the new products which take advantage of the new manufacturing and were designed to be a more cost efficient package. Those are in production today. They'll be shipping in Q3 and Q4, so I basically will have at three to five-month period where I have a heavy concentration of the larger die product. Ambrish Srivastava - Harris Nesbitt: Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Charlie Glavin of Needham and Company. Charlie Glavin - Needham and Company: Thanks. Paul or Andy, in terms of the back half of the year, what gives you the conviction in terms of having the mix right? Paul, there's certainly a fair number of new products -- Woodcrest, Conroe, Merom -- which have been getting good reception, but if I take a look, you've already got about 13 new brands not including the Viiv. Andy, I recall you having previously said you can get the absolute numbers right, but the mix always scares you. Given that you're really counting on probably the strongest second half you've had since 1996, where can we get the conviction that you got the mix right?

Well, we will build our newest, best products most and fastest. So we will load the 65 nanometer factories as fast as they're possible to ramp, with Woodcrest, Conroe, and Merom. We'll backfill that, because there is a natural ramp on new products and yield and so forth. We'll backfill that with the existing 65 nanometer products, which are the core-based products, Core Duo product and the Prestor product that goes out today and Dempsey and servers. Since we'll load from the top, my conviction goes up a much higher in terms of mix predictability. Viiv, if you talk about brands, Centrino and Viiv and the upcoming brand associated with the business desktop that we'll talk about on Monday, those all will take advantage of a variety of microprocessors, but generally speaking all 65 nanometers. Charlie Glavin - Needham and Company: In terms of the current excess, if I back out the numbers, it looks like about $450 million in excess right now in terms of Q2. What is the general mix of that? Is it more lower-end product, are we talking about a combination of both servers and desktops? Could you give a little bit more granularity, particularly given the geographic or the diversity of the geographic strength in Q1?

Again, it's somewhat speculation because you don't get inventory reporting from your customers by part and by speed. My guess is it's pretty much a general mix of what we sell. So I don't think there's anything unique out there. Again, remember we're talking about between one and two weeks, we're not talking about six or eight weeks worth of parts of anything. Charlie Glavin - Needham and Company: 1 million to 2 million?

One to two weeks. Charlie Glavin - Needham and Company: Several million.

Several million, which is one to two weeks' worth of consumption. Charlie Glavin - Needham and Company: Thanks.

Your next question comes from the line of Cody Acree of Stifel Nicolaus. Cody Acree - Stifel Nicolaus: Thanks. Andy, in this quarter a lot's been made of the pricing competition in your efforts to clean out the channel. Can you talk about your pricing strategy? Sounds like your ASPs are only down just moderately this quarter. I guess there seems to be a little disconnect. How does the pricing strategy change in the second half with the new products?

Let me address the question, second half first. The new products that will come in right on top of our existing price points and then ramp very quickly from there down. So they tend to replace the existing dual-core products at the high end. They have new SKUs, new in splits on top of our product line, and new feature sets. So that one is pretty easy. In terms of the pricing actions we've taken in the first quarter and looking at Q2 and Q3, they tend to be more aggressive towards the bottom of the market, particularly on desktops. I think that's one of the reasons you're seeing a bit of a glut in the channel today, not at our distributors because the inventory there is in relatively good shape, but in the grey market and that's up to distributors and brokers. You tend to see a bit of a discount for most microprocessors of all flavors, of all brands in the channel right now. Cody Acree - Stifel Nicolaus: Paul, if I may follow up there. You talked about the market share stabilizing here in the first quarter, basically with the same product portfolio that caused some of the market share losses in the second half. Is it a more aggressive pricing strategy that caused that stabilization or is there something else going on there?

Well, the fact that ASPs were down only slightly says it wasn't a radical change in pricing. There were some line items that had fairly significant moves, particularly at the bottom of the stack. But we also did a good job selling our high end products this quarter, particularly in notebooks as the Core Duo ramped. So the number that we talked about in my comments was a blended number. Cody Acree - Stifel Nicolaus: All right. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of John Lau of Jefferies. John Lau - Jefferies: Great. Following along the lines of the pricing question, there has been a lot of concern on the pricing action and you did mention that the blended price, didn't go down that much, which means you did a very good job in terms of offsetting that with the high end. As you look into Q2, what are your expectations with regards to that blend again, given that you were quite aggressive in the low end? Thank you.

As I've slowly, a piece at a time, given the gross margin reconciliation, about half of the decline in Q1 and Q2 is because of revenue drop. The next biggest element was unit cost for microprocessors, the dual-core ramp. The next one would be an ASP decline. So I do expect again a modest decline. But recognize it's not a big number. It's again, it's relatively modest. John Lau - Jefferies: As a follow-up, you did mention something that was quite interesting. Europe was down so much. What do you attribute that to? Is there anything that was regional or anything out of the ordinary that would cause such a precipitous drop? Thank you.

It seems like in general, both the consumer and the enterprise business was soft in Europe. We're seeing that. We've seen that from comments from a number of the computer manufacturers now as they've discussed the environment in Q1. I think that it was equal as well between notebooks and desktops. I didn't see that one was stronger than the other. So we just saw a very soft quarter in Europe and as I said, that was one of the reasons we saw inventory stacking up at our OEM customers. John Lau - Jefferies: Great, thank you.

Your next question comes from the line of Jim Covello of Goldman Sachs. Jim Covello - Goldman Sachs: Good evening, thanks very much. Guys can I just ask a philosophical question first? Coming off two quarters where you missed numbers and the environment is choppy, why not set a lower bar for yourself for the second half of the year? Everybody knows the business is pretty choppy right now. Why be so aggressive?

Sure, I'll be happy to take that one. We have a philosophy that says we communicate to the general public what we actually believe is going to happen. We don't lowball, we don't take aggressive numbers. We think that's what's expected of us by the SEC. It's certainly what we do. So I realize that means I'm going to miss an occasional number. But it seems to be the high integrity way to do it. Jim Covello - Goldman Sachs: On a more fundamental basis, on the CapEx cut can you give us some color on where the CapEx is coming from? Usually you give us some indication in the analyst meeting here in the spring on the forward-looking CapEx and what you think that might look like. You've talked before about just how a little bit of overage on the capacity can cause a pretty big hit at the margins. A final piece to that question is, you're spending at $1.8 billion a quarter on CapEx and depreciating a little over $1.1 billion a quarter. How much is the depreciation going to ramp here over the next couple of quarters, which would cut into any the margin ramp? Thanks very much and sorry for all the questions.

Boy, a lot of questions in there. On the depreciation question, we've given a full year depreciation, you can pretty much draw a straight line between Q1, Q2, and the full year. There's no right turns in there. It will just be a gradual ramp. In terms of the capital spending, there's no big place that we cut. As Paul said we're protecting the 45 nanometer ramp, we're protecting the 65 nanometer. What you're really seeing is cuts around the edges. You're seeing, if I was going to build a building someplace, maybe I'll not do that. Maybe I'll do a little more compression. Some engineering tools. So it's not a big cut. It's not in any particular place where you try to protect capacity and then look at all the things beyond capacity and see if we could save some money. We'll talk next week about the capital efficiency. I don't intend that to be a signaling device for next year's capital. But I understand if you do math, you can start to triangulate where you think we're headed. I'll save that for next week. Jim Covello - Goldman Sachs: Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of David Wu of Global Crown Capital. David Wu - Global Crown Capital: Can you clarify one thing? Historically, when PC OEMs or channel partners get into trouble with excess inventory, they were very, very quick to get rid of it. From the stuff that you get out of Taiwan, it looks like the European slowdown really hit in January and February. By March, things were more or less getting back to normal. Why do you think it will take the whole second quarter to get rid of that excess inventory which you admitted was one or two weeks?

Yes. Well, I mean, it is still several million units and we factored that into the numbers, David, relative to normal seasonality between Q1 and Q2. So we looked at what normal seasonality would be. At this point, we have a fairly good view, at least with our largest customers in terms of exactly how much product they need for calendar Q2. Those orders reflect their view of consumption, assuming that they drive their inventories down. As our collective view on the size of the market in 2006 changed over the last few months, they've also reduced their view going forward and reduced their inventory levels. Part of this, I think, is also trying to kind of clear the decks for our new products coming out in Q3. No one really wants to be on the wrong side of that inventory conversion. So the combination of those, I think, leads us to a fairly high confidence that the inventory will come down this quarter as we're projecting. David Wu - Global Crown Capital: Okay. Thank you.

Your next question comes from the line of Mark Edelstone of Morgan Stanley. Mark Edelstone - Morgan Stanley: Good afternoon. Andy. For you, what type of inventory build should we expect on your balance sheet here this quarter?

I would guess this quarter will be similar to last quarter, which without share-based compensation was around $300 million. I would guess it's in the ballpark. Mark Edelstone - Morgan Stanley: And then just so I'm clear, the microprocessor revenues are down about 15% sequentially. If I take a relatively slight decline in ASPs it sounds like units would have been down about 12% sequentially in Q1. Is that about the right order of magnitude?

You're probably pretty good at math. I actually haven't calculated that number so I don't know. But it's probably in that neighborhood. Mark Edelstone - Morgan Stanley: I think AMD disclosed their units were down 6%. I was just trying to reconcile the comments on the share issue in the quarter.

Well, if you go back to what they said, they said they believe they gained revenue share. They didn't say anything about unit share, to my knowledge. We've done the math. We know what we shipped and we did the math on what they shipped. By the way, just on your number, you may be assuming too aggressive of an ASP decline for Intel in your comments there. We said slight. Mark Edelstone - Morgan Stanley: Okay, fair enough. Just last question on the operating expense guidance, especially for the implications for the second half of the year. It certainly seems like pretty aggressive goals. Can you get to those goals without some type of restructuring or head count reduction?

In order to hit those goals, there would have to be some kind of head count reduction, probably similar to being on full attrition and then conserving around the edges. So making sure you control your discretionary spending. It does not require a layoff to make those numbers. It just requires discipline around not hiring people. Mark Edelstone - Morgan Stanley: Thank you very much.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Chris Danely of JP Morgan. Chris Danely - JP Morgan: Thanks, guys. We're all concerned about a price war out here. If I do the math on the full year revenue guidance it sounds like you guys are expecting about 15% sequential growth in Q3 and Q4. Are you not anticipating a price war in microprocessors in the second half in order to gain back the market share?

I don't know what a price war means. I think we're going to be bringing better products that compete better against the competition. I think that price will still be necessary to win back market share we lost. So I guess I would imply, we've had as Paul said, in certain markets, we've had pretty aggressive pricing through the first part of this year. It may lighten a little bit in those markets, but you'll continue to be on normal price curves for all your products. ASPs will be down some through the year. Chris Danely - JP Morgan: So you're expecting a normal price curve in the second half of the year, nothing too crazy?

We're not expecting anything crazy, but it is a competitive environment. Even as we bring out new products and new capabilities, you have to win business back that you lost. Chris Danely - JP Morgan: A philosophical question, Paul. If you have the choice between sacrificing a little bit of margin but gaining back your market share, which choice would you take?

I would take the choice that keeps my factories the fullest.

Ladies and gentlemen, your next question comes from the line of Tom Thornhill of UBS. Tom Thornhill - UBS: Creating demand for the new products is going to be a function also of meeting that ramp with the 1264 capacity. Do you feel that the ramp is going to be able to meet that demand? And to the degree it's not, what gives you the conviction you'll be able to substitute product coming out of the 1262 process?

Well, the largest consumer of our 65 nanometer process today are the dual-core desktop and notebook products that we launched in January. Those products were designed to be able to afford a fast ramp on 65 nanometers and the new products coming in are socket compatible with those. So to some extent, it's a much easier transition than, say, when we brought the Prescott product on a couple years ago or the first Centrino product, both of which were platform changes. Secondly, we've got three factories now humming at very good yields and very high production on the products. So our comfort level with both the health of the products and the health of the processes and the ability to continue to ramp is much smarter now than it was three months ago when we had just begun shipping these.

So we'll show you some data next week, Tom, on the health of the process in the factories. It looks as good as anything we've done.

Yes. And go back to what I said earlier; this month we will have the crossover on 65 nanometer wafer starts; more processors wafer starts on 65 than on 90. Tom Thornhill - UBS: Okay. A follow-up if I could, Andy, on some analysis on COGS. One approach is to take out depreciation and look at the residual or the proxy for direct labor, direct materials. The ratios through '04 and '05 were running in the 29% to 31% range. It looks like we're headed into a period where it's going to be more like 35%. So higher COGS and some lower margin. Is this something we should think of as a structural issue with direct materials, direct labor versus dual-core products and die size? Or is this a temporary issue where we'll get back to those previous ratios when we get past this?

I have to go look at it in detail. I'm a little bit winging my answer for you. If I look at today, I'd say a little of each. We do know that there's been constraints in substrates, some of the material COGS have gone up and I think those will last for a while. On the other hand, we also know that as we go to the smaller die, we'll get less labor COGS per die, so we'll see some benefits there. The efficiency project Paul is talking about will be focused in that space. And recognize your 35%, when you just pull out depreciation, there are some reserves and things like that in that costs of goods sold. So in reality 35% sounds high to me. It will go back down towards historical low. My guess is it will settle above where it's been during some of the material cost issues. Tom Thornhill - UBS: Thank you.

Thank you very much, sir. Ladies and gentlemen, our next question comes from the line of Ben Lynch of Deutsche Bank. Ben Lynch - Deutsche Bank: Andy, a question for you and sorry it's a little bit long, but I think you'll get the gist of it. You guys attributed the trend of the Q4 revenue shortfall to excess customer inventories at the end of Q3. Then you attributed the original 300 million shortfall in the Q1 guidance to customer; again, 300 million customer inventories at the end of Q4. Now you're saying Q2 below seasonal is -- I guess it works out about 400 million excess inventory. That sounds like a lot of accumulated excess inventory. Is part of what you're saying here is maybe the initial diagnosis was wrong on that? The way inventories work, if Q1 already saw some inventory drawdown, which I think you said, then for Q2 to be below seasonal, then the amount of drawdown would be a lot more than it was already in Q1. But if you're saying there's only one to two weeks of excess out there, that doesn't seem possible. I'm really just trying to understand all of that, please. I do have a follow-up.

Okay. So, my answer will be as long as your question, is my suspicion. As we ended the third quarter, we believe there's about $100 million of excess inventory out there. Looking back it's possible there's a little bit more, but not significantly more. In the fourth quarter, we believe there's about $100 million of excess inventory out there. In retrospect, after the quarter, remember when we got to the end of the quarter, we had a bunch of cancellations and we were trying to figure out what's going on. We saw the weaker market and we still thought we ended the quarter at a $100 million excess. When we looked back later, we said we were wrong, it was probably more than twice that. So the excess inventory at the beginning of the first quarter was higher than we thought. As we go into this current quarter, what's happening is our customers are indicating they want leaner inventories as they prepare for the second half. So that's not necessarily inventory that was excess to begin with. But as they reset their inventory targets because of a weaker growth environment and preparing, clearing their deck for the newer products, there's a further reduction they're looking for. So it's kind of a combination of, we think we lost a little more share than we thought in the fourth quarter. Therefore, the inventory was a little larger than we thought. The Q4 burn off was relatively small. Customers are resetting low inventories now for the second quarter. A combination of all that is why the second quarter numbers comes out so big. Ben Lynch - Deutsche Bank: Great. And then just a second question I had was the notebook or mobility CP RAS looks sort of flattish but operating profit was down very significantly. You raised the mix, but in the process, cut prices a lot for the high end so that you got maybe flattish ASPs overall, but the price on the mix degraded a lot and that's behind the operating profit decline? Or is there something else, something off or something there?

It's more on the cost side. As we begin to ramp the new products - so that's one of the place we hedged some of the reserves. It's also one of the places where some of the older products got revalued downward because the new costs were much lower. So in essence, think in terms of the revenue drop, kind of drops through at 100%. Then you have some other inventory issues causing it to go down a couple hundred more million. Ben Lynch - Deutsche Bank: Thank you.

Thank you very much, sir. Ladies and gentlemen, our next question comes from the line of Apjit Walia of RBC Capital Markets. Apjit Walia - RBC Capital Markets: Thank you, good evening. A question on the second half. You're assuming market share gains back in the second half, in your assumptions. If all else is equal and you don't gain any share back in the second half, how will that impact your guidance for revenue?

So, I won't give you specific number. Again, add your $400 million to $500 million into Q2, run seasonal Q3 and Q4, subtract it from down 3% and you'll get your number. The bigger number does rely more on the inventory correction reset than it does on a share win back. Apjit Walia - RBC Capital Markets: One long-term question. Given the competitive dynamics you're seeing from AMD at this point in the recent threshold, do you see your long-term growth margin band which is say late 40s, early 50s, to early 60s, do you see that contract in the next couple of years?

Boy, I hate to make a long-term gross margin prediction. It's been between 50 and 60 for years and years and years. If we can, as I said earlier, we can continue to drive costs, which I think we have a chance to, we have a pretty good opportunity to keep margins at a pretty good level. We do have to drive the cost element. Apjit Walia - RBC Capital Markets: And just one clarification. Your chipset constraint issue from last year, is that something completely removed now?

Essentially so, yes. Combination between our chipsets and a third party's should meet all the market needs. Apjit Walia - RBC Capital Markets: Okay. Thank you.

Operator, we'll take two more questions, please.

Thank you very much, sir. Your next question comes from the line of Tim Luke of Lehman Brothers. Tim Luke - Lehman Brothers: Thanks. I guess for Paul or Andy, just in guiding for a somewhat more moderate market, but suggesting you'll get the share gain in the second half. Could you give us a sense of where you would expect to make the share gain most materially? Would that be in the notebook, desktop, or in the server area, maybe any comments on the dynamics you see in terms of your share positioning for the second half in those arenas? Thank you.

I'm not going to give you a specific set of numbers. Over the last year, the steepest market segment share loss was in servers and we have -- we think -- an extremely compelling product line coming out with Woodcrest so we've already begun shipping its platform with the Blackbird platform in Dempsey now, so that one I expect to start turning the corner on in terms of market segment share fairly rapidly after launch. Tim Luke - Lehman Brothers: A blind stabilization or gain, in your view?

Yes, exactly. Tim Luke - Lehman Brothers: Which one?

Well, stabilizing and then gain. You have to do one before the other. In mobile we've had actually fairly good traction the last few years with Centrino. I think the Merom product is icing on the cake in terms of giving us accelerated lead there. The one that is very interesting is Conroe. It is the most significant performance gain that we've brought into the marketplace from an Intel perspective since we introduced the Pentium versus the 486. This product at the same time lowers the power, so I think that that one we'll see immediate uptick in two areas and the enterprise as it's associated with our new brand, platform brand for business desktop, and in the gamer high-end community and workstation community where they want to use that heat-seeking kind of performance that this product will deliver. Tim Luke - Lehman Brothers: As a follow-up if I could I ask, with respect to the second quarter, Andy, when you think about digital enterprise and mobility, should the sequential decline that you're forecasting be fairly similar between those two areas, or would it be more pronounced in the digital enterprise arena?

Again, if you're looking at year-over-year trends, we've seen stronger growth in mobile than we have in the digital enterprise. So I would tend to look at my last few quarters of year-over-year and assume it's similar to what you've seen there. Tim Luke - Lehman Brothers: Thanks.

Thank you very much, sir. Our final question comes from the line of Chris Caso of Friedman, Billings, Ramsey. Chris Caso - Friedman, Billings, Ramsey: Hi, guys, thanks for taking my question. Andy, I wonder if you could expand a little bit on some of the unit cost comments that you made. I think you were implying that the new products in the second half would have smaller die size. Maybe you could talk on that with respect to products that are going to come in at similar price points on a price point per price point basis, are you going to enjoy a smaller die size?

The answer is yes. What I'm trying to get to show for you next week at the analysts' meeting would be to show you the dual-core costs. Typical we only show average microprocessor and I'm trying to get a chart that will show you the dual core so you can actually see how the new products come in and how it changes the costs of those products at the high end. That is where you'd expect to see most of the benefit probably more in the fourth quarter than the third quarter and certainly next year. But again, I'll try to give you that next week. Chris Caso - Friedman, Billings, Ramsey: Just finally, with respect to Vista coming out at the beginning of 2007, given your revenue guidance for the second half of the year, it seems like you guys are not dialing any impact of that. I guess it's anybody's question what the consumer actually does, but safe to say that's your assumption at this point?

Well, that is our assumption. That's been the history. If you look at normal seasonality the last five years, it did not include an operating system release. That's where we're modeling on that same kind of seasonality. When you go back to the XP release, which was a late Q3 early Q4 release, you saw a bit of a gyration because it impacted enterprise as well as consumer. Right now, we don't see that there will be any kind of material impact in the fourth quarter. But boy that's a long way off to call. Chris Caso - Friedman, Billings, Ramsey: Thanks.

Okay. We'd like to thank everyone for listening for today's call. A recorded playback of this call will be available at approximately 5 p.m. Pacific time tonight. Those interested should dial 1-888-286-8010 and reference pass code 34883847. Thank you.

Thank you very much, sir. And thank you ladies and gentlemen for your participation in today's conference call. This concludes the presentation. You may now disconnect. Have a good day.