Kevin Sellers - Director, IR Paul Otellini - CEO Andy Bryant - CFO

Uche Orji - UBS, New York Cody Acree - Stifel Nicolaus Glen Yeung - Citigroup John Lau - Jefferies & Company Chris Caso - Friedman, Billings Ramsey Tim Luke - Lehman Brothers David Wong - A.G. Edwards Joe Osha - Merrill Lynch Sumit Dhanda - Banc of America Securities Krishna Shankar - JMP Securities Hans Mosesmann - Nollenberger Capital Michael Masdea - Credit Suisse Gurinder Kalra - Bear Stearns Ross Seymore - Deutsche Bank David Wu - Global Crown Capital James Covello - Goldman Sachs

Thank you Bill and welcome everyone to our Q1 2007 earnings conference call. Before I begin, I want to point you to our investor website www.intc.com for some important information related to today's conference call.

First, our earnings release and updated financial statements are available there for anyone who still needs access. Second, a replay of today’s call will be posted there at around 5o'clock Pacific time and will remain there for about two months.

And lastly, if during this call we use any non-GAAP financial measures, we will post the appropriate GAAP financial reconciliations there as well. Joining me on today’s call are Paul Otellini, Chief Executive Officer and Andy Bryant Chief Financial Officer.

In a moment, Paul will review the highlights of the quarter and comment on our key strategies, products and technologies with Andy providing more details on our financial performance and business outlook. As we begin, let me remind everyone that today’s discussion contains forward-looking statements based on the environment as we see it today.

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.

So with that Paul let me hand it over to you.

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Thanks Kevin. The first quarter marked another solid period for our microprocessor business.

Units were inline with seasonal patterns and ASPs held up well despite competitive pricing in the low price segments of the market. In general, we saw a flat quarter-to-quarter pricing in mobile and desktop segments, and a decline in server ASPs driven by a shift to dual and uniprocessor servers.

We continue to see strong demand for our core micro-architectural processors all of which continue to ramp nicely. We’re pleased with our operating performance, with lower microprocessor unit costs, higher margins, good inventory management and lower spending resulting from our structural cost efforts, which are running ahead of our projections.

Flash was weaker however, driven by lower NOR units and NAND pricing. The desktop segment was competitive this quarter but our pricing held firm as we shipped more Conroe processors in the first quarter than in the second half of 2006.

We are very pleased with the momentum of our vPro processor technology, which adds a number of security and manageability features for IT and is now being deployed at over 200 companies and organizations. In mobile, we are shipping product in preparation for next month's launch of the new Santa Rosa platform with volume shipments of the new Crestline chipset and continued strong demand for our Merom processor.

The platform will be branded Intel Centrino Duo for consumers and Intel Centrino Pro for businesses that want to deploy the benefits of our vPro technology in mobile as well. Our server platforms also continue to shift to new technology, with another quarter of growth for Woodcrest and a near doubling of Clovertown quad-core shipments.

Our belief is that maintaining scale is essential through our strategy of ramping new manufacturing and platform technologies quickly, delivering high performance and low-unit costs. Today's product leadership is built around our 65 nanometer technologies and we are well along the path to introduce products based upon 45 nanometer technology later this year.

To that end, we've announced the use of breakthrough materials in our 45 nanometer process that will allow us to introduce faster and more power-efficient microprocessors to pack more features into smaller die. We have disclosed this week that our Penryn family of processors will offer leadership performance with gains of 15% to well over 45%, when compared to today's best Core 2 Duo and Xeon processors.

Cache sizes will be 50% larger, yet die sizes will be 25% smaller. We have six different microprocessors already running based upon this process, and they are running a broad base of applications on five operating systems.

We also disclosed plans for Nehalem, our next generation micro-architecture for 45 nanometers, which will take our performance, power and cost leadership even further beginning in 2008. In summary, the R&D cadence that we discussed at last April's analysts meeting is providing us with the very best products in the marketplace giving a strong momentum and relatively stable pricing in a competitive business environment.

We are seeing good progress on unit cost and spending reductions. And our strong execution of 65 nanometers is being followed up by an innovative 45 nanometer technology and products.

We are planning for growth in the second half of the year and look forward to sharing our future plans at our New York analysts meeting. With that let me turn the call over to Andy

Thanks Paul. This is another quarter of progress, marked by products, well received by customers, major advances in process and manufacturing technologies and comprehensive cost savings.

Gross margins for the quarter was better than we expected and we can report excellent results over the last year in cutting spending, which is $0.5 billion lower than the first quarter of 2006. Looking beyond the transitional second quarter, we see an improving second half as the distinctive products and process technologies catered date.

We expect gross margins to improve significantly in the second half with a percentage in lower 50's range and we have raised our forecast for the full year. Revenue for the first quarter was $8.9 billion, within the range forecast in January and down 9% from the fourth quarter.

The total number of microprocessor units was down and approximately seasonal. Average selling prices for microprocessors were slightly lower overall.

Unit volumes of chipsets, motherboards, and flash memory were lower than the fourth quarter. More than half of total revenue $4.8 billion came from the Digital Enterprise Group.

Revenue for this group was approximately 8% lower than the fourth quarter, primarily due to lower unit volume from sales of microprocessors and chipsets. The Mobility Group accounted for more than a third of total revenue.

This revenue of $3.3 billion was down 8% from the fourth quarter, primarily due to lower unit volumes of microprocessors. Compared to a year ago, total revenue was approximately flat.

Revenue from the Digital Enterprise and Flash Memory groups was lower and revenue from the Mobility Group was higher. Gross margin dollars were $4.4 billion, $378 million lower than the fourth quarter.

Gross margin percentage of 50.1% was above the midpoint of our forecast and 0.5% higher than the fourth quarter. While lower revenue and higher manufacturing start-up costs reduced gross margins, this was more than offset by increases in gross margins due to lower microprocessor unit cost and the sale of previously reserved products and inventory.

In a year-to-year comparison, gross margin percentage is five points lower than the first quarter of 2006, primarily a result of lower average selling prices for microprocessors. R&D and MG&A were approximately $2.7 billion, in line with the forecast and down 6% from the fourth quarter.

In addition, we had restructuring and asset impairment charges of $75 million. The progress we have made in cutting expenses is most apparent in a year-to-year comparison.

Spending for R&D and MG&A is down 17% from the first quarter of 2006. And as a percent of revenue, spending has declined by nearly six points.

The number of employees is down by more than 11,000 or 11% to 92,000. Interest and other income is significantly lower than the fourth quarter, when we realized a gain of $482 million from the sale of the Company's communications and application processor business.

The provision for taxes in the first quarter was also significantly lower as it included a reversal of previously accrued taxes of approximately $300 million. Fully diluted earnings per share were $0.27.

Reversal of previously accrued taxes accounted for about $0.05 out of the $0.27. On the balance sheet, total inventories were approximately flat with the fourth quarter.

Finished goods were down, while work in process and raw materials were up. Total cash investments comprised of cash, short-term investments, and fixed income trading assets, ended the quarter at $8.6 billion, nearly $1 billion less than the fourth quarter.

Capital spending was $1.4 billion, dividends payments were $650 million, and stock repurchases were $400 million. As we turn now to the outlook for the second quarter, please keep in mind that unless otherwise specified, the forecasts do not include the effect of any new acquisitions, divestitures or similar transactions that may be completed after April 15.

I will use the midpoint of forecast ranges while making comparisons to specific periods. We are planning for revenue, which is typically lower in the second quarter to be between $8.2 billion and $8.8 billion.

The mid-point of this range would be a decrease of 4% for the first quarter. On a year-to-year basis, the outlook anticipates growth of 6%.

Our expectation for gross margin percentage in the second quarter is 48%, plus or minus a couple of points. Lower revenue overall, lower sell-through and previously reserved products and higher start-up costs will reduce gross margins from the first quarter, partially offset by continuing progress and reducing unit costs and lower under-load charges.

Spending for R&D and MG&A in the second quarter should be approximately $2.6 billion to $2.7 billion, approximately flat with the first quarter. In addition, in the separate category for restructuring and asset impairment charges, we expect expenses of approximately $60 million.

While we have no full year forecast for this category, we do expect to continue to incur charges as we restructure this company as a part of our program to improve financial performance. For the full year, manufacturing start-up costs will be concentrated in the first half as we discussed in January.

These start-up costs will be lower in the third quarter than in the second, and this change should contribute at least an additional two points to gross margin in the third quarter. Due to the lower unit costs and permanent average selling prices for microprocessors in the first and second quarters than we previously expected, we are raising the forecast for gross margin for the full year to 51%, plus or minus a few points.

The results for the first quarter combined with the outlook for the second pointed gross margin for the first half of 49%. That would imply the margin for the second half of the year would be between 52% and 54%, with the expectation that the fourth quarter is a bit higher than the third.

We have also adjusted the outlook for spending on R&D and MG&A for the full year. R&D spending is now forecasted to be approximately $5.6 billion, $200 million higher than the prior forecast.

And MG&A spending is now forecasted to be approximately $5.1 billion; $200 million lower than the prior forecast. Our tax rate for each of the remaining quarters in the year is now expected to be 31%.

The results for the quarter and our current outlook appear to be a good beginning for 2007. Business remains competitive and it is essential that we remain focused on the right priorities.

Deliver products that customers find compelling. Execute superbly with 45-nanometer.

Attack costs on all fronts in the factories, in R&D and in MG&A. The goal is steady progress and increasing returns, based on successfully bringing technology customers want to the marketplace.

With that, let me turn it back to Kevin.

Okay. Thank you, Andy.

So, we would now like to open the lines for questions and answers, and let me turn it over to you for that.

Thank you very much. Just two questions, First, if I look at your ASPs for the quarter, I'd like to say they have held up well.

If I look further down the line, with the new products you have, despite that you raised your gross margin expectation for the second half. What is implied in the pricing environment within that side?

We certainly think we continue to see a competitive price environment. But if you think back, over the last year, starting mid-last year as the new products were introduced into the desktop server and mobile segments, we started to see our products differentiate themselves from the competitor.

As time passes, as we extend those products into the product stack, we think we have more than just price to compete on. So we find ourselves in a better position than we were a year ago.

We think it held up pretty well in the first quarter and we raised margin percentage for the year.

Thank you very much. One more question, on inventory, first of all how much of the inventory that was reserved that was sold in the first quarter, the impact it had on the margin.

Are you able to help us quantify that, so we can get a sense of what the gross margin was for the quarter?

Sure I can. I'll let you do a piece now, let me give another speech.

And I am going to answer your question, from Q4 to Q1, margins were up slightly. I want to break the margin change into some pieces though.

Let's talk about the ongoing business. You sell products, you make products, you have mix changes, you have pricing.

If you take the normal running of the business with a revenue graph of 9%, you would normally expect margins to be down. Based on the strength of the lower cost per unit, margins on the basic running of the business were up 1 percentage point Q4 to Q1.

That's step one. Now, we have some other things that we had to put in there.

We sold some previously reserved inventory. Essentially all in the microprocessor space, all in the digital equipment side, the pack (inaudible).

In that space, we picked up one point of good news margin because we sold products that had been previously reserved. We had one point of good news in the first quarter on under-load charges versus Q4.

So the under-load charges in Q4 were higher than Q1. So that gives you three points of good news from those three elements.

Then we knew that startup costs were going to increase. Startup costs in the first quarter were just under three percentage points, a bad news to gross margin in the first quarter.

So running the business a little bit better, selling previously reserved inventory a little bit better, under-load charges are a little bit better, almost completely offset by startup costs.

That's great. Thank you very much.

That's helpful.

Thank you. Andy, could you just clarify startup costs were 3, you said you had ongoing startup costs that you would normally have Q-to-Q.

With the three percentage points higher than those, what would be an ongoing roll in startup cost?

Yes, what we have said in the past is you typically get about two percentage points of margin deterioration for startup costs. Essentially think of it as three points on top of the normal.

Okay. Very good.

And then into Q3, you expect that to get to about two percentage points, so we step up again in Q2. That's your largest, that's going to be your peak spending.

Do you have any quantification there?

Sure. It is the same log we just did that for Q1 to Q2, this is a forecast for Q2.

So the revenues steps down some. As that happens, as you put all the things then, mix, unit costs, everything.

Margins, we dropped about two points with that decline in revenue. We then don't have the benefit of previously reserved inventory.

That would depress margins down one point, because of the offset of the first quarter. Startup costs will be one point worse in the second quarter versus the first quarter.

So that gives you, about five points of bad news. The offset is under-load charges by two points better in the second quarter versus the first quarter.

So, business, with two points, previously reserved and startup costs with a point each, that's four, not five, as I said. And then two points for good news or under-load which is why our margins are down two points in the second quarter.

From that point, I expect to see at least two maybe more points of margin improvement in the third quarter, just for the startup costs alone.

Perfect. Alright, thanks Andy, for that.

And then lastly, the microarchitecture percentage of revenue as you are moving more into these cost benefits. Can you give us about where you stand?

And when that crossover is? And maybe how we can proceed into the Q2 and Q3?

Sorry, talking about the percentage of new products on the new architecture we started shipping last year?

Yes.

Point that we are making now its --

Everything today is on 65 nanometers, it’s essentially all core based or derivates of the core based products that are being run through the line now.

That's being run through the line now but, what about on percentage of revenue now?

Again it will be the vast majority. If I look at my inventory and I try to look at how many of the older architecture products, it's a very small percentage.

Okay. And then last and I will go away.

Santa Rosa launch, do you expect or can we anticipate any kind of volatility of orders, pre-launch/post-launch, I guess what are you guys aiming for?

As I said in my commentary, we are shipping product today to our OEM customers in advent to that launch. So, they can build their systems for the launch in May.

So, this was all programmed in. We haven't seen and nor are we anticipating a stall in front of the launch, if that's what you are trying to get at.

We do think there's a lot of excitement around these products. Particularly around the Centrino Pro version which brings vPro into the notebook segment for the first time.

When you look at how corporations deploy vPro technology, they like to deploy it in large swaps at once. So, making sure that all their employees both mobile and tethered to the desktop have access to their technology is a prerequisite for deployment.

Alright. Thanks guys.

Thanks. Nice job on the quarter guys.

Question, I want to ask first is on the revenue outlook for the second quarter. Down at 4%, it looks just slightly below normal seasonal, and wanted to get a read on why you see that?

And in particular, your thoughts on NOR flash, which fell, possibly in the first quarter and I assume will fall again in Q2?

You take it as down 4%; we take that slightly on the low end of the seasonality average, seasonal for us. We think it is between three and four.

No cosmic reason, we do resist a little overhang of some competitive products out there that we have to be content with, that could have some effect. As far as, the forecast for NOR, I really don't want to give forecasts of the sub-business unit lines.

We all know it has been a struggle in the flash business and it continues to be a competitive business market right now.

And just to clarify, the initial statement. So, obviously we know Andy is sitting on a boatload of parts that are still out there.

You are suggesting as you are dealing with that competitively via price, via units, combination of both?

Again, our assumption is there is some excess inventory out to [supplier] and that does, maybe get worked up and it does disrupt the marketplace. Not a big one by the way.

Remember, we are talking about 4% versus 3 point something percent down. So, we just think it's a small disruption we have to deal with.

Okay. And my second question is on the outlook for operating expenses, because you made the point that you're a quarter early on the headcount reduction at a minimum.

And I wonder if you have any sense as, should we be thinking the $2 billion, $1 billion OpEx savings that you had told us we would see over this year or next year might shift a little bit earlier given you are ahead of plan on headcount?

I wouldn't go that far that fast. What we have committed for the year is a combined operating expense of 10.7.

We guess we'll hold to that. If we do find a little bit of upbeat in the efficiency, it gives Paul the ability to look at other projects that he might want to think about.

So I would think of it holding pretty firm to the 10.7.

Okay. And Paul just a quick follow-up on our first question, any thoughts on the NOR business here, losses are getting greater, I know you've talked in the past about maybe getting out of that business if you couldn't earn a profit, it doesn't look like you are doing a good job here?

Profits certainly eluded us in that business in the first quarter and a lot of that had to do with the very competitive environment in NOR, from a pricing standpoint and an overall stated demand standpoint. We have the team who are 100% focused right now on switching products to general purpose channel products away from some of the OEM customers to try to bring in more of that business that will drive us to breakeven point faster.

Our plan right now is to get this business profitable.

Okay. Thanks very much.

Great, thank you. I just wanted to circle back to you with regards to your estimates on gross margin.

It's certainly much higher for the full year. And in your thoughts about that, I was wondering if you can give us a little insight as to your assumptions of what the pricing environment would be for the second half of the year and also what the overall growth for the PC market will be by this 2007?

Thank you.

I can't give do that with granularity John. What we did see was as Paul said prices held up pretty well for the first quarter a little better than we expected.

We think we are starting to see some benefits of the strengths of the product line that is certainly included in our thinking as we think about the year. But I also want to point out the good news in unit costs.

The focus on efficiency programs improving throughput cost and cutting overhead inside the factory is paying off. It's a combination of two.

Some things that are happening at Intel right now that I think are good for us.

And as a follow-up, there have been some quite dramatic pre-announcements from your competition with regards to what the comments on the resale channel. Have you seen that significant amount of pick-up in market share, did you gain market share into those certain markets in Q1?

Well, I think we'll let the market share forecasters forecast the market share when all the numbers are in, because we haven't seen all the data. I will comment though that we had a very strong quarter in the channel in Q1, and that is in the face of what is normally or seasonally a down channel quarter as well.

And I think that is not a matter of just pricing as was evidenced in our ASPs, particularly on desktop. The channel was very, very strong on selling Conroe, which is the Core 2 Duo desktop product.

Great, thank you.

Hi thank you. I wonder if you can give some detail on what impact we might expect from the introduction of the 45 nanometer product in the second half, specifically on gross margin impact, you talked about 25% smaller die size, do you expect that have any material effect on gross margins this year and if not maybe you can talk a little bit about what we might expect in the 2008?

When you start a new process you typically have a little bit of variation, and it comes with it because you have the start-up cost that you're dealing with now. Then before the product gets called you have the pre-quality reserves and then you’re quick valuing at a point in time.

So, when we get into the Q2, I will give a better forecast of when those products may qualify and when you might start to see the inventory being valued and the costing marginal effect. So, I guess, I am telling you, I am not going to give you many specifics about that.

Yes, we think the cost envelope for those products can be very competitive, we feel pretty good about where those are headed. But I think again for this year, it's more inventory valuation in fact and costing effect.

Right. Okay, from a technical side on a performance basis, you talked about the fact that you would increase the cache size in those 45 nanometer products?

Should we also expect then to see higher clock speeds out of those, well can you talk a little bit about what we can expect performance wise on the 45 nanometer processors?

Sure. Let me back up a bit though, Chris and it can be the perspective.

If you may recall at the last Analyst Meeting last April. I talked about a new cadence for development and deployment of technology right, where we would continue our two year technology deployment of silicon generations, and then have an alternative year cadence of new micro-architectures.

And that we would ramp new silicon technologies with shrink sort of slight improvements of the existing micro-architecture to be able to ramp very quickly with the high performance product to small die size, which you saw in '06 was that new micro-architecture coming in on 65 nanometers, which you will see starting at the end of this year, with the beginning of the 45 nanometer shipments are derivatives of that micro-architecture shrunk if you will to 45 nanometers with some new instructions, with some new feature sets, with some larger cache and with some faster clock speed. All that combines to give us a nice boost in performance, and I give you a range of 15% to 45% depending on the application type and the product type.

So, we are seeing a nice boost on the performance side, as well as a decrease, a significant decrease in die size.

Okay. And just may be last question, with regard to the ramp of those 45-nanometer products.

I guess it's early, would you expect that to be about as fast, may be faster or slower than the ramp of the Core 2 Dual product or family of products.

It will be at least as fast as the 65-nanometer ramp was.

Okay, great. Thank you.

Andy, just to clarify on the gross margin, you say the gross margin in the first quarter was elevated by a percentage point from the sellers previously reserved inventory. Is that correct?

Correct.

And for the June period, your gross margin, vis-à-vis some of the prior models is moving to 48% perhaps a little lower, but the second half you are now raising. Could you just walk through the key things that are raised in the back half gross margin, vis-à-vis, what you were expecting previously?

The first quarter gross margin if I am not mistaken was broadly in line excluding the reserve, with what you had expected and maybe --

No, no. I'm careful.

We knew what we are doing, that's why we had a forecast.

Oh, you did?

So, what's happening is we're ahead on unit cost reductions.

Okay.

ASPs firmed up a little bit. If we had done the same math for everyone last time, we did for this time we'd have seen -- might keeps your margins actually a little elevated to where I thought it was at the beginning of the year.

So, I believe we're seeing some good news as the operating of the business in both the first and second quarter. In the back half of the year, we expect to see, if you assume something along the lines of seasonal revenue pick up, fixed cost industry; you pick up some margin for that versus our prior expectations.

Like I said, we're ahead on unit costs, not just in the first quarter but that stayed ahead through the year. So, we pick up a little bit of good news for that.

We think the strength of the new products is starting to help us a little bit. We picked up a little good news for that.

So, especially, the business is working like you and hope it would be working right now, plus you get the uplift for the start-up costs.

And then if I may just as a follow up, we should think about you looking to build inventory as you move into the seasonally stronger second half or how should we think about you managing your inventory levels as you move through and exit the second quarter?

Again, what I would get for the second quarter is up marginally a little bit, not much. We do start to build some inventory for revenue uplift and that will start to happen.

So you'll see some increase. In reality, I'd love to keep and play it again.

I just don't think I'll quite get there. It won't be a big change.

Thank you very much.

Hi, thank you very much. Just a couple of clarifications on what you have said about pricing in the quarter.

For notebooks, there was some amount, was it primarily stability or pricing or was it also a mix of the higher end? And similarly, when you talked about selling more Conroe, were desktop like-for-like prices roughly stable as well?

I am not sure I understand the like-for-like. What I said was that the aggregate for notebooks and desktop was approximately flat for each of them quarter-to-quarter.

There is a bit of a mix shift as we continue to drive Core 2 Duo more rapidly and more broadly into the product line. At the same time, we are also using our cost capability right now to participate pretty broadly across the market.

The combination of that was flat ASPs in each of those segments.

And what about for service, for identical products, can you talk -- you alluded to some amount of mix shift separating service?

It was almost entirely a mix shift.

Okay. Great.

And your policy going forward, do you anticipate needing to take any pricing actions or are you finding that you are gaining share without any particular response to your competitors' pricing?

We always have price moves scheduled in, right. And those are pretty well telegraphed across the industry.

And the price moves are essential for us to be able to move our most advanced technology through the stack. So you'll see us continue to have price moves in terms of the overall average, so that really is a function of how well we can drive demand to the newer products.

Great. Thank you.

Hi, folks. Congratulations on the solid execution.

Listen, I looked at this, your revenues flat on a year ago, your gross margins down by 500 BPs and you've added about $900 million in inventory, and you've reduced your competitor to rubble in the process. So, I look at the second half of the year, and I guess my question is, in order to get to these numbers do you need to have inventory continuing to grow faster than sales, so that you don't take anymore inventory write-down charges and capacity under absorption charges or any of these other things?

I am just trying to figure out how things get even better than they are now such that you don't have this sort of continuing precession of problems absorbing your capacity.

I am not sure what question you asked me. If you asked to me, do I have under-load charges or inventory write-down?

Let me rephrase that. I guess the question would be, do you need these under-absorption charges and inventory write-downs to go away to get you to these numbers that you are talking about?

Yes, of course. Our forecast assumes, if there are no under-load charges, assumes there are no unusual inventory reserves.

If that doesn't happen and you do have under-load charges then you have lower margins.

Do you need to add another? Does inventory need to go to stay 100 days or so to drive this?

No. Inventory should be dead flat.

And the same thing would happen, inventory can go up, so the same thing would happen.

Okay. So, the follow on then is you are confident that, the 65 nanometer process technology you have, you can observe it even as you ramp your 45 nanometer process technology?

Obviously, we think we can. If the market tops when we think then we should end up with issues.

But, we actually do build plants out multiple years and in those build plants, our capacity is utilized.

Okay. And then just, Paul, may be you can help me with this one.

I assume that the thought here is that, obviously, you can't comment on your competition directly, but the market share trajectory that you've enjoyed so far as a result of your excellent execution continues for the remainder of the year?

I kind of answered that earlier, Joe. I said that that we'll leave the market share forecasting to the forecasters.

But I am pretty well convinced that when the data rolls in, in a week or so, we'll be very pleased with the answers.

Okay. And I'm sorry, one final one.

As we look at 45 nanometer, should we assume that that kind of looks like a standard Intel ramp, when we think about, when you get 65 versus 45 crossover?

Yes.

Okay. Thanks very much.

Yes, hi, Paul and Andy. A couple of questions.

Andy, you talked about better unit cost and the fact that it's coming in. It will come in progressively better versus the augmentation for the remainder of the year.

Could you sort of give us an idea relative to what you had indicated at your analyst day last April? Number one, is that a material improvement versus what you had suggested where your unit costs peaked in Q3 of last year and started to come down?

And number two, is the fashion in which it comes down the same? In other words, it comes down in Q1, flattened out in Q2, and then comes down again in the back half?

That's it from me.

So, I am going to deduct most of your questions, because I am showing the data in two weeks in New York anyway. And I will show you where we are versus last year's forecast, and you'll see that the trend is the same and a little ahead.

There was probably the biggest quarter-to-quarter savings in cost for the year was is in the first quarter. But we built on that in the second quarter, but not in the same manner.

So, when I talked about the overall business, all pieces in, being two points versus the second quarter, part of that was good news and the unit cost versus the first quarter. So, we continue to drive costs down steadily through the year.

We have got a nice big step function in the first quarter which was somewhat expected, somewhat a little bit of surprise.

No, I guess on that point in terms of the unit cost benefiting you in Q2; I don't recollect you saying that. You also indicated that the under load charges going away would benefit you by two points on top of the one point benefit in Q1?

That's correct.

So, my recollection was that the total impact from under load in Q4 was only two points. I guess I'm confused because you are suggesting a total benefit of three points from under load charges going away over two quarters, but the total impact initially was only two points from recollection?

So the charge in Q4 was more than two points. The benefit in Q1was about a point, the benefit in Q2 rounds up to two points.

Again, I'm trying not to say 1.7 margin points for that. Take my word for it, it goes from two plus points in the third quarter to approximately zero in the second quarter.

And the unit cost benefit in Q2 is less than a point --?

Yes, we haven't quantified that and I don't plan to. What I think I said was, if you take all the pieces of running the business; that includes price, that includes volume and includes mix and includes unit cost, it's about two points worse in the second quarter but cost per units is a benefit.

Just a couple more quick ones. You said that 65 is basically almost all of the mix at this point on a microprocessor basis.

Could you give us some sense? I think your forecast was for the 90-65 mix to be about two-thirds, one-third by the end of last year.

Where was this in Q1, was it less than 10% 90 nanometer, if you are thinking about the mix of the processors or was it still above 10%?

Actually I know the answer is sitting in front of me. We are getting into some pretty arcane questions.

So, I think I am going pass on this one, unless you give me a better idea of what you are after.

Okay. I will let this pass.

One final question, on Q2, is the forecast just basically on revenues hinging around, what seasonality typically is plus some conservatism as it relates to what the competition might do? There is nothing you could really point out from your OEM or your channel customer base would suggest that your inventory is better than any [material fashion]?

We think our inventory is in the channels, like it is just fine and the customer's standard is fine. I wouldn't say it’s conservatism, I would say caution around what's happening in the competitive space.

So, yes, we are thinking of the second quarter in terms of seasonal with some caution because we think there is a little bit of excess inventory floating around the world.

Okay. Thanks very much.

Yes, Paul, within the service base, is there anything unusual going on in term of this mix shift you alluded to the move from MP to DP in unit processor? Or is this just a seasonal trend?

Do you see any impact from virtualization on these trends?

I think the overall shift to DP in particular is one which is kind of the overarching trend in the industry over the last three or four years. That has picked up a bit as we've shifted to Dual and now Quad-Core products, because the Quad-Core DP is essentially a cheap 8-way, with much of the robustness and very good price performance and the power matrix are exceptional.

So that's driving an overall trend away from MP towards DP in the industry and that's going to modulate quarter-by-quarter, but for the most part that is the trend line that we operate on. And in MP space, that really gets down to the specific customers and specific product lines and so forth.

I don't know that I want to comment on our customers, except to say that this over arching trend is one that we would expect to continue over the course of the year.

And the impact of virtualization, do you see any slower demand?

Yes, I forgot about that one. I don't actually think that's a problem.

We actually like that trend because in the short-term I think it helps to make sure that people have up-to-date hardware to be able to run those virtualized environments. Second of all, when we look at the server demand over the next three or four years, we think the fundamental issue isn't virtualization but rather adding sufficient capacity to do the job.

One of the things we'll talk about in the analyst meeting in a couple of weeks is that we believe that less than 5% of the servers that need to be deployed by 2010 are operating in the market today. So, we still see significant growth in servers despite a fairly positive trend around virtualization, which helps make it more efficient.

And my final question is on Vista. It sounds like it didn't really have any positive impact on Q1.

What's your outlook for the second half of the year and what the market reception is to Vista loaded PCs?

Well my view hasn't changed from this call a quarter ago, which is that in the corporate space, I believe most companies will act like Intel, by doing some pilots and testing today. But the deployment will actually happen when the service pack gets released in the fourth quarter timeframe, probably in the October, November timeframe.

Most companies we believe are buying machines that are Vista ready today, if you will at the enterprise level and we think that's one of the advantages of the vPro ramps that we'll talk more about in two weeks at the analyst meeting. In terms of consumers, essentially all the new consumer SKUs are Vista.

So, right now that is driving the numbers.

Thank you.

Thanks. My questions have been answered.

Yes, thanks a lot. Andy you mentioned the major core differentiation, I mean you are seeing in your products that will certainly pay off a little bit.

I guess the questions around that are, what are the key differentiating areas for either you or Paul and also does that ultimately long-term change your cadence back to a level that we saw in the past, or does this cadence that you guys have established sort of stay around for good?

Let me try that one Michael. I think the near-term differentiation is clearly performance, performance reward and the activity we have done on segmentation optimization, in our power envelopes and those kinds of things at the microprocessor level.

A higher order of segmentation though is the platform strategy, right. So Centrino, as we are now going into our fourth generation of Centrino with Santa Rosa platform is of course about the microprocessor but also about other technologies coming into.

We were refreshing other technologies at least at the rate of the microprocessor refresh. So this one has NAND technology on the motherboard for faster boot, faster application loading.

It’s got a new version of the WiFi chip; it’s got a new graphics engine in it for Crestline and so forth. Similarly, on the desktop the vPro technology has been doing quite well in terms of driving higher end sell up kinds of metrics in the enterprise that we think will now also manifest themselves in the mobile marketplace.

Okay, I guess this follows on which is really what I am getting at is if you are able to sustain this differentiation which looks like you believe you can do this, this should be a business where everybody saw a 50% to 60% gross margin and we are obviously at the lower end of the range of that. Is there anything structurally changed compared to what we saw in this industry has in the past in your opinion or do you think that we actually have seen some change in that and we need to think about a different dynamic?

So I think we are ready to make long term gross margin forecast here. We do believe the key to having increasing improving healthy returns is to have the best products, that clearly and occasionally which means the cadence Paul talked about we won’t go back, we’ll wisely continue to drive the technology in both the architecture and the manufacturing side.

That was very helpful. Thank you.

Thanks. I guess in terms of your upside for the second half for margins, what are your assumptions/thoughts on Barcelona and its competitive impact and in some of our new products AMD might launch on desktops and notebooks?

Well we have yet to see a demo of Barcelona so it’s hard to understand the metrics here. But everything we've seen or if we take the early indications or early commentary at face-value.

I believe that we’ll be able to maintain our competitive lead in servers and in high-end desktops in the face of the introduction of that product line. And even though it isn't more competitive product line then they are shipping today, I think it still going to get down to the ramp and you'll have to ask AMD about their plans to ramp the product.

Certainly, now you’re having outlook for margins for the second half you’re assuming that the traction you are getting right now it just continues to widen despite AMD's product introductions.

I am assuming that we will be able to maintain our competitive lead in all segments all year.

Okay. Nice, thanks very much.

Thanks. Paul earlier you mentioned that the channel side of the business was kind of better than seasonal in the first quarter.

What do you think is going on in the Channel side versus the OEM sides? I guess that would also imply given your overall business for seasonally a little weaker that the OEM side was weaker than you may have expected?

The Channel is obviously not terribly strong in selling notebooks the light book business is not a large chunk of the market today, where the Channel excels is in selling very good value in terms of technology for the bang for the buck. They were early to grab Woodcrest and Clovertown, which is our dual and quad-core servers and the White Box server business has been doing quite well particularly in North America and we see them as I said earlier ramping Conroe on the desktop.

In some cases a little bit faster than some of the OEM's which gives them an advantage in the marketplace because of their cost effectiveness. So the combination of those is that you've got a quick moving set of players in the channel that are capitalizing on technology and winning business at the local level.

And is it that something that you, it doesn't sound like any of those metrics would change as you go into the second half of this year. Is that a fair assumption?

The relative advantage over the large OEM's tends to mitigate overtime as the large ones ship their product line to have the same kind of profile. But, other than that you start to, the agility factor is still one that, that has been there historically.

Okay. You mentioned a little bit just now about Woodcrest, and Clovertown, again just overall when you said the ASPs are down in your server segment, if the mix is increasingly dominated by the Woodcrest, and the Clovertown's, why were the ASP’s be dropping?

Why were they dropping from quarter-to-quarter?

Yes, if the mix improves I would assume by more Woodcrest, and more Clovertown.

Because the MP's which are much higher price become less of a share of the server business.

Okay. Is that a simple thing?

Okay.

Yes.

And then the final question was just on the R&D side of equation, I noticed that popping up of course the M&A is coming down, so the net changes is zero on the OpEx, but overall Andy, if you could go little bit into what’s happening on the R&D side please?

Kind of, they changed from before, what happens is we continue to believe, we are a technology company. We believe that’s the light side of Intel.

So, as we find ways we can save money in the non R&D spaces. Well, again like I said before rather than drive spending even lower, we would tend to reinvest in the R&D side and hold the 10/7 for the year.

With a little luck, we can see this happening again in the future.

Great, thank you.

Bill, we are coming close to the bottom of the hour. We'll take two more questions please.

Yes, good afternoon and thanks for taking my question. On the system integrated business are these people very flighty in terms of adopting the latest hot technology and therefore if you gain market share in Q1 and these people when they presumably will in Q2 as well is there risk that, that these same people who are quick to adopt new technology might so called fight back to the other people for your competitor in the second half.

And I was wondering whether the OEM business was a little weak in Q1 because you obviously gain a lot market share incrementally from AMD and I don't see it in, in the Digital enterprise base?

Well, the systems integrators are typically -- relatively small companies. They live and die by the competitiveness of their product line.

They have moved very rapidly to our products and as long as we can continue to give them, pay the best products and be the best support and critical to that support is our terms and condition, our ability, supply and volume. The parts they need, when they need them and not constrain them.

I think that they'll continue to do business with Intel and I am pretty confident about that. In terms of the mix shift to OEM and versus channel it wasn't that big of a thing and wasn’t that big of swing and I'll go take you back to Andy's earlier comment on overall revenue, which is that, that the micro-processor business was about were we expected it to be.

Well, you know your only competitor had a major short fall in the unit volume and find it should land in your court. So I think that if the system integrated business was unseasonably strong then to get to your original target, the OEM business must be unseasonably weak?

The relative scale is a lot different, right. I mean our distribution business runs about 30% of our overall business.

It's not like its 50-50.

I see. Okay.

Thank you.

Hey, thanks guys. Just a quick question on the NAND Flash business.

Obviously, it's been difficult. We know what you guys are doing there with the Santa Rosa platform.

But how do you think about the benefits from Santa Rosa versus some of the cash that's been spent out and the returns that you could generate in the business long-term, if the pricing stays kind of depressed here?

Well, we are still in the investment stage of this business as you indicate James. It's a lot of factors such as start-up costs as we ramp up new facilities and as we migrate to more dense products.

The NAND pricing environment in the last six months, actually last three quarter has been particularly acute on the extreme aggressive side of the price curves. We have actually seen some firming up with NAND pricing in the last six weeks or so.

And I am not going to give you a forecast, but there is some cause for optimism that has returned to more normal pricing curves.

And is there a point at which, as you think about your expense that you had in the NOR business over the last few years, is there a point at which the pricing would reaccelerate to the downside that you guys might think about may be scaling back on the commitment a little bit, at least the level of commitment?

No, we continue to look at that business plan. We look at it every quarter.

We look at it every time when we make the capital commitment with our partner Micron, and the business continues to have the right kind of MPV model long-term for us to continue to invest in.

Great, thanks so much.

Okay thanks, Jim. We are going to conclude the call now.

I would like to ask Paul to give us a few closing comments as we do so. Paul?

Thanks Kevin, and thank you all for your questions today. I wanted to leave you with a message that we have been highly focused on technology leadership and business efficiencies.

We are seeing very good results in these areas. And I wanted to thank our employees for working hard and staying laser focused on these objectives.

As you know, Intel's R&D pipeline extends many years into the future, and we have much to share with you on May 3rd, at our Analyst Meeting in New York. Thank you very much for your attendance today.

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