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Here’s the entire text of the Q&A from Intel's (ticker: INTC) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

The prepared remarks, by CEO, Paul Otellini, and CFO, Andy Bryant, are in a separate article.

Q&A

Operator: Thank you very much, sir. Our first question comes from the line of Apjit Walia of RBC. Please proceed.

Q: Thank you. Essentially Andy for the September quarter, if you did not have the chipset constraint, how much more revenues could there be?

A: Well, it is difficult to estimate. If we had not had the chipset constraint, it would certainly cause us to round to the next higher, if not a little bit more.

Q: Great. And I am terms of the inventory build, with the end customer, essentially is this, I mean are you seeing this across the board or is it more specific? And where do you think it comes from.

A: I don't want to point out any specific customer but there is not a lot of them. We saw the inventory build. And what happened, I think, is we have been in a period of tightness. Our customers do want to make sure they have respond to a fourth quarter upside and in reality it is perfectly natural if you can get a few extra part, you get a few extra parts.

Q: And lastly, if you were to rate India and China as revenues, what would they be right now?

A: I'm sorry?

Q: China and India as end markets, what would they be in revenues right now in your respective.

A: China would be far greater than India at this point. And I think that China is probably

A : China is about to become, or if it hasn't already, the second largest consumption market in the world for PC's after the U.S. It is about to pass Japan. So it is in that range.

A: China, what we called out specifically, because it is a big enough percentage of revenue, so you will see that. India is much smaller at this point. Clearly just getting under way as a growth market.

Q: Great. Thank you.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mr. Chris Caso of Friedman Billings Ramsey. Please proceed.

Q: Yes, hi, thank you. I wonder if you could just give some more color on the gross margins and, specifically the increase for the fourth quarter, if you can kind of break down for us where the sequential increase comes from, perhaps, break it out by the different components?

A : By far, the vast majority of the increase in large percentage for the fourth quarter will be in the qualification of the products in 65-nanometer production. You always get a little bit of benefit when have you increasing revenue, particularly in a quarter when you make processors the biggest driver, so to a small amount, we have the product mix. By far, the biggest explanation will be adding the qualification for the 65-nanometer product.

Q: Okay. And as a follow-up, if you can just,, address, obviously, a lot has been discussed about the capacity constraints that you're under right now. How do you see that playing out perhaps into Q4 and into Q1. Which areas do you still expect to be tight as you exit the year and go into Q1?

A : Clearly, the chip set constraint will continue into the fourth quarter. We are producing more chip sets ourselves. We do have relationships now with a couple of other suppliers who will be providing chip sets for the low end desk top. It takes a while for that competitor to come online. I still think you will hear a fair amount of noise in the third quarter. We are hopeful that as we get to the end of the quarter we will start to get some relief from the constraints we have been seeing.

Q: Okay. Thanks.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Christopher Danely with JP Morgan. Please proceed.

Q: Thanks, guys. Just a quick clarification and then on to the questions. So, Andy, you said that the reason that the Q4 sales guidance is a little less than seasonal is basically because Q3 was better than seasonal and there is a little bit of an inventory build out there? Is that where we're going?

A : That's correct. I said that I thought there was about $100 million of inventory build in the third quarter, which means if you look at quote normal consumption, it would have put us back more towards the midpoint of the third quarter season. If you recall last year, we had a situation like that, and we over forecast the following quarter, and not allowing the inventory to be used by a customer, so what we see is seasonal consumption, and we see about $100 million inventory swing for us between the third and fourth quarter.

Q: Okay. And how about your own inventory? How do you expect that to change in Q4?

A : Well, you saw inventory up under $100 million, all essentially good for the third quarter, which was a pleasant surprise, to be honest. And I do think as we qualify the product for the 65-nanometer, that then does put some spending into inventory and I would expect to see the increase in inventory levels in the hundreds of millions, above 200, less than 400, something like that.

Q: Okay. That's fine. Thanks a lot, guys.

Operator:

Thank you very much. And again, ladies and gentlemen, we do have a question, please key * 1. Our next question comes from the line of Michael Masdea of Credit Suisse First Boston. Please proceed.

Q: Thanks a lot. Continuing on the gross margin side, one of the major concerns out there is that we may be at or around peak gross margin for Intel. Can you talk to us about the dynamics that are playing out in '06 that go into making a decision like that or a call like that? What are the moving parts and cogs that we should think about next year assuming that demand is alright and ASPs don't surprise us in a big way.

A: You took away all other factors. The biggest factor of gross margin next year will be demand, will be the worldwide economic health and our factories stay full, our margins will remain fine. I think that our product is getting stronger and stronger as the year goes on. I like our product lineup at this point and what it comes down to, can I keep my factories full, and if I can, we're in pretty good shape and continue to make our cost targets and continue to have a decent year. I'm not going to make that call until January. January, we will give you an estimation as to how we think the year will unfold.

Q: Is there a structural limit that were hitting up against here? I guess that's what I'm getting at.

A : The answer is no. But, I'm not going to tell you, if you go back through our entire history, it doesn't get much better than it does in the fourth quarter. There are ways it could be margins could be higher but it is a complex mix that has to be how successful your chip set business arch the flash business and the mixers involved and different types of processors involved, and a lot of moving parts. It can be higher, and quite frankly it can be lower. Again, why don't you wait until January and I will try to give you a little bit more insight.

Q: A quick follow up on the chip outset I'm trying to recall Intel has been capacity restraint consistently for a year and is there something else going on here that is driving this on the transition of 300-millimeter or anything else that is factoring in here?

A: The factories are helping, no issue there. The chip sets are on the 8-inch network. We're transitioning to the 12-inch network next year, which will certainly give us a lot of relief. I would say we're gearing toward a decision to try not to grow the 8-inch network. We want to invest in the 12-inch, which is our future. Demand spiked on us and as a result we got tighter than we would like. The investment goes forward these days.

Q: Makes sense. Thanks a lot.

Operator:

Thank you very much, sir. Ladies and gentlemen, our next question comes from the line of Mr. John Lau of Jefferies & Company. Please proceed.

Q: Thank you. Andy, circling back to the inventory comments, I think most people are concerned about. That so specifically, do you believe that this inventory is prudent given the current tightness? And if so, and if you take a look at the PC demand, if that remains seasonal throughout the year, seasonally normal throughout the rest of the year, will that inventory sell through without any excess by year end? Thank you.

A: I clearly believe the inventory that we have in the third quarter is prudent. In fact if I could have it today, I would take it today. And it is in a time when we have been constrained, we're doing all we can to try to make sure we have the parts available. We've learned many times again, which you see over this last year, Intel is always better to have parts available ready for an upturn and not constrained like we have been. So yes, inventory is prudent. Under normal business conditions we will not have excess inventory. It is a very controlled normal environment. The only thing that is going to cause me a problem will be if there is a worldwide economic problem. And demand drops more than you would see in the first and second quarter.

Q: And those comments, I was also relating not only to your own inventory, but the inventory that you had commented with regards to your major customers. Is that correct?

A: Absolutely. Again, $100 million in the worldwide PC networks is very small. We still are in a situation today where we have customers in channels we would like to actually have more products. So we have outlets if we would have inventory right now.

Q: Okay. And just, I know I'm beating this again on you, but assuming a normal PC seasonal demand out there this shouldn't be an issue by year-end then?

A: Right. Are you talking about year-end '06?

Q: No, this Q4.

A: Oh, absolutely not. By year-end '04, as I said earlier, I still think I'm going to be struggling to meet the chipset demand. I think the nanoprocessors is gone.

Q: Thank you very much for answering that.

Operator:

Thank you very much, sir. Ladies and gentlemen, the next question comes from the line of Mr. Adam Parker of Sanford Bernstein. Please proceed.

Q: Yes, could you give a little more color about Q4, your guidance in revenue in particular? Do you think it is indicative of a slowing PC market, a sense that maybe your blended ASPs are going to be down? I think you said they're flat sequentially. Or is it continued share loss to AMD who has guided to more like 10% growth that is making you,, coming into I guess it is several points below normal seasonality?

A: So I will choose the fourth, and say none of the above. What I believe is happening is there is a bit of inventory build in the third quarter, that inventory will be sold out in the fourth quarter, and quote, the extra inventory won't be replenished but as a result it will appear to be an above seasonal third quarter for us, and a below seasonal fourth quarter consumption in PCs, and PC-type products will be perfectly cease seasonal for the third quarter and the fourth quarter.

Q: I mean if you add 100 million to your midpoint, which is the number you're throwing out there, and it is still, it doesn't get you to even the lower end of normal seasonality over the last five years so it just seems like, maybe we're splitting hairs on a couple hundred million dollars, I'm just trying to figure out do you think that anything else is going on?

A: I agree. You also subtract 100 out of the third quarter. And if you take 100 out of the third quarter, you have a seasonal third quarter and if you add 110 to the fourth quarter number from the third quarter number, you are back to your seasonal fourth quarter.

Q: It is close enough. All right. The other question is, you talked about, trying to keep your revenue growth above your operating expense growth, and are you looking at a year where SG&A growth is going to be about 20% plus or minus above your revenue growth. It is there something that you can point to in terms of why that is really had to come up a lot in the last year? Is it competitive positioning or new initiatives with dual core? And how should I think about, the SG&A growth in particular going forward? Are we in a new environment where that is going to have to be still pretty high or how should I think about that?

A: If you look at we will take R&D and SG&A and look at it as a combined investment spending. Year-over-year, the increase in that bucket will be the same as the increase in revenue for '05 versus '04. The difference you're seeing is the front half of the year we grew spending at a much lower rate, as we have in some prior years. And the second half of the year spending more quickly. We have every intention now to trail off the spending growth to match revenue growth next year. So we think where we're at for the year right now is a pretty comfortable place to be.

Q: So I'm kind of confused. Why do I have to think about it as combined SG&A and R&D? I guess dumb Wall Street guys sort of think R&D going toward technology and the SG&A going toward marketing. Is that too simplistic?

A: We think of them as both investments. For example, we have to choose between whether you're going to do a new version of a processor versus a marketing program like Centrino. Or _____ you get a return on each of those. And what we have to do, under the guise of trying to make sure spending in total matches revenue growth, it depends, figure out which of those we think we will get the best return on and allocate spending appropriately. We don't separate the two buckets. We make investment choices in total.

Q: Got you. So bottom line is long term there is no operating leverage? I mean in terms there is no operating expense

A: Our intent right now long term would be to have revenue and spending grow pretty much in line with each other.

Q: Thanks. Take care, guys.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Tim Luke of Lehman Brothers. Please proceed.

Q: Thanks. And I was wondering in your guidance of midpoint, could you give us any sense of after the quarter and third quarter digital enterprise was up around and mobility under around 12 or 13, whether one would continue to expect the mobility to exceed the digital enterprise growth or talk about maybe some of the factors, influencing the differentiated growth rates of the two areas?

A: We certainly expect to see mobility to be a driver of growth. It is now a year ago, we would sit and talk about it, and talk about the U.S., and is not a worldwide phenomenon. It is going to continue, we're seeing the price points of those products hit in the places around the world where many, many more people are choosing to have the ability to have a laptop to be mobile. And American business, you see it almost exclusively, being what is being bought, same thing in Western Europe. I don't see it changing. The capabilities of those machines are such that they will continue to be the growth driver.

Q: So it could be a double of the growth rate of one over the other?

A: I don't want to get pinned down to giving growth rate percentages off of baseline inventories. We don't provide it to being with. I would just say, you can look at (36.19) has been, it is going to continue for a while. We don't think we've begun to hit the equilibrium point yet.

Q: And just with respect to the inventory, the 100 million is in which area? Which of the product line?

A: It would be well, I will say in the Intel architecture product line. I would say it is not flash or communications stuff.

Q: But it is likely to be on the service side or how should we view that? Or is broad?

A: I don't want to define it any more than that. It is in the Intel architecture, so think logic, and silicon, and as my friend Paul is pointing out to me, $100 million equals about two days worth of shipments, so it is a small number.

Q: And lastly, as we look at the beginning of next year, if we assume normal seasonality, just if you could give us any flavor of the factors that may influence the gross margin from this very high 63% level, as you end this calendar year?

A: No, I'm going to, I have got new back one, I will hold off answering '06 margin questions until '06.

Q: Thanks.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Joe Osha from Merrill Lynch. Please proceed.

Q: Hi, folks. Two questions. First, just back of the envelope math, in terms of your silicon acreage next year, if you will, would indicate to me that your capacity growth for 2006 is going to be higher than 2005. Is that a reasonable statement?

A: Yes.

Q: Okay. All in 300 millimeter?

A:All in 300-millimeter.

Q: Okay. Second question, you bought back now $7.5 billion worth of stock this year a lot of it at higher levels than where the stock is now. You got a market multiple basically, your dividend yield is half the Dow, so I guess my question is, since the market obviously isn't necessarily being all that impressed by these buybacks, why is the dividend yield on this stock not twice what it is?

A: That's a decision made by the Board. It is a decision that gets debated throughout the time frame and those discussions are under way, and if they decided to change the dividend yield, we will certainly let you know within 24 hours.

Q: Well, I mean you're a smart guy. What's your impression of why it is the Street is not rewarding this massive stock buyback?

A: Actually, that is a hard debate for us to get into. If we hadn't done matching buyback, the price would be the same. Anyway, I don't really actually I'm not going to go there. We will continue to look at ways to return cash to shareholders, and I'm sure we will look at whether we should increase the dividend and do more of that versus buybacks.

Q: And just back to the first question. Is it fair to say that the incremental just confirming your incremental capacity comes from bringing the conversion of Chandler back up, and then also continuing to ramp the second phase of Ireland?

A: Yes.

Q: Okay. Thanks, very much.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Michael McConnell of Pacific Crest Securities. Please proceed.

Q: Hi. Thank you. A question for Paul. Paul, with the Bensley right around the horizon, what should we expect in terms of the server market, with the competition there? Are you expecting to regain some share with Bensley, or do you have a higher degree of confidence that if we look into the summer with the new architecture on the micro server time, should that be the time we think about share reversals in the server market?

A: I think that I'm not going to give you a specific number, Michael, but we've got three events all of which are very positive in our server line. One is the tax bill launch for DP a dual processor, and then MP, which is coming later this quarter, which are already having an impact in our volumes. The second is the Bensley platform launch in Q1 that you referenced which I think will give us another pop. Implicit also in Q1 is our first very low power blade for servers, Soccer man will be shipping, and then mid year, you're right, we have the next generation 65-nanometer products woodcrest platform shipping. All three of those events happening over a kind of a quarter a piece, over the next year, really give us much more competitive road map in '06 than we have today even. And I would expect to be able to exploit it.

Q: In terms of though, an inflection, should we think about it being more gradual? I'm just trying to get a sense of your perm confidence and when we can

A: We're going to ship the heck out of them when we get them. At that point it just becomes how our customer does.

Q: Okay. But any sense of just feedback from the customer right now?

A: They're all very excited, and the feedback about pulling the product line in is very, we're very well received. Our customers, as you've already seen, are able to exploit it with a dollar per TPC number that Dell put out, giving them industry leadership on that platform.

Q: Okay. And then one last question, just on the chip set side, on the low-end desk topside, there's been some speculation that Intel is going to be exiting that segment. Should we look at that as being strained or is this a matter of you being constrained right now as we go into Q1 you start to ramp the chip sets at 90-nanometer, are you expecting some of the third party arrangements that have you right now to work their way back down, and then you start to obviously ship what you want to within that particular market segment?

A: We backed off on the low-end desktop volumes this year, because of the capacity constraints. And we didn't get out entirely. We backed down some. And you will see us as we get capacity over the course of the next year, re-enter that part of the market again. It is our intention to be a broad-based supplier of chipsets. It is intrinsic to our platform strategy.

Q: Thank you.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Tom Thornhill of UBS. Pease proceed.

Q: Thank you. Question for Andy in gross margins. You laid out a unit cost program at analyst meeting about a year ago, Q4 '04 to Q4 '06, down 25%.

A: Yes.

Q: Where are we on that plan? How much progress have we made? How much progress is there yet to go?

A: Today, I'm a little ahead on that plan. And if my factories can stay full next year, I'm pretty comfortable with that plan. What it comes down to, today, Tom, quite frankly it is also a give me, because the fact I'm building everything I can build. If we have normal loadings next year with the company on track to make it, today with loading, I'm ahead of where I thought I would be.

Q: Are we about halfway through this plan or?

A: Boy, I don't want to wing it. Sorry, I don't know the specific number we had for this particular time.

Q: I'm not trying to be that precise. I'm trying to estimate it, how much more there is to go.

A: There certainly is more to go next year. You get the benefits of 65-nanometer coming across the product line. You get more 300 millimeter near the product line. You get, non-processor products fitting into the 300-millimeter factories. So there is the technology is bringing more benefit through next year.

Q: In '05, gross margins were impacted by 65-nanometer start-up costs and I understand that their start-up costs continually on new process, but there are ramps and sort of tidal surges in those. What has in '06, is there something similar in the offering that we had in '05 or not?

A: Not the same level of tidal surge. As you get towards the end of next year, you will begin to start seeing the beginning efforts of getting ready for the next manufacturing process. But it is to back in the last year and it will be much smaller than we saw in '05.

Q: Okay. Paul, a question about enterprise. Revenue growth quarter to quarter, can you differentiate at all between desktop and server? I mean it is clear that mobility had good growth, because we can see that, the way you report, but between server and desktop, was there a difference in the growth rates?

A: There was a no difference. They were both positive. That's about as much granularity as I can give you Tom. We grew units in both desktops and processors this quarter.

Q: Given that your servers were up, and since we know what your competitor has already reported about their sequential growth, they are clearly the rate of share change slowed, what were the key factors in that, in the first quarter? That carry into Q4?

A: Again, a new platforms shipping, we've been doing actually better than we expected internally this year because our product line has been able to be pulled in over the course of the year. Bits and pieces and that along with our customers being pretty aggressive, you've seen bell be aggressive, you've seen HP be aggressive, IBM with the hurricane platform has done very well with Intel based XEON products. All of those combined have given us pretty solid year-end servers. Better than I had expected coming into the year.

Q: Thank you.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Ambrish Srivastava with Harris Nesbitt. Please proceed.

Q: Hi Andy just trying to considering your comments on channel business, you mentioned it was flat Q-over-Q. And then you talk about growth in emerging markets. And what am I missing here? Is there something going on, IE, some market share shifts or how should we be looking at it going forward?

A: The emerging markets are served more than just by the channel. You have big local OEMs like novo and Dell establishing presence and you have HP being active and what tends to happen this quarter is we saw the large OEMs being more successful in all markets, emerging markets particularly, versus the channel, but not the management. Like I said, the channel is flat, so the growth happening in the OEMs happens around the world.

Q: And this is about between 10 to 30% of your total business, is that correct?

A: It tends to be at the high end of the numbers that you just listed.

Q: And should we expect it to be up in Q4?

A: It hangs around the 30%, plus or minus a couple of point force the last decade so I wouldn't see it moving out of that range.

Q: Okay. Thanks.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Hans Mosesmann of Moors & Cabot. Please proceed.

Q: Thanks. Quick question on Bensley. What is the performance improvement over Paxville ill that we can expect to see?

A: Well, we're not allowed to give out TPC numbers until they're in volume but we're comfortable that this will be a very competitive platform and it is not just in TPCs, it is as I said earlier, we've got other platform features in terms of manage ability and virtualization that will be released with that platform that we think have nice value-add for our customers.

Q: Okay and a quick follow up 65-nanometer, when do you expect the crossover to consider in '06, if it does occur in '06.

A: I think I said in my commentary, by the third quarter we will have crossed.

Q: I think you said for the performance

A: Oh, you meant for the entirety?

Q: Right.

A: I don't have that number in front of me. I'm sorry.

Q: All right. Thank you.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes in from the line of Cody Acree of Legg Mason. Please proceed.

Q: Thanks. Paul, following up on the server side, not being able to give specific jumps in performance, but it does sound like Woodcrest is going to be a real step function in capability. Do you run into an issue, maybe where there is such an anticipation in the step functioning capability that we see some delayed purchases during the first half of next year, waiting on this new architecture to come out next year?

A: I have never seen that yet in my history of this industry. So it would be remarkable for that to happen. And I don't think so. I think people tend to buy from their existing vendors, when they need the product, and they look at the road maps, they have to vault them, and the one difference is when they see the need for a new blade server that may have a lower power envelope into an existing data system, that is something that might actually be something that people wait for and you have seen us launching the product early in Q1.

Q: Okay. And then just secondly, last year, you guys ran into an issue in excess supply, partially at 90-nanometer yields came up faster than you anticipated. 65 sounds like it is coming on pretty quickly here. As you run into next year and you start to look at a little inventory building here internally, not knowing exactly where demand is going to fall next year, but yet it looks as though yields are progressing well, what are you doing to make sure we don't see some repeat of that upward yield surprise last year?

A: Well, the difference this time is 90-nanometer factories will be a pressure relief valve for our chipset business, which as Andy indicated, are essentially built-on our eight-inch network today and therefore constrained at the upper end of their volumes. By having the processors move to 65-nanometers, we free up capacity for chip sets. And that allows us to move on to the next generation, more capability, lower cost, and ultimately take the eight-inch either offline or retrofit that.

Q: Thanks.

Operator:

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mr. Ben Lynch of Deutsche Bank. Please proceed.

Q: Hi there. First question I had was, Andy, you guys have stuck to this sort of typical $600 million revenue range guidance for Q4. Given that your capacity constrained, I would think that you might have a tighter view on attainable revenues. Sort of removed one degree of freedom. I'm just wondering how much is their revenues attainable sensitive to capacity constraints? And somebody asked specific to Q3, what did you, you think the dollars left on the table were, and you didn't want to get pinned down. Could you maybe comment on that for Q4, please?

A: Sure. The, there is a reasonable probability it could show up in the upper end of that range. Remember we are building the inventory. If demand is strong enough to consume that inventory, we do have upside to the current range. So I don't think I'm capacity limbed at this point. We do make sure we have chip sets available, that customers do have a little bit more juggling than they normally do, but I'm pretty comfortable with the inventory build I have planned, that if demand is strong, that we can find a way to meet higher levels in the midpoint we've given.

Q: Okay

A: In terms of whether Q4 will be constrained. It is tough to predict. At this time, I don't think I see chip sets con straining the business, other than the chip set business, and it's hard to know today exactly how much that will be. It is hard to even know looking backwards how much it is con strained to prior quarters. So I think there will be some constraint. I think there will be some lost revenue opportunity in the chip set space. And I think the rest of the business will be about okay.

Q: Okay. And you're not sort of factoring in the possibility as just product availability for a tight for chipsets that you ship a bit later in the quarter than you normally would?

A: It certainly is a possibility but again the customer base is pretty resourceful in finding ways to meet demand if demand is now. So I think we will continue to see people scrambling, we will continue to see people doing all they can to meet customer's demands because they're concerned of a loss shipment a delayed shipment is a lost shipment.

Q: And the other phenomenon that you have is we're launching the Napa platform and the Viiv platform in Q1. So I think people will take product later in the quarter in anticipation of the launches in the January timeframe.

A: Right.

Q: Okay. And then the second question I have is then for you Paul, directly was I think in September, according to current analytic, one of the houses out there, they say that AMD for the first time ever over took you in U.S. retail desk top for a full month. Can you take a bit about this in terms of, to you think the data is sort of representative of what happened? It doesn't really matter? It is due to chip set shortages? You guys are focusing on notebooks? Just sort of give your perspective on that, please.

A: Well it is about of all three of those. I did see the data just briefly and I haven't analyzed it yet, but the first approximation, I can't argue with. It the U.S. retail phenomena, though, have you to remember is no longer reflective of the U.S. consumer market. Because it excludes the direct business. For example Dell is not in there and Dell is the largest consumer vendor in the United States. So you need to really add Dell's numbers into that to get a snapshot of the U.S. consumer numbers. Number two, as we were constrained on low end desktop chip set, much of those were retail oriented and for companies like Hewlett Packard, and the results are what you saw as a result in U.S. retail. On a worldwide basis, the numbers don't look anywhere near like that.

Q: Great. Okay. Thank you very much.

A: Operator, We will take two more questions, please.

Operator:

Thank you, sir. The next question comes from the line of Charlie Glavin of Needham & Company. Please proceed.

Q: Thanks. Hopefully not beating a dead horse, Andy but in terms of the last comment, when you said that the delayed shipment is potentially a lost shipment, in terms of stock-out, when you take a look at the 100 million in the inventory, was that essentially due to a constraint? And did some of your lower guidance for fourth quarter, based on an assumption that some of that 100 million, or what was constrained in the third quarter won't materialize in the fourth quarter?

A: Well, I'm not honestly I don’t I think I followed the entire question. Can you do it again?

Q: The 100 million build that occurred at some of the larger OEMs, I assume was due to constraints and the inability of some of those OEMs being able to ship?

A: I don't think so. I think it was the OEMs wanting to make sure they're prepared for an up Q4 and have inventory in place when they had a chance to have it. I don't think it was lost orders for them.

Q: Maybe looked at it a different way, you answered earlier that you did believe that some that there was some upside that could have been realized in the third quarter. And what I'm looking for is whether or not we are still somewhat tight in the fourth quarter. Could that spill over into the first quarter as you like to bend people are still scrambling and make sure a delayed shipment does not become an outright stock out and a lost shipment?

A: It is possible if we're con strained in the first couple of months, some revenues lost that could have been had. I think I was talking about our revenue, and I'm not speaking for our customers. You need to get their input, their data from them. And in our case, we believe if we had more chip sets, we could have shipped more chip sets.

Q: Andy, one other question, just in terms of the shift going on right now. I noticed your tax rate actually coming up a little bit, even with the other issues. And yet, your shipments to Asia are well over 50%, and seem to continue to grow fairly well. Can you give some sort of idea as far as is there a shift going on right now, or some of the stall-outs, and Paul, to that idea, the ESPD group, in terms of the server side, included with the OEMs or within channel group? Just for a little more clarity.

A: Our tax rate, I will do the tax rate one first. Our tax rate is essentially a function of mostly where the fabrication takes place. As more is done in the United States and Arizona, and in the development Fab out in Oregon, you see a higher percentage of the revenue and less effectively a higher tax environment.

A: Your question on the service, all of the server revenue is reported in the DEG or Enterprise Revenue Group, whether it is shipped through the channel or through the OEMs.

Q: Okay I think when were you talking about flat channel, any progress in terms of that ESPD group as far as enabling now particularly toward the i campaigns?

A: Yes, that continues to grow. The numbers are relatively small in that server space, but they're growing.

Q: Okay.

Operator: Thank you very much, sir. And ladies and gentlemen, our last question this evening comes from the line of Glenn young of Citigroup Investment Research. Please proceed.

Q: Thank you. I guess either for Andy or Paul. If I were to look at, let's say your guidance plays out for the fourth quarter. Can you compare where your utilization would look like exiting Q4 of this year compared to how it looked exiting Q4 of last year?

A: Exiting Q4 of this year would probably be a little higher than exiting Q4 of last year. If you recall last year in the fourth quarter, we had the 12-inch factories full by the end of the fourth quarter. We had wafers start in 8-inch factory full. However, we started though in the middle of the quarter that the lead time to get through the factories. At this point, everything is full. Beginning in the first quarter, first part of the quarter. So in effect, have you a little higher utilization but not dramatically. In both cases, you see three or pretty full factors.

Q: And one of the elements of this year's first quarter was 65-nanometer start- up charges looking better than you had anticipated. And I think you answered this already but just to be clear, you don't have anything like that in the first quarter of next year where it could play a factor in the way gross margins could proceed?

A: Again, I'm trying to stay away from next year's margin questions but there is, to my knowledge now, actually no big surprises in the first quarter, no.

Q: And then early in the year, you had talked about ASP pressure in servers in particular. And I wonder if we looked out into 2006, at Bensley, both with Dempsey and Woodcrest, middle of the year, whether you would anticipate the pricing pressure next year would not be as intense as it was earlier this year?

A: I do think our products are getting stronger versus competition but I really can't talk about pricing for next year. It is way too soon.

Q: And the last question, just to absolutely clarify this, when you look out at your guidance for the fourth quarter, recognize can that the combination between Q3 and Q4 is normally seasonal, has there in fact been any change from your customers' perspective in term what was they're telling in terms of what demand will look like in either quarter?

A: Yeah. We see nothing other than business as usual with a little bit of inventory build.

Q: Thank you. Thank you very much.

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