Intel Corp. Q4 2008 Earnings Call Transcript

Intel Corp. (NASDAQ:INTC) Q4 2008 Earnings Call January 15, 2009 5:30 PM ET

Executives

Kevin Sellers – VP, IR

Paul Otellini - President and CEO

Stacy Smith - CFO

Analysts

Glen Yeung - Citigroup

David Wong - Wachovia Capital Markets

John Pitzer - Credit Suisse

Ross Seymore - Deutsche Bank

John Barton - Cowen & Co.

Jim Covello - Goldman Sachs

Hans Mosesmann - Raymond James

Uche Orji - UBS

Chris Danely - JPMorgan

Sumit Dhanda -Banc of America Securities

Tim Luke - Barclays Capital

John Dryden - Charter Equity Research

Kevin Cassidy - Thomas Weisel Partners

David Wu - Global Crown Capital

Gus Richard - Piper Jaffray

Brian Piccioni - BMO Capital Markets

Operator

Good day, ladies and gentlemen. Welcome to the Q4 2008 Intel Corporation Earnings Call. At this time, all lines are muted.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Kevin Sellers, Vice President of Investor Relations. Please proceed, sir.

Kevin Sellers

Thank you, Melanie, and welcome, everyone, to Intel's fourth quarter 2008 earnings conference call. Joining me on the call are Chief Executive Officer Paul Otellini and Chief Financial Officer Stacy Smith. This call is being webcast live and a replay will be posted to our website at around 5:00 Pacific Time and will remain there for about two months.

Two quick items as we begin, first, if during this call we use any non-GAAP financial measures or references, we will post appropriate GAAP financial reconciliations to our investor website, intc.com, after the call. Second, a reminder for everyone that today's discussion contains forward-looking statements based on the environment as we currently see it.

And current uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters and makes it more likely that Intel's actual results could differ materially from expectations. Please refer to our press release for more information on the specific risk factors that could affect our results. So with that, let me now hand it over to Paul.

Paul Otellini

Thanks, Kevin. Our fourth quarter results reflect the difficult economic climate. Putting our results into perspective, this is only the second time in 20 years that our fourth quarter revenues were below the third quarter, the last being the year 2000 where revenues declined less than 1%. The pace of the revenue decline in the quarter was dramatic and resulted from reduced demand and inventory contraction across the supply chain.

While inventories in total have declined, we are assuming further reduction in Q1. The fourth quarter was a weak ending to a tremendous year of accomplishment for Intel. We launched two groundbreaking architectures with Atom and Nehalem which together strengthened our competitive position in the traditional PC marketplace and offer incremental growth opportunities in new markets in foreign factors.

We continued our focus on efficiencies and have built that mindset into our daily operations. We divested a number of non-strategic businesses and spun out others such as our NOR flash operations. We saw the scale-out of our 45-nanometer manufacturing process, and the design completion of our next generation 32-nanometer process technology. WiMAX entered commercial deployment and holds great promise of becoming a ubiquitous mobile broadband technology.

In summary, we delivered on our operational goals in nearly all elements under our control. This disciplined execution remains an important strength for us and is the centerpiece of how we plan to manage the business during this economic downturn.

Now, let me briefly discuss our priorities for managing during this environment. First, we understand the absolute need for fiscal discipline and have in place several initiatives focused on savings and modulating our investments. We have been undergoing a broad-based restructuring for the past three years and have the efficiency gene strongly ingrained into how we do business.

Our restructuring effort was not a point project, but an ongoing process focused on operating more efficiently. These programs have yielded greater than $800 million in savings in 2008, leading to cumulative savings of greater than $3 billion since we began the program in 2006. Second, we've always believed that the best way to successfully emerge from recessions is with tomorrow's products, not by standing still with today's.

We will continue our pace of investment in R&D. In 2009, we have a slate of new products and technologies coming to market that offer superior value for our customers. We remain on track for introducing our 32-nanometer process technology in the second half of this year and we will not slow down this introduction. We believe that the shift to 32-nanometers will increase our performance lead, lower our product costs and usher in a new era of high volume system-on-chip products.

Third, we will continue to invest in our growth initiatives. Atom is launched and is being well received. It is a great addition to our product portfolio in this recessionary environment in that it enables new capabilities at affordable price points and good margins. We have made good progress in the consumer electronics space with our Canmore processor.

Those of you that attended CES saw numerous designs showing the power of using the Intel architecture to bring the Internet seamlessly to the TV. We've also made solid progress in the handheld market. Our first generation product is in production with multiple customers ramping in volume. Our second generation is sampling. And our system-on-chip third generation is well into design.

We expect a number of significant design win announcements over the course of 2009. In the midst of the difficulties of the global economy, we remain optimistic about where our strategy and execution can take us. One example is our Nehalem dual processor server offering which began shipping for revenue in December.

The performance of this product is stunning and will allow our customers to offer businesses unprecedented performance while lowering their operating costs. Lastly, we have great confidence in the cash generation element of our business model and as a consequence my plan is to not reduce or eliminate our dividend. With that, let me turn the show now over to Stacy.

Stacy Smith

Thank you, Paul. The slowing of the worldwide economy resulted in a weak fourth quarter. Revenue for the fourth quarter declined 19% from the third quarter to $8.2 billion, as downstream inventory corrections attempted to keep pace with the decline in demand that occurred over the course of the quarter.

Revenue of microprocessors, excluding Atom, was significantly below seasonal patterns but average selling prices were up. Fourth quarter revenue for Atom-based microprocessors and associated chipsets was $300 million, up 50% from the third quarter. Including Atom microprocessor revenue, overall microprocessor average selling prices were flat to the third quarter.

Revenue in the Digital Enterprise Group and the Mobility Group was down due to a decline in microprocessor and chipset unit shipments. Revenue in all geographies declined sequentially and year-over-year. Gross margin of 53.1% was down 6 points from the third quarter and down 5 points from the fourth quarter of 2007.

As we responded to reductions in demand, we reduced factory loadings, which resulted in about $250 million in underutilization charges, or about a 3-point decline in gross margin from the third quarter. An additional 3-point decline came from inventory write-offs on computing-related products which were primarily demand related. Spending on R&D and MG&A was $2.6 billion, $300 million lower than the third quarter, due to lower revenue and profit related expenses and targeted spending reductions.

In the separate category for restructuring and asset impairment charges, expenses were approximately $250 million, with about $200 million related to the shutdown of 200-millimeter NAND manufacturing facilities and the Intel/Micron joint venture. We ended the year with approximately 84,000 employees, down 3% from a year ago, and down 16% from the end of 2005.

Gains/losses on equity investments and interest and other income was a net loss of $1.1 billion, higher than our outlook net loss of $50 million primarily due to a $1 billion reduction in the carrying value of the company's investments in Clearwire. The provision for taxes in the fourth quarter was at 36.6% effective tax rate, higher than the 29% previously forecasted primarily due to the inability to take the full benefit of the loss associated with impairment charges.

Total cash investments comprised of cash, short-term investments and fixed income trading assets ended the quarter at $11.5 billion, approximately $250 million lower than the third quarter. The credit quality of our fixed income investment portfolio remains high with other than temporary losses during this tough credit environment minor, at approximately $10 million in the fourth quarter. Cash flow from operations was approximately $2.6 billion. Capital spending was $1.8 billion. We paid nearly $800 million in dividends and did not repurchase stock in the quarter.

For the year, we generated approximately $11 billion in cash flow from operations, spent $5.2 billion in capital, paid over $3 billion in dividends and repurchased over $7 billion of Intel stock. As we turn now to the outlook for the first quarter and the full year, 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 January 14. I will use the midpoint of the forecast ranges when making comparisons to specific periods.

The worldwide economic situation is creating a high degree of uncertainty around demand. Therefore, we believe there is a broader than normal range of possible outcomes for the first quarter and the full year. In light of the uncertainty in the current environment, rather than provide precise ranges for typical outlook items we will provide business drivers for some items and wider than typical ranges for others. Intel is not providing a revenue outlook at this time.

For internal purposes we are currently planning our business for first quarter revenue to be in the vicinity of $7 billion. Our expectation for gross margin is that it will decline significantly in the first quarter. As we continue responding to demand signals with cuts to factory loading levels, we expect that underutilization charges will lead to an additional 8-point decline in gross margin. In addition, as we begin the ramp of 32-nanometer process technology we expect another couple of points decline in gross margin in the first quarter.

Based on our current view of the market, we expect gross margin for the first quarter will decline into the low 40s. As the quarter unfolds, changes in demand levels and pricing of products could impact inventory write-offs, mix and unit costs, and potentially create an additional several points of margin variability.

Spending for R&D and MG&A in the first quarter should be approximately $2.5 billion, down slightly from the fourth quarter. Additionally, in the separate category for restructuring and asset impairment charges, we expect expenses of approximately $160 million as we continue to improve our costs and overall efficiency. Our estimate for gains and losses from equity investments and interest and other income is a net loss of $130 million.

Looking ahead to the full year, R&D and MG&A is expected to be between $10.4 billion and $10.6 billion. This is down 6% from 2008 due to targeted spending reductions, lower spending for revenue and profit-dependent items, and the standard shift between R&D and cost of sales spending as we ramp our new 32-nanometer process technology. With the efficiencies that we have generated over the last three years and the spending reduction already achieved in the fourth quarter, we are confident that we can achieve this spending level.

For Research and Development, we plan to spend approximately $5.4 billion to develop innovative leadership products and advanced manufacturing process technology. Our expectation for capital spending is to be flat to slightly down from 2008. Our capital spending for 2009 is expected to primarily consist of investments in 32-nanometer process technology.

Depreciation for the year is forecasted to be $4.8 billion, plus or minus $100 million, up from $4.4 billion in 2008. The estimated tax rate for 2009 is 27%. Despite the unprecedented drop in demand we experienced in the fourth quarter, we entered this downturn well positioned both competitively and financially.

Our cash flow generation, strong balance sheet and the focus we have had on improving efficiency over the past three years will allow us to weather this downturn. Our restructuring and efficiency program has already resulted in run rate savings of greater than $3 billion, CapEx avoidance in excess of $1 billion, and a reduction of 20,000 employees from our peak in 2006.

While we are making selective investments to further our competitive position, like investments in R&D and 32-nanometer process technology, we are also focused on responding to the weak demand environment. We plan to take another $700 million out of spending next year. In the factories, we are aggressively reducing build plans in order to avoid putting unnecessary cost into inventory and while that will have a significant impact on our financials in the first quarter, it is the prudent response to the current environment and will benefit us when demand stabilizes.

With that, let me turn it back to Kevin for Q&A.

Kevin Sellers

Okay. Thank you, Stacy and Paul. We'll now be happy to take questions.

Just as last time, in order to allow as many of you as possible to participate in the call we'll limit each person to one question and one follow-up. Melanie will introduce each one of you and then prompt your question and then I'll ask for a follow-up, and then Melanie will introduce the next questioner. Okay, Melanie, we're ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Glen Yeung. Go ahead.

Glen Yeung - Citigroup

Thanks. You know, I guess I first want to look at the notebook market in the fourth quarter that you just printed. It was down considerably in your numbers and yet when I think about the end market it wasn't down that much. I wonder if you could address how much of that notebook reduction you guys saw was a function of inventory decline and how much of it you think was cannibalization from netbook?

Paul Otellini

I think very little of it was cannibalization from netbook, Glen. We've done surveys now of buyers to try to triangulate on that. While there is some cannibalization, the data suggests that the vast majority of netbook sales are incremental. And by the time we get to the analyst meeting we'll share that data with you.

On the notebook side, I think what you see is that it takes longer to slow it down. Much of our desktop business is through the channel, which is a configure-to-order model. And so the channel adapts very rapidly. They have little inventories to begin with, but adapts very rapidly to demand changes, and in fact if anything our channel inventories in desktop products are a little light right now as channel sales stabilized in the second half of December.

Notebooks for the most part are assembled in China and Taiwan and then shipped, most recently in the last six months or so, on boats. So the supply line actually lengthened as people fought to save money on shipping as the air transit prices went up with the gas going up. So that all started to contract.

I think there probably was more inventory contraction in classic notebooks than in desktops as a result. We'll know a little bit more as we go into the quarter, but that seems to be the picture.

Glen Yeung - Citigroup

Okay. As a follow-up, Paul, also for you, in the press recently there's been a lot of talk about Intel reducing prices and claiming that that's in response to the environment that we're in.

I know that some of those price reductions were planned long ago and maybe just your strategy on pricing in this kind of environment, if there's anything unique about it?

Paul Otellini

I think we've got a very good and competitive price stack across the board and we're getting good value for our products. If you listened to Stacy's commentary on ASP, the net ASP for the quarter was flat and the net ASP without Atom was up slightly. That says we're getting good value for our products.

What you're seeing in our price moves in the coming quarter and even over the course of the year is not anything that's reactive to external environments. It's really the continuing process of us bringing in new technology from the top, the stack, like the core i7 that was launched in November and that drives down the overall pricing, as we bring products down.

So it's more of a stack adjustment for new technology that is much more part of the day-to-day part of the business than any kind of reactive move.

Glen Yeung - Citigroup

That's great. Thanks a lot.

Kevin Sellers

Thanks, Glen. Melanie, next question.

Operator

Our next question comes from David Wong. Go ahead.

David Wong - Wachovia Capital Markets

Thank you very much. A bit further on that question with regard to notebooks and desktops, the Digital Enterprise microprocessor sales were down by just about 10% sequentially, if I calculate correctly. Was there some strength in servers that helped prop up this number?

Stacy Smith

Yes, the DEG was impacted positively because the new technology we brought in helped us from a pricing standpoint and servers so you saw a little bit of an ASP increase there.

And then just a further on Paul's point, if you look across the different segments of our business, while everything is down, what you can see is those elements of the business have the longer supply chain are down more because of the inventory correction and so that, going back to Mobility Group, that's what called Mobility Group to be down a bit more.

David Wong - Wachovia Capital Markets

Great, thanks. The other thing is can you give us some idea of the pattern of 32-nanometer start-up charges in each of the next few quarters?

Stacy Smith

Sure, and if it's okay with you, why don't I do that in the context of the overall gross margin. I think that will allow me to talk about a few elements of gross margin here. What we're seeing in the first quarter is a pretty steep decline in gross margin and the drivers there are we take a fairly significant underutilization charges as we reduce the loading in the factories and we start to see start-up costs elevated as a result of 32-nanometer process technology.

Focusing on the underutilization charges for a second, what's going on in the first quarter is we have three elements that are causing us to cut back the builds in our factory aggressively. We started cutting back in the fourth quarter.

We're accelerating in the first quarter as a result of the weakened demand environment, the fact that the supply chain is contracting and taking inventory out and also the fact that as we were cutting back builds in the fourth quarter, even with that, we built a little bit of inventory and so we're going to try to bring our inventory levels down in the first quarter. So you see this pretty steep decline in factory loadings.

That piece will start to get better in Q2 and the factory loadings get back into a more normal range in the back half of the year. For start-up costs what you see is the start of start-up costs in Q1 and then consistent with the shape of the curves that we've shown you in the past, you'll see that going up a little bit in Q2. And it will start to dissipate by the time we get to the back half of the year.

Kevin Sellers

Thanks, David. Melanie, next question.

Operator

Our next question comes from John Pitzer. Go ahead.

John Pitzer - Credit Suisse

Yes, thanks, guys. Stacy, maybe just as a follow-on to that with a little more detail. You said about taking your inventory down in Q1, would you care to give us a sense of how much you think on a dollar basis you think you could bring down inventory given where factory loading is if you hit that kind of $7 billion internal plan for top line?

Stacy Smith

Yes, it's going to be hard to call, based on what happens to demand, but I'm pretty confident based on the aggressive actions we're taking in the factory network we'll be able to bring it directionally down and should be a meaningful number.

John Pitzer - Credit Suisse

I guess the second question, if I were to run normal seasonal sequentials off the $7 billion in the March quarter, you're getting revenue down over 20% year-over-year. And the OpEx number, you guys are taking it down but clearly not that much. I'm just kind of curious, are there more levers you can pull there if you don't see a snap back or are you hitting that OpEx target to try to hit some strategic things you want to get done this year?

Stacy Smith

The answer to that, to both sides of that question is, yes. I'll answer the second part first. From an investment standpoint, we're absolutely prioritizing the investment that it takes to get to 32-nanometer process technology. As Paul said in his speech, we're going to get there as fast as we possibly can. That's what gives us performance advantage, cost advantage, and allows us to get this higher level of integration of the future markets that we want to serve requires.

That's the SOCs. We're protecting that. We're protecting the R&D in products in order to refresh our product portfolio with an eye towards when this recession ends.

I think we've shown over the last few years, we've been pretty adapted focusing on our cost structure, focusing on efficiency. I think we reacted pretty quickly in the fourth quarter based on the weakness that we saw. We'll continue to drive efficiency in the Company and bring our costs down everywhere we can.

I'm pretty confident that $700 million figure relative to my view of demand, if demand ends up being much worse than that, then we go and focus and find other opportunities.

John Pitzer - Credit Suisse

Great. Thanks, guys.

Kevin Sellers

Thanks, John. Melanie, next question.

Operator

Our next question comes from the line of Ross Seymore. Go ahead.

Ross Seymore - Deutsche Bank

Hey, Stacy, looking at that the gross margin line, if I go back to when the dot-com bubble burst the gross margin stayed no better than 51% for the better part of two years. Can you just walk us through what would be the same or different in this downturn versus that one? And what it would mean for gross margin?

Stacy Smith

Yes. I think, Ross, simplistically, the speed at which the global supply chain is taking inventory out and the speed at which we're trying to take our inventory levels down is very different than in 2001. If you remember 2001 there was an overhang of inventory, both in the industry and for semiconductor companies. It lasted for a long time.

So I'm committed and Paul's committed. We're going to bring the utilization of the factories down dramatically in Q1. Avoid putting a bunch of cost into inventory and I think that sets us up for a better gross margin profile over the course of the year.

In fact, even with a weaker view of demand, a more muted view of demand so without anticipating a big snapback in demand, I would anticipate that Q1 is the trough. And as I start increasing the loadings again in Q2, even with the increased start-up costs, I think my gross margin will go up a bit and I think its back into what I would call a healthy range by the second half. At least that's how we're planning the business today.

Ross Seymore - Deutsche Bank

You mentioned about inventory coming down. Internally, you think by a healthy amount do you think the channel inventory falls by a similar healthy amount like the fourth quarter, more or less?

Stacy Smith

Similar to the fourth quarter. If by channel you mean worldwide supply chain similar to the fourth quarter. When we say channel we talk about our specific distributor channel. That inventory actually came down dramatically in Q4. And as Paul said, if anything, it's probably a little lower than what you would expect even in this more muted demand environment.

Kevin Sellers

Thanks, Ross, appreciate it. Melanie, next question.

Operator

Our next question comes from John Barton. Go ahead.

John Barton - Cowen & Co.

Thank you very much. Paul, you commented about the strength of the Atom processor in the fourth quarter, 50% to $300 million. To the extent that you can, if the economy was normal in the fourth quarter, what would that have been and if you thought about '09 in a normal economic environment, I mean, what do you think the Tam actually is and obviously in a normal economic seasonal kind of growth profile?

Paul Otellini

The Tam for netbooks or the Tam-Tam?

John Barton - Cowen & Co.

The Tam for your portion of it, the Atom processor and the chipset.

Paul Otellini

For the PC industry?

John Barton - Cowen & Co.

That's correct.

Paul Otellini

Well, if we knew that number, we probably would be giving you guidance for Q1. I think at this point in time, our visibility is as limited as anyone's. For planning purposes, if you look back at prior years, and in these kinds of things someone referenced the '01, '02 years after the dot-com bubble burst, those years were sort of flattish in terms of units.

And so in recent memory, that's sort of the worst we've seen as an industry and even that had a U-shaped curve in it. So I think that you'd have to look at that as being a model, although there's so much different in this cycle, in terms of the inventory and the global nature of it and the non-tech nature of this economic cycle that I think that it's just difficult to predict.

John Barton - Cowen & Co.

What I'm actually asking for is if you could ignore the economic slowdown, right, and look into next year, based upon the marketing data you now have for the acceptance of the Atom, if it was a normal economic environment with all those caveats you just gave me, where do you think that market goes for '09 or would go?

Paul Otellini

That's like asking Mrs. Lincoln what the play was like. I don't know that you can have that view. I do think Atom will grow substantially year-on-year into '09. Every pattern we see from our customers and just looking at the exit rate from Q4 says that we will see a significant year-on-year growth, but the what could it have been if the world had been normal, I mean is a whole different number set and I think that's hypothetical and probably not worth talking about at this point.

John Barton - Cowen & Co.

Fair enough. I mean, as a follow-up, how do you envision competition materializing at the processor level for the netbook application as you look out over the next few years?

Paul Otellini

At CES you saw a lot of buzz around netbooks and you saw a lot of commentary from non-traditional competitors and traditional competitors about the desirability of entering that segment. Which to me validates our view that it had a high potential for growth and it was an exciting segment and that it would be attractive, in particular in this kind of economic environment.

And so, A, we have a very good lead since we sort of established this business. Our product, as near as I can tell, is by far the best on the market, not just in our own architecture but in all architectures given the costs, the benefits, the battery life and the software capability we have. So I would expect that we will do very well in the netbook market over the course of the next couple of years.

John Barton - Cowen & Co.

Thank you.

Kevin Sellers

Yes, thanks, John. Melanie, next question.

Operator

Our next question comes from the line of Jim Covello. Go ahead.

Jim Covello - Goldman Sachs

I guess I'd like to ask about the CapEx a little more detail on the flattish kind of CapEx in the really bad revenue environment. I understand the need to spend, but could you be a little more conservative. What kind of levers could you pull if you did lower the CapEx as we went throughout the year? Where would that lower CapEx come from? Thank you.

Stacy Smith

Sure, Jim. It may be useful to break the CapEx out into couple of chunks and then I can tell you how I'm thinking about those two pieces. The majority, in fact, the predominant majority of the CapEx that we will spend in 2009 is for 32-nanometer and leading edge process technology. For us, that's a very important investment stream to get there as fast as possible.

It's really capacity that will come on line, for the most part in 2010. We'll have products in production this year, but in 2010 is really when that ramps. And as you know, because you follow us, that the advantages to us of getting that kind of process leadership over everybody else is that we can extend the performance leadership of our products, we get a great cost benefit in terms of the cost per transistor, and then specific with 32-nanometer the power characteristics of that process enable us to go more aggressively at some of the adjacent markets that we're looking at.

So in this environment, we're planning to protect that investment stream. Now, that being said, we will absolutely modulate the ramp rate of the process based on the demand environment that we see. But getting the first capability on 32-nanometer is key to our strategy and we're going to get there as quickly as possible.

There's, the minority of the capital budget which is CapEx for processes that are in production today and that's why we have kind of a wider range of potential CapEx outcomes. If the market continues to deteriorate that would be a piece that we could look at and lower the peak on 45-nanometer and do some things like that.

Alternatively, if things pick up, that piece would increase a little bit although that's really not the environment we're planning for. There's those two chunks. That second piece is one you'll see us continue to modulate based on our view of demand.

Jim Covello - Goldman Sachs

Thank you very much.

Kevin Sellers

Thanks, Jim. Next question, Melanie.

Operator

Our next question comes from the line of Hans Mosesmann. Go ahead.

Hans Mosesmann - Raymond James

Thanks. Most of my questions have been answered. Just a product line question. What's the timing of the integrated graphics into the Nehalem core or core products, what's the timing for that? Is that still second half of this year?

Paul Otellini

Yes.

Hans Mosesmann - Raymond James

And that product would be called Havendale?

Paul Otellini

There's a couple of versions, one for notebooks and one for desktops. Are you asking a schedule question? We're not quite sure of your question.

Hans Mosesmann - Raymond James

Yes, the timing of the integrated so you're going from an integrated chipset solution to putting graphics on the microprocessor.

Paul Otellini

If I infer where I think you're going, Hans, you can expect volume production of Nehalem into mainstream price points for desktops and notebooks in the second half of this year in various (inaudible).

Hans Mosesmann - Raymond James

Okay. And then a follow-up in terms of the utilization rates, it's a very, very significant decline quarter-over-quarter. Has that ever happened at Intel and if so when has that happened when you're taking utilization down so quickly.

Stacy Smith

I'm always hesitant to say it's never happened, but you're right, it's absolutely significant what we're doing here and again, coming back to the elements that are impacting Q1, it's those three things I said. It's the weaker demand environment, it's the fact that we want to bring our inventory levels down to avoid putting a bunch of cost into inventory in the face of this weaker economic climate and it's the fact that the supply chain is reacting aggressively to do the same thing.

So yes, I don't know if it's never happened before but it's a steep decline and it's by strategy. We're aggressively bringing those utilization rates down. I expect that to start getting better in Q2 and utilization rates to get back into the normal range by the second half.

Hans Mosesmann - Raymond James

Great. Thank you.

Kevin Sellers

Thanks, Hans. Go ahead, Melanie.

Operator

Our next question comes from the line of Uche Orji. Go ahead.

Uche Orji - UBS

Thank you very much. First question, Stacy, or to Paul, within the mix of your revenues, chipsets seems to have dropped off quite sharply for both desktops and also for mobile.

To what extent is this an indicator at all, first of all can you explain what may have happened within that in the context of your revenue and how much was this a function of ramping earlier for Nehalem and then things falling off. Can you please explain that?

Paul Otellini

Sure. Let me try. It really had nothing to do with Nehalem. If you wind the clock back to our third quarter, one of the things we talked about, was that we had record all-time revenues and units in the chipset business and in fact, we talked about the fact that historically, the chipset business is a leading indicator for demand and that chipsets tend to ship into the PC ecosystem six to eight weeks before processors are mated with them in the system. And so that was one of the indicators that gave us reasonable confidence for the fourth quarter.

Obviously, the rest of the industry, people that were buying parts from us felt the same way or they wouldn't have bought the parts. And then what you saw with the dramatic erosion in demand in the fourth quarter, particularly the second half is all that inventory, basically much of it was still around. And it didn't get consumed.

In fact, there's still some out there. So the chipsets, if you will, overperformed in Q3 and significantly underperformed, but over a six-month period I think there's still a little bit of inventory there. That was really the story. To our knowledge, it's not a share loss, it's not an indicator of anything deeper than that.

Stacy Smith

Uche, it's back to my simplistic rule of thumb, which is those elements of the business that have a longer supply chain are seeing the steeper declines and those elements of the business that had less inventory out there are bottoming more quickly. If you really think about our business in that term, all of the elements make sense.

Uche Orji - UBS

That's helpful. Let me ask another question, please, Paul. Canmore, you mentioned that in your opening remarks. Not quite sure how you tend to brand those products as that expands outside of the PC market. The Intel inside program works very well for PCs. What will be the branding strategy for products outside of the PC market?

Paul Otellini

All of these system-on-chips will be members of the Atom class ultimately. I don't think you won't see a PC class branding program associated with these. But there will be programs to associate it in the minds of end users and certainly working with our customers. We think that helps identify the value of the full Internet that these products bring. It's not the kind of Intel inside program, cooperative marketing program that we run in PC space.

Uche Orji - UBS

Thank you very much.

Kevin Sellers

Thanks, Uche. Go ahead, Melanie.

Operator

Your next question comes from the line of Chris Danely. Go ahead.

Chris Danely - JPMorgan

Thanks, guys. If I run through the math real quick, it seems to me like you have to take out, reduce your inventory maybe $700 million, $800 million, $900 million in Q1 to get back to normal levels. Am I in the right ballpark?

Stacy Smith

I'm not going to put a quantification on it. I expect it to come down some in Q1, and then based on the shape of both demand and if the inventory, the worldwide inventory pipeline has corrected and starts to refill, it could get you to a different answer as you get to Q2.

But we're committed to keep from putting a bunch of cost into inventory and that's why you see us taking our utilizations down. If we have to continue that into the second quarter, we will. But right now the expectation of the shape of this is that we can start to reload the factories a bit in Q2 from where they are in Q1.

Chris Danely - JPMorgan

Got it. As my follow-up, you guys said you're shooting for, I guess, the normal factory loadings in the second half of the year. Assuming this is like an 01, '02 type of downturn and you guys don't get back to $8 billion in revenue until the end of 2010, how would you get your factory loadings to normal levels, looking at $7.5 billion in revenue at the end of the year on a quarterly basis?

Stacy Smith

Well, in that kind of a hypothetical situation, the levers you would see us push is we would slow the ramp rate of 32-nanometer, we would look at our older generation process technology and because we build in the ability to reuse and roll forward that equipment from 45 to 32, you would see us take some of the older generation capacity off-line and roll it forward to 32.

Those aren't actions that we can execute in a quarter, but over the course of a year or so, those are actions that we can pretty cleanly do and those would be the types of things you would see us do to get utilizations to the right level.

Chris Danely - JPMorgan

Got it. Thanks a lot.

Stacy Smith

Sure.

Kevin Sellers

Go ahead, Melanie.

Operator

Our next question comes from the line of Sumit Dhanda. Go ahead.

Sumit Dhanda -Banc of America Securities

Yes, hi. Couple of questions. Stacy, your comment about the impact in Q1 from 32-nanometer start-up costs being a couple of points, roughly equates to about $150 million in the quarter.

And then the fact that it's moving up modestly into Q2 seems like we have a lower peak in place than what you might have alluded to at the analyst meeting last year. Is that accurate, first of all?

Stacy Smith

I think the shape of it is similar to what we showed you in the analyst meeting. We see elevated start-up costs in Q1. They will go up. I don't know if it's modestly or not. Maybe it's only modestly relative to the 8 points of excess capacity charges that we're taking in Q1.

But they will go up in the second quarter and then they'll start coming down in the second half of the year. Obviously, in the demand environment, we're looking at every opportunity to save those dollars, but we're also absolutely committed to get to 32-nanometer as quick as possible so we're kind of executing down both of those paths.

Sumit Dhanda -Banc of America Securities

Just to be clear, then, 2 points is about the right number to think about for Q1 in terms of the hit and then the shape of the curve is very similar to what you had indicated last year?

Stacy Smith

Yes, should be pretty similar. And, yes, you're right, it's about 2 points in Q1.

Sumit Dhanda -Banc of America Securities

Okay. My follow-up question is on flash, any sense you can give us of what the flash number looked like, is it lumped under the all other category? It seems like it might have done reasonably well. Was that related to the efforts on the SSD front?

Stacy Smith

It is in the other segment. The actions that we're taking, I think, are benefiting the business, but also say it's a challenged pricing environment in this economic climate. But we have executed on the strategy to take some of the capacity offline in conjunction with Micron so we closed down the 200-millimeter factory that was providing supply into the JV.

That helps our costs and we're getting some good early market acceptance of our SSDs and that's a better margin segment of that business. So I'd say incremental improvement, still a very pricing challenged segment of the market, given the economic climate, that shouldn't be a surprise.

Sumit Dhanda -Banc of America Securities

Thank you very much.

Kevin Sellers

Thanks. Go ahead, Melanie.

Operator

Our next question comes from the line of Tim Luke. Go ahead.

Tim Luke - Barclays Capital

Thanks very much. I just had a question, Paul, with respect to Atom. It looked like off the $300 million of revenue that unit wise it might be around almost 10% of the microprocessor units.

And I was wondering how you perceive the mix of Atom going forward as you maybe exit '09, and how you see that in terms of are there any sense of moderating that or accelerating it as a percentage of the mix?

Stacy Smith

I think the Q4 impact, I actually haven't done that math, I would be surprised if it's that big but I would have to go do the math. The Q4 impact gets back to my rule of thumb of you got to view the different segment of the business through the lens of supply line and inventory corrections.

And Atom was at the other end of that spectrum where there was very little inventory out there. The pipeline was filling. It probably caused it to have a better Q4 relative to some of the other segments and we're likely to see a correction in that that's coming up in the first half of the year.

Paul Otellini

And relative to the demand or the penetration in '09, Tim, what we're seeing coming out of CES is that there's new players entering this marketplace, non-traditional players. And there will be all kinds of models. There are already models, for example, in Japan where you get a netbook for one yen if you sign up to a wireless subscription.

So I think you'll see all of those people will play with those models much like they did in the early days of the cell phone and I think that it's very difficult to figure out which of those will stick and which will have preference. As I said earlier, I think the best data we've seen so far suggests that in excess of 80% of these are not cannibalizing.

They're not taking business from ours or competitive notebooks, competitive based notebooks for the most part. And as that moves into emerging markets and price points continue to come down next year, I would expect that trend to continue. So it really is a bit unbounded because you're dealing with a price point which has not existed before and that's the nature of Tam expansion.

Tim Luke - Barclays Capital

Stacy, just with respect to your earlier comment on saying that you thought you would get into a healthy range in the second half of the year on the gross margin side with a trough in the first quarter, is a healthy range back towards that low 50s or how should we think about that?

Stacy Smith

I wasn't being scientific with that. If you look across the last 10 years, you'd see that 75% or so, 30 or 40 quarterly gross margins have been between 50% and 60% so I kind of threw that out as my range. I expect based on how I'm currently viewing demand, the abatement of start-up costs and the fact that I start loading the factories at a much better level in the second half that I'm kind of back into that range.

Tim Luke - Barclays Capital

Excellent. Thank you, guys.

Kevin Sellers

Thanks, Tim. Go ahead, Melanie.

Operator

Our next question comes from the line of John Dryden. Go ahead.

John Dryden - Charter Equity Research

Hi, thanks for taking my questions. Was Asia worse than other geographies? Was that due to the change in the shipping method mentioned earlier in the call or a larger reduction in demand?

Stacy Smith

Yes, it's the same rule of thumb that I gave. Asia, Taiwan and China, in particular, are really the manufacturing hub for notebooks and for many of the other products. That's where a lot of the inventory resides. So from a billing standpoint, you're going to see that being depressed more in Q4 than the rest of the business and I frankly would expect that to continue into Q1 as the inventory correction continues.

John Dryden - Charter Equity Research

Stacy, as a follow-up, investments in non-marketable securities down $1.1 billion, was that the write-down action specifically with Clearwire or is there a mix associated with the number?

Stacy Smith

Actually, I'm not sure what you're referring to on the balance sheet. The one balance sheet account that's probably moved that much is where we would account for the dividend payable which is down about that much and then as we articulated last time on the call, we had the forward contract for the stock repurchase that we've unwound and that unwound this quarter so I think that's probably what you're talking about.

John Dryden - Charter Equity Research

Thanks for taking my questions.

Kevin Sellers

Thanks, John. Go ahead, Melanie.

Operator

Our next question comes from the line of Kevin Cassidy. Go ahead.

Kevin Cassidy - Thomas Weisel Partners

Thank you. In your development of the 32-nanometer products, are there certain areas or certain market segments you're targeting first, say, the Atom to be at 32-nanometer first or is it a server product?

Paul Otellini

We would typically ramp a new silicon technology with a high volume product. You get a ramp vehicle. So the most likely scenario that one would paint, I don't want to reveal all our plans now, is mobile and desktop parts, mainstream mobile and desktop parts. And then as the process picks up volume, you bring in the system-on-chips, you bring in Atom, you bring in servers.

Kevin Cassidy - Thomas Weisel Partners

Okay. And so the platform, say the Calpella platform, is on schedule for, say, an October introduction?

Paul Otellini

I really don't want to get into specific product platform things here, sorry.

Kevin Cassidy - Thomas Weisel Partners

Okay. Thank you.

Kevin Sellers

Thanks, Kevin. Go ahead, Melanie.

Operator

Our next question comes from the line of David Wu. Go ahead.

David Wu - Global Crown Capital

Thank you very much. I've got a quick one. How does the OEM look to you, those customers around the world in terms of inventory of desktops and servers?

Paul Otellini

Well, to first approximation, you need to ask them, David. If I take a quick tour, as I talked about the channel inventory before, so that's in relatively good shape. The OEMs, I don't see anyone as an outlier at this point. Every one of our customers seems to be taking very aggressive action across the board to reduce the build and to not get stuck with unsold or unsalable, potentially unsalable product.

What is different this cycle is that Taiwan also took an aggressive move and part of that is the degree of outsourcing that's grown as the industry evolved from 2001 cycle to this cycle. There's much more of the industry that is now being built in China and Taiwan by those companies.

So what we saw was I think really unprecedented extraordinary hitting of the brakes very, very rapidly in the December time frame and those brakes are off a little bit right now, but they're likely to stop again around Chinese New Year. Our read of the factory networks in China and Taiwan is that many of them will shut down not just for New Year's week but potentially an extra week. Everyone is being very cautious on inventory until they get the real demand signals coming out after Chinese New Year's.

David Wu - Global Crown Capital

I see. So if I were to follow up with that, if I'm reading you folks correctly, the best guess at this point is that those inventory-related issues should be behind you by the end of Q1?

Stacy Smith

That's probably a little more precise than I would be. I think we started to see the supply chain cutting back inventory levels pretty dramatically as you got into the second half of the fourth quarter. It continues into the first quarter. I think the lion's share of it will de done by the end of the first quarter. But there absolutely could be some that continues on into the second quarter.

David Wu - Global Crown Capital

Okay, thank you.

Kevin Sellers

Yes, thanks, David. Melanie, we're going to take two more questioners, if you could, thanks.

Operator

Certainly. Our next question comes from Gus Richard. Go ahead.

Gus Richard - Piper Jaffray

Yes, thanks for taking my question. In the press release, you mentioned that you're going to reset to a new level. Is the lower level of demand a function of longer life cycles of PCs, a slower replacement cycle or is it a slowdown in the global penetration?

Paul Otellini

I think it's more the latter. I mean, I used that phrase because I didn't want to light a lantern around the snapback scenario which was really no one sees right now. I think what we're seeing in our industry, and many others around the world, demand in those industries is reset to a new level.

That means that you start growing from that level again at some point. As opposed to having a snapback and all of a sudden it's now Q2 of 19 or Q2 of 2008. I don't see that. I think we are looking at a scenario where once this stabilizes, once we find bottom, you'll start to see normal growth patterns come back into the industry.

Gus Richard - Piper Jaffray

And then just as a follow-up what do you expect to be the early, you can't tell me the depth and you can't tell me the duration, but what would be the early signs that you've reached that new level of demand? What would tell you that you've gotten there?

Paul Otellini

I think Stacy hinted at one of the broad ones, which is if our margins do as he's hinting in Q2, and Q1 is the trough, that would be principally driven by underutilization charges reversing themselves or going away in that quarter, as we started ramping up based upon demand calls from our customers. So to me, that's the thing. You have to remember, our throughput time through our fabs now is about half of what it was the last cycle. Right. It's one of our efficiencies.

So in 2001, it took us roughly a quarter from the start of a wafer to a product out the door. We're half that cycle now. So that means our response time is less than it was and it also means that customers don't have to order nearly as early.

So you have all these things compounding the cycle that make in general the industry and us more efficient in dealing with cycles like this. It also means you don't see the signs of recovery until there is real orders in people's hands.

Stacy Smith

Just simplistically, and I know I sound a little bit like a broken record, it's inventory. When you see the inventory correction done, you reset the demand levels and there's portions of our business, relatively small portions of our business that you look at and say that kind of happened in December and there's big portions of our business that the inventory correction is still ongoing. That's what will be the signal that drives the factory utilization.

Gus Richard - Piper Jaffray

Got it. That was very helpful. Thank you.

Kevin Sellers

Thanks, Gus. Go ahead, Melanie. This will be our last questioner.

Operator

Thank you. Our final question comes from Brian Piccioni. Go ahead.

Brian Piccioni - BMO Capital Markets

Thanks for taking my question. Obviously, most of the questions I had would have already been asked by now, but I was wondering, you didn't buy back stock in the quarter.

What sort of rule of thumb or policy decision you've adapted with respect to, or adopted with respect to buybacks?

Stacy Smith

Yes, thanks, Brian, it's similar to what we've articulated to you before in terms of our capital structure. We protect that dividend and Paul commented on our thinking of that going forward. We utilize buybacks as an opportunity to modulate our cash balances. What you should take from the fact that we didn't do buybacks in Q4 is we see this environment as an environment where having more cash is better.

That's why we didn't do a buyback in the fourth quarter. We don't comment on it going forward, but you can certainly read what we did in the fourth quarter and draw your conclusions.

Brian Piccioni - BMO Capital Markets

So presumably as cash generation would increase, then the buyback would be reconsidered, I guess?

Stacy Smith

We don't comment on the buyback going forward but the buyback historically has been a part of our capital structure and how we return cash to shareholders. But we didn't do any buyback in the fourth quarter.

Brian Piccioni - BMO Capital Markets

Okay. And sort of a follow-up, kind of unrelated, you've been discussing about various actions you can take with respect to utilization, so on and so forth. If the current downturn ends out to be worse than transient, shall we say, prolonged, is there much you can do to reduce the underutilization charges?

Stacy Smith

Yes. I mean, it's the similar answer to what I gave to Jim, which is over time, if our view of demand is wrong and this is much worse than we expect, so take that as the hypothetical situation, we would modulate down the ramp rate of new capital for 32-nanometer.

We take advantage of the fact that we have reusability and roll-forward capability of stuff we bought for 45-nanometers, so we'd convert that over and still get to the leading edge as fast as possible, but do it by reusing investments we've already made. That would be our strategy. Again, you can't do that in a six-month horizon, but you can certainly do that in a horizon that stretches out a year or so.

Brian Piccioni - BMO Capital Markets

Thank you.

Stacy Smith

You're welcome.

Kevin Sellers

Thanks, Brian. Melanie, just to quickly wrap up here, I want to thank everyone for joining the call and remind those on the call that our quiet period begins, for the first quarter, will begin the close of business on February 27 and that our first quarter earnings conference call is scheduled for April 14, 2009. Thank you all, again, for joining us. Good evening.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a great day.