Intel Corp INTC
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/17/2013

Operator: Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Intel Corporation Earnings Conference Call. My name is Jamie and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Mr. Mark Henninger, Director of Investor Relations. Please proceed, sir.

Mark Henninger - IR: Great. Thank you, Jamie, and welcome everyone to Intel's second quarter 2013 earnings conference call. By now you should have received a copy of our earnings release and the CFO commentary that goes along with that. If you've not received both documents, they are available currently at our website,

I'm joined today by Brian Krzanich, our CEO and Stacy Smith, our Chief Financial Officer. In a moment, we'll hear brief remarks from both of them followed by the Q&A.

Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Also, during this call, if we use any non-GAAP financial measures or references, we'll post the appropriate GAAP financial reconciliation to our website,

Lastly, I'd like to highlight a change we will be making to our earnings release process starting with the third quarter earnings announcement on October 15, 2013. To ensure the timely and controlled release of information, we plan to make our results available on our IR website about a minute after the market closed and no longer distribute quarterly financial results through a Newswire service.

With that, let me hand the call back over to Brian.

Brian M. Krzanich - CEO: Thanks Mark. It's great to have a chance to speak to you all on my first earnings call as CEO. The last two months have been exciting for me. I have spent the majority of my time meeting with customers, employees and my executive team. I've heard a wide variety of views about our industry and Intel, how we are positioned, where we're strong and where we can improve. I've had the opportunity to share my vision and strategy for our Company and lay out my expectations as we move into the new era with an updated set of priorities. Those conversions leave me more enthusiastic and more confident than ever about our opportunity as a Company. Intel has unmatched assets in process technology and architecture, a powerful brand and talented employees that are producing some remarkable results.

Let me give you a few highlights from the second quarter. There were several significant milestones in mobility. First, we unveiled details about our next-generation Atom architecture, code named Silvermont. The Silvermont architecture will deliver up to a 5x reduction in power at the same level of performance or up to a 3x improvement in performance over our prior generation of architecture. Silvermont is unique in its ability to span the market's appetite for computing from ultra-mobile divides to the Data Center, and it supports both Windows and Android. The Silvermont platform will underpin our products for tablets, two-in-ones and desktops as well as our phones and microserver products for the Data Center. The products will be Bay Trail, Merrifield and Avoton respectively. Then at Computex, we launched the Haswell family of processors, which delivered the biggest improvement in battery life in Intel's history, making no compromises, high performance two-in-one devices, that make all day battery life a reality.

Haswell along with Bay Trail will power the more than 50 different two-in-one devices in the pipeline, including the very first fanless Core designs. During the same week at Computex, we also launched a landmark tablet design in the Samsung GALAXY Tab 3. The GALAXY Tab 3 will use an Atom SoC and our LTE solution, signaling important progress in the tablet space. The Data Center strategy is continuing to pay dividends. Our cloud storage, cloud and storage business each grew their revenue more than 40% year-over-year. Networking grew more than 20% and High Performance Computing business won 98% of all new systems entering the top 500 list. In fact, the number one system on the top 500 was all Intel for the first time since 1997 using a combination of Intel Xeon CPUs and Xeon Phi accelerators.

Finally, our investments and expertise in process technology continue to be the foundation of our industry leadership, with 22-nanometer defect density and throughput times at record low levels, and 14-nanometer on track to enter production by the end of the year. Together these accomplishments highlight to me what's possible when we focus our resources on the right objectives and we hold ourselves accountable for results.

At the same time, I understand that we've not always lived up to the standard that we set for ourselves. Intel was slow to respond to the ultra-mobile PC trends. The importance of that can be seen in the current market dynamics. The traditional PC market segment is down from our expectations at the beginning of the year, while ultra-mobile devices, like tablets, are up. Even more important, there will always be another next big thing. It's our job to continue to scan for emerging trends, unlocking, participating in and shaping these nascent markets; doing that will require some changes at Intel, which we have begun.

Just a few weeks ago, I announced the significant reorganization. The changes we made flatten the organization, improve decision making, and will contribute to a culture of even greater accountability. These elements are critical in the fast paced ultra-mobile environment.

In addition to the organizational changes, we have made several strategy and priority changes that will allow us to focus and win in that environment. These changes will drive a greater emphasis on our Atom-based products, bringing the full weight of our process and architectural leadership to the Atom family. We will move Atom even faster to our leading-edge silicon technology and focus on the SoC integration of key components like graphics, communication and other devices. This does not mean we will lessen the value or leadership of our Core product family, but rather make Atom an equal player in technology leadership for the ultra-mobile space. Both product lines will be driving Intel's future.

Some of the changes we're making are subtle and some are more transformational. In general, you're likely to see us making moves and adjustments in the market before you hear us talking about them, but we'll of course have a substantive update for you at the Investor Meeting in November. What I can say now is that all of the changes are focused on value creation. Our Company has a strong record of cash flow generation and returning that cash to our owners, and recognize that we are the stewards of our owners' capital and that tradition will continue.

I'm excited about what lies ahead. Intel is a Company with extraordinary assets at its disposal and I'm looking forward to making the most of those assets in an environment where the pace of innovation and market transformation is faster than it's ever been.

With that, let me turn it over to Stacy.

Stacy J. Smith - SVP and CFO: Thanks, Brian. I'd like to take a few minutes to walk through our second quarter financials and our expectations as we head into the back half of the year. Then we can get right into Q&A.

The second quarter results came in as expected. Second quarter revenue came in at $12.8 billion, up 2% from the first quarter. The Core business came in as expected, but we saw some softness in our baseband business. At a segment level, the PC Group grew 1% sequentially and the Data Center Group grew 6%. As expected, inventory levels across the worldwide PC supply chain grew slightly as customers began building Haswell-based PCs, but inventory levels are still being managed well below historical averages based on uncertainty heading into the back half of the year.

For the third quarter of 2013, we are forecasting the midpoint of the revenue range at $13.5 billion, up 5% from the second quarter, which is at the lower end of the historical range as a result of our expectation that our customers will continue to operate with lean inventory levels exiting the third quarter.

Moving to gross margin, second quarter gross margin of 58% was in line with our guidance and up 2 points from the first quarter as a result from the qualification for sale of additional Haswell products and higher volume. As expected, the reduction in excess capacity charges in the second quarter was offset by an increase in 14nm start-up costs.

For the third quarter, we expect gross margin to increase 3 points to 61% as we qualify our Bay Trail product line for sale, increase our volume and start to see factory start-up costs come down.

For the second quarter, spending was in line with expectations at $4.7 billion. For the third quarter, we're forecasting an increase to total spending of $100 million. The reclassification of spending on process engineers from cost of sales to R&D increases our spending, but we expect this will be mostly offset by spending reductions across the Company. These spending reductions allow us to reduce our spending forecast for the year to $18.7 billion. Operating income for the second quarter was $2.7 billion with earnings per share of $0.39.

Taking a look at the balance sheet, total cash investments ended the quarter at $17.4 billion, up slightly from the first quarter. In the second quarter, we generated approximately $5 billion in cash from operations, paid approximately $1 billion in dividends, purchased almost $3 billion in capital assets and repurchased over $0.5 billion in stock.

While our first half financials played out as expected, the overall PC market segment for 2013 is expected to be weaker than we forecasted at the beginning of the year. Our expectation is now that revenue will be approximately flat to last year. As a result, our gross margin forecast for the year is now 59% versus the prior forecast of 60%. Additionally, we have reduced our forecast for capital spending by $1 billion to $11 billion.

We have an unprecedented lineup of products coming to market in the second half of this year across all the segments of our business. Haswell delivers a historical increase in battery life across the diverse lineup of ultra-mobile form factors like two-in-one convertibles, tablets, and other touch-enabled devices. In the second half, we will launch Bay Trail which will further extend our product line across screen sizes and price points in both tablets and PCs.

In our phone business, we are on track to ship multi-mode data and voice LTE baseband solutions as well as our next-generation applications processor, codenamed Merrifield by the end of the year.

In the Data Center, we have now microserver and Xeon class products coming to market in the second half. This leadership product portfolio is built on an extending manufacturing lead which gives us the world's highest performing, lowest cost and lowest power transistors. Building on its leadership further, we are on track to start production on our 14-nanometer process technology in the back half of this year.

With that, let me turn it back over to Mark.

Mark Henninger - IR: All right. Thank you, Brian and Stacy. Moving onto the Q&A, as is our normal practice, we'll ask each participant to ask one question and a follow-up, if you have one. Also, we are experiencing some network interference. So, I'll ask all the participants to speak slowly and clearly. And if we're not able to hear you, we will ask you repeat the question.

Jamie, if you could go ahead and introduce our first questioner.

Transcript Call Date 07/17/2013

Operator: Glen Yeung, Citigroup.

Glen Yeung - Citigroup: The first one is on the second half of the year and your outlook there. If I look at your guidance for the year and your guidance for Q3, the implication is 7% sequential growth in revenues for the fourth quarter, and I wonder, that's obviously high relative to historical norms kind of like numbers we saw back in the early part of the last decade, and I wonder, what gives you the confidence there, is there something about the mix, obviously, new product, is there also something about the mix maybe between Data Center and Client?

Stacy J. Smith - SVP and CFO: Hi Glen. This is Stacy. I would characterize – I guess, I'd say this, it's a little early to get that specific about Q4. At this point, I'd expect seasonal, which is a little less than what you said but still gets us into that kind of flat year-on-year revenue growth, and I think the tale for us will really be written in the back half of Q3 when we start to see how our customers are putting in place inventory in anticipation of that fourth quarter selling season. Right now, our view on that is fairly cautious. We expect that they'll continue to run lean inventory levels, but the reality is we won't know that until we get into late August or early September, that's when you normally start to see them putting in the supply line, that also aligns with other things in the industry and so we think that's when we're likely to really get a sense of Q3 and the momentum into Q4.

Glen Yeung - Citigroup: The next question is for Brian. First of all, Brian, congratulations on your new role. The question is now that you've seen that role for a couple of months and as you say, you've talked to customers. Today, Intel has very good products in mobile and tomorrow will have arguably the best products in mobile than they do today. I wonder in your discussions with customers, if you think that, that's enough, if the customer base is now open to accepting an x86 based processor, where it's traditionally been an ARM market or does it matter?

Brian M. Krzanich - CEO: Okay, as Mark said, it was a little hard to hear you on our side. We're having some network issues, but let me try and answer your question. The question is, can x86 go into these ultra-mobile markets, and how do the customers view that? My answer would be, they are more than willing to accept it. The fact that x86 works on both Android and Windows is a real advantage to our OEM base. They look at that and say that they can have one architectural design, one set of products and use both operating systems. So, it's a unique feature that we are able to provide. It's more been in focus by Intel of actual going in and designing for those markets and moving our products in there. You really see that with Haswell and Bay Trail. Haswell on the Core side, and Bay Trail on the Atom side, really being designed for those ultra-mobile products. We talked about Haswell producing the first fanless Core products out there in the market at any kind of real volume and then Bay Trail, really being designed for the much lower price points that you see, these tablets and even down to the entry level tablets, and so the fact that it's x86 is an advantage actually because, we've been able to produce both Android and Windows on our product now.

Operator: Vivek Arya, Bank of America Merrill Lynch.

Vivek Arya - Bank of America Merrill Lynch: Brian, first of all, how should we think about ASP trends in the PC segment? I think you outlined 3% sequential declines in Q2 and you're guiding to another 50 point gross margin hit from lower ASPs in Q3. Why are you not seeing more of an uplift from the rollout of Haswell?

Stacy J. Smith - SVP and CFO: This is Stacy. I'll take that one because it was in the CFO commentary that I put out. You should think of it as mix shift for us and share win at the low end of the market. I think if you look at our first half results, you'll see we came in pretty much in line with what we thought. But during a time where the TAM was somewhat weaker than we thought. I think offset there, the plug is that we gained some share low ends and so we have a bit more mix at the lower end and then due to share win in that particular segment of the market.

Vivek Arya - Bank of America Merrill Lynch: As a follow-up, why are we not seeing more benefits from the decrease in 14-nanometer startup costs? Like when I look at the uplift we should expect this time, they are not as much as uplift we have seen in prior cycles when the startup costs have decreased, and I think your guidance implies a sequential gross margin decline in Q4. If you could just walk us through the puts and takes, I'd appreciate that.

Stacy J. Smith - SVP and CFO: Yeah. I'm sorry. We are having networking problems. So, let me just make sure I got your question. You're asking to simplify in what are we seeing in terms of the startup cost trend relative to prior and what are the puts and takes for Q4. Is that what your question is?

Vivek Arya - Bank of America Merrill Lynch: Yeah, relative to gross margins, that's right.

Stacy J. Smith - SVP and CFO: Relative to gross margins, sure. So, the startup costs trend directionally is the same as what we've seen in other generations. It will be the same shape, generally the same impact on gross margins. So, you see the peak in startup costs in the second quarter. They'll come down some in Q3, and then we'll get a bigger benefit in Q4 and then it will come down a bit more in the first half of next year. So, it's a comparable trend. In the fourth quarter, the puts and takes – so let me just do the gross margin progression across the year. We were at 56% in Q1. We hit our forecast in Q2 of 58%. We are expecting a few points of increase in the third quarter to 61%. And then as I think about Q4, I think we have a couple of tailwinds. So, I would expect the volume to be up some. We should get some good news associated with startup costs, and then the offset in Q4 is going to be – we should be well into the build of Broadwell. So, doing the build on the prequalification material, so my sense is we'll have an increase in inventory write-offs in the fourth quarter and that offset some of those good news. Net of all that, I expect gross margin in the fourth quarter to be at or maybe a little bit higher than where we are in Q3 and we'll provide that forecast in another 90 days. And just so that we don't get lost in codenames, that product is our lead product in 14-nanometer. So, that kind of aligns with being in manufacturing in the back half of the year on 14-nanometer.

Mark Henninger - IR: If I can remind the participants to please slowly, we apologize for the network issues we are having.

Operator: Christopher Danely, JPMorgan.

Christopher Danely - JPMorgan: Brian, you said in the press release and the spiel upfront that you are taking in a wide variety of views from customers and people of the company and stuff like that. Could you just give us your opinion on what has surprised you and maybe how your view has changed in what you think has been important out there?

Brian M. Krzanich - CEO: Sure. So, I don't know if anything really surprised me. I think the things that were positive for me is that our customers especially, they want Intel to get into this expanding ultra-mobile market. They are looking for Intel to be stronger and have a better – and more capable product lineup in there and they're excited about the products that we have coming, the Haswell and Bay Trail. So, the key message that they've been giving us is we really want you there. We see the products coming. We want even more and we want a faster lineup following those. So that you heard in my speech today and in the earnings release that we're really putting much, much stronger effort on Atom and driving our SoC integration, and pulling it forward to the leading-edge. So, I'd say that was the major point or major comments I got back from our customer base.

Christopher Danely - JPMorgan: Then as my follow-up, so you guys are guiding for some decent growth here in the second half of this year. If we go back to last year, you were essentially flat in the second half. So, can you just give us your sense of what's driving the confidence that things are going to be better for you guys in the second half of this year versus the second half of last year?

Stacy J. Smith - SVP and CFO: Yeah, I'd say it's a couple of things. I'd also say, what we're guiding for Q3 is sub-seasonal growth, so off of an okay Q2, but not a gangbuster Q2, so I don't think it's a wildly optimistic forecast. In terms of the tailwinds that I see, first and foremost is the product cycle. Haswell is a great product for Ultrabooks and two-in-ones and as Brian said, with Bay Trail coming to the marketplace, we're going to be hitting price points in the touch-enabled segment of the PC market that we've never touched before and we'll be able to do that profitably and we'll start to gain share in tablets. We've got kind of our first big tablet wins out in the marketplace and with Bay Trail, we think, again, we enable other designs to come to market at price points that are going to be nicer in consumer price points. The second tailwind that I'd say is, we expect generally an improving macroeconomic climate as we go into the back half. I think that's aligned with most economists. In the first half, the U.S. was a little bit stronger than we had thought starting the year. China was a little bit weaker. But generally I would expect an improving macroeconomic environment in the back half.

Operator: John Pitzer, Credit Suisse.

John Pitzer - Credit Suisse: Brian, although early, the initial read we're getting on Bay Trail with your partners is pretty positive and I think that's driving a concern in the investment communication with whether or not Bay Trail is going to be so good that it starts to cannibalize Haswell. And so, I guess I'd like to get your thoughts on how you can segment the market properly? To what extent do you think you are a slave to market force and to what extent do you think you can bring applications that are MIPS attentive into the ecosystem and secure the Core business even as try to get more aggressive in Bay Trail and Atom.

Brian M. Krzanich - CEO: First, let me tell you. Our view right now Bay Trail is that we don't believe it will be cannibalistic in that nature. But we believe what it really does is allows us to get into these markets that we're not in in a big way today. And that, as Stacy said, are these sub-$400, sub-$300 in some case, clamshells and touch-enabled convertibles and two-in-one devices and tablets, 199 and below, some you are going to see even lower below 150 and much below that as we go through the holiday season. So, Bay Trail really first and foremost we believe gives solid performance, solid battery life relative to the competition in price points and markets that we are simply not in, in a big way today. So, we look at it mostly as an expensive. The other thing that I'd make as a point is, Haswell as we've said, is the largest battery life improvement in Intel's history along with great performance and it's providing products that have Core level performance that will be fanless for the first time. So, we still believe that there is a strong drive for performance in segments of this market that look for high def video performance, gaming, all of the things that if you actually look at a lot of the tablet usage even, people are doing more and more and definitely in these two-in-one convertible devices, people look for that kind of application. So, we believe that Haswell allowing us to go down into those better price points and lower powers will give us the performance option that keep people up into those region.

Stacy J. Smith - SVP and CFO: If I can just add a couple of data points on that in terms of what we've seen over the last few years. First off, to reinforce what Brian said, there still is a big gap in terms of performance and features between the best of Bay Trail and the Core i3, i5, i7 segment of our product line and if you look at the last three years even in the time where the market has been relatively weak, the Core i5, i7 volumes have been very healthy and if anything, we've seen a larger mix overall to Core over that time period. So, it says there is a segmentation in the marketplace where Bay Trail will play, it will start to expand us into markets where we don't play today and because of the cost structure, we think we can do it with more dollars per unit than we would be able to do it, if we're going after that segment, say with Celeron or even with some of the low end of the Pentium roadmap. So, it's a powerful product from that perspective John.

Brian M. Krzanich - CEO: At the end of the day, the market will go where the market goes, and better to have a product like Bay Trail that we can play no matter where it goes rather than miss that market, which, if you look over the past, was more the case.

John Pitzer - Credit Suisse: Then, as my follow on Stacy, several years back, you put out a long-term gross margin target of sort of 55% to 65%, and I think for most of the time since you've put that target out, you've been operating near the higher end of that range. I'm just kind of curious as, you start bringing Bay Trail, Merrifield a renewed effort into the Atom s base, should we think that the next three years that range is going to be more directed towards the lower half or are there other puts and takes within that gross margin range?

Stacy J. Smith - SVP and CFO: As you probably anticipated, I'm not going to get pinned down inside the range. I'm still very comfortable with the 55% to 65%. I think the second half is a great proof point. We're going to be, from Q1 to Q3 we're going to quadruple our tablet volume. We'll run in a 61% gross margin at the Company level. As Brian said, the market's going to go where it's going to. We've got some great product to give us the cost structure to after them profitably and I'm still confident in that gross margin range and we'll talk more about the specific segments when we get to the investor meeting.

Operator: Stacy Rasgon, Sanford Bernstein.

Stacy Rasgon - Sanford Bernstein: First on the annual revenue guidance, your prior guidance had total revenues up in the low single-digit as well as total units up in the low single digits. With the new guidance of relatively flat revenue, does that essentially imply flat total units and if so, how important is the Bay Trail launch and Bay Trail volumes to actually achieving that type of a unit target?

Stacy J. Smith - SVP and CFO: Apologies. This is Stacy. Let me restate your question to make sure I'm answering that correctly, because that was a little garbled in the middle. It's not your fault. We're just having some issues on our part. I think what you're asking me is, kind of defend my flat revenue forecasts and give you a sense of what's going on in client versus other segments of the business and in particular, what's going on with units. Is that where you were going?

Stacy Rasgon - Sanford Bernstein: Yeah, that's it. And then if the guidance does actually imply flat units correlated with your revenue, how important is gaining Bay Trail volume in the back half to achieving that type of a unit outlook.

Stacy J. Smith - SVP and CFO: Yeah, okay. Let me go there. So, first, I'd say, we would actually expect that overall compute units, so tablets up through PCs, they will be down some this year and that's kind of system where the flat revenue forecast is for the Company. So, let me just kind of walk you through. I 'll start with what you've seen from Gartner and IDC, their view of the year. We're pretty aligned with those numbers in terms of our view of the classic PC market. But to get to then our units you have to make some adjustments to that. So, first off, in their classic view or PCs that would not include some of the ultra-mobile devices, i.e., the Microsoft Surface Pro. So, you'd add that in to get to our PC client group unit. We think we are gaining some share in tablets. So, that's a little bit of an offset. Net books for us is declining pretty significantly. That's not in the PC client group segment, that's in the other IAG segment. And then as I said earlier in my prepared remarks, we think we gained some share so that also gives us a little bit of help. But when you net all that out, you'd say, our unit and our revenue for the PC Client Group is down year-over-year. It's just not down as much as the headline number that you see from Gartner. So, you start there and then the offsets to that, the places where we're growing is Data Center Group, which we think grows in the low double digits if you do manage your math on that it's 20% of our revenue, so that adds a couple of points to growth to the Company. NAND is probably worth a point on its own. They look to be having a good year. You have some other smaller things but you kind of net that out against PC Client Group that's down a bit and you get to flat for the year. So, just kind of rough math, that's how I'm viewing the different segments. Did that answer your question?

Stacy Rasgon - Sanford Bernstein: No, that's very helpful. As my follow-up, if I could carve into the Data Center a little bit. So, it looks like you're still looking for low double-digit growth in this business that seems to be unchanged from the last couple of quarters. Does that not imply a very significant ramp both quarter-over-year and year-over-year? I mean in the ballpark of 15% to 20%, sequentially as well as year-over-year in the second half. Can you give us some I guess where your confidence comes from that you're going to get that kind of growth in the Data Center in the second half, is it all macro or is it something else, what drives that?

Brian M. Krzanich - CEO: This is Brian. I'll answer that one. Yes, we're still confident in the second half growth of our Data Center business overall. As we mentioned, we're seeing strong growth in the cloud, the high-performance computing, our networking and our storage and we think those continue through the second half of this year. What was down as Stacy mentioned was the Enterprise, Data Centers were down a bit in the first half. We think as the macroeconomics continue to improve through this year, that picks up a bit and when you put that all together, we believe that absolutely, our view is that we can continue through this year with that low double-digit growth.

Stacy Rasgon - Sanford Bernstein: The enterprise had to have been down more than that right, you said that the hard drives or storage and networking, all those other stuff was up 20% to 40%. I think your total Data Center business in the first half year-over-year is just flat to up a little bit. So, that enterprise piece had to have been down quite a bit year-over-year in the second half. So, you're saying you're going to see a very significant reversal of that trend in the second half?

Stacy J. Smith - SVP and CFO: Yeah from a wonky finance standpoint, realize there's also kind of prior period comparison thing going on in the first half of last year. We were in the steep part of the ramp for Romley. In the second half of this year, we'll be launching other versions of Ivy versions of the Data Center, so the short answer to your question is yes, I would expect some pretty steep quarter-on-quarter and year-on-year comps in the back half of this year. That is what we're planning for.

Operator: Ross Seymore, Deutsche Bank.

Ross Seymore - Deutsche Bank: First question is for Brian. On that focus on the ultra-mobility side of things, can you talk a little bit about what that implies for the OpEx for Intel. The OpEx is elevated as a percentage of sales versus where it's been historically mainly on the R&D side. My understanding is the majority of that spending is for the mobile effort. Is your efforts to expedite that process likely to mean more OpEx to deliver those better results? Maybe a follow on to that is, when do we get either results on the top line happening or you rationalize some of that OpEx?

Brian M. Krzanich - CEO: Sure, so let me start. The simple answer is no. We're not going to increase our OpEx spending and in fact, what we've really been focusing on is managing that as well. What you're going to see – and remember, as we move our architecture more and more toward SoC, a lot of the work we do bridges between Core and Atom and as we pull Atom forward onto the leading-edge technology, again, that allows a lot of the architectural work to be in alignment and be shared amongst the two products. So, we believe that we can move faster on Atom and into this ultra-mobility space without having to change or increase our OpEx. So, absolutely, that's the current model that we're working under. From when will you start to see it? Some of these changes have been started a while back and you see Bay Trail coming out towards the end of this year. It's a product that is on that Atom core that is truly industry leading. We talked earlier about lot of the benchmarks coming out, showing it very strong against the competition, if not leading the competition, in many other metrics. So, we believe that you'll start to see some of this just naturally over the next six months as Bay Trail ramps up and gets into production. We have a series of products after that. You'll see more and more acceleration. So, don't think of this as a one-time shift where you'll see a digital move. Look at it as a constant pushing of the accelerator down and the thing just gets faster and faster as time goes by. So you'll just see more and more strength of that Atom line as time goes through here, and it will be kind of just look back and say, well, it's obvious, the Atom line has truly become strong and they've got share in the tablet space.

Stacy J. Smith - SVP and CFO: If I could just add to that and give you a little bit of sense of where we are trying to go. You, I am sure, noticed we brought the overall spending forecast for the Company. We know that we're running hot in terms of spending as a percentage of revenue. We've been very consciously making investments in that space. What I've seen of Brian, in his tenure, is he's very focused on driving that efficiency and bringing it down. We'll come down a few points between where we were in Q2 and the end of year in terms of spending as a percent of revenue and the expectation is we can come down more next year.

Brian M. Krzanich - CEO: My point was just going to be to reemphasize what Stacy just said is that my answer for why OpEx won't go up, is you just take a look at what we've done moving into Q3, right, and the efficiency and structure that we put in both the reorganization that we did and flattening and decision-making and just the cost savings that we've already put in through efficiencies in both the OpEx and the CapEx that you saw. We expect that same level of efficiency to keep moving forward even as we make this transition. So, to me, those are not separated. Those go hand-in-hand actually as you become more efficient.

Stacy J. Smith - SVP and CFO: Thanks for your patience with the audios. Ross, do you have a follow-up question?

Ross Seymore - Deutsche Bank: Yeah, I do. Switching gears again for BK, but on the foundry side of things. I think Paul described that you're no longer crawling on the first quarter conference call. I know that's a business that's near and dear to your heart given your prior job. Can you give us some benchmarks that we should watch for to deem the success or lack thereof that Intel plans to have and generally speaking, can you explain how your strategy in foundry may be any different than the prior CEO?

Brian M. Krzanich - CEO: Sure. You have to remember that even when you sign up a foundry customer, it's 18 to 24 or sometimes even longer 30 months before that foundry customer is able to start producing product, especially when they move from one foundry to another, as they go through their design cycle and their product qualification, so you should think that even the customers that we've already signed up, that you've heard about in the press, those revenues that impact on Intel's bottom-line is still laid out, in any changes we'd make in strategy or additional customers we make now will have that same timeline. I think again, Paul said it right, you want to kind of crawl, walk, run not necessarily because that's what we should do in order to manage it. It's more – you really want to make sure that the systems and the customer support models that you have are in place, to handle the volume that you're really taking on and since we haven't been a foundry business all our life, we wanted to go and make sure we really knew what we were doing there. We are moving from, I'd say that crawl space to reach the walk space. I think that the philosophy we have moving forward is that we are going to treat every one of these customers that come to us and come talk to us about foundry opportunities, individually and look at them from a strategic standpoint, what size of business they bring and whether their products kind of really take advantage of our process leadership, and so, we don't take a look at this as, in separating out the we wills or won'ts, we're taking each customer individually and looking at them as an opportunity and what is the right thing for the shareholders, bringing value to the shareholders with this technology that we have.

Operator: David Wong, Wells Fargo.

David Wong - Wells Fargo: You mentioned moving Atom even faster to the leading-edge. Can you give us some detail as to when we might see 14-nanometer Atom products in the market and similarly you talked about 14-nanometers going into production end of this year. So, does that mean the first 14-nanometer Core products will launch in the first quarter of 2014?

Brian M. Krzanich - CEO: You asked a couple of questions. We're not going to give changes to the roadmap or any kind of product schedules here from what will happen as a result of this strategy. We'll try and bring those updates to our investor meeting that happens in November. As far as our 14-nanometer Core launch and just our general product launch, I think what we said so far first half of 2014 and we're not ready to give any specifics beyond that.

Stacy J. Smith - SVP and CFO: I gave you a pretty strong hint with the fact that we'll be taking pre-qualification reserves. You can kind of sense that we're well – and those are going to be material. So, we'll be well into production in the fourth quarter.

David Wong - Wells Fargo: And just one other. If the lower CapEx plan due to lower spending on 14-nanometer and 10-nanometer or lower on 450-millimeter or both?

Stacy J. Smith - SVP and CFO: It's a variety of things, David. As we said on the call, our view of the overall market is less now than it was when we started the year. I think you've seen us trying to be very responsive to changes in demand and get the balance right and so, as our view of the market change we saw some opportunities for things that we thought we were going to put in place this year that we no longer have to put in place. It's across the board. It's no one thing. Similar to what you saw in Q1 where we've got opportunities to drive more re-use, here we are finding some opportunities to push some capital out of the year. Some of it is 450 not based on schedule changes, but it's just based on some efficiencies that we're able to find and shortening the time it takes us to install certain things and that kind of stuff. Some of it is (M&E) for 14-nanometer; some of it is space, but just a variety of kind of small things that added up to a $1 billion.

Mark Henninger - IR: Operator, we have time for two more questions.

Operator: Jim Covello, Goldman Sachs.

Jim Covello - Goldman Sachs: Just to follow up on the CapEx, does the new $11 billion forecast still include a full $2 billion for the new shell or is that some of what has gotten pushed out?

Brian M. Krzanich - CEO: Specific on the 450 – is that 450 question, Jim?

Jim Covello - Goldman Sachs: Well, yeah, that shell that you guys had articulated there was sort of an extra $2 billion in the CapEx that was related to that 450 shell.

Brian M. Krzanich - CEO: That one is down a little bit, but not a lot. It does change my round. I was rounding up to two and now, I would round to 1.5, but it's the theme of $1 billion changes. It's not the largest driver. It's not even that a large of a driver. I think it's interesting when you deconstruct the CapEx and you just kind of get down to the level of CapEx that's in place for current run rate. You take out the 450. You can take out some of the capital that's being spent, not necessarily for our current production, but things like IT and labs. You take out some of the greenfield space that we've built in place and you get down to a run rate of CapEx kind of in support of our current businesses in the mid-$50 billion and $55 billion or so in revenue in that range, that is I think a nice healthy level, a nice sustainable level and I can run it at that level and generate a 60% gross margin. So, it feels pretty good from that perspective and as we said we are continuing to try to balance the CapEx relative to the business size.

Jim Covello - Goldman Sachs: Sure. I'll use my follow-up on the CapEx as well. So, it's great to see the CapEx come down from the 13 originally to the 11 today. The first half spending is 4.9, so that would still imply pretty far below the 11. Obviously, maybe a little more of that shell comes in the back half. So, that would be some of the increase in the back half CapEx, but can we get any kind of hope that potentially even 11 is a number that there's some downside to?

Stacy J. Smith - SVP and CFO: So, first the linearity, the more of that shell, most of that shell frankly is in the back half of the year, so that shifts the linearity and you also see the 14nm spending going up in the back half. So, it's kind of a back half loaded year. I think, as I said earlier, we will continue to look for the right balance between capital and demand, but I want to stress, when you really deconstruct our CapEx at kind of $7 billion to $8 billion of capital being spent to support a business that's in the mid-$50 billion in revenue, it's the right level of CapEx I'm very comfortable with that. It's not putting in a bunch of incremental capacity, and it's a level that I can sustain, gross margin that's in that range that I've been talking about and kind of right at 60%.

Operator: Tristan Gerra, Baird.

Tristan Gerra - Robert W. Baird: Actually, years ago, when Atom first launched, I think you had mentioned that Atom was slightly lower gross margin, but same or slightly higher operating margin than the corporate average. Is that view still holding with the new products that you're launching?

Stacy J. Smith - SVP and CFO: This is probably better conversation for the investor meeting and keep in mind that Atom spans from servers to the PC segment of the market now where we're enabling these 299 price points to phones, to tablets, right? So, it's worthwhile to have a deeper discussion about the different segments. As we articulated earlier, generally, when you're looking at the predominance of our volume, the Core business, when Atom is price point replacing Celeron or a Pentium, we're doing it at a better margin dollars per unit than we were selling Celeron into that space and we're enabling lower price points. So, from that perspective, it's a great product with lots of kind of fight on the front foot and go after markets profitably that we had trouble to go after before. I'll save the rest probably until the investor meeting.

Tristan Gerra - Robert W. Baird: And then on this call, there has been obviously a good amount of discussion about diversification into ultra-mobile. If we look at the Core business, the ramp of Haswell and the ultra-books obviously hasn't been enough to bring back PC unit growth this year. Should we have the view that PC is basically past the peak, continues to decline and if not, what catalysts do you see going forward and what hasn't worked so far could work later in revitalizing PC growth going forward?

Stacy J. Smith - SVP and CFO: We had a hard time hearing that one because of the break and the networking problems we're having on this end. Let me try and repeat it and make sure – I think probably your question – or the basic of your question was, PCs have continued to decline. You've introduce Haswell, you're still forecasting a back half decline. What gives us confidence that we'll be able to turn that around or make any change in that? Did I capture your question correctly?

Tristan Gerra - Robert W. Baird: Yeah, that's correct. Thank you.

Brian M. Krzanich - CEO: I'll answer first and Stacy can jump in. My answer would be simply Haswell has been not a single product launch. So, let me first start with Haswell. We launched the Quad Core products in the second quarter. As we go into the third quarter, the Dual Core products, which go more into those lower price point region is actually going out to the market. So, it's a staggered launch, which is a little bit different than we've done with some other product. So, we are just now really starting to see the ramp of Haswell into the consumers' hands. So, I think it's really way too early to say, here is what Haswell is and you are just going to see as we move into the second half some fanless devices with Haswell. As we move forward, Bay Trail and 14-nanometer as we move into next year. Well, you can imagine, we will drive prices and battery life and the number of fanless devices up even more. So, that will be my first answer. The second answer, I'd tell you what's different moving forward, again we've kind of talked about this is Bay Trail. Bay Trail is going into some of these same classic PC devices that you see today. The clamshells where they've got touch-enabled clamshells coming down into the $300 range. You are going to see convertible clamshells where you can detach or flip and you access both the tablet or PC in the sub-$400 range, right around $400. As we move into next year, those price points will continue to drop. So, the fact that PCs especially with Bay Trail are going to move down into this, let's call it $200 to $400 range, is going to shift that market we believe as well and that's different than what's been out over the last few years. So, you've got fanless Haswell. You've got Bay Trail coming in. All of those things allowing devices that haven't been allowed in the past with our designs.

Mark Henninger - IR: All right. Thank you all for joining us on the call today, and again, our apologies for the audio challenges that we've had. Jamie can you please go ahead and wrap up the call?

Operator: Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation, you may all disconnect. Have a good day.