Analyst Conference Summary

conference date: July 17, 2007 @ 2:30 PM Pacific Time
for quarter ending: June 30, 2007 (2nd quarter 2007)

Forward-looking statements

Overview: Not a great quarter, except in comparison to the year-earlier disaster.

Basic data:

Revenues were $8.7 billion, down 2% sequentially from $8.9 billion in Q1 2007 but up 8% from Q2 2006.

Net income wa $1.3 billion, down 22% sequentially from $1.6 billion but up 44% year over year.

EPS (earnings per share) were $0.22, down 21% sequentially $0.27 per share but up 47% year over year.

Ended quarter with $10.2 billion in cash and equivalents, up $1.6 billion sequentially.

Guidance:

Excluding acquisitions and divestitures:

For Q3 2007, expect revenues of $9.0 to $9.6 billion, gross margin of 50% to 54%. Spending (including SG&A, R&D) between $2.7 and $2.8 billion. $150 million restructuring and impairment charges. Interest and gains from investments $320 million. 29% tax rate. $1.1 billion depreciation.

2007 outlook is 49% to 53% gross margin. R&D total $5.7 billion. General and administrative expense $5.1 billion. $4.9 billion in capital spending. 29% tax rate. $4.6 billion depreciation.

2nd half 2007 gross margin of 52 to 54%.

Conference Highlights:

Results included tax items increasing EPS by 3 cents along with restructuring charges of $82 million.

Gross margin was 46.9%, lower than expected, due to low demand for NOR flash products, low ASPs, and failure to sell previously-written off inventory. Margin improvement is expected through remainder of year.

Orders strengthened and revenue came in above midpoint of their expectations. Restructuring efforts led to a 26% increase in operating profits from a year ago. Factory network is delivering great yields, low costs and fast throughput.

Computer demand was strong but pricing was competitive, especially at low end of PC market. Performance server and notebook markets were relatively stabile. Microprocessor unit sales were higher, but ASP (average sale price) was lower.

Xeon quad-core processor unit shipments doubled sequentially. Over 1 million shipped since launch. Server units and revenue up double digits sequentially and year-over-year.

Mobile revenues were up over 20% year-over-year. Santa Rosa platform has over 230 design wins. 40% of client shipments were mobile. Will continue to benefit from market shift to mobile in second half.

Desktop shipments were higher than seasonal with across-the-board strength. But revenue was down from year earlier. Channel business strong, with decreased inventories.

Chipset units set a record, with sequential growth across servers, desktops, and notebooks. Strong bookings for Q3.

Unit volumes of motherboards were lower.

Digital enterprise group revenue was down 2% sequentially primarily due to lower desktop revenue and divestitures.

Flash business mixed. Nand saw a jump in units and densities, as well as ASPs. But Nor demand was weaker than expected, resulting in margin pressure.

Broad family of 45nm processors to ship by end of year.

Due to factory efficiencies, they are lowing the 2007 capital spending forecast by about $600 million. Reduced pipeline inventory by several weeks. Wafers now start closer to time customers need the output. But manufacturing startup costs weighed on gross margins.

We are leaner, more competitive, and agile. Inventories were reduced 5% sequentially.

R&D and MG&A were approximately $2.6 billion, sequentially flat but down 15% from year-earlier. $82 million charges for restructuring and impairment. Capital spending $1.3 billion. $650 million in dividend payments. Stock buy backs were $100 million.

Number of employees down by more than 12,000 from year earlier, to 90,300.

Q&A:

Q3 only 6% year-over-year? Pegging at typical seasonality. Believes global economy is strong. Nothing in particular.

Q3 pricing environment? Q2 was more competitive than we expected. Expects that to continue. Best defense is better products. Quarter by quarter we have improved our product differentiation; 45 nm is the next step. Pricing pressure is overall the same but is now targetted at low end of desktop market, and to some extent in low-end notebooks.

Demand outlook in 2nd half? Q2 strength was across board in computers (but not Nor), expects expansion of that, with particular interest in notebooks. Quad-core server products doing well. Will focus on high end where they expect less competitive pressure.

Buy backs? Depends on further generation of cash.

Inventory? Down about $200 million, mostly due to improved efficiency, but inventory in channel also came down. That is unusual, expects it to flat in 3rd quarter, not to ramp up.

Nor Flash impact on margins going forward? Does not expect it to get worse, maybe a little better.

Desktops better than expected? Mainly upside in channel sales, which tend to be emerging market sales. Will be selective going forward with OEMs at low end, due to concerns about margins.

45 nm impact? Spends money on producing product but does not value it as inventory until they believe it has sales value. So 1 quarter of negative impact on margin. This happens about every two years.

2008 operating expense? Intent to have flat 2008 v. 2007 op ex.

Walk away from low end, low margin products? Not our intent, reducing cost structure to continue to go after low end. May "leave some stuff on the table" when it does not make sense.

Server ASPs? Trend is likely to be eroding because shift to DP (dual processor) servers from MP (multiple processor) systems. Trend to quad-core will be similar. Optimistic about second half because of expected expansion in mobile and in servers.

Gross margin expansion comfort? More comfortable with second half because microprocessor gross margin was good in Q2, though Flash brought margins down a point.

Will OEMs cause diminishing returns on pricing battle with AMD? Our customers are concerned about their own ability to compete with best products. We expect to be much stronger in high end performance segment of market. We will extend our lead in power efficiency with 45nm products.

Nor Flash in 2008? Revenue down when business is sold off, gross margins to go up 1 to 2%, our share of gains of losses will be in investment of new company.

45nm milestones? Sampling all versions of product today. Next will be IDF in September, where products will be shown. Did not give a ship date.

Pentium Duo in notebooks? Why does competition [AMD] have higher unit growth? Yes, our product is superior at price points. Ought to outsell at low end of retail range. We do better in international markets than in the U.S. Don't know why.

Nor versus Nand Flash? Does not split them out. Expected Nor to hold its own and Nand to improve. But Nor deteriorated in sales and had increased production costs.

Q3 market share? No comment on market share. In notebooks will move ads from brand establishment to Centrino branding. Will emphasize battery life.

Channel side? Hard to tell if we took share, but channel had a good quarter and customers said they had good product margins. Emerging markets were relatively strong.

Inventory of AMD? Intel's inventory has been cleaned up. Rumor is AMD is a bit long on inventory.

Growth rate of low end of server and notebook segments? Our low end is more energy efficient. But we will drive those two segments as aggressively as possible.

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