Paul Otellini
Our first quarter results clearly reflected the depth of the efficiency work in which we’ve been engaged over the past three year. While the global economy continues to be weak and uncertain, our execution this quarter was outstanding. We have adjusted quickly to this new environment where demand remains difficult to predict and order lead times have contracted.
As we indicated in our last earnings call, we made significant reductions in our weaker starts to bring inventory in line with the new demand environment. These actions resulted in an inventory reduction of 19% below the fourth quarter levels. Our spending is being controlled and the number of employees declined by 1,400 from Q4 levels.
Almost all the headcount reductions in Q1 and in 2009 will be focused on aligning our factory network to the new demand levels while accelerating our conversion to newer silicon technologies.
Our product development machine is in high gear, delivering a new generation of products in all segments. We believe that these products extend our lead in our core businesses and position us for significant growth in the new markets we are targeting.
In terms of demand, we saw a few important trends play out this quarter. First, we are seeing signs that a bottom in the PC market segment has been reached. I believe the worst is now behind us from an inventory correction and demand level adjustment level perspective. We saw order patterns strengthen throughout the quarter. Desktop sales appear to have hit bottom first and have followed more normal patterns since early February. In notebooks, the length of the supply chain and higher levels of inventory took longer to work through but now have returned to normal levels.
In terms of end-user consumption, the consumer segment has held up much better than the enterprise. This is particularly true in consumer notebooks, which continue to be the volume driver in this segment. Netbook sales continue to grow as anticipated and are clearly incremental volume for us in a difficult market.
In the enterprise segment, the server portion is in reasonable shape, partially reflecting demand for our newly released dual-processor products. The client portion remains weak, reflecting constrained budgets and redeployment of older equipment. The install base of enterprise notebooks is now over three years average age and will need to be upgraded as capital budgets free up.
Lastly, in terms of end markets, we saw the U.S. and China demonstrate relative strength while Europe, Japan, and the emerging markets showed continuing weakness.
Looking forward, I want to comment on our product and technology direction. First, we recently launched the dual-processor server versions of our Nehalem family of products and the market reception has been remarkable. Nehalem is no ordinary upgrade. These products reflect the single largest increase in server performance we have ever delivered, generation to generation and enabled revolutionary advances in performance and performance per watt metrics.
At launch we had over 230 designs using the new Intel Zion 5500 across all of our OEMs with a fully-stocked distribution channel ready to support a fast ramp. This family offers enterprises the opportunity to improve their capability while lowering their cost of computing. I expect that value proposition to be extremely important during these challenging economic times.
If you combine the core I-7 and the Intel Xeon 5500 processors, this week Intel expects to ship its one-millionth Nehalem-based microprocessor, demonstrating that the market still responds to the best performing products.
Our 32-nanometer process is very healthy and shows great promise for us. This is the reason we recently announced a $7.0 billion investment in plants and equipment to accelerate high volume deployment of this technology.
We have pulled in Westmere, our fist 32-nanometer product family, and will now be shipping those products later this year. We have shipped thousands of Westmere samples to over 30 EOM customers already. We also look forward to the launch of our new consumer ultra low voltage products which will enable many new thing and light notebooks at very compelling price points.
In closing, while it is clear that our end markets are still impacted by the global financial conditions, we are comfortable with our investment levels and capacity profile. We expect business conditions in Q2 to mirror those in Q1 with some gradual recovering of demand and replenishment of inventories occurring as the industry sees increasing signs of stabilization and a return to more normal seasonal trends.
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