Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Ross Seymore - Deutsche Bank.
Ross Seymore - Deutsche Bank
Stacy, could you walk us through the gross margin trade-offs into the second quarter and specifically why the assumption on ASPs going down to offset the under-utilization charges also dropping?
Stacy Smith
We are forecasting a gross margin that’s in the mid-40%. You can think of that as being approximately flat to where we were in Q1. What you see is a couple of things that offset, so we will get about 5 points better in excess capacity. You know, we started reloaded the factories in Q1 a little earlier than expected, so we will see some significant increases to utilization that drives some gross margin good news.
Offsetting that, then we have a few smaller items. One, as you said, is average selling prices. That really is a mix issue. As Paul said in his speech, we expect the enterprise market to continue to be relatively weaker. A higher percentage of our shipments are going to go into consumer, which is a more price-sensitive segment of the market, so we will see a mix down in average selling prices in the second quarter. That’s our prediction.
The second item is we expect our costs to increase a bit in the second quarter. What we’ll be shipping in the second quarter are products that we built in Q4 and Q1. We built those products in factories that were underloaded to carry a higher cost in inventory and so that will cause our shipment costs to go up a bit in the second quarter.
And then, we are going to see our 32-nanometer start-up costs peak in the second quarter and that’s pretty consistent with what we’ve seen in prior generations and what we showed you in last year’s analysts meeting. You know, we see a significant increase from Q4 to Q1. That’s in our gross margin and it will go up a bit more in Q2 and then we expect it to start coming down pretty rapidly when we get into the second half of the year.
Ross Seymore - Deutsche Bank
What do you expect your internal inventory to do and any commentary on the end-market inventory that’s been burnt more on the channel side of things.
Stacy Smith
Those two things are obviously related. I will start with the channel inventory question first. As we do our checks of channel inventory levels, we saw a significant burn off of the overhang of inventory that we had seen in Q4 and the beginning of Q1. If anything, that burnt off a little more quickly than we thought. That’s what allowed us to start lowering our factories. And then you can see that in our inventory levels. You know, we dropped significantly from Q4 to Q1.
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