Q3 2019 Earnings Call
Gentlemen, thank you for standing by welcome to the third quarter 2019, Intel Corporation earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, lease program is being because.
Got it and now I'd like to introduce your host for todays program Drake Campbell head of Investor Relations. Please go ahead Sir.
Thank you operator, and welcome everyone to Intel's third quarter earnings Conference call by now you Should've received a copy of our earnings release in the earnings presentation.
If you've not received both documents are available on our investor website to see dotcom. The earnings presentation is also available in the webcast window for those joining US online I'm joined today by our CEO , Bob Swanson, and our CFO George Davis in a moment will brief remarks from both of them followed by Q and <unk>.
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. A brief reminder, that this quarter, we have provided both GAAP and non-GAAP .
Antal measures today, we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentation and earnings release available on 90 Si Dot com include the full GAAP and non-GAAP reconciliations with that let me hand, it over to Bob.
That's right.
Q3, 2019 was the best quarter in our company's history.
We generated $19.2 billion in revenue and a $1.42 and non-GAAP yeah.
She didn't know gardens by 1.2 billion and 18 cents respectively.
We've achieved record revenue, both overall and in our data centric businesses, while making continued progress on our strategic priorities.
Simply put our ambitions had never been greater.
We are growing share and a large an expanded 300 billion dollar market opportunity.
Your body exponential growth of data, which is reshaping computing.
I want to start with a recap of our my analyst day in all three priorities.
Salaried and grow.
Improving execution and deploying capital for attractive returns.
First growth.
It starts with the core be me.
Here are the key inflection point with the exponential growth today, they're creating massive demand for semiconductors.
Cloud workloads are diversifying networks are transforming and more computing performance is moving to the edge.
We've been out a multiyear journey to reposition the company's portfolio to take advantage of this industry catalyst.
Today, we have the product and technology leadership that uniquely positions us to capitalize on these trends.
We're investing in the IP required to help our customers when the inflections and the future.
The opportunity is massive.
As we told you in May we expect to generate $85 billion in revenue and $6 an E. P. S. In three to four years.
But that doesn't happen just by saying that.
Achieving this goal means delivering on our operational and financial priorities every 90 days.
Gross starts with our core business, where our workload optimized platforms are winning in a highly competitive marketplace.
It's now been nine quarters since the first the on scalable processor launched and we're proud to have delivered over 23 million units has customers rely on xeon to power their data centric workloads.
In the third quarter.
Leading cloud customers ramped our second generation Z and scalable processors with Cws, Google and Ali Baba the point instances based on Cascade like.
Customers, including BP and two Daarmstadt selected our highest performing to see on scalable platform. The 9200 series for their most demanding workloads.
One key reason customers are choosing xeon scalable is the platforms built and workload acceleration forever.
With a combination of Intel deep learning boost and Adx 512 technologies, we're seeing advantages of up to nine and Hey, I am fronts persons competitors Gpus.
We also see cloud and enterprise momentum building for our breakthrough memory technology Intel uptime.
This quarter, we announced a strategic collaboration with Oracle.
Oracle's incorporating the high performance capabilities Intel obtained DC persistent memory into its next generation X the data platform, which powers high performance database infrastructure that most of the world's leading banks telecoms and retailers.
And in client computing, we're excited that all our major PC OEM customers have always like designs with 18 already shipping out of a total 30 expected to launch this year.
We recently announced the next generation of Intel Xeon W and X series processors for high end desktops.
These platforms lead the industry and bring Intel deep learning boost powered a odd acceleration into high on Pcs and mainstream workstations for the first time.
Available soon these products deliver performance in value that good enthusiast and creators more reasons to keep choosing Intel.
We've also embarked on a multiyear program called project Athena that charts of course for the PC ecosystem to raise the bar on laptop innovation.
Amazing devices like the Dell Xps 13, two in one and the H.B. elite Dragon fly that meet the project Athena spec are already available.
Our PC answer or franchises are vital, but our ambitions are even greater.
We're extending our product leadership to power and increasingly five tree and a high enabled world.
We have multibillion dollar networking and I O T edge businesses, delivering double digit growth and a allied is driving significant revenue across our product portfolio.
We began investing 10 years ago and network IP, so see capabilities and software so that we could drive workload convergence on Intel silicon.
Today, we achieved number one share in the network console can market with expected 2019 revenue more than $5 billion growing at 12% this year.
We're also well positioned for Fiveg deployments in 2020, and expect to grow our market segment share and wireless base stations to 40% by 2022.
And we're ready for the next market inflection as Fiveg enable significant new aiotv and edge growth opportunities that extend front in network and on premise edge equipment to smart connected and point.
Winning here means blending the right compute performance per watt with the emerging killer apps at the edge.
Computer vision and a <unk> in France acceleration.
These are the differentiating capabilities that are propelled our I O T G and mobileye businesses to leadership share and that combined annual revenues approaching $5 billion.
The businesses are also growing quickly up 18% year to date, excluding wind river.
We're only have to bend, the curve and yet your opportunity and we're investing to lead.
Finally artificial intelligence.
Hey, I is becoming a pervasive use case.
According to RTC, 75% of enterprise applications will use a odd by 2021.
And that's why weren't using AI in everything we build.
But this isn't just about the future.
We are driving meaningful revenue inside Intel now.
Wood products spanning from the data center to the edge, we expect to generate more than three and a half billion dollars in a I driven data centric revenue in 2019.
More than 20% year over year.
We're confident in our growth, but we also need to improve our execution on multiple fronts.
First supply.
We've increased our output in response to stronger than expected demand.
We've invested record levels with Capex, the last two years to expand our capacity and support our customers grow.
With that investment we've increased our 14 nanometer capacity, 25%. This year well also ramping 10 nanometer production.
We expect our second half PC client supply will be up double digits compared to the first half.
And we expect to further increase our PC client supply by mid to high single digits in 2020.
But that growth hasn't been sufficient.
We're letting our customers down and they're expecting more from us.
PC demand has exceeded our expectations and surpass third party forecasts.
We now think the market is stronger than we forecasted back in Q2, which is made building inventory buffers difficult.
We are working hard to regain supply demand balance, but we expect to continue to be challenged in the fourth quarter.
Our manufacturing process node execution is also improving.
We have fabs in Oregon in Israel and volume production on 10 nanometer and will soon start 10 nanometer production in Arizona.
Yields are improving ahead of expectations for both clients and data center product.
The Intel 10 nanometer product to era has begun and our new 10th Gen core ice like processors are leading the way.
In two three we also shipped our first 10 nanometer agile Lux P.G. eyes.
And in 2020, well continue to expand our 10 nanometer portfolio with exciting new products, including in India in Prince accelerator.
Fiveg base station Association.
The on CP use for server storage and network and a discrete GPU.
This quarter, we've achieved power on exit for our first discrete GPU TG, one kind of important milestones.
As we discussed at the May Investor meeting, we are accelerating the pace of process node introductions and moving back to a two to two and a half year cadence.
Our process technology and design engineering teams are working closely to east process design complexity and bell on schedule performance power in cost.
We are on track to launch our first seven nanometer based product data center focus discrete GPU in 2021 two years after the launch of 10 nanometer.
Were also well down the engineering path on five nanometer.
Last a few thoughts on our capital deployment priorities.
We are confident in our future in our board is approved an additional 20 billion dollar share buyback authorization.
We have an excellent balance sheet.
Generate strong free cash flow and continue to invest in R&D and capex to grow.
We've also returned 100% free cash flow to shareholders over the last 10 years.
At the same time, we're making trade offs.
Well, we've increased R&D spending by more than a billion dollar since 2015.
We have reduced our total spending by nine point over the same period.
Additionally, we have established clear criteria for our big that like Mobileye, Fiveg and memory and storage.
Our ambitions are to play a larger role in our customer success.
And generate attractive returns for our shareholders.
If we can't do both will take Swift action.
We are making great progress with our Mobileye acquisition.
We've now shipped over 12 million I two devices this year, but more than 40% over the same period last year.
And in the third quarter, we delivered record revenue and secured six major new design wins totaling nearly 10 million lifetime units.
We've increased our investment in Fiveg, but we've also announced our fiveg smartphone modem exit and the sale of the I enough T. fab to micron.
We expect those to close in the fourth quarter.
And we continue to take steps to improve threed, NAND profitability and reduce memory Capex investment.
While evaluating a variety of partnership options that can accelerate the path to profitability and improve returns.
We are confident in our multiyear business plan and consistent with that we're increasing our buyback commitment.
We expect to repurchase approximately 20 billion shares over the next 15 to 18 month.
Well fund the buyback from proceeds would generate from partnerships and or non core asset disposition.
And by returning approximately 100% of 2020 free cash flow to investors.
In summary, our energies are focused on accelerating our growth.
Improving our execution and allocating our capital wisely.
Thanks to the team for a great quarter now I'll hand, the call over to George for more details on our Q3 results and business outlook.
Thanks, Bob and good afternoon, everyone.
We had an outstanding Q3 with record revenue of $19.2 billion.
Fortunately flat year on year and $1.2 billion higher than guide.
We saw record data centric revenue of $9.5 billion, representing just under 50% of our total revenue an all time highs.
D.C.G. Io TG NSG and mobile on all individually achieved record revenue in the quarter.
PC centric revenue was down 5% year on year on a very tough compare.
Q3 operating margin was approximately 36% one point ahead of our guide on revenue strength and spending leverage.
Gross margin for the quarter was 60.4%.
Modestly below expectations as strong flow through of higher D.C.G. revenue was more than offset by mix effects of higher than expected man revenues.
And one time impacts in NSG, including the absence of unexpected grant associated with or Nam factory.
Q3, EPS was one dollar and 42 cents.
10 cents above our guide.
The results demonstrate strong top line performance.
Expense discipline.
Pre share, but buybacks as well as non operational factors like lower tax rate.
Upset by the onetime items in our industry business.
Year to date, we have generated $11.7 billion of free cash flow.
Returned $14.3 billion to shareholders.
Operating margin of 36% in the quarter was down approximately four point versus last year.
He is the strength in our server in client businesses and lower spending were more than offset by man pricing degradation changes and modem reserves platform volume declines and higher cost as we ramp or 10 nanometer client products.
Yes was up 1% or two cents year over year as lower operating margin was offset by lower share count.
The absence of one time impairments related to the I am of tea joint venture and have a lower tax rate.
Our non-GAAP tax rate in Q3 was approximately 11%.
Down one point versus last year, and below or 13% guide as we reported a better than expected tax benefits related to our non U.S. sales on our recently filed 2018 U.S. tax return.
Well as for the 2019 tax year.
Let's move to signal performance.
Our data Center group had record revenue at $6.4 billion.
4% from the prior year on our recently filed 2018 U.S. tax return.
As well as for the 2019 tax year.
Let's move to segment performance.
Our data Center group had record revenue at $6.4 billion.
4% from the prior year and up 28% sequentially.
These results beat our expectations with platform is piece up 9% year over year on strong adoption of our highest performance second gen. The on scalable products.
Against the tough year over year compare platform units were down 6%.
While D.C.G., Jason sees achieved 12% revenue growth.
Written by our connectivity solutions.
D.C.G. grow segment.
Cloud in comps now represent over two thirds of total D.C.G. revenue.
<unk> revenue was up 3% year over year, returning to growth. After a historic 2018 platform refresh as cloud service providers exited a three quarter past the absorption cycle.
Enterprise and government revenue came in ahead of expectations growing 1% on strong mix and better China demand well communication service providers revenue increased 11% on continued adoption and share gains of IP based solutions.
We estimate in Q3 that the enterprise and government and communication service provider segment.
Benefited from trade related demand pool is.
Of approximately $200 million in revenue from Q4.
As a result of these strong topline performance D.C.G. achieved record quarterly operating income and operating margin of 49% was up 13 point sequentially.
Our other data centric businesses were up 13% year over year.
In Q3, Mark I O T. Geez first 1 billion dollar revenue quarter up 9% year over year.
Underscoring Intel's expanding opportunity at the edge.
[noise] audio TG operating income was down 4% year over year due to lower benefits from inventory reserves and a mix shift to lower margin products.
Mobile <unk> revenue and operating income were up year over year, 20% and 29% respectively on continued Ada es penetration and new program launches.
And as she revenue returned to growth up 19% on continued bit growth, partially offset by year over year pricing declines.
These pricing declines along with the onetime impacts discussed earlier contributed to industries operating loss of approximately $500 million.
PSG revenue grew 2% year over year on continued strength in wireless.
Partially offset by softness in cloud and enterprise.
Operating income was down 13% on segment product mix.
CCG revenue was $9.7 billion down 5% year over year as E.S.P. strength, partially offset lower platform volume.
See unit volumes were down 10% versus Q3, 18, where we benefited from drawing down internal inventory to satisfy demand.
We continue to be supply constrained in Q3, particularly at the value into the market is higher than expected PC demand strength continues to outpace our supply despite the capacity additions that Bob discussed earlier.
The Jason sees grew 10% year over year, driven by strong demand for modems and connectivity solutions.
Operating margin was 44% flat year on year has lower revenue was offset by lower spending driven by the fiveg smartphone modem exit.
Year to date, we've generated $23.3 billion and operating cash flow and invested $11.5 billion in capex.
Also returned 122% of free cash flow to shareholders through dividends and buybacks.
During the quarter, we ramp buybacks purchasing 92 million shares at an average price of $40.78 per share.
Now moving to the full year outlook.
As a result of our strong Q3 operating performance and momentum into Q4, we are increasing or revenue outlook for 2019 by $1.5 billion $71 billion.
We expect revenue from our data centric businesses to be flat to slightly up for the full year and expect our PC centric business to be flat to slightly down.
Both improving versus prior guidance operating margin for the year is expected to be approximately 32.5%.
Half a point from our prior guide.
Full year expectations for gross margin are unchanged at approximately 60%.
Expect Q4 gross margin to be down to two two and a half point sequentially.
As we continue to ramp 10 nanometer and we'll have sold through the previously reserved inventory consistent with prior expectations.
Expectations for full year spending or unchanged down approximately $900 million year on year.
As a result, non-GAAP EPS for the year is now expected to be $4.60.
20 cents from our July guide on strong topline performance and tight expense control.
We are raising gross capex by half a billion dollars to $16 billion as a result of increased 10 nanometer and seven nanometer investment.
And we're raising our free cash flow guide by $1 billion to $16 billion.
Let's turn to Q4.
After adjusting for the impact of trade related pool is in D.C.G., We expect Q4 revenue of $19.2 billion up 3% year over year and flat sequentially.
Our data centric businesses are expected to be up 6% to 8% year over year on continued cloud recovery and sequential man pricing growth.
Our PC centric business is expected to be flat to slightly down year over year.
We expect Q4 operating margin of approximately 33.5% and attach rate of 13.5%.
EPS is expected to be one dollar and 24 cents down sequentially on lower gross margin.
Lower below the line non operational benefits.
And a higher tax rate.
In summary, we were very pleased with the company's strong operating performance and we will be very focused over the quarter on delivering a record year.
With that let me turn it back over to trade.
Alright, Thank you George moving on now that the Q in a as is our normal practice, we would ask each participant to ask just one question. Operator. Please go ahead and introduce our first caller.
Certainly go first question comes on line of C.J. Muse from Evercore. Your question. Please yeah. Good afternoon. Thank you for taking the question I guess a question on the data center side, just square up the numbers it looks like you're suggesting DCG up maybe 5% year on year. So can you speak to the accuracy of that and then I guess bigger picture.
Tom service provider side clearly.
A very.
Lord source of strength for you for you guys up 11%.
And now representing more than 40% of the mix. So curious if you can kind of speak to the most important drivers of that business and how you're thinking about gross over the next 123 years. Thank you.
Yeah. Thanks, CJ first I'm sure Yeah, we gave a D D C centric God of six to eight and yeah, I would say, we didnt get D.C.G., specifically, but I would say, it's a little bit lower than our 60% data centric grow so you're you're in the ballpark on calm service the comp.
This has been a and extremely important aspect of the business for a number of years now where we've seen the you know program ability at the network.
With NFC and software defined networks and opportunity for us to.
Migrate the networking environment to <unk> architecture. So we've been doing this for a number of years, it's been a.
Arsone growth for us over time and in the quarter, the 11% growth was.
Significant enough itself, but remember last year's third quarter was also up in the mid to high Twentys. So we continue to make it great progress what we see going forward in this business is really a big opportunity in Fiveg. So next year are going to see your are good progress has been on Threeg and Fourg next year.
Sure I'm, we see real a you know design wins that we've achieved real growth.
As a week when do it five GE world for we continue to see what we characterize is cloudification the network more and more compute moving from the cloud in data centers out to the network in edge and that's been an opportunity for us that we've been investing in a over the past and we expect to be a big source of growth for us.
Going forward.
Thanks TJ.
Thank you. Our next question comes from a line of John Pitzer from Credit Suisse. Your question. Please.
Yeah. Good afternoon, guys. Congratulations on the solid results I want to stick with D.C.G., Bob If you look impressive today its fees rose 9% year over year.
She is a mix shift towards the coms business, which I believe tends to be marriott's piece. It's also happening in the quarter, where you're seeing your competitor ramping their next generation chipsets. So I guess I'm trying to understand what's the powering xeon scalable upgrade cycle you referred to in your prepared comments what inning are we.
In your mind, how much of an S.P. list can that give you and do you anticipate any unusual pricing action as competition heats up in this market.
[laughter] Oh boy was that your one question, John Oh, sorry, [laughter] yeah. Okay. So so first I'd say 10 are obviously, we're well into skylake, but the transition hours into Cascade like and yeah, that's a higher performance skew in the quarter or the.
Hi S. P is we're really driven by you know a particularly cloud customers really move into the highest end product within the Cascade like family. So we're seeing that transition from skylake to Cascade Lake and within Cascade like I'm real high performance Q, that's our highest <unk> <unk>.
Form and say SP I'm. So you know that that mix dynamic in Q3, I don't expect that to stay where it is I think we'll go to more of a balanced as we're going to crew for next year and you know in terms of that you know competitive dynamics I would just say that we've got a great lineup of products.
Got you know, we got skylake to Cascade leg for SAP and next year when looking at Cooper like as we talked before we're really excited about ice like server coming out in the second half of next year.
And we realize that it'll be a more competitive environment and we've tried to capture that Nelson and how we think about 2000 twentys both demand demand equation, but also the margins that we flagged a little bit on the on our Q2 color back at Analyst day, I think so good good quarter Goodman men.
Tim first have to second half high performance skews driving real high ASP is even though I'm, you're right that the S piece with comps have a tendency to be a little bit lower.
Thank you [laughter] thanks, John .
Thank you. Our next question comes on line of Joe Moore from Morgan Stanley . Your question. Please.
Great. Thank you I Wonder if you could talk to the shortage is a little bit more and I guess in the context of how much you said you've brought 14 nanometer capacity up.
And I realize demand is better but it seems like it's a few points better and yet the shortages are oh, sorry, intensifying can you just talk a little bit about that and when do you think will be in a position where you know you don't you don't have lost interest in your business anymore.
Yeah. Thanks, Thanks, Joe.
First I'd just kind of tried to put it into context over the course of the lot.
Three years, I guess, we've grown the business by about 20% so.
$14 billion in revenue over the last three years and the practical reality as we didnt anticipate that kind of explosive growth three years ago. So we didnt have the capacity in place to to deal with it and we've been working our tails off for the last 12 months to ensure for our customers that we wouldn't be a.
A constraint on their growth.
From a use last two years I'm I think as you know we spent over $30 billion in Capex.
To both have more capacity for Fourk TV, while we also began to ramp 10.
My prepared comments I said, we added 25%.
Ah wafer start capacity 2018 to 2019.
Our first half to second half unit volume will be up double digits. So we're making good progress throughout the course of the year, but our expectations were in the second half we would it be back in a supply demand equilibrium and the fact that matters, we're not there because.
The demand profile, that's resulting in our billion and a half a higher revenue. It's just higher than we had anticipated. So we have more work to do to meet our customers demands in the fourth quarter and going into 20.
Is we see fourth quarter, we're still going to be we're still going to be constraining, our customers growth, which is absolutely where we do not want to be but with the higher demand we will be constrained the growth in the fourth quarter, but as we go into 2020, our expectations are what another 25% capacity both for 14 and.
10, and that 'em, we will have particularly for you know for PC client, we expect to be able to do mid to high single digit unit volume.
Growth next year, and you know that we don't expect the market to grow that fast, but we got to have just more inventory buffer so where they are when our customers need us so.
Q4 would be a little challenging and Ah Ah 2020, we expect to be able to rectify thing.
Thank you.
Thanks, Joe.
Your next question comes from the line of Ambrish Srivastava from BMO Bank of Montreal. Your question. Please.
Hi, Thank you very much [laughter], Bob I wanted to go to the priority and the cadence that you talked about bringing it back to two two and a half year [laughter] is that's a it because my understanding is that they were just simply laws of physics that were causing the cadence to stretch out so what.
Problems SFC engineers, and the process folks called out there and it or is it just limited to the seven nanometer and then you would revisit that again. Thank you.
Yeah. It's a good question you know last back in our analyst day, we tried to go through this and quite a bit of detail both.
One kind of our lessons learned coming out of a the challenges we've had with 10 and how we're capturing those lessons learned as we think about the next two generations, but you know first our focus in energy's right now around scaling 10.
And as we said we feel you know very good about capacity what did we put in place the products, we have coming down the pipeline and the yields that we're achieving almost weaken week improvement over the last six months. So for 10, we feel really good.
Second you know, we when we when we.
Put the design rules and for seven nanometer, we were less aggressive in terms of density.
Our learning from going from 14 to 10 is.
For the benefit of hindsight, we were just we tried to scale today, you know 2.7 factor and that was that ended up putting too much.
Invention or revolutionary nodes into the fab environment to meet those kind of hurdles and a learning from that as we just can't hit those kinda really aggressive targets when to your point. The they you know the dynamics are getting increasingly challenging so lots of learning sought attend a transit.
Turning to 10 that we incorporated into seven the design you know the design rules, there's less complexity and you know for the last couple of years. The you know we've been working with easy.
Lift though has been the challenge Weve had you know you use the that we've been working with for a few years now and we expect to use you V.
As we scale SAB and and we indicated that our first product will be to two years from you know from this quarter or so fourth quarter of a 2021, our first seven nanometer products will come out and our expectation is that we'll get back on a two year cadence and seven and beyond so lots.
The learnings are out of 10 nanometer that we've incorporated.
And we said back in May and we reiterated today, we expect to be back to a two to two and a half your cadence going.
Going forward at least for the next you know that's you know.
Thank you.
Thanks, a lot.
Thank you. Our next question comes from the line up your favorite <unk> from New Street Research. Your question. Please.
Hey, I'm sure checking my question.
One question, but medium to biopsy.
Hi.
Breaking up.
Yes.
Okay, Let me just.
You bet or not.
The little or no.
Okay.
I think where she was pretty bad but she's on stage Joel.
Youre starting to exceed your seeks.
Because she's kansallis.
Uh huh.
So not a convenience we.
Yes, I can we just watch that even precedent getting.
Dave <unk> <unk>.
We did see.
My question is what's your best depending on.
Yes, I could use on street in just three months, how things maybe I'm each mine, which once you how do you mind and what you would expect even when we school Tim.
No the scenario.
And then.
Oh, that's like the foot brings you have in but they eat or something you can use to competition.
Yes.
Peter Let me kind of refrain that maybe I think you're talking about competition and how we feel about that.
The PC in the data center level and I'll, maybe I'll jump in on the PC because I think.
A year over year compare on Q3 is Ah could be causing some concern. This reminder, in Q3 last year.
We had basically drawn down more than a we can have of inventory, which went into the channel and so when you do compares.
So a year over year on on Q3, P.C. looks a little bit like on demand.
Really as we look over the last 90 days, we haven't seen any difference in our view of the competitive dynamics or we are.
Clearly being impacted significantly on the value end of the market, which is a supply issue for us.
It's one of the reasons why we're building a volume capacity continues to build volume capacity a into 2020 .
Because we think it gives us an opportunity to compete for those units again next year.
I didn't know if you want to comment on the D.C.G.. So yeah, I'll try because I'm not exactly sure I got the question, but yeah in terms of competitiveness if that's a.
A question.
No look it's a more competitive world and in that World. We just raise our full year outlook by $1.5 billion.
And increased our operating margins. So yeah, I think competitively nothing's really changed in the last.
369 months relative to what we expected and are the only thing that's really changes our performance.
But we do know that going into next year that you know our role is to dramatically expand.
The role we play in our customer success. So we're expanding the product the architectures to packaging technologies the process capabilities.
On the software that we build so we can continue to deliver better and better product performance for our customers on I'd, just say that we feel we feel really good about where we are but we're not complacent by any means in terms of an increased competitive environment as we go into 2020.
Thank you.
Thank you. Our next question comes on line of Stacy Rasgon from Bernstein Research. Your question. Please.
Hi, guys. Thanks for taking my question.
I was wondering if you could tell us within your enterprise cloud and <unk> com business isn't DCG in the quarter, how much of each of those was driven by China.
And given the 200 millimeter, a 200 million dollar pull forward across enterprise and cloud the dimension enterprise and complementary.
Was done between enterprise relative to expectations more or less than $200 million.
Yeah, I think Stacey you you've got the numbers right a 200 million was on the enterprise and.
And government and Coms area and that's a I would say it was more in line with our expectations.
Once you take out that 200 number we had expected it's come up a little bit the growth year over year was definitely above our expectations.
And so by nearly $20 million.
Yeah that was yeah that was a that was a fairly big number for us.
Relative to our expenses.
So how much of enterprise was China than.
Well look I think in terms of the makeup of the business for data Center you got it you know roughly two thirds is cloud and coms and you know roughly one third is enterprise and government. So that that as you know has changed dramatically over the years as weve can continue to grow our presence.
Once in the cloud and as I mentioned earlier to Joes question I think gained share in comp.
So now we're in kind of a two third one third state and enterprise and government was.
Across the board in D.C.G. and the core the strength was.
Yeah, much higher than we anticipated back in July we had a first half the second half acceleration, but you know the acceleration was just.
More more than we expected and the I would say we saw strength across the board, but as we looked at that at the E. N. G growth in particular, you know we're trying to determine.
What is Scott, what Pat has a tendency to but Poland versus what can we count on as we project things forward in our our best guess on our stronger performances of the billion too that we were over roughly 200 million of that was particularly related to enterprise and government, particularly related to out.
To China.
Thanks Stacy.
You.
Your next question comes on line, though Timothy Arcuri from Youve, Yes. Your question. Please.
Thanks, So much Bob it sounds like for 10 nanometer sounds like it's like is still on track for the second half of next year and it sounds like the seven nanometer GPGPU is still on track for 2021, you did talk though for the first time about five nanometer. So can you talk a little bit about how you think of make versus outsource and really what I'm. After is it.
Anything sacred.
Or if go into a foundry partner to make CPQ, where maybe even like a chip what strategy if that would eliminate a significant piece of your competitive disadvantage would you consider that or is that sort of off the table for now thanks.
Yeah, well I mean first to to the comment yes. The you know nothing new about.
Process relative to what we said at analyst day, you know ramp ramp 10.
To your cadence for seven in our expectations at the cadence going for be more at two to two and a half year timeframe. So.
You know intently focused on 10, now and a and seven for the product you mentioned the fourth in the fourth quarter.
So were yeah, we're investing to recapture process leadership going forward.
At the same time, you know we're going to be extremely open minded about how do we you know ensure that we're building the best products and where we build them was is something that will always evaluate I think as you know with you know with yeah. The other foundry players you.
Yeah, they been a source of our capacity over the years and.
Our expectation is to the extent that they can do something to support our growth better and or for Pete kind of demands were always going to look at.
How do we evaluate the opportunity set that's going to position us back.
To meet our customers demand for the growing diversity of products that we have in our in our portfolio.
Thanks.
Thanks, you aren't next question comes to mind Ross Seymore from Deutsche Bank. Your question. Please.
Hi, guys I wanted to ask on gross margin a year ago on your third quarter call. Bob you gave some directional commentary on what you thought for the out year for 2019.
Today as we look into 2020, you have a lot of moving parts with two notes ramping or 10 nanometer seven nanometer yields a competition or lots of moving parts admittedly, but I was hoping it at least versus maybe the fourth quarter exit rate. This year that you could give some puts and takes on how you're feeling about next year's growth.
Margin.
Hey, Ross this is George maybe I'll take that actually there's it with respect to 2020, there's no material change to my characterization on the last call a where we were talking about a 58% outlook for Q4, and 57% and 20.
21, and the question was will should that are those good proxies for.
2020, and my point was Oh, we we think will be closer to 60% then to those numbers, but if you want to think about tailwinds and headwinds going into 2020 that we look at as we think about that number.
So tailwinds will be obviously, we're going to have a lower modem a in the mix next year memory is the is starting to come out of that deep.
Down S.P. period.
And we think volumes are going to be up as we get a little better.
Supply and demand situation.
The headwinds that we're very mindful of is obviously 10 nanometer ramping.
It is <unk> can be a little bit of a headwind on margins.
And also competitive impacts on his piece so those are the.
Those are the things that will continue to look at but as we look at those today no material change at all from my previous comments.
Yeah, I think I I would probably just.
I guess echo and all the complexity and all the moving parts.
Yeah, George George kind of flags or what I'd characterize the for things that were really dialing in a one going into next year.
Mix is gonna be better.
As our modem volume will be lower.
And our NSG profitability will be better.
So mix is gonna habit mix has been a drag on 2019 gross margins and it will be a big contributor as we go into 2020.
Secondly, you know in the first half of Ah Ah 2019, we had a lot of the <unk>.
<unk> costs are cost to sales related to a you know pre PR to 10 nanometer product so that will not repeat itself. So those two things or you know good favorable thing.
The third thing is you know just yeah, George flagged that such a simplified as node transition.
And for US know transition next year is gonna be 14 nanometer won't be a little better in terms of its profitability fields won't be dramatically different because we're extremely mature, but depreciation levels will be lower because you know a lot of these tools have been fully depreciated because we've been on that note for so long.
Long built for the no transition 14 will be a little bit better.
Expectation is 10 nanometer yields will continue to improve.
But at the same time the mix of 10 versus 14 will be a little bit of a little bit of a weight. So no transition will well work against US and we also you know Weve tried to best we can take into account competitive dynamics as we exit this year and go into next year in our and our quest to play a bigger role.
In our customer success, we're going to yeah, we're going to compete to protect our position and expand expand the role we play. So those are the four things and.
Lots of complexity and lots of moving parts, but.
You know, we we've a year ago, we dialed in 2019 pretty well I'm now we've got a dial in 2020 as well.
Thanks for all the detail operator, I think I think we'll have time for two more calls.
Our next question comes to mind that Victoria from Bank of America. Your question. Please.
Thanks for taking my question, Bob You mentioned, you're still facing some.
Capacity shortages I wanted to understand how you're planning capacity for next year, what proportion that would be 14, what could be 10 and went back to a mix require a higher or similar never enough capital intensity as you saw this year.
Yeah I mean.
Our intention or next year is to not be a constraint on our customers growth first and foremost and.
Given that what I indicated is we expect to increase.
Capacity or by 25% next year, which is the same kind of level.
We did this year, we expect to do that again I'm. So we believe that yeah data center, we've been pretty decent shape, but for client, we just want to get to.
Mid single digit Kinda unit output mid to high single digit unit output. So one.
We can meet what we expect customer demand profiles to be but also so they can rebuild a buffer levels of inventory. So we can deal with these peaks et cetera. So we're trying to put the capacity in place that we think will meet the customer demand and try to service the the inventory buffer that.
<unk> has been depleted over the course for the last Ah nine nine months or so.
In terms of a in terms of capital.
I would just say, we'll probably give you more detail on that come come January but George Kinda laid out pack in may a multiyear view a capital and wasn't any dramatic changes from kind of where we are now obviously that'll be a function as a function of growth.
I would just said one thing to remind everybody is that a in 2019, we made a major shift.
<unk> spending capital in the memory area to moving that capital over to expand or.
Both or a 10 nanometer and some 14 nanometer we continue to pass in 14 nanometer and began adding capacity at seven nanometer as well so.
We are.
[noise] very focused on getting.
The capacity in place that will allow us to takes a word a shortage of our quarterly discussions.
And again thank you.
Thank you our final question for today, then comes from the line of Harlan sur from JP Morgan Your question. Please.
Good afternoon, and good job on liquidity execution, you know last time, we had a cloud and enterprise spending digestion plausible. Its first off of 2017, that's kinda seems set up though just passed by similar to those 2017 D.C.G. had strong second half growth and in fact back in 2017, it kicked off what was up four.
There are five quarter period of strong spending buyer cloud customers do you guys get a sense in discussions with your customers that the Indian we acceleration [laughter] sustainable for the next few quarters I mean, if I look at things like compute workloads growth [laughter] that continues at a strong pace workload themselves are getting more complex and so just wanted to get your views on first.
And the ability of the strong growth profile in D.C.G. into next year.
Yeah, Joe to Yeah, I think the the trends the macro trends that we see happened subsided at all and that is.
Insatiable appetite for the creation of data and the need to compute yeah process store move.
Make that data more relevant those those macro trends have been very had been very attractive for the long for for a while we expect those to continue.
But to your point the you know our experience with the with the cloud providers Insseco accrued big buying cycles, and then a relatively long digestion period and what we did experience last year was.
Again, you know gang Buster year, but it's been three quarters I'm coming into the third quarter, where they went through Digestions and what we started to see in the third quarter was particularly for high performance compute.
Started to see them come back into the market to really.
Begin to begin to purchase a little bit more so how long that cycle last.
Is gonna be a function of several variables, but yeah. There dimmit, there and demand seems to continue to be relatively strong and therefore they need to.
Add capacity, we think we'll we'll follow their end demand given day, that's been out of the market a little bit for about three quarters now up to up till Q3.
Yes. Thank you.
Thanks, Harlan <unk>, we're in a hand the call back over to Bob's for some closing comments yeah look thanks for a thanks for joining us we feel great about the quarter. Its a where we're looking at yeah, we had a record quarter or worked all raising our outlook for the full year.
Market, we see the trends, we see are as big as they've ever been and we're really focused on continuing to deliver for our customers 10 nanometer areas now.
Yeah, we're ramping a multitude of products, we have increased confidence and five nanometer and as we mentioned.
For seven and five getting back to a two and a half two year cadence is what we're focused on and we're and we're confident in the future.
And you see in both in the first nine months to the year as well as with our a higher share buyback that were putting your money where.
You know to work to reduce the flow because we think there's a disconnect between the intrinsic value of the plan. We shared with you Bakken back in May and how we're trading so with our balance sheet. We're taking advantage of that so thanks for thanks for joining us. Thanks for your questions and we'll talk too soon.
Thanks, Bob Jordan and thank you everyone for joining the call today operator could you. Please go ahead and wrap up the call.
Certainly thank you. Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.