Q4 2019 Earnings Call
2019, Intel Corporation earnings Conference call.
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 the session no need to press star one on your telephone as a reminder, studies program is being recorded.
Now I'd like to introduce your host for today's program Drake cable.
Head of Investor Relations. Please go ahead.
Writer and welcome everyone to until fourth quarter earnings Conference call by now you should have received a copy of our earnings release in the earnings presentation. If you've not received both documents are available on our Investor website fine DC Dot com. The earnings presentation is also available in the webcast window for those joining us online.
Good day by our CEO , Bob Swanson, our CFO George Davis in a moment, we'll hear brief remarks from both of them followed by QNX.
Before we begin let me remind everyone that today's discussion contain forward looking statements based on the environment as we currently see it.
And as such doesn't 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.
Brief reminder, that this quarter, we have provided both GAAP and non-GAAP financial measures.
Today, we will be speaking to the non-GAAP financial measures when describing our consolidated results.
The earnings presentation and earnings release available and I do see Dot com include the full GAAP and non-GAAP reconciliations with that let me hand, it over to Bob.
Right.
Exceeded our expectations for Q4, 19, capping off a fourth consecutive record year.
In Q4, we generated $20.2 billion in revenue and $1.52 and earnings per share exceeding our guidance by 1 billion and 28 cents respectively.
For the four year, we delivered $72 billion in revenue and $4.87 any Pos.
The PC data center, Aiotv memory, and mobile I businesses, each set all time annual revenue records.
Several years ago, we began a transformation to reposition the company to take advantage of the data Revolution that is reshaping computing.
Exiting this quarter, we now have greater than 50% of our revenue coming from our data centric collection of businesses.
But our journey is just beginning.
To reach our multiyear goals, we will continuously focus on three key priorities.
Accelerating growth.
Improving execution and deploying our capital for attractive returns.
I'd like to share our progress against these priorities over the last 90 days.
We are accelerating growth by expanding the capabilities of our workload optimized platforms and playing a larger role in our customer success.
Demand for Intel Xeon scalable processors is very strong as customers continue to make the on the foundation for their AI Infuse data center workloads.
One of the reasons Cascade like as our fastest wrapping the on CPQ 'cause it's on rivaled AI performance.
Yeah, It's a high performance will take another step in the first half of 2021, our third generation Z and scalable processor Cooper like the abuse.
Cooper like features new Intel deal boost extensions for built in a I traded acceleration, providing up to a 60% increase in trainee performance over the previous family.
Additionally, we've been expanded beyond the CP or when the data center wood products, such as Optune persistent memory customers six Ethernet and silicon photonics.
In Q4 data center adjacent products grew more than 30% year over year.
In client computing, we are seeing excellent momentum for our first 10 nanometer mobile CPQ ice like with 44 system designs already shipping.
In addition to our CPQ capabilities, we continue to deliver leadership PC platform conductivity.
With why fly six we're delivering gig plus speech and for wired conductivity, We just announced thunderbolt for for platforms in 2020.
AH Yes, we also showed customer momentum for our project Athena innovation program.
Including the first project Athena verified chromebooks.
Project, Athena verified laptops had been too and tested and verified to deliver fantastic system level innovation and benefits spanning battery life.
Sent responsiveness instant wake application compatibility and more.
We verified 26 project that seem to designs to date and expect 50 more devices across windows and chrome to be verify this year.
In addition to strikes and in our largest businesses, we're investing to win key data driven technology inflection.
These inflections include the rise of artificial intelligence.
The transformation of networks.
And emergence of the intelligence and autonomous edge.
The market.
They silicon is growing and evolving quickly.
New workloads are emerging at existing workloads like high performance computing are converging where they are.
In 2019, we generated $3.8 billion in AI based revenue.
Yeah, Hi market opportunity is expected to be 25 billion by 2024, and we're investing to lead with a strong portfolio of products.
In addition to integrating it into all our leading products, we've introduced and acquired new capabilities that deepened and already unparalleled portfolio of assets.
We announced the acquisition of how bought allowed a leading developer programmable deep learning accelerators for the data center.
About a combined with intel's existing basics and software expertise.
That's our AI offerings for the data center with high performance training and in France processors, and they standards based programming environment to address evolving hey, I workloads.
Delivering the optimal silicon architecture is critical but not sufficient to solve customers problems.
That's why we launched the one <unk> industry initiative to deliver a unified and simplified programming model.
Application development across heterogeneous processing architectures.
One a pie marks a game changing evolution from today's limiting proprietary program approaches to an open standards based model for cross architecture developer engagement and innovation.
As expected our networking business reached $5 billion revenues in 2019.
We've grown our business by helping our customers transform their networks like consolidating and Virtualizing workloads on Intel architecture based servers.
Now as we advance into the Fiveg error, we see our momentum and design win pipeline accelerating that's we're positioned to win significant share in base stations.
This quarter, we announced the strategic agreement with Alibaba to support both the Tokyo and Beijing Olympics.
Building out five GE infrastructure utilizing xeon scalable.
Octane persistent memory and Intel software.
These data optimize fiveg networks will support amazing experiences such as he mercent eight KBR.
<unk> three D. stadium simulations and cloud broadcasting.
We also delivered almost $5 billion, an annual revenue from our I O T slash edge portfolio of products.
In November we disclose started nexgen those videos vision processing units came back.
He bay is hardly optimized for edge in France with groundbreaking leaps forward in power efficient performance delivering up to Fourx the performance or six ex the performance per watt over comparable competitive solutions.
It's been over two years since the acquisition of mobilized and we couldn't be more excited about the team's progress.
This quarter, we announced several exciting new engagements.
We established an agreement for Ram data harvesting with S.C. I see motor.
And the barked on a strategic partnership with deal to deploy mobilize self driving system as a full stack solution for deals consumer Avi.
We also continue to accelerate the commercialization of driverless mobility as a service with two new partnerships.
Alright T P in Paris.
And Daegu City in South Korea.
In Q4, we were also excited to host analysts and investors that mobilize headquarters to discuss our strategy to win the more than 70 billion dollar opportunity for aid us.
He and data and to expand our aspirations to an even larger role in the hundred $60 billion opportunities for mobility as a service.
Our guests had the chance to test drive our technology on the demand inroads in Jerusalem, as we demonstrated industry's leading AB solution stack navigating a wide variety of driving complexities and delivering on matched agility and safety.
We have significant opportunities, but realizing them requires improved execution, starting with delivering more supply for our customers.
In response to continued strong demand, we invested record levels of Capex in 2018 in 2019.
That added capacity allowed us to increase our second half 2019, PCCP you supply by double digits relative to the first half.
However, demand has continued to outpace PC supply and supply remains tight in our PC business.
We're continuing to add capacity, so we're not constrained in our customers growth.
Across our 14 and 10 nanometer nodes, we're adding 25% wafer capacity this year to deliver a high single digit increase in PC unit volume.
This will enable us to meet market demand.
Deliver our 2020 financial plan and increased inventory to more normalized levels.
Our near term challenge is working with our customers to support their desired product mix.
Our process technology execution continues to improve.
In Q4, we ramped our 10 nanometer production and continue to see yields improve.
We are planning nine new product releases on 10 nanometer this year, including our Nexgen mobile CPQ.
Hey, Fiveg base station, so see in AI in France accelerator, our first discrete GPU and xeon for server storage and networking.
We're also on track to deliver 10 nanometer plus this year, our first performance upgrade on 10 nanometer.
Our seven nanometer process remains on track to deliver our lead seven nanometer product Panta vecchio at the end of 2021 would CPQ product following shortly after in 2022.
We're also driving innovation in the next generation of computing.
Yes, we provided a first look at our next Gen. Intel core mobile processor code named Tiger like which is designed to offer groundbreaking advancements when it ships later this year.
Hi, good legs built on Intel's 10 nanometer plus process will deliver significant gains in compute.
Hi, graphics and interconnect over the prior generation.
We will also deliver initial production shipments on our first 10 nanometer based d. and scalable product ice Lake in the latter part of 2020.
We're also investing to lead the next wave is technology breakthroughs such as quantum computing.
Our investment in quantum computing covers the full hardware and software stack in pursuit of a practical commercially viable quantum system.
For example, last month, we unveiled a first of its kind cryogenic control chip.
Force Ridge that will speed up development of full stack quantum computing systems.
We made good progress this quarter, but we'll continue to be laser focus on improving our execution.
That means delivering the supply leadership process technology and product innovations that allow us to play a larger role in our customer success.
Our third priority is to thoughtfully deploy your capital to deliver attractive returns.
That means first investment in the R&D and capex necessary to drive our long term business plan.
Since 2015, we have grown revenue by more than $16 billion, while reducing spending by 500 million.
Spending as a percentage of revenue was down nine points all over the same period, we've increased R&D spending by 1.2 billion.
We acquired a bottle labs, a fantastic company that will accelerate our a. I plans, while also making thoughtful this investment.
We closed both the Fiveg smartphone modem exit and the sale of buy enough tea in the quarter.
We are confident in our future and consistent with that our board has approved the 5% increase in our dividend to $1 in 32 cents per share.
Last quarter, we announced a commitment to execute $20 billion and share repurchases over the next 15 to 18 months.
And three months into that window, we've already repurchased $3.5 billion in shares.
Finally, our role goes beyond delivering strong results to be in a great corporate citizen that has real impact on the world around us going in their communities, where we work.
I'm proud of the many outside recognitions, we've received for our responsible business practices.
This reflects our culture and the efforts of our hundred thousand plus employees around the world.
Also we continue to believe that a diverse workforce and inclusive culture are essential for executing our growth strategy, which is why we released detailed workforce representation data that raises the bar on ourselves and others for continued improvement.
And it's important to us to be a leader in environmental sustainability, and we're investing to continue to increase the energy efficiency of our operations and our products.
And we're also making significant progress on our goal of restore and 100% of our global water use by 2025.
Second our May analyst day, we told you that the industry was at an inflection point, where the exponential growth of data is fueling massive expansion in multi cloud environments, transforming that works and catalyzing the intelligent edge.
We believe we're well positioned to lead this data revolution, and we expect to generate 85 billion in revenue.
Yes, six hours in earnings per share in the next three to four years.
One year into that plan, we are tracking well ahead of our commitment.
We have $3 billion more revenue than we've earned an additional 52 cents in earnings versus our may expectations.
Our expectation is to continue to make deposits towards our multi year goal every 90 days.
In summary, our priorities are to accelerate growth improve execution and thoughtfully deploy our capital on behalf of our owners like you.
I'm excited by the opportunities in front of US can appreciate your continued support.
I'll now hand, the call over to George for details on our Q4 results and business outlook George.
Thanks, Bob and good afternoon, everyone.
Q4 marked an outstanding finish to another record year with $20.2 billion in revenue.
8% year on year and $1 billion higher than guide.
We saw record data centric revenue of $10.2 billion, representing over 50% of our total revenue an all time high.
D.C.G. and mobile I, both achieved record revenue in the quarter.
Q4, PC centric revenue was $10 billion up 2% year on year tapping cc geez fourth consecutive year of revenue growth.
Q4 operating margin was approximately 36% two points ahead of our guide on higher gross margin and spending leverage.
Gross margin for the quarter was 60.1%.
Meeting expectations due to strong flow through higher D.C.G. revenue.
Q4, EPS was $1.52 cents 28 cents above our guide primarily due to strong operational performance and further boosted by gains from our I kept portfolio.
These results demonstrate the strong demand for our leadership products and solid execution to achieve record breaking here.
As a result full year S $4.87 was up 6% year on year.
We generated $16.9 billion of free cash flow up 19% and returned $19.2 billion to shareholders.
We anticipate another record year end 2020, and are raising the dividend, but 5%.
Moving to more details on Q4 performance.
Operating margin of 36% in the quarter was up over half a point versus last year as higher volume in S.P. strength in our data centric portfolio and lower spending were partly offset by the ramp of our 10 nanometer process and then pricing degradation.
He Pos was up 19% or 24 cents year over year on higher operating margin.
Equity gains driven by our I kept portfolio and a lower share count partially offset by a higher tax rate.
Our non-GAAP tax rate in Q4 was 13.6% inline with expectations and up five points year over year due to tax benefits from tax reform and discrete items in Q4 the team.
Let's move to segment performance.
Our data Center group had record revenue of $7.2 billion up 19% from the prior year.
These results beat our expectations with platform volume's up 12% platform is piece of 5% year over year on strong cloud demand and continued adoption of our highest performance second Gen Xeon scalable products.
In Q4.
Revenue was up 48% year over year as cloud service providers.
Newbuilding capacity to serve customer demand.
Enterprise and government revenue was down 7% Walt communication service providers revenue grew 14% as customers continue to the up I based solutions to transform their networks and transition to the five GE Your Oh.
All three segments exceeded our expectations for the quarter.
Our other data centric businesses were up 6% year over year in Q4, I O T. G achieved another double digit growth quarter with revenue up 13% and operating income of 29% year over year as customers increasingly adopt until it I am fuse products to power the growing intelligence.
Yes.
And mobile AD revenue and operating income were up 31% and 54%, respectively, driven by the industry, leading to products, which offer unmatched computer vision and mapping capabilities and continue to win in a fast growing eight aftermarket.
Hi, Q revenue was up 41% year over year.
And as she revenue grew 10% on continued good growth, partially offset by year over year pricing declines.
And as she reported an operating loss of $96 million as man cost improvements were more than offset by pricing declines.
BSG revenue declined 17% year over year on softness in the embedded segment.
Generally driven by lower last time buys versus Q4, 18, partially offset by strength in wireless.
Operating income was down 48% on lower revenue and segment product mix.
D.C.G. revenue was $10 billion in the fourth quarter up 2% year over year, driven by higher PC and modem volumes.
You see unit volumes were up 1% on continued market strength and increased capacity.
Jason sees which include modems and wireless and wired connectivity solutions grew 13% year over year, driven by strong demand for modems and a better mix of connectivity solutions.
Operating margin was 41%.
Up four points year on year on higher revenue and lower spending driven by the Fiveg smartphone modem exit.
As a result, CCG achieved record operating income in 2019.
In 2019, we generated $33.1 billion, an operating cash flow and invested $16.2 billion in capex.
We also returned 113% of free cash flow to shareholders, who dividends and buybacks.
During the quarter, we purchased 63 million shares at an average price of $55.32 per share.
Total 2019 share repurchases were 272 million and then 2020, we expect to return in excess of 100% of free cash flow to shareholders.
Under the 20 billion dollar buyback program announced last quarter and the increased dividend announced today.
Let's move to outlook.
2020 is expected to be another record year for the company, we are forecasting revenue of $73.5 billion and EPS of approximately $5.
We expect our PC centric business to be down low single digits year over year on a slightly down PC town.
Within 2020, we expect to see strong first half and a moderating second half dynamic due to lower modem revenue and expected lower PC Tam in the second half of 2020, that's the Windows 10 commercial refresh matures.
We expect revenue from our data centric businesses to be up high single digits for the full year as we capitalize on the secular trends that Bob outlawed.
We are expecting an exceptionally strong Q1 as cloud customers continue to build capacity and adopt our highest performing products. This was more three quarters of strong cloud buildout and we expect more modest capacity expansion for the remainder of the year.
Yes, please move to a digestion phase.
We're also planning for an increasingly competitive environment as we move through the year.
As a result of these dynamics, we expect total revenue can be more front end loaded in the first half than we've seen historically.
Gross margin is expected to be 59% for the year data point versus 29 team.
Both mix of products and the impact of 10 nanometer costs.
I think for the year is expected to be approximately $19 billion or 26% of revenue.
Down one point, resulting in a flat operating margin of approximately 33%.
We expect 2020 capex of approximately $17 billion.
More than half of which is comprised of investments in fab space.
And seven and five nanometer equipment.
Free cash flow is expected to be approximately $16.5 billion.
The flow through from revenue growth in higher depreciation is offset by higher capex and rebuilding of critical product inventory, but to the more normal operating levels.
Let's turn to Q1.
We anticipate a particularly strong start to another record year with Q1 revenue of $19 billion up 18% year over year, and well above normal seasonal patterns.
This is being driven in particular, but data centric revenue growth expected to be above 25% year over year on continued cloud buildout and NAND bit growth.
Our PC centric business is also contributing and is expected to be up more than 10% year over year on continued PC market strength.
Additional supplies and higher modem revenue.
With strong topline growth and mix, we expect Q1 gross margin of approximately 61%.
Up three points year over year.
Q1 operating margin is expected to be approximately 35% up seven points versus last year on higher gross margin and spending leverage on higher revenue.
Tax rate is expected to be 13% and EPS is expected to be $1.30 cents, a 46% year over year.
In summary, 2019 was Intel's best year ever and we expect to strong start to 2020 on the way to another record year.
With that let me turn it back over to trade.
Alright, Thank you George moving on now to 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 our first question comes from a line of Ross Seymore from Deutsche Bank. Your question. Please.
Hi, guys. Thanks for let me ask a question congrats on the strong into last year and start to this year, Georgia, Bob Whichever you want to answer this I want to go a little bit into the trajectory of revenues George you gave some great color there.
On the two different segments, PC centric and data centric, but appears by the end of this year you could even be going negative in both of those segments year over year. So it seems like it's a pretty significant drop I appreciate conservatism in the end of life and the window side of things, but how do you factor in the increased competition that you mentioned in the fact that shortage.
You should go away she could actually have some market share gains.
Yeah, let me.
Thanks, Ross, let me start charging you can you can chime in first that the.
Thank you for the compliments on our fourth quarter results. When we look at 2020 demand cycles.
We kind of have three things going on that or that did impact the first half the second half outlook and George touched on on a few of these but first at the macro level.
Yeah. This insatiable appetite for data and the processing resources that need to go to make that data relevant those trends continue and we feel very good about how we're positioned to capitalize on this increased demand.
Second the as you know from a cloud perspective, which now is.
Bigger and bigger part of our old overall D.C.G. revenue.
We expect them to continue to benefit from the trajectory.
I mentioned initially at the same time, you'll remember from last year, our ability to predict the cloud foot.
CSP purchasing.
And then kind of digestion patterns is relatively hard so we look at first have to second half.
You want will be the you know enough since the third quarter in a row of real strong.
Consumption patterns from the cloud so.
So we know from history that at some point they go into digestion mode, and the buying patterns began to slow down and it doesn't impact the medium or long term trends, but it does impact cyclical trends during the course severe and we've tried to based on our past learning to take that into account as much as we can so hopefully.
They were wrong, hopefully, we're conservative but at this stage of the game, that's kind of how we've looked at cloud cloud purchases first half to the second half.
The second thing you know PC Tam, we think there's going to be flat to down a little bit this year and the expectation is the first half will continue to be a windows 10 refresh that George flagged.
And we expect that to slow down in the second half and then the third item is you know modem. It's as we go into the second half for the year, we expect mode and volume to be a to be lower as we as we phase out of that business as smartphone modem moves to the moves to the Fiveg world.
So those three things have us looking at the full year of.
Kind of 2% growth in inherent in the in that is we know we got a much more competitive environment and our intentions. During the course of the Irrs can compete vigorously to protect our position well continue to expand as compute moves further and further away from the cloud out to the network into the edge.
No I didn't I guess I would just said that we feel really good about a year overall, it's just going to be a little flatter in terms of the pattern than certainly than we saw last year and.
Certainly different than our normal seasonal pattern, but no good strength growth in all of the businesses really outside of the PC, which is going to you know is coming across the us some headroom.
Some.
Headwinds from a Tam, but but we still expect it to work on gaining back share in some areas, where it's had difficulties in the past as we can circle relied more units.
One last comment I apologize, but I think just on a year over year basis the comps.
In the first top 20 are gonna be easier and then after a very strong second half of 19 comps get tougher in the second half of their but net net the were short shaped up we're looking for another record year in 2020. Thanks Ross.
Thank you.
Thank you. Our next question comes from a line of the Victoria from Bank of America. Your question. Please.
Thanks for taking my question and then congratulations on.
Strong resides and especially the buybacks nearly 10% she answered the guide and the last two years.
Question, Bob on 10 nanometer I saw in the Slide you mentioned 10 nanometer use ahead.
Right off of a expectations and you mentioned nine product releases on Dan can you help what's not in context, what does it imply in terms of the range of desktop and server skews I. I think that at some.
Speculation that maybe 10 nanometer might be a small north rather than a regular node or I guess.
Cost in a different way what percentage off your sales do you expect to be on 10 nanometer this year and maybe even next year. Thank you.
Well first we continue to make real good progress on yields on 10 nanometer and that's been after all the challenges we've had that's been kind of a consistent theme over the last.
Four to six quarters just on yield.
For 10, so we feel very good.
Within the year and coming to this year on where we are in yields.
Second in terms of the product road map, Yeah, we have 'em, we launched I slick for client in the fourth quarter or we launched a f. pj's agile Lux products on 10, eight or 10 nanometer in the fourth quarter and then through the course of this year or what have you know successive products is.
AI inference accelerator.
Five G.S. so see that we're really excited about for the for the you know for the Fiveg network.
As you launch and then you know lapse and certainly not least springing up I slick server product at the backend back ended the year. So we've launched at yields are good designs.
Across our portfolio of products are good and will ramp them up during the during the course severe.
But primarily for in terms of volume I will still be you know the client businesses alone we're going to ramp the fastest it'll it'll ramp during the course of the year it'll be on our second Gen.
10 nanometer or what we'll call 10, plus the second half for the year, which introduces a whole new level of performance for that product, but in the aggregate we won't have a huge percentage of our volume of our overall company volumes and the in the second half Theyll grow as we exit to exit the year can be.
Come a much much bigger part of our of our overall volume in 2021.
And then last I'd, just say that.
Our intention back in May and we reiterated again today is that we want to get back to a two to two two to two and a half your cadence and.
Shortly after launching ton our expectations is we'll have our first.
Our first seven nanometer product launch in the latter part about 2021 with CP is to closely follow so pens ramping now I will go to 10 plus for clients.
Well and will ramp seven out of two two year cadence and 2021.
Thank you.
Thanks, Thanks, a lot.
Thank you. Our next question comes on line of Blayne Curtis from Barclays. Your question. Please.
Hey, guys. Thanks for taking my question and I'll Echo the congrats great results, but maybe just following on that because I see I remember two quarters ago, you talked about.
Taping out.
As for servers in the first half and that yeah, there's a lot of different.
As soon as it gets confusing when you say second half do you actually is that a volume ramp or is that when you actually expect depending on their servers to be out.
Yeah. It's a good good question just a few things I think what first in terms of how we deploy the technology you know today, our ecosystem partners has already received ice like server sample. So that's a that's kind of the first first step for us and then.
And what we indicated is we'll start production wafers in the first half of this year.
And that that will translate into production of shipments in the latter part of 2020. So that's a sequence of events so production.
We load wafers, we deliver samples Jack reload wafers first half we deliver production output latter part of the year. So that's been pretty consistent with how we've been trying to ramp this over the last.
Several quarters.
Thanks for that and then just the clarity on the client side.
Surprised by the seasonality, but I guess I understand what when 10.
With that growth there are the strong year view or you're seeing in Q1 are you still shortening the market I guess yeah.
Yeah first you know the.
There Yeah, we came into 2019 looking at kind of a flat PC Tam and when all was said and done we end the year with about 3% growth overall, even stronger in the fourth quarter. So we've had a real strong the market has had a real strong year in 2019.
At the end of year as we indicated we were we were we are still constraining.
Our our PC customers and their so I'd say there. So we left some backlog on the table that we are.
Quickly trying to fill as we can then to the come into the first quarter. So that that that obviously a disappointment in terms of our serving customers at the end of year, but that adds to volume in the first first quarter first half.
As we go through the course of the year just from a macro level.
Yeah, we spent record capital and 18 again record capital in 19 as Jordan since George laid out in his prepared remarks, we'll spend will have record capital in 2020, and it's really geared to ensure that we never constrain our customers growth.
And our expectations in 2020.
As it will have high single digit PC unit volume.
And against the market that we expect to be flat to down slightly. So we are we are going to be in good position to meet.
Customer of the market demand in 2020 to love to deliver on our full year outlook and to begin to build the inventory levels to more natural position. So that the mix dynamics of what product for selling when we can manage the volatility in that much.
Rather than we had been able to in the fourth quarter. So supply constraints. We are maniacal about eliminate eliminated now so that we can meet customer demand and they don't have to worry about it.
And we'll expect to see more small core in the second half, which may be part of the dynamic we haven't really been able to serve that into the market in the way that we'd like to so that may be part of what you're looking at.
Okay.
Thank you.
Do you and as a reminder, ladies and gentlemen, please limit yourself to one question. Our next question comes in the line of John Pitzer from Credit Suisse. Your question. Please.
Yeah. Good afternoon, Bob George Let me add my congratulations to the solid results.
I guess I've got a similar question losses first question on revenue above, but my is going to be on gross margin. If you just sort of look into Q1 guidance of 61% versus the full year Oh keep in mind I'm, just trying to understand kind of the puts and takes that brings gross margin down throughout the year and explicitly how much of this.
Just kind of you guys baking in some some increased competition or how much of this is a pull forward of seven nanometer because 59 is pretty close to what you talked about the analyst day kind of flattish year on year, but it is slightly lower and you were pretty explicit about gross margins going down in calendar year 21.
I'm, just kind of curious as to whether or not we're getting a pull forward of seven here or what are the puts and takes you think about gross margins throughout the year.
So as we told me to start with a full year, because I think that'll that'll be helpful. As Ah that's the highest level, what you're really seeing is the.
An impact of.
Largely related to 10 nanometer costs that are coming into the system. During this year and increasing as we go into the second half.
For all the reasons above laid out.
We're actually getting some help that is.
That is moderating the impact of that from improving NAND pricing year over year, that's actually going to help us on gross margin and lower modem mix in particularly.
In the second half of the year, but in the year overall. So those are the big drivers of modems that nets out to about a one or 1% reduction.
And in Q1, what you're really seeing.
He is a lower modem.
And the lower variable comp being the reason that we're moving up a point see from Q4.
And so nothing.
No nothing unusual the other than normally you would have expected to see a much bigger drop in Q1 gross margin because of the mix of products is a it's the obviously the seasonally down quarter for.
Many of our businesses.
The Georgia, the only thing the I've seen that I would add is we do you know inherent in our guide is our expectations for lower ASP.
And then it's a function of two things one that George mentioned, which is we will eliminate the supply constraints and begin to get more volume on small core which as you know as lower ASP is and secondly, we're anticipating a more competitive environment in the you know as we go through the course of the year. So.
Yeah, the kind of bring it back.
We're ramping 10.
Its great.
We're ramping 10 in the second half for the year and you know in parallel with that we are investing in seven in 2020 and in 2021 and those are the things that we flagged back in May at the analyst day, and I'd say, the one thing that.
Really changed since then is that our yields on 10 or just a little bit better and there are lot. There are contributor to you know slightly better gross margin in the second half of 19, and we expect that to be continue to be a contributor next for this year I should this year.
Perfect. Thanks, guys.
Thank you. Our next question comes on line of Harlan sur from JP Morgan Your question. Please.
Good afternoon, and great job on a quarterly execution on the FLIR guide for data centric up high single digits. Appreciate the first half second half profile on D.C.G., but how are you guys thinking about growth of DCG within that framework for the full year is it is it inline with the sort of high single digits growth for data center.
Patrick and then within that framework, how do you see the growth trends in other DCG segments. He enterprise income service provider I think you.
Yeah. So the way we would look at D.C.G. I would say that growth readably month modestly lower than the overall growth rate you've got some.
Very high growers.
Contributing to pulling that up a little bit.
So a little below the average, but still attractive growth in here.
Garland.
Thank you. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question. Please.
Hi, guys. Thanks for taking my question I wanted to ask a bit about the capacity additions. So I kind of get this I'm, adding 25%.
Wafer capacity sick to support your own volumes going up high single digits.
In a market that you think is down does that imply that you're actually going to be over shipping the market.
This year as you sort of built those channel inventories.
No it stays and what.
How does that imply from going if you're going forward into 2021, where the PC market itself may still be in decline and you'll be go up higher capacity and ideally like die shrink at that point like how do we think about that.
I hear your 0.1 of the things that.
We mentioned is we are gonna be producing in order to build inventory levels back up in the year.
And so the second half of the year, we would expect to to be able to bring a both our server products and and.
And most importantly, our PC products back to a more normalized inventory level. So we are being up in the high single digits.
Is meant to allow us to not only satisfying our customers.
Yeah, but also rebuild inventories so your math is correct.
That's so that's your own inventory or or in the wants to jump you can be selling that to the customers or keeping it on your books.
It will be our own inventories and then we'll have to see if you look at the.
Some of the channel information you, but you might see customers trying to build some inventory as well.
But but were were when we're talking about building inventories, it's our inventory levels.
But I'd also say the the the channel.
Channel inventories exiting exiting the year for for PC, I'd say are relatively low and that.
That's that's on us.
So I do expect during the course of there we will.
We will build our inventory levels to more deal with.
You know spikes in demand set at the same time, we expect the channel to be at more healthy levels as we exit 2020 and enter 2021.
Then just the one thing I'd mentioned as we think about.
The business overall unkind to the demand signals.
Yeah, we continue to make really good progress on the comps sector.
Particularly with the growth in the network and that the role that we play in that transition to Fiveg.
And you know we characterize is the intelligent edge. We you know weve delivered double digit growth with Aiotv for the last several years and.
Yeah network, and Aiotv are bigger and bigger parts of our business that we think we're very well positioned so when you think about.
You know piece Tc volume up or down over time, Yeah. We got this bigger growing aspect of our business it.
Places a places demand on our manufacturing footprint. So that's the only thing that I would add Stacy. Thanks.
Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley . Your question. Please.
Yes. Thank you.
I guess I'm going back to the PC constraints that you're seeing.
You'd like to build your inventory back up and I think you said early in the year, but seems like we're just a few weeks from you going out to customers and telling them that you would be short. So you know at what point can they start to add inventory or you're forecasting that would happen in the second half in the first half and then you know do you do you feel like when those constraints or east.
You'll be able to take back units share on the client side.
Yeah, I think you know first it was.
Middle of Ah you know middle of the November I should say that we went out and yeah, we want to be able to provide as much advance notice to our customer base is possible. Yes supply is is going to constrain their ability to grow to give them time to deal with to deal with it and in November with strong data.
Center growth PC demand continuing to grow and a factory excursion common those combination of those things. We felt it was very important to get out to our customers as soon as possible.
I think as we close the or one of the favorable things once we got more output from our factories and because of the capacity we put in place and 18 19 and going into 20, we're really beginning to build back that capacity to meet the demands. So our expectations are more have.
Sufficient supply and the first quarter or I should say sufficient supply throughout the year I think our challenge is really going to be on.
Two things typically in Q2 words with Pcs and that is linear already getting not just the supply in the quarter, but you know we kind of weak supply as our customers are hoping for and then second yeah particular, ASC excuse or product mix out, making sure that we'd have to the <unk>.
The right product mix, so well have enough capacity I think Q2 will be a little challenging as we try to deal with a product mix and linear already but overall, we really planned to be out of the supply constraint environment in 2020.
Okay, and then other shortages anywhere other than client is entirely Klein are there any anything in server or any other products.
We're in pretty good shape on server and I, you know I I think that yeah, going with 19% growth and fourth quarter.
The pleaded our inventory level. So we're not yeah. When you have that kind of spike in demand. We're not we're not perfect across all all products are all skews, but you know.
Ah server see pews, we really prioritize that and try to put ourselves in a position, where we're not constrained and were pretty good pretty good shape.
Great shape macro micro if you a few challenges here in there but server CPQ supply is is is pretty good.
Your next question comes in a line of Christopher Rolland from Susquehanna. Your question. Please.
Hey, guys. Thanks for the question.
On Capex, specifically, either 17 building you mentioned some of the parks there [noise].
But we divide that up between seven and five.
First as you know, what you're dealing with and I don't know theres still adding some some 14 even [noise].
And as we think about Capex moving forward and capacity here.
Do you guys feel about outsourcing non CPQ products like for example, PSG.
Could you outsource that the foundries how are you thinking about capex going forward. Thanks, guys.
Sure well, maybe I'll take Capex and Bob you can cover the outsourcing PC.
So on Capex were part of the reason we're at the spacing 17 billion. This year is we're we're building more space.
Some of the longer lead time items, one of the things that's really impacted us in terms of closing the gap.
On a customer demand and our ability to support it has been not enough.
Space available to fill with equipment, which you can you can do in a much shorter timeframe you will you have a space in place so.
You said you know over half is gonna be for space and then for seven and a five nanometer equipment. As you know we've got a all three nodes right on top of each other and so.
We're going to be perhaps a little less capital efficient when you combine that with the fact that we were trying to close the gap on meeting our customers' requirements.
And I think all those things that 17, but we also were building for the future to make sure. We have the kind of capacity a shelf space someplace, where we could quickly add capacity to meet demand if necessary.
Yeah, and I just on the the one of the thing is.
Yeah, maybe with the exception of lift so.
The reuse from one note. The next is still relatively high so what we put in place for a 10 or a seven for the most part we can continue to reuse those those tools for for next generation.
The second part the second part of your question Yeah. We've historically, yeah leveraged third party foundries for for a long time, and it's always been enough probably 20% to 25% of our of our overall supply we get from from third party foundry.
These and yeah, we continue to look at particularly in the non I a non CP you products. We continue to evaluate where is you know and a capital intense business Where's the best place to have these things manufacturer, that's an ongoing process and I would say you know all.
All else equal the broader the breadth of our portfolio.
As we play a larger and larger role in our customer success, we build more products and with that the evaluation of what we do inside what we do outside is is a a you know full full time effort and our end so well continue to do it will continue to prioritize you know where are we couldn't get.
The best most efficient output.
Make those decisions overtime.
Great. Thanks, guys.
Jonathan I think we have time for one more question and then we'll turn the call back over to Bob to wrap things up certainly your final question then for the day comes from the line of Timothy occurring from yes to your question. Please.
Thanks, a lot George I wanted to go back to gross margin and I think last quarter, we were talking about 60% for this year and we're now 59% for the year on a little bit better.
Revenue, yes, it's only a 100 basis points less but obviously people are concerned about the you know about the competitive environment. So can you just talk specifically to what changed and maybe as you exit the year. It looks like that number has to be in the 57 57 five range, which is about where you said next year would be 2021. So is that still the right number for.
Our next year too thanks.
Tim Let me, let me just kind of a quick history, just a little bit.
What we said over the last couple of quarters was when the question was it when we look at 58, which is what we quoted for Q4 does that mean a is that the number that we should be expected.
For 2020.
And also with a.
57 on the table for 21 is is that where we are and I said, we will be closer to 60 than we will be to either of those numbers.
And so 59 is very much in line with what we believe we were guiding.
So I don't I don't really feel like we're down a point.
But.
You know clearly there the factors that we talked about everything from product mix to 10 nanometer mix.
Those are all things that are having an effect, particularly as the year plays out.
And also the shape of the year I'll, let Bob talked about some of the things where were will be the mix in the first half is going to be much richer than we would normally have seen and we may see a little less rich mix in the second half.
So I think in a really nothing more than those type of movements, which are very much in line with what we were thinking we would see this year.
Awesome George Thanks much.
Thanks, Tim.
Yeah, Tim It maybe just to wrap.
First yeah. Thanks, Thanks for joining US yeah, we feel great about how we wrapped up the year, our best quarter and the company's history 2019, the best year in our company's history and our outlook for 2020 is at all is we'll we'll we'll do it again, we expect it to be another.
A record year.
And you know our ambitions of just never been greater as you know we're going after larger Tam we're expanding the role that we play in our customer success were.
Leveraging our CPQ architecture, but also evolving beyond the CP you to Gpus and visual processing units as workloads continues to evolve and given the overall dynamics of the industry. How we feel very good about where we stand and we realize it's an increasingly competitive world now we.
We feel like we're well positioned to deal with it. So thanks again for joining us our focus is on obsessing about how we serve our customers bass and if we can we expect to do that better and better and thatll be what really drives the growth of the company. So thanks, and we look forward to another deposit 90 days from now.
Thanks, Bob and George and thank you all for joining US today, operator could you. Please go ahead and wrap up the call.
Certainly thank you ladies and gentlemen few participation in today's conference. This does conclude the program you may now disconnect good day.