Q2 2020 Intel Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2020, Intel Corporation earnings Conference call.
It's time, all participants' lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
Lastly question during the session you will need a press star one on your telephone.
Please be advised that today's conference is being recorded.
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I'd now like to hand, the conference over to your host today, Mr Trade Campbell director of Investor Relations. Thank you. Please go ahead Sir.
Thank you operator, and welcome everyone to until second quarter earnings Conference call by now you should received a copy of our earnings release in the earnings presentation.
You've not received both documents are available on our Investor website I in T.C. Dot com.
The earnings presentation is also available in the webcast window for those joining us on line.
Joined today by our CEO, Bob Swanson, and our CFO George Davis in a moment, we'll hear brief remarks from both of them followed by Q1 day.
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 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 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 on <unk> Dot Com include the full GAAP and non-GAAP reconciliations with that let me hand, it over to Bob.
Thanks, Trey and thank you all for joining our call.
The mid a very challenging environment cloud and network infrastructure and PC capabilities have been vital and allowing businesses and people who continue to work learn stay connected and provide critical goods and services.
Those trends contributed to a very strong corridor in which we generated $19.7 billion in revenue and delivered $1.23 and earnings per share.
We exceeded our guidance by 1.2 billion on the topline and 13 cents on the bottom line.
Our data centric businesses grew 34% and drove approximately 52% of the company's revenue.
And our PC centric businesses grew 7%.
I continue to be amazed by our employees and supply chain partners, who are diligently worked to keep our business operating at a high level. During this unprecedented challenge.
<unk> 19 has driven redesigned workflows and added additional environmental stress that I know has strained employees and ecosystem partners as they try to maintain productivity in this new world.
I want to thank our employees and partners for their incredible contributions.
Our primary focus continues to be ensuring the safety and well being of our global workforce.
Delivering for our customers and helping the communities in which we operate.
On each earnings call I give updates about our progress against three key priorities.
Accelerating the growth of the company.
Improving our execution.
Continuing to thoughtfully deploy your capital.
Let me give you a few thoughts on each.
We're transforming the company to accelerate growth.
That means not just playing defense the position our business to grow share in the largest market opportunity in our history.
Weve built scale businesses index to key technology inflections, such as cloud.
Hey, Ahi, Fiveg and the intelligent and autonomous edge.
We see a world where everything increased need looks like a computer, including our homes our cars our cities our hospitals, our factories to now even our schools.
This new world our opportunity set becomes more than just the CPQ.
It's more and more Intel silicon inside more and more computers. So we can have a larger impact on our customer success.
That diversity is one critical factor in driving today's results.
I'll highlight a few examples from the last 90 days.
Hey, I use cases are becoming pervasive and we are embedding a I capability into all our products.
Our Xeon platform is foundational for data center AI with value scalability built in a acceleration and entrance leadership.
This quarter, we launched our third generation Intel Xeon scalable processor Cooper Lake, which is the first mainstream server C. P to P float 16 support which increases that throughput by reducing the amount of data required for the same accuracy.
Developers can use in test latest Intel optimize versions of Tensorflow in pie torch to train their models using be float 16.
And the Intel distribution of open being out to deploy optimized inference from cloud to edge.
In Q2, both our cloud and calm service provider businesses grew more than 40% year over year as critical cloud delivered applications continue to scale and Fiveg buildouts accelerated.
Leading cloud service providers, including Ali Baba Baidu Facebook in 10 cents announced they are adopting our third gen. Intel Xeon scalable processors into their infrastructure in services.
Also this quarter I sure introduced several newsy on scalable instances, including general purpose and memory optimize azure virtual machines.
We were also excited to be part of an industry first with rocket Tom's full scale commercial launch of its mobile carrier service.
This service is the world's first to end to end fully Virtualized cloud Native mobile network tenets powered by Intel processors, and S.P.G.H. bass from the radio access network to the Fiveg ready mobile core.
Compute capabilities are moving from the cloud to the edge and Catalyzing vast array of new usages in market opportunities.
The largest opportunity we see at the edge is the 230 billion dollar 2030, Tam for Ada data and mobility is a service technologies.
Since the last call we acquired move it.
Hey, leading mobility as a service solution company.
Combining mobilized market meeting a das and Avi technologies with move it accelerates our ability to become a full stack mobility provider and truly revolutionize transportation.
The most important demonstration of the power of our technologies is that commitment of our customers and we were excited this week to announce a significant design win with Ford.
Design wins to date in 2020 include multiple new eight ounce production programs, representing cumulative volume of over 20 million units.
We're also driving an incredible innovation for our customers across a wide spectrum of PC use cases.
This quarter, we introduced three new additions to our 10th Gen processor family.
Standing our leadership in gaming and business.
The core SNH series processors for desktop and mobile gaming deliver speeds out of the box, reaching up to 5.3 gigahertz, making them the world's fastest gaming processors.
And our new tenths Chen Intel core V Pro processors delivered uncompromised productivity and hardware based security for commercial Pcs.
Q2 also marked the launch of Lakefield, featuring our new Intel hybrid technology, which is a hybrid CPQ architecture for power and performance scalability.
We also continue to work on improving our execution.
I can tell employees and our supply chain partners have role model teamwork and navigating difficult conditions, while working to support customer upsides during the crisis.
We have made significant progress and increasing our capacity and improving our supply while delivering $2 billion above our plans to the first six months severe.
We're on track to return to more normal levels of PC inventory as we work through the second half the year.
Acceleration of our next generation products continues.
We now expect to increase our 10 nanometer based product shipments for the year by more than 20% versus our January expectations.
Customer demand for our family of 10 nanometer based associates for Fiveg base station designs is also very strong.
We delivered a full node of performance improvement within our 14 nanometer based products by optimizing our product and process together.
And the power of our internal improvements continues with our next generation 10 nanometer based client product Tiger Lake.
Tiger Lake delivers breakthrough performance and CPQ graphics, and AI and will be shipping to customers in a matter of weeks.
We're also targeting initial production shipments for our first 10 nanometer basi and scalable product ice Lake for the ended the year.
And we have a pipeline of exciting new product architectures for 2021 led by all their lake for client and Sapphire Rapids for server.
Both products will start initial production shipments in the second half of 21.
Let me provide some updates on our technology Road map.
We continue to demonstrate proof points of our breakthrough advanced packaging technologies.
Our lakefield product, which I mentioned earlier delivers scale production of our three D packaging technology focus for us combining both 10 nanometer and 22 nanometer capabilities in a disaggregated architecture.
This quarter also marked a significant milestone in our datacenter GPU technology.
We successfully powered a pair of flop scale GPU with high bandwidth memory, using our advanced embedded multi die interconnect bridge for email to de packaging technology.
Turning to our seven nanometer technology, we are seeing an approximate six months shift in our seven nanometer base CPL product timing relative to prior expectations.
The primary driver is the yield of our seven nanometer process.
Which based on recent data is now trending approximately 12 months behind our internal target.
We have identified at defect mode, and our seven nanometer process that resulted in yield degradation.
Weve root cause the issue and believe there are no fundamental wells blocks.
But we've also invested in contingency plans to hedge against further schedule uncertainty.
We are mitigating the impact of the process delay on our product schedules by leveraging improvements and design methodology touches died desegregation and advance packaging.
We have learned from the challenges in our 10 nanometer transition and have a milestone driven approach to ensure our product competitiveness is not impacted by our process technology roadmap.
Our overarching priority is to deliver product leadership for our customers and we are taking the right steps to produce a strong lineup of leadership products.
We will continue to invest in our future process technology roadmap, but we will be pragmatic and objective in deploying the process technology that delivers the most predictability and performance for our customers whether that be on our process external foundry process or a combination of both.
Both.
Our advanced packaging technologies combined with our disaggregated architecture gives us tremendous flexibility to use the process technology. The best serves our customers.
As an example, our data center GPU design part to Vecchio, well now be released in late 2021, or early 2022, utilizing external and internal process technologies combined with our world leading packaging technologies.
We now expect to see initial production shipments of our first Intel based seven nanometer product a client CPQ and late 22 or early 23.
We're also focused on maintaining an annual cadence of significant product improvements independent of our process roadmap, including the holiday refresh window of 2022.
In addition, we expect to see initial production shipments of our first Intel based seven nanometer data Center CP you design in the first half of 23.
Finally, while process technology is very important it is only one of the six technology pillars of innovation that drive differentiation in our products.
You will hear more about advances across all six technology pillars process packaging architecture memory interconnect and security slash software at the upcoming into architecture day.
Lastly, we are focused on the thoughtful allocation of your capital.
We are investing to grow our capabilities, even as we deliver significant free cash flow this year.
Since 2015, do we have grown R&D spending by more than a billion dollars.
While divesting non core assets and reducing overall spending as a percentage of revenue by nine points.
We also look for opportunities to augment our product lines and speed the pace at which we can grow the company.
As discussed earlier, we acquired move it this quarter investing approximately $900 million to dramatically accelerate our capability to capitalize on 160 billion dollar mobility as a service opportunity.
We also announced a 250 million investment and Geo platforms, a high speed wireless connectivity and digital services provider to help fuel digital transformation in India.
Our purpose to deliver world changing technology that enriches. The lives of every person on Earth has never been more essential.
But the global problems, we face are bigger than any one company can solve alone.
That's why we established 2030 corporate responsibility goals, which call for a collective response to revolutionize health and safety.
Make technology fully inclusive and help address climate change.
We've also committed more than $50 million and extended our expertise global reach and influence to combat covert 19.
Well as social and Justice.
The early results of our pandemic response technology initiative, which we announced earlier this week underscore intel's unique ability to partner and collectively solve critical problems.
In closing I want to thank all our employees, who are working through this challenging time to deliver our purpose and support our customers.
Thanks, Bob and good afternoon, everyone.
The a typical seasonal effects of covert related demand for mobility products and data center infrastructure continued in Q2.
Resulting in record Q2 revenue for CCG DCG and memory.
Revenue came in at $19.7 billion up 20% year on year and $1.2 billion higher than guide.
Data centric revenue of $10.2 billion up 34% year on year.
Represented 52% of our total revenue an all time high.
Strong demand for NAND, and Fiveg networking solutions and richer server mix.
Drove most of the upside versus our expectations.
Q2, PC centric revenue was $9.5 billion up 7% year on year on strong notebook PC sales enabled through increased manufacturing supply on capacity additions over the past year.
Gross margin for the quarter was 55% slightly below expectations on higher product costs from faster uptake of our Fiveg basic products.
Which our margin dilutive relative to the company average.
And also continued acceleration of 10 nanometer products overall.
Partially offset by a shift of costs from cost of sales to R&D related to seven nanometer product timing.
As a reminder, we expected an approximately three point reduction in gross margin in the second quarter on the effect of pre PR Q reserves for Tiger Lakeland product.
This is largely a timing item with respect to the full year as we benefit from these zero dollars units in our initial sales of product, which will begin this quarter.
Operating margin of 31% in the quarter was approximately flat versus last year as spending efficiency offset lower gross margin.
Q2, EPS was one dollar and 23 cents 13 cents above our guide is stronger than expected operating results from notebook memory in a richer makes a server products along with higher gains in our trading asset portfolios offset increased costs from our 10 nanometer celebration and the effects of a discrete for.
And tax item.
In Q2, we generated $11.2 billion, an operating cash flow and invested $3.4 billion in capex with a $7.7 billion of free cash flow.
92% year over year.
We returned $1.4 billion to shareholders via dividends.
As a reminder, we pause or share repurchase program in Q1, as we felt it was prudent to do so in the current economic environment.
We expect to complete the balance of our 20 billion dollar share repurchase program and return to our historical capital turn practices when market dynamics stabilize.
Moving to segment performance in Q2.
Datacenter group revenue of $7.1 billion was up 43% from the prior year coming in higher than expectations with strength across our customer segments.
Year over year platform volumes, and Asps were up 29% and 5% respectively.
D.C.G. adjacent sees also delivered significant growth with revenue up 118% year on year on strong adoption of Fiveg networking solutions.
Well year over year comparisons for D.C.G. benefited from a weaker Q2 19.
Revenue in the quarter came in at the second highest level ever for DCG.
And the highest revenue ever in our club business.
Revenue year over year was up 47% in cloud.
34% in enterprise and government and 44% for communication service providers.
Operating margin was 44%.
Up 8% year on year on higher revenue in high end compute mix.
We see increased competition this year, but we've also seen strong customer response to our product portfolio and now expect to end the year with market share that is somewhat higher than our original expectations.
Our other data centric businesses were up 14% year over year, primarily on demand dynamics in Q2.
Despite significant coated headwinds impacting demand in a more GDP sensitive businesses.
TG a mobile Oh.
Oh, TG revenue and operating income declined, 32% and 76% respectively.
Primarily on lower revenue from industrial retail envision segments.
Mobile I revenue was down 27% and operating income turned to a modest loss as the decline and global auto sales more than offset continued Ada es penetration and new acute program launches.
And this cheese record quarterly revenue of approximately $1.7 billion was up 76% year on year on strong NAND bit growth and improved pricing.
Q2 was an all time record for quarterly revenue for a memory business.
The business also returned to profitability this quarter generating approximately $300 million an operating income.
PSG revenue grew 2% year over year on cloud strength, which was partially offset by weaker demand from embedded and communications segments.
Operating income was up 54% on richer product mix and improved unit cost.
D.C.G. revenue was $9.5 billion in Q2 up 7% year over year, driven by no put them in and higher modem and wife, I sales, which more than offset lower desktop volumes.
We see unit volumes were up 2% year over year on higher notebook demand and increase supply.
We expect our share to improve throughout the remainder of the year as we begin to recover unit share in notebooks utilizing our smaller core products.
It was we have not been able to fully serve given the strength of demand for our large core products.
Operating margin was 30% down 12 points year on year has higher unit costs associated with the ramp of 10 nanometer products and the pre PR Q reserves ahead of our Q3 Tiger leak launch more than offsets the benefits of higher revenue.
Moving now to our third quarter outlook.
Based on demand signals from our customers, we expect continued strength in cloud and coms infrastructure and consumer notebook Pcs in Q3.
But we expect that the weak economic environment will impact our commercial PC business.
Particularly the desktop form factor and also drive lower demand for the enterprise and government segment in D.C.G. and Io TG immobilize.
As a result, we expect total revenue of $18.2 billion.
With PC centric and data centric businesses down mid single digits year over year.
In Q3, we expect the PC Tam to be down high single digits year over year on OEM inventory drawdown.
Softer desktop demand and the effects of the global recession.
Gross margin is expected to be approximately 57%.
Down 3.5 points year over year has accelerated ramp of 10 nanometer products and lower platform revenue more than offset NAND margin improvement.
We are expecting a tax rate of approximately 15.5% in Q3.
This is approximately two to tune at points above our previous expectations, primarily due to a lower city benefit in the year.
They temporary reduction and R&D tax credits in California, and the effect of a push out of a foreign grant.
The higher tax rate is reducing our EPS in the quarter by approximately three cents versus our prior rate expectations. As a result, it Q3 P.S. is expected to be approximately one dollar and 10 cents per share.
Moving to full year.
We are providing full year guidance, although visibility remains somewhat limited into the fourth quarter.
Phil We do expect some part of the company's first half outperformance will be additive to our estimate for full year revenue.
We're now forecasting revenue of $75 billion and E. P S of approximately $4.85.
We expect our PC centric business to be flat to slightly down against the PC Tam that is down mid single digits year over year.
Following a very strong first half of the year, we expect demand trends to moderate in the second half is weaker global GDP and the maturing when 10 commercial refreshed by the lower PC Tam.
Again, we also expect to increase our market segment share as we have greater supply for entry PC designs.
Additionally, we are forecasting lower modem revenue in the second half.
We expect revenue from our data centric businesses to be up approximately 10% for the full year on strong cloud demand and increased Fiveg buildout.
After significant cloud expansion in the first half and into Q3, we expect capacity expansion to moderate as csps.
Move to I'd digestion phase.
We're also planning for an increasingly competitive environment as we move into the second half.
We expect continued global GDP related impacts to our Ohio, TG, a mobile I businesses in the second half of the year.
Overall, our implied first half second half revenue contribution ism anomalous, 53% to 47%.
As opposed to more typical year was undisturbed seasonal buying patterns of 46% and 54% respectively.
Gross margin is expected to be 58% for the year.
Down one point versus our original expectations for the year.
And two points lower year over year.
This change is being largely driven by higher cost from higher than expected demand for 10 nanometer products and the push out of a government grant for our memory business.
These effects coupled with softness in our I O T businesses more than offsets the stronger overall demand improved mix in D.C.G. and the shift in some spending between opex and cost of sales related to the product timing delays Bob discussed earlier.
Spending for the years expected to be approximately $19.7 billion for 26% of revenue down one point year on year.
Full year spending is up versus our January expectations on higher R&D expenditures, including the previously discussed shift between Opex and cost of sales.
ER and costs related to co vid, partially offsetting the cost reduction on the modem exit and other portfolio actions as well as ongoing SGN a productivity gains.
The resulting operating margin is 32% down one point year over year.
The tax rate is expected to be 14.5%, reflecting the impact of discrete items and the lower for the benefit.
Full year EPS of $4, an 85 cents is 15 cents below our January expectations as increased server in notebook PC demand and slightly higher equity gains are more than offset by cobot related impacts to Io TG and mobileye higher product costs from accelerating Tim.
Nanometer.
The higher tax rate in the impacts of improving our liquidity by raising additional debt and temporarily pausing or share buyback.
The combination of our liquidity actions and the higher tax rate alone impact full year EPS by more than 15 cents.
We expect 2020 Capex of approximately 15 billion.
And free cash flow of approximately $17.5 billion.
To conclude I'd like to join Bob and thanking our employees worldwide very much appreciate the hard work of our employees and contractors, who delivered excellent results in the face of very difficult environment.
With that I'll hand, it back to tray and we'll get to your question all right. Thank you George moving on now to the queuing day as is our normal practice, we would ask each participant to ask just one question. Operator. Please go ahead and introduce our first caller.
As a reminder, ladies and gentlemen to ask the question you will need to press star one on your telephone to withdraw your question press the pound key and your interest of time, we have such a please limit yourself to one question.
Please standby, while we compile the Q on a roster.
Our first question comes from does that ARIA with Bank of America. Your line is now open.
Thanks for taking my question I wanted to dig into the competitive and financial implications off seven nanometer delay stacked a bump up you mentioned so under competitive side I'm you know by the time you come out, but seven TSMC is trying to be on the three not even north so it will still be a generation ahead.
So what's the market share implication of that and then related on the financial side, you know, what's the capex and gross margin implications and unmanned even pricing applications [noise]. If you stay on on 10 nanometer.
Longer next did and I guess the bigger question that a lot of investors would have is at what point entered should just consider out. So we're seeing a lot more do foundries. So that you can.
Keep in line with the state of the art and manufacturing technology. Thank you.
Yeah that thanks, thanks for the back I mean first you know our primary focus is on ensuring that we're delivering.
Leadership and annual cadence of leadership products, each and every year for our customers and a predictable manner.
What we talked about today is a.
A strong line up for 2020.
2021, 2022 for both Quietened server and we feel very good about that line up and our expectation on 10 nanometer much like what we're able to do on 14 nanometer is to get.
Another note of performance within that within 10 nanometer Internet of itself. So we feel very good it out.
Product road map through 2022.
That being said is we think about that next generation of products and yeah late 22, and 23 and beyond how we need to make sure that we continued to deliver strong performance in our priorities in the ideal world his leadership product.
On our process technology, so recapture the economic benefits of <unk> of ITM, but.
The focus will be leadership products, so to the extent that we need to use somebody else's process technology, and we call those contingency plans.
We will be prepared to do that and if we do you know the there's lots of moving parts, but the economic implications.
In the event that we.
Decide to move to somebody else is foundry.
With our scale.
You know how do you get.
ASP is inline with our costs.
Continue to deliver leadership products, so recapture attractive ASP.
And to reduce the amount of capital that we have to deploy to build a foundry on an older I don't know their note or out of last Chen kind of thought process node. So in the aggregate and for the last couple of years would be.
Real focus on product leadership, we've been engaging with the ecosystem.
And a much more holistic way, we've been designing our products and advancing our packaging technologies. So that we have much more flexibility to decide if when and we will use our our fabs or somebody else is to deliver that and.
Okay, and some leadership products, we feel very good through 22 timeframe and now we're evaluating the optionality that we have on 23 and beyond.
Hey, let's let me just a comment on your question around what we're gonna see what we might see next year.
Next year is still gonna be as as it was when we talked about Alas in May of 19 is still going to be largely at 10 nanometer with some 40 nanometer year.
And the dynamics, there or is we're coming into it with having moved a little bit further along the yield curve as we've seen more demand for 10 nanometer products in 2020 than we had expected.
So you know, we're we're not going to update 21 at this time, but I think a you know were more concerned about what the global economy is doing then a where we are on 10 nanometer.
Thank you.
Thank you. Our next question comes from CJ Muse with Evercore. Your line is now open.
Yeah. Good afternoon. Thank you for taking my question I guess just follow up question, though on the seven nanometer delay.
I just curious.
How should we think about the implications for Capex.
Required.
Actually the edge it at 10 nanometer and and 14 nanometer and then just to circle back on the other comment around contingency plans. After 22, you know considering your your first data centers GPU will launch in first half 23 are you, suggesting that that could be found out.
And not be both internally and so thank you.
The first part of your question India with.
2020 to be in a in essence say full array of 10 nanometer products yeah. The expectation is.
All else equal a little more 10 nanometer spend in and less seven nanometer spend provided we decide to.
Continue to you know.
Do all of our production inside in the event, we decide that.
We're going to leverage third party foundries more effectively we would have a little more tan and a lot less seven and that's kind of the you know that's kind of the <unk>.
The Optionality that we've tried to build in as we evaluate you know the future of the future of Moore's law and depth and technology development leadership.
In the event, where we're not there and there's a better alternative be prepared to take out to take advantage of it.
Thank you.
Our next question comes from John Fischer with Credit Suisse. Your line is no.
Yeah, you guys mentioned, let me ask question sticking on the same topic of seven nanometer Bob If you could tell me understand yield your 12 month beat behind where you would expect them, but the product ramp is only six if you could square that circle that'd be helpful. But more importantly, you had multiple sort of push outs of 10 nanometer you're identifying this.
Seven nanometer push out today, what confidence level do you have that this is sort of a one and done issue and it doesn't turn in to a repeat of 10, where you kind of had multiple periods of push outs.
Thanks, John I mean, first product products schedule slippage or roughly two quarters while process.
We expect now to be roughly four quarters.
The difference to the gap is driven by a couple things one or a buffer and are planning process between process and product to make sure that we don't.
Minimal disruption on on customers because of process.
Second.
As I've mentioned in the prepared remarks.
Died desegregation.
And advance packaging it gives us the ability for it give enough so see to do some stuff inside and some stuff outside and therefore.
Yeah further compress the product delivery in light of process out process slippage. So that's why we've been able to.
I'd be confident in a six month product shipped slipped even though process was was moving out 12 months.
In terms of I think your second question was about you know we've we've seen this movie before maybe and.
Yeah, I think the importance of our many lessons coming out of.
10 nanometer.
One of them was how do we ensure that we have.
Contingency plans in the event is that.
Our advancements and process technology.
As it gets increasingly complicated do not play out the way we'd hope.
How do we make sure that we can continue to deliver leadership products for our customers.
On that annual cadence.
So it I am sure things will play out exactly the way we want we think we've dialed in seven but at the same time, what's different is.
We're gonna be pretty pragmatic about.
If and when if and when we should be making stuff inside or making outside and making sure that we have optionality to yeah build internally mix and match inside and outside or go outside in its entirety, if we need.
Too and that's kind of one of our learnings coming out of 10 is in the event process doesn't move along as we expect let's make absolutely sure with advanced contingency planning.
And real milestones that weekend.
Rich.
Ah the best we can to leverage somebody else and not lip products schedules in light of process complexities.
Right. Thank you.
Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys are going to stick with the theme and ask about the seven nanometer as well I guess, Bob it's great to hear that you're being you're saying you're going to be more pragmatic about internal versus external but it. It seems like contingency plans three years down the road is how the external option is being treated.
Investors are frustrated with how long the misexecution on manufacturing it's happened other steps were instead of being a contingency plan you actually start making the external side. The primary source before 2023, obviously on the designed by more than the revenue side and maybe a follow up is three to five years down the.
Road. The 2080 20 external 80 internal Nicole you think that changes.
Let me, maybe I'll I'll flip those around you know over the last.
Couple of years I'm, we've been talking about.
Yeah, as we expand our capacity evaluating.
More holistically when do we use third party foundries, rather than do everything ourselves and yeah, we call that engaging in the ecosystem.
And much more holistic ways for a variety of different reasons.
So we don't have to build everything ourselves as.
The capital associated with that each node becomes a bit higher so in general I wouldn't say for planning purposes, Weve been engaged with the ecosystem much more and you know all else equal I would expect that roughly 20%.
To to be a little bit higher as we focus on on growing on growing the business.
Your your first question in terms of planning then.
You know we yeah, we have a we feel like we have a real solid product road map again for.
The second half of this year for 21, it for 22 and that will do it on our existing 10 nanometer that's ramping faster than we expected it yields him in line with what we expected. So yeah for for the near term. We think we got a great lineup of products and we expect.
But yeah fight and protect our share while expanding the role we play in a variety of different places in the industry.
But now is lumber planning for 20 to 23.
And yeah, we are evaluating now in light of where we are where we think the industry. The competition. A third parties are evaluating now what's the best option for us to make sure is that.
We can deliver.
An annual payments the product leadership for our customers and those decisions, they're not decisions that will make in 2023 those decisions based on the information that we.
We have along the way you know will be made a long before then whether its decisions about how much capacity, we need to put in place.
Or decisions about how do we leveraged more effectively somebody else's process capabilities and factories so that.
You know, we can get real good incremental returns on capital deployed.
Thank you.
I think eating our next question comes from Stacy Rasgon was Bernstein Research. Your line is now open.
Hi, guys. Thanks for taking my question.
I want to ask about the acceleration in 10 nanometer is this really because you are getting better and is higher demand well because you're trying to offset the seven nanometer delayed because it's it's hitting the margin big time, which doesn't really tie in my head to like yields getting hugely getter versus where you thought there we're going to be in January so how do we think it.
If the drivers of that seven nanometer acceleration in light of the seven or 10 minutes acceleration likes to second half years like what's what student margins.
Yeah, Hey, Hey, Stacy this is George maybe I'll just covered in general on the margin picture for the year because it's clearly.
It's having an impact there the the acceleration is really definitionally tied to the fact that we're growing faster than we expected.
In 2020.
And we're part of that growth is a higher mix.
On the PC side, and I would say on the Coms and Oh Gee AC side.
A higher demand for products that are until now than we had forecasted for the year.
So, it's why you're seeing Oh, well, a little less flow through on revenue.
Then we would have expected for the years, it's a it's a a positive growth story in that.
Again, we're seeing customers are attracted to the 10 nanometer products.
Wait wait wait a minute be <unk>, if I look at your your annual guidance now versus wasn't where it wasn't even if your its higher but it's actually lower in the second half versus what you had implied and you know in when you first give annual guidance just six months ago. How does how does that imply that demand is higher versus where you were no given you've actually lowered the second house, that's the demand for.
10 nanometer products within the mix of our overall revenues days.
Well I think at start with our full year demand relative to where we were at the beginning of the areas.
Our guidance is up by $1.5 billion in revenue. So that you haven't you just you just speak shortly.
Well, let me let me just finished <unk> I think it's understood alright. Good question, but maybe if you could give me a chance to answer it so full your demand for the company is higher.
Secondly, the yields for 10 nanometer, we've kind of set are in line with what we expected coming in there yeah through the first to the first six months and we feel pretty good about where we are on.
On yields.
Third the overall demand for our products on PC side and for the Fiveg, So see and the comps sector is higher than we expected that as part of the contribution to the billion and a half of higher revenue for the year and as we accelerate 10.
Faster.
Oh, because customers are demanding that more.
The implications are that our margins all else equal will be lower and George kind of highlight those were the primary drivers as a one point decline 10 nanometer products are ramping faster.
And our Fiveg Coms business and the data Center group and it's growing much quicker than we had anticipated I put that I put ramping up 10 nanometer faster and the in the good category. We feel we know margins are lower when we start a new node versus exit and all bode 10 nanometer margins our law.
More than 14 at this stage and the game.
Ramping 10, we think it's a good thing for customers, we do take a dip in yield if it's more of our growth than we had anticipated all all else equal margins will be a little bit lower and that's kind of the updated guidance for off for the year higher growth in a more challenging market.
More demand for our 10 nanometer products that were ramping as we.
Ramping yields as we expected wouldn't more volume all else equal well have a modest impact on our gross margin for the full year.
Thank you.
Thank you. Our next question comes from Timothy Arcuri would you be US your line is now open.
Hi, Thanks, I wanted to ask also understand manufacturing topic. So I think Bob do you were talking about pumps and Vecchio I think you said that you're going to package. It internally, but it seemed like you are implying an external foundry contingent she even for this first GPU product I guess my question is did I read that right and also I wanted to ask Joe.
George what the long term indications are a if you need to somebody else, who SAB and what does this due to year 50, 70, 63% long term gross margin and how does it impact free cash flow I mean, obviously a change on capex that cannot be treated your free cash flow. Thanks.
Yeah, Yeah on the I'm proud to Vecchio, you know I'm originally yeah. The the architecture of Ponte tobacco includes.
And I O base die.
Connectivity.
Hey, GPU and some memory tiles, all kinda package together, that's kind of the design.
Panta Vecchio.
From the beginning and we would do.
Some of those tiles inside and some of those tiles outside and again leverage the packaging technology as a proof point of how do we mix and match different designs into one package. So that was that was that design from the beginning then again when we talk about.
The staggered day this aggregation more flexibility optionality in our designs.
Use some stuff inside some stuff outside pot to vacuous really popping back you know on the data center side and lakefield on the on the client side, we're kind of our test products both of one of which we've launched the other on which is in which isn't development.
So that design desegregation gives us lots of flexibility.
As we go forward now we can think about whether we introduce.
Panta vacuum, which is I should I I think I said some of those tiles or inside and outside from the beginning now ask me go forward, we can assess whether we swap out one of yeah. One of our tiles for a third party foundry or not but again, that's the beauty and the Dow.
Value of this change and design methodology that gives us much more optionality and flexibility so India that.
There's a process slap we can we can.
Hi, something rather than make it all ourself.
And with respect to the long term outlook for so our long term margin outlook is not 57%, we've we've talked about it being well above that overtime.
But in terms of as it is we dynamically.
Move potentially move product, depending on where it is this a provided I think that certainly gives us more flexibility to optimize our capital spend get a higher return.
On that capital spend.
And it should should be accretive to free cash flow.
So we talked a little bit about that actually back in may of 19 that Ah you know are embracing the ecosystem and and balancing some of our activity.
Externally.
<unk> is going to be important as we look to improving returns overtime.
Thank you. Our next question comes from Weston Twigg with Keybanc capital markets. Your line is now open.
Hi, Thanks for taking my question and just I wanted to ask about the data centric revenue heading into Q3, the mid single digit decline year over year implies a pretty big decline from Q2, you helped a little bit on the call, but im wondering if you could help us better understand the reason for that big quarterly job and.
Kind of as an aside you also mentioned increased competition in D.C.G. into second half Im just wondering what exactly you're returning to that on that side.
Yeah, you know as you as you look at but the data centric revenue or we'll see a number of factors at play obviously year over year, you're going to see.
The impact of the fall off in Aiotv and in Mobileye, but what we're seeing in the data centric or the D.C.G. side is you know we think we peaked on cloud in the second quarter.
And it was an all time records, so not a bad peak.
We've we probably peaked back in Q4 of 19 on enterprise and government.
And while it was a reasonably strong in Q1. It's you know you can see it coming down.
Over the next few quarters.
It may have it often has a little bit of a bounce in Q4 will have to see.
And our comps provider.
You know I would say, we expect Q2 two have been a peak there.
ER and a and that'll start rolling off or start rolling off from there. So.
Everything on the on the.
DCG side is got a step down from a very strong Q2, and and probably continues down on cloud.
And ER and comps.
As far as our current outlook.
Does that help okay. Yeah. That's helpful and then to comment on increased competition and DCG second half.
Yeah, you know we had we expected based on a the ER <unk> competitions.
Product roadmap that we would see increasing competition in the second half of this year.
We also thought you know we've been a little bit pleasantly surprised in Ah.
In the strength of our other demand for our products in the first half a year and its continuing into the second half.
So we don't think the impact will be quite as large a competitively in the second half as we thought and as I said on PC, We think we're going to actually gainshare.
All right. Thank you very much a it's that we will that when we guided back in January and the context of our guidance.
We made that statement. So George is just reiterating that that we see a more competitive world them, we'll be prepared to deal with it and we've factored that into our outlook for a for the second half there.
I think it's one thing I'll think operator, I think we have time for a one more question and then we'll turn the call back over to Bob wrap things up.
Yes. Thank you and her final question comes from Srini Pajjuri SMBC Nikko. Your line is now open.
[noise]. Thank you George I've a question about your guidance for the full year I think it implies DCG declining again in Q4.
The much and double digit sequentially. So just trying to understand I mean is it primarily because of digestion that you've talked about and also if you can talk about to what extent you have visibility into Q4 or already just taking a conservative stance because you're just simply don't have visibility into Q4.
Ah you know I think is as I said on the last question that we have.
You know a reasonable view that that spending is gonna be coming down in a in the cloud and enterprise.
And and even coms off a very high levels and we expect that to continue into Q4.
And so.
Again, I think when we looked at the full year a stronger than expected. Overall you know this is this would be oh in many ways. We're delighted to be a is close to or forecast as we were given all those things going on in the world.
But again.
We've seen very strong demand, peaking for cloud in the third quarter excuse me the second quarter.
Peaking for comps in the second quarter and its just going to be a period of a little bit of ER digestion.
As one would expect.
Thank you.
Yeah, Yeah, let me just a kind of close out and and where where we began yeah first over the last couple of years is there's you know we've expanded our our Tam or in the quest to play a much larger role in our customer success by.
Investing in key a leading technologies like Fiveg AI and intelligence at the edge and we feel pretty good about investments that we've been making and last year, we wrapped up our yeah, beshir and the company's history entering entering 2020.
Obviously this year has been an incredibly challenging year on multiple fronts.
But at the same time, we expect.
20 to be the best year in our company's history, our fifth record year in a row delivering.
Better better results than we expected in January at a time when the market is worse than we expected. So competitively we feel stronger as we exit a as we exit 2020.
Third point I'd make is our execution has improved capacity and supplies in place we're ramping a slew of 10 nanometer products across our portfolio.
We are ramping 10 faster.
Then we had planned and we have a strong leadership products strong pipeline over the next several years.
And we believe we can deliver another note of performance on 10 nanometer itself.
Fourth point, you know at the same time, our seven nanometer products will be delays, we've pushed out the timing of the seven nanometer node, but along the way we have taken steps.
On die desegregation advance packaging deeper engagement with the ecosystem.
And contingency planning as a as a sign of strikes not as a side of weakness that gives us much more flexibility to make their decisions out worse than most effective way to build our products.
To deliver that annual cadence so leadership.
For our customers and we yeah, we feel pretty good about about where we are though we're not happy I'm not pleased with our seven nanometer process performance.
But as we sit here today, you know six months through the year or people are say, we're delivering for our customers. The communities. We operate in or are better as a result of our presence in the passion of our employees for making a difference.
And next not 90 days from now we'll talk more about.
Our efforts to create world changing technologies that continue to enrich the lives of every person on Earth.
Thanks for a thanks for joining us and we'll talk too soon.
Thanks, Bob and thank you all for joining US today, operator could you. Please go ahead and wrap up the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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