Q3 2020 Intel Corp Earnings Call
<unk> earnings conference at this time, all participants are any listen only mode. After the speaker.
Your presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your host director of Investor Relations Trey Campbell, Sir. Please go ahead.
Thank you operator, and welcome everyone to until third quarter earnings Conference call by now you should have received a copy of our earnings release and the earnings presentation. If you've not received both documents are available on our investor website sign T.C. Dot Com. The earnings presentation is also available in the webcast window for those joining us online I'm joined today by our.
CEO, Bob Swan and our CFO George Davis.
In a moment, we'll hear brief remarks from both of them followed by Q and a.
Before we begin let me remind everyone that today's discussion contains forward looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please.
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 on ITC Dot Com include the full GAAP and non-GAAP reconciliation with that.
With that let me hand, it over to Bob.
Thanks Trey.
Thank you all for joining our call.
We delivered solid third quarter revenue and profitability, despite increasing kobin driven headwinds.
Nothing significant portions of our business.
Led by strong consumer notebook demand and continued cloud growth, we generated $18.3 billion in revenue and delivered a dollar at 11 cents in Ethiopia.
We exceeded our topline expectation by $133 million and our bottom line expectation by one cents.
Hi, I'm incredibly proud of our employees performance through these challenging conditions.
Our team has shown tremendous perseverance and has really come together as one intel to deliver for our customers.
Over the last couple of years, we have been focused on three critical priorities.
Improving our execution to strengthen our core business.
Extending our reach to accelerate the growth of the company.
And continuing to thoughtfully deploy your capital.
Let me discuss our third quarter progress.
First improving our execution to strengthen our core business.
This quarter, we launched our 11th Jan Intel core processors with Intel Iris Xcede graphics code named Tiger like this.
This is the world's best processor for thin and light notebooks.
Then real world workloads versus competitive products, however, like delivers up to 2.7 times faster content creation.
20% faster office productivity and more than two x. faster gaming plus streaming.
I'm excited to announce that we now expect a hunger tiger like based designs in the market by the end of this year double.
Doubled the expectation we provided in April.
Tiger like is a shining example of the product leadership, we can deliver for our customers through our six pillars of technology innovation.
Breakthrough architectural improvements in CPQ graphics.
And software combined with our newest 10 nanometer based technology, Superfunds, which delivers the largest single internal performance improvements in our history.
Accompanying the Tiger like launch we also updated our master brand and debuted a new platform brand even though.
Based on 11th Trencor Evil design sports a sleek ascend unlike form factors would premium conductivity audio and video.
Evil notebook is verified to deliver consistent responsiveness outstanding real World Battery life instant wake and fast charging.
We expect our customers to have 40 evil designs in market by the end of the year.
Turning to our data center business.
We and our customers are excited about the upcoming launch of our third Gen Z and scalable product ice like what.
We're targeting qualification at the end of Q4 with volume ramp shortly after in Q1.
Recently, Oracle announced that they plan to leverage the computing performance of ice like for the next generation of cloud based high performance computing instances within Oracle cloud infrastructure.
The combination of surgeon Intel Xeon scalable processors with other improvements and oracles, New X nine generation instance, can drive up to 30% higher performance gains on certain workloads compared with the existing X seven generations instances.
[noise] Cpms are foundational to our business, but we're also adding a range of other processing engines or expertise to our portfolio.
We've made great strides in graphics, we are now scaling our crop its architecture from integrated two discrete levels of performance.
Our first discrete GPU TG, one is shipping now and we'll be in systems from multiple Oems later in Q4.
We also powered on our next generation GPU for client did you too.
Based on our Exi high performance gaming architecture. This product will take out discrete graphics capability up the stock into the enthusiast segment.
Beyond the CPQ and the GPU, our customers tell us they want a diverse range of AI solutions to fit every power level and performance need somebody in.
From the intelligent edge to the data center.
For the most demanding they are workloads our customers are looking for purpose built X P is that leverage a standard based programming environment.
With that in mind, we acquired or bought a lab almost a year ago.
Weve integrated I bought or what our platform capabilities and added software resources. So that we can deliver game changing capabilities to the performance tier of the data center market.
Hi, bottoms in Prince card is now in volume production and shipping to customers.
And we're also on proof of concepts with several major cloud service providers on a bond is trading card.
In addition to our architectural advancements and process improvements and Super fan with.
We also advanced our packaging technologies.
Several weeks ago, the U.S. Department of defense awarded US the second phase of its state of the art heterogeneous integration prototype program for ship. This.
The ship program enables the U.S. government to access Intel's state of the art semiconductor packaging capabilities, and Arizona, and Oregon and take advantage of capabilities created by Intel's tens of billions of dollars in annual R&D and manufacturing investment.
Softwares, another a central pillar for product leadership, which is why we have more than 15000 software engineers working across the stocks some bias to application optimization.
As an example, we have dedicated software expert to optimize key workloads using our hardware capabilities.
Through these efforts we have increased the performance of top data set of workloads such as the Nnamdi molecular dynamic simulation code used in the fight against COVID-19 by 1.8, X. via it'd be X 512, and.
And natural language processing and using the bird model by 6.8, X. via a range of software optimizations.
Additionally, we have been working closely with the ecosystem on the open standard one a P.I. effort as part of the XP you transformation.
With one a pie we are creating an open unified software architecture that can support the variety of EFS fuse that our customers demand.
We've made tremendous progress with developers and release back one data all of want a pie in the third quarter yeah.
And on track to have the gold release of one <unk> software in the fourth quarter. This year.
Second we're focused on extending our reach to accelerate our growth.
We are actively executing against say diversified growth strategy and now have several multibillion dollar businesses fueled by data and the rise of artificial intelligence.
Gee network transformation and the intelligent autonomous edge.
We built these businesses by positioning the company to grow share the largest market opportunity in our history.
In a world, where everything increasingly looks like a computer.
Our ambitions are much greater and to realize them, we must play a larger role in our customer success.
Here are some recent examples.
We created open vino in 2018, so the developers could quickly accelerate applications with deep learning inference and solutions deployed from edge to cloud.
In the third quarter, our open vino download rate was more than double our peak last year and we've now seen our open vino related edge design wins scale more than five acts in the first half of this year versus the same time last year.
And we're only beginning to realize the opportunities created by Fiveg.
As communication service providers evolve their networks to support the rollout of future Fiveg networks. They are increasingly adopting a software defined virtualized infrastructure.
This quarter rise and successfully completed the world's first fully virtualized and and Fiveg data session.
Virginia and tells the vast portfolio of products, including Z on F.P.G.H. Ethernet cards influx ran software reference architecture and our years of experience in virtualization.
We continue to see excellent customer momentum in our mobile business.
Year to date, we now have 29, new design wins for more than 26 million lifetime units.
Following last quarter's landmark design win with Ford, we announced collaborations with Geely H G and Willa.
Gili automotive group the largest privately held auto manufacturer in China unveiled its new electric vehicle featuring mobilize supervision surround view for hands free a das solutions starting in late 2021.
We expanded our mobility as a service collaboration network with two important partnerships.
The first is with L. hub tour group from the U.S. Lee.
Second would rollers, Japan to propel the deployment of autonomous vehicles and mobility as a service.
Mobileye is also first of our I O T G businesses to return to pre cold at levels as global vehicle production improved in the third quarter.
Finally, we're always mindful of our role and thoughtfully allocating your capital.
This week, we signed an agreement to sell SK Hynix, our NAND memory business for $9 billion.
We believe this is a fantastic win win transaction that allows us to focus our energy investments in differentiated technologies, where we can play a bigger role in the success of our customers and deliver attractive returns to our shareholders.
At the same time, that's behind US can build on the success of our NAND technology at a greater scale and grow the memory ecosystem to the benefit of our data center customers partners and employees.
We are retaining or obtain technology and intend to continue investing in developing and scaling the uptime business.
We've also significantly improve supply for our customers, we've expanded our capacity by more than 25% in 2020, and currently have three high volume Fabs, producing 10 nanometer products to meet our customer demand.
Earlier this quarter, we also entered into an accelerated share repurchase agreements to repurchase $10 billion in stock.
Following this repurchase we will have completed approximately 17.6 billion of the 20 billion repurchase commitment we made in October of 2019.
We have a very strong balance sheet and even as macroeconomic uncertainty persists. We are confident in our long term strategy and the value we create as we grow our business.
Finally, let me share a few thoughts about the guiding principles, we use to deliver the most value for our customers.
Our overarching and most important priority is to deliver a predictable cadence of leadership products.
A few years ago, we decided that an architectural shift to die. This aggregation enabled by our differentiated advanced packaging would be potent tool from point, the best technologies that we and the ecosystem can provide.
We also realized that delivering on that promise met engaging the ecosystem in a different way.
Treating equipment and D.A. providers, and third party foundries not of suppliers, but as strategic partners that we can learn from and that can help us solve customer problems.
Now, we have more flexibility and whether we make or buy or whether we make for others.
Many of our future products can no longer be described is manufactured inside or outside or is being the large core or small core product.
These products will take advantage of hybrid architectural approaches and the universe of IP deployed both inside and outside the walls of Intel.
That said, we have and do get great benefits from internal manufacturing.
We called our idea of advantage because it provides us attractive economics.
Co optimization of design and process technology development and supplies shorts.
So as we engage the ecosystem more broadly we want to preserve some of the advantages by the like schedule performance and supply as we work with our strategic partners.
Finally, I want to reiterate our intention to continue investing in leading process technology development to bring future process nodes and advanced packaging capabilities to market.
This is a powerful force in creating future differentiation for our products and provides tremendous option value for our business.
As I look to the next several years of products I am excited about the products, we have coming we.
We are now sampling our 2021 client CPQ Alder Lake.
And we'll be sampling our 2021 data center CPQ Sapphire Rapids later in the fourth quarter.
Both will deliver significant capabilities enabled by our six pillars of innovation, including our enhanced Superfund technology.
We have another great lineup of products in 2022, and I'm increasingly confident in leadership, our 2023 products will deliver on either in sell seven nanometer or external foundry processes or a combination of both.
I look forward to providing further update in the January call.
Thanks, Bob.
Good afternoon, everyone.
Despite intensifying covert related demand impacts, particularly in our data center enterprise and government segment we.
We exceeded our revenue and EPS guidance, but.
Achieved record notebook sales.
And saw continued growth in our cloud and calm service provider data center segments.
Revenue came in at $18.3 billion.
4% year over year, and approximately $100 million higher than God.
Data centric revenue was $8.5 billion down 10% year over year uncovered related weakness in the DCG enterprise and government segment.
In I O T G.
And NSG.
PC centric revenue was $9.8 billion up 1% year over year on strong notebook PC demand in consumer and education segments.
I don't increase supply.
Gross margin for the quarter was 55%.
Two points below expectations due to lower data center is piece driven by mix shift from enterprise and government to cloud and lower.
Lower PC client is peas on increased demand for consumer and education Pcs.
Operating margin was 29% down one point versus our expectations.
Q3, EPS was one dollar an 11 cents slightly better than our guide as lower spending and the impact of our accelerated share repurchase more than offset lower client and datacenter A.S. piece.
In Q3, we generated $8.2 billion in operating cash flow and invested $3.7 billion in capex, resulting in $4.5 billion of free cash flow we.
We paid $1.4 billion to shareholders in dividends and initiated an accelerated share repurchase program for an aggregate of $10 billion of common stock.
Following settlement of these agreements by the end of 2020, we'll have repurchased a total of approximately $17.6 billion in shares as part of the plan $20 billion share repurchase program announced in October 2019.
We intend to complete the $2.4 billion balance and returned to historical capital return practices when markets stabilize.
Year to date operating cash flow is $25.5 billion up 10% year over year and.
And year to date free cash flow is $15.1 billion up 29% year over year.
Let's move to segment performance in Q3.
Against the challenging compare data center group revenue of $5.9 billion was down 7% from the prior year coal.
<unk> driven headwinds significantly impacted our enterprise and government segment, which was down 47% year over year.
Following two consecutive quarters of more than 30% growth.
Our cloud and calm service provider segments were up year over year, 15% and 4% respectively.
D.C.G., Jason fees grew 34% as strong adoption of Fiveg network solutions continues.
Platform units were up 4% and Asps were down 15% on a higher networking, so see volumes and weaker enterprise and government volume.
Operating margin was 32% down 17 points year over year on lower revenue due to enterprise and government weakness and the ramp of 10 nanometer Fiveg base station associates.
Pre p. or Q reserves on our Icelleight server product.
Revenue in our other data centric businesses was down 18% year over year due to declines in our I O T G NSG and PSG businesses.
TG revenue and operating income declined, 33% and 80% respectively on continued cobot related demand weakness.
Mobile I returned to profitability with revenue up 2% year over year, and 60% sequentially as global vehicle production improved.
NSG revenue was down 11% year over year on lower volume, partially offset by higher is piece.
Operating income was $29 million for the quarter up 500.
$228 million year over year on improved his peas, and reduce unit cost.
[noise] PSG revenue was down 19% year over year on weaker embedded and communication segment demand, partially offset by cloud segment growth.
43%.
Operating income was down 57% on the lower revenue.
CCG revenue was $9.8 billion up 1% year over year, driven by strong consumer notebook demand.
Offset by lower desktop volumes and declines in the modem and home gateway businesses due to divestiture.
PC unit volumes were up 11% year over year on record notebooks volume.
Enabled by significantly increased supply.
He is fees were down 6% year on year due to increased volume in our consumer entry and education segment as Bob.
As Bob mentioned Tiger Lake ramp is exceeding expectations with 100 design wins expected by end of year up from 50 forecasted in Q2 as supply increases and we see strong demand for our leadership products, including Tiger Lake, We continue to expect to regain share through year end.
Operating margin was 36% down eight points year on year on a higher unit cost associated with the ramp of 10 nanometer products.
Moving now to our fourth quarter outlook.
We see many of the same dynamics in Q4 that were in place in Q3.
We see continued strength in consumer notebook Pcs supported by work and learn from home dynamics and from increased supply we.
We also expect continued strong mobile growth as design win momentum continues and the automotive industry stabilizes.
We expect continued demand weakness in I O T G and NSG as well.
As well as in the enterprise and government segment of D.C. G.
Further our guide assumes cloud segment demand moderates as key customers enter a digestion period following multiple quarters of above trend line growth.
As a result, we expect total revenue of $17.4 billion.
PC centric down low single digits.
Data centric down approximately 25% year over year.
Gross margin is expected to be 55%.
Five points year over year on the same operating environment, we saw in Q3.
Relative to our prior guide for Q4.
We are expecting opex to be down modestly in the quarter.
And gains from our Intel capital portfolio to be up on the order of eight cents per share.
Q4, EPS is expected to be approximately one dollar and 10 cents per share our non-GAAP tax rate in the quarter is expected to be 14.5%.
In the fourth quarter, we announced the sale of our NAND business the SK Hynix.
The sales consideration is $9 billion in two stages.
The unique structure of this deal is strictly a factor of existing commitments within our long term agreements with micron.
At the first close subject to regulatory approvals, we will receive $7 billion and transfer the assets of the factory and the Dahlia and facility overall.
We will continue to operate the factory for SK Hynix until we can transfer the entirety of the business and 2025.
We will begin accounting for the NAND business as held for sale effective this quarter for GAAP purposes.
Non-GAAP reporting will be unchanged in Q4 and then.
And then NAND will be excluded from non-GAAP reporting effective Q1 21.
Under held for sale depreciation.
Depreciation is suspended from the announcement date Ford.
The benefit of this change will not be seen until existing inventory carrying depreciation and cost of sales is sold through.
So early this benefit will be later in Q1, 21 or Q2 21.
Capital spending for the NAND business will be shown in assets held for sale and excluded from free cash flow. This.
This will reduce our forecasted capital spend for 2020 by approximately $300 million and raise our free cash flow by a similar amount.
We believe this sale is a true win win as SK Hynix will commit the necessary investment to bring this business to scale.
And until we will dispose of a non strategic asset to focus on our core opportunities ahead.
Let's move to the full year.
Based on our Q4 guidance, we expect revenue of $75.3 billion and S $4.90 $300 million.05, higher respectively versus our July expectations.
We expect our PC business to be up mid single digits year over year against the Tam that is also up mid to high single digits year over year.
We expect revenue from are data centric businesses to be up mid single digits year over year.
On strong cloud demand and is she growth.
Increase fiveg buildouts offset by cold weather related weakness in our Io TG business.
Gross margin is expected to be 57% for the year down approximately one point versus July guidance on the mixed dynamics, we are seeing in both Q3, and Q4 and higher 10 nanometer volumes.
Year over year gross margin is most heavily impacted by higher volumes of 10 nanometer products, partially offset by higher NAND margins on asps and lower modem volumes from exited that business.
<unk> spending for the year is expected to be approximately $19.1 billion.
Down approximately 400 million year over year.
Spending as a percentage of revenue is expected to be approximately 25% of revenue down two points year on year due to divestitures and improved operating leverage.
The resulting operating margin is approximately 31.5% down 1.5 points year over year.
Full year EPS of $4.90 is five cents above July expectations as higher equity gains reduced spending and reduced share count are partially offset by lower covert mix related gross margins.
We expect 2020 capex of approximately $14.2 billion to $14.5 billion and free cash flow of approximately $18 billion to $18.5 billion.
To conclude I'd like to join Bob and thanking our employees worldwide as they continue to deliver for our customers in a most challenging environment.
And with that I'll hand, it back to Bob for some additional thoughts before we go to your questions Bob.
Thanks, George before we get to your questions just a little context on the year.
2020 has been the most challenging year in my career with a global pandemic geopolitical tensions challenging business principles of globalization and social unrest.
Despite all this we expect to deliver the best year in our storage 52 year history.
We plan to grow revenue by 1.8 billion more than our January expectations, even as coal that has significantly impacted our business mix.
Full year gross margin will be down approximately two points versus our January expectation, primarily driven by acceleration of 10 nanometer based products and a change in mix of products and they work from home study from home environment.
We've maintained spending discipline, even as we invest in our workforce communities and supply chain to combat Cove. It and then just.
And the decision we made to sell our NAND business will drive one to two points of non-GAAP gross margin accretion next year.
Finally, we are mindful of your capital and made decisions to increase shareholder value through our MSR and increased dividend and prudent management of our Intel capital portfolio.
Nine months into 2020, we now expect to beat our January free cash flow guide by one and a half to $2 billion.
In closing I want to thank all our employees, who are working through difficult circumstances to deliver these financial commitment and support our customers.
All right. Thank you Bob moving on now the Q and 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.
Yes, Sir our first question comes from the line of Timothy Arcuri.
Yes. Your line is open.
Thanks, a lot George I guess I want it to double click on gross margin.
Came in obviously below for Q3, and Q fours about 400 basis points below what it was going to be so there's not much of a recovery in Q4, and I certainly understand the weaker enterprise and government and mix, but you were already pretty cautious on those segments and you already paid the price for the pre Quals on the you know Tiger Lake. So so it sounds like that's at least on track.
And then Q4 revenues about as you thought it would be three or so months ago, if not a bit better. So I guess I'm just trying to understand how mix could account for this much lower gross margin I guess the point that investors are going to say is that this is competition and it's you know sort of the beginning of a slippery slope. So I wonder if you can vote.
Talk about that's right yeah.
Thanks, Tim.
You know I think in many ways you kind of summarized what took place in the third quarter and really the fourth quarter is quite similar with the with the.
A few changes all talk about.
But for the two two point fall off in the third quarter. It really was a factor of it turned out to be very different quarters than we thought going in.
Much much.
Much heavier mix of the entry level, you see markets are both consumer and education.
So you saw that in the U.S.P.'s, even as we saw strong strong unit demand.
In server enterprise and government after two consecutive quarters of growing 30%.
Ah dropped 47% year over year and as you know that's a from an E. S. P standpoint, that's a very healthy market.
Healthy market for us and so if you.
If you if you take that into account and also the fact that we saw growth in our Esso sees within the data center that actually pulls down S.P.s.
As they have very different is fees. Obviously, then the Oh server chip. So overall it was really a mixed story, yes, you know competition, we're seeing increased competition in the second half of the year, but not different levels of competition than we thought we feel good about.
Where we are on the year. So I would say, it's really a mixed story.
In a very different mix than we thought going in.
Maybe just Oh go ahead go ahead I was just going to work.
Hey, good to see the the one other dynamic and we it's impacted us as we thought about the second half, but it's been even more more exacerbated now is the demand for our 10 nanometer products.
Yeah, we said that it was going to be it was up 20% in the second half from what we thought back in the beginning of the year and now we're saying it's up north of 30% from what we thought and that's a function of the Tiger like product that we launched in the third quarter real real strong did.
Man double a that design wins that will be on the shelf during the course of the fourth quarter and the ramping of.
Three high volume manufacturing Fabs.
To enable more and more supply we're going to get more 10 nanometer product than we even anticipated you know 90 days ago, such as to one added.
Added feature that a topic Georges commentary.
Yeah, and I would say in Q4 or Tim you'll see more of the benefit of Tiger Lake is the volume there ramps further.
So no books will be a stronger contributor in Q4 than they were in Q3 and then as we said we think cloud digest and start so we expect that to fall off and put pressure.
On gross margins, because we don't see E G coming back so.
So stronger notebook better flow through and.
And you know I think it's kind of a rinse and repeat quarter in terms of the gross margin outlook, but it's a.
But it's a mixed story and it's one where we think.
We think as mix normalizes that gets healthy gross margin gets healthier.
Thanks, Tim operator.
Yes, Sir our next question comes from the line of Harlan sur of JP Morgan Your question. Please.
Yeah. Good afternoon. Thank you for taking my question.
Another question on gross margin so the positive 10 nanometer demand acceleration this year.
Obviously, good to see but is it is having the impact of muting. Your gross margins you know you're still coming up the learning to edge up.
This should be a tailwind to gross margin in 2021 as more of the volume is going to be on 10, you're getting to the early yield learning and higher cost profile. This year is that how the team sees it and if so should we expect the team to recapture the 200 basis points of gross.
Margin next year did you gave up this year because of the more aggressive 10 nanometer pull forward.
You know the way.
The way we look at it we said you know as 10 nanometer accelerated because as it's displacing 14 nanometer.
There was a margin impact from that so we think it even as we see cost initiatives that are improving the cost structure of 10 nanometer.
The teams are working on the yield performance of 10 nanometer all that should should show up as positive or the impact of 10 nanometer. It will still be felt in in 2021 as we guided back in may of 19.
So ramping earlier has change the mix a little bit in 2020 from what we thought and that has put some pressure on.
Yeah, but 2021, you know right now I wouldn't I wouldn't call. It a tailwind we've got other tailwinds.
For gross margin in 2021 for instance, a you know our Io TG business was really hurt this year, we think that starts to come back and we get margin accretion. There mobileye is already a return to year over year growth in the third quarter and as we see it accelerating further.
We think EG comes back you know, we kind of had the reverse of what you normally see in enterprise and government, which is a weak first half strong second half and we saw very strong first half in a weak a weak second half. So we think normalization is good we think cloud digestion will take some time, but.
You know, we expect cloud to be back acquiring in in 2021, So and then on top of that we have the modem exit so as we sell fewer and fewer modems, that's actually margin accretive.
And then of course, we announced the NAND.
The NAND exit, which Oh, we think it gives us about a one to two point tailwind on gross margins next year.
Next year.
Great. Thank you.
Next question. Thank you. Thank you. Our next question comes from Blayne Curtis with Barclays. Your question. Please.
Hey, guys. Thanks for your question, maybe just drilling down on the gross margin.
Looking at the op margin in DCG, 32%, I think that the lowest ever. So maybe you should just read do that yeah.
I guess, just focusing on gross margin data center, because that's an area that you haven't yet really ramp and nanometer. So I'm just kind of curious how to look at that business as that layers in and also you've pulled off in later.
Yeah, Abhi, obviously, what we saw was a lower revenue than we expected there was a fall off in G.
And as you look at the S.P. dynamics of that of such a steep drop off 47% year over year drop off.
That certainly has an impact on gross margin, which flows right through to the operating margin.
On operating margin to we've also added a the the Havana business into the spending profile. So you've seen some growth.
Some growth in spending as a as we're investing in the AI area.
And then and then again overall, we think is even g. comes back and Oh recovers a week.
We should be seeing a strong.
Our margin performance out of the DCG.
But as George mentioned earlier, the you know year on year.
Yeah, the 15% ASP decline, but when you look at within the segments of the business class.
Cloud growth continued to be really strong so on.
So on a year to date basis cloud is up yeah.
Mid mid 30, percents, so cloud performance relatively strong.
Our coms business real strong volume growth.
As the role we play a network and the edge becomes larger yet that strong unit volume growth.
As but much lower asps than our kind of normal cloud and enterprise business.
And then third with the enterprise decline being so big where the asps have a tendency to be higher prices. The combination of that mix effect mix alone up the business drove the lion's share of the 15% yes.
P. decline so mix dynamic.
That George flag.
With strong cloud growth.
I think the reality of the LNG is remember we were up 34% through the first six months of the year.
So when you take into account third quarter volume on a year to date basis. The GE business is flat at a fairly challenging macro.
Macro macro environments. So all told.
I think what we saw in the course of the second quarter going into the third quarter's inventory levels in the channel or probably relatively high they bled off quite a bit.
The third quarter, and therefore year to date at being flat is probably in line with where we were when we started the year stronger first half a weaker weaker second half.
And another way to look at it Harlan is we kind of had a year that was okay.
Compared to our normal seasonality, we had our strong second half of the year in the first very very big prints on operating margin for DCG a year over year.
And and what we're seeing is as we forecasted a weaker second half and.
And which looks a lot more like what we would normally see in the first half.
Thanks for the color.
Excellent.
Well listen Nexobrid. Thank you Ryan next question comes from the line of John Pitzer of Credit Suisse. Please go ahead yeah.
Yeah. Good afternoon, guys. Thanks, Let me ask question well Bob I appreciate your comments around seven nanometer.
And your ability to kind of want to maintain maximum flexibility around your seven nanometer decisions, but there comes a point in time, where you are in lead times of capacity.
For lead times capacity for.
Forces a decision upon you guys. So I'm wondering if you could just help us understand the win.
The window closed.
When you have to make a decision on said then and if you could help us understand kind of scenarios, we should be thinking through is this as much as an all or nothing or are we talking.
Percentage each year and how should we think about that.
Yeah, Thanks, John I mean first.
We have a very strong product line up for 2021 and 22.
For our clients.
For server.
And for Aiotv. So we feel very good about what our lineup looks like over the next over the next three years and not just for the <unk>.
You, but for the GPU franchise and prep P.G.A. So the next three years, we feel very good about the product the product lineup.
So as we think about 2023 and beyond we're lucky not.
Yeah, the products required at that time.
And we're evaluating our process versus other third party third party processes and the fundamental criteria as you could imagine or at the macro level fairly fairly simple.
Schedule unscheduled predictability.
Product performance.
And economics.
Good Ah Ah.
Supply chain you know.
Our ability to control the supply chain best we possibly can so the criteria are relatively simple and we're evaluating each one of those kind of as we exit 2000.
2020, and really early 2021, because that's the time that well have to make that determination as to whether we're buying more seven nanometer equipment or whether it's third party foundry would be adding that capacity. So we're going through this process really looking at.
Our our capabilities other's capabilities Oh around those three fundamental criteria.
I would say that the since the last time, we spoke.
Our seven nanometer processes is doing very well I mean last time, we spoke we had identified an excursion we had root cause that we thought we knew the effects now weve.
Probably the fact that made made wonderful progress, but nonetheless, we're still doing all the valuation third party foundry versus versus our foundry across those three criteria and the call will be towards the end of this year really.
Early next year.
Your last question John about.
No is it an all or nothing no yeah, I'd say it's.
You know we look at.
Server or client, we look at big core small core.
And we looked at some segments of the stacked within a product lines. So we're looking at a variety of different parameters in terms of the makeup of the business and as I said in my prepared remarks, yeah. It's it's probably not an all or nothing that's probably a mix in terms of the best path to ensure that.
We had a predictable cadence leadership products for 23 and 24 like we believe we will have in 2021 and 22.
And we'll learn a lot more as we have in the last 90 days during the course of the next 90 days and I think being a pretty good position to lay out our our decision in the January timeframe.
Thank you.
Thank you. Our next question comes from the line of Joe Moore of Morgan Stanley. Your line is open.
Great. Thank you.
I Wonder if you could talk a little bit about the server roadmap and in particular, you've talked about actually being kind of more volume early part of next year and Sapphire rabbits also next year. It seems like a pretty quick transition [laughter] too.
To what seems like a pretty important sapphire rapid launch can you just talk about you know how that's going to play out with those two being so close together.
Well I mean, its I think Joe it's been fairly consistent a road map over the course of the last.
You know 18 months or so Cascade Lake now why it's like you know end of year beginning to ramp Rolling next year, a very in our mind at very attractive and enhanced feature set for Sapphire Rapid city. You know ended the year kind of four.
Kinda for four quarters.
Later, which is kind of road map that we've laid out for our customers over the course of the last 18 months and I think people are pretty excited about getting nice like out and.
Equally excited about the enhanced.
Feature set of Sapphire Rapids at the end of a at the end of the year. So you know as long as we got it fairly laid out predictable. So our customers can plan effectively oh, we want to be able to continue to do that cadence of leadership products I'm kind of in sequence and four maybe five.
Core to kind of timeframe.
And this is not dramatically different than than how we've approached it in the past.
Okay. So just to make sure I understand so stuff I wrap it will be sort of more volume in kind of early 2022 or is it.
Trying to kind of to two finally, there you're doing a little too to find today.
Okay. Thank you so much thanks a lot.
Thank you. Our next question comes from the line of Tristan Gerra of Baird. Your line is open.
Hi, good afternoon, I'm on dairy it you know.
Are you aware TSMC still building.
Leading node processes for you.
I understand you have and you'd have to they could at this over the next 90 days can you explain how easy it is to transition from TSMC back to you in turn on manufacturing, how fungible or that is.
And would that be for existing.
Type of architecture or more like chip, let type of Funky pictures.
Yeah. It's a good question I mean, I I gave kind of the the criteria around Oh good.
Good we under what circumstances go out more of schedule predictability of performance.
And you know a economics, if you will but.
The book end on that that and those three criteria are really around a one or the ease the portability of our technologies to go out.
And I would say.
We feel.
I'm very confident in the ability of.
Our being able to port to.
To to TSMC and the other book end is in the event that we go out.
Let's see ease in which we can port back if we conclude that the best alternative for either yeah core.
Core product core products or a chip, let say I would just say that we feel increasingly confident that yes. In fact, if we conclude going out makes sense that we can and.
And also that India that we want to pour back in Oh, we can't as well and that's a those are general observations on about around the book kind of questions.
And then there's a bit of complexity based on the nature of the product whether it's a more big.
Big core versus more synthesizing more cores. So we can go out weak.
We can come back in and we're in the process of evaluating the should we and under what circumstances.
Great. Thank you very much.
Thank you. Our next question comes from them on the Pierre Ferragu of New Street Research. Your question. Please.
We already have here.
The Oh Pete Peter Please make sure. Your line is muted if you know speakerphone lift your handset.
Can you hear me well, we can in the sector.
Okay. That's great. So, yes, I'd like to go back to the PC market and the comments you've made on market share. So it looks like you're getting any regaining market share in the lower end of the market the notebook market.
Notebook market or how things in the higher end of the market like Virginia community.
Oh, how these things play out in Q3, and how do you see them playing out over the next year.
Yeah I'll start George you can you can pile on I mean first.
Now, we're we're you know up nine.
You know up 9% unit volume.
Year to date, a 11, 11% unit volume in the third quarter.
With a Tam that's probably up and yeah. The high single digits at this stage. So when we came into the year. We won two number one.
Increase our capacity, which we have in fact on so.
So number to launch some you know some very good product and then number three would that incremental capacity and improve product road map to begin to recapture share and I would say that we.
We feel.
We don't exactly know how to three Pam is going to be but I think on a year to date basis, we feel like weve gain back some market share primarily by protecting the higher end.
And recapturing a the small core.
And I think those have all been a little bit exacerbated by a market that is.
As much stronger than we anticipated.
Number one and then as George flagged this massive mix shifts that happened really in the third quarter and we expect to continue in the fourth quarter to more more mobile notebook products, where we think we've got a wonderful product offering.
So in the aggregate, we're looking at a Tam and high Yeah mid mid mid to high single digit growth for the year, our volume through nine nine months is 9%.
We got really good ramp of our 10 nanometer products in the holiday and we think we've got a nice.
Nice supply chain kind of up and down the stack as we go into the holiday season.
Yeah, and we and we said you know in the first half of the year, we had seen share in the entry markets. We just didn't have the capacity to do.
Due to serve both the the the higher end PC market and the entry level. We're seeing you know we expected the some mix shift clearly not at the level that we we saw in Q3 and Q4. So we're getting we're getting the opportunity to recover share in this.
Facing quite frankly.
You know Oh Wow.
We could have sold if we did everything we could have produced on top of what we produce we could have sold in Q3, and we are seeing super strong demand coming into Q4, as we're ramping more capacity. So we we feel feel very good about starting to recover and grow that share in the second half that we where we were down in the first half.
In the in the entry market.
Thank you.
Thank you Peter.
Thank you. Our next question comes from Chris Danely of Citi. Your line is open.
Hey, Thanks, guys actually just just a just a clarification first and then a longer term question on gross margin. So when you talked about the reasons for the pressure on gross margin as far as mix goes I just want to make sure that there's no I guess, a aggressive pricing on your part or no pricing pressure from the competition and then.
My longer term question is it seems like some of these headwinds on pricing such as mix and more calm revenue are not going away. So do you think longer term, we should we should look at your gross margins as maybe being the range being a little bit lower than what you've indicated previously or is that going to be offset by the.
The NAND situation, maybe just little clarification there.
Sure, maybe maybe I'll start and then Bob may want to throw in some things so on on the on the pricing headwinds it largely mix again, we're seeing the competitive environment that we expected to see it's not to say that there isn't some pricing effect from competition.
But it is the change is really dominated by the mix change and.
And in terms of long term implications you know I think yeah. We're in a very unusual circumstances, just the dynamics of our year, you know kind of a 50 545 year and the the radically different mix that we saw and both of those were really respond.
Responding to Cove it related to the demand dynamics, so I think I wouldn't draw too many long term implications of this I mean, you know there's there, but our focus is on having the most competitive profile and each of these segments.
And and we think we'll see a normalization to a mix that that probably is more like 19 than 20 over the long run.
Yeah, and I would just excuse me I would just add as we as we exit.
The year.
I think it was Joe that assist a little bit earlier, yeah. We go in to 2021 with yeah to some.
It's a real tailwinds and and some headwinds, but net net I think.
I think the reason to be well balance relative to the longer term outlook that we gave you back in a in May at night made at 19 and.
And just to highlight the Tailwinds and you mentioned one of them you know we made decisions on.
Some of the.
Lower margin businesses in our portfolio.
Obviously this week's announcement on on NAND.
The decline that we expect to see and.
Modem volume as we go and 21.
We exited the.
Home, all home home device connected business or middle of the year. So.
So the mix of the business is a net tailwind as we enter 2021.
Secondly, yeah, we've made really good progress on 10 year yields during the course of this year and the expectation as we mature going into next year on 10 nanometer will in fact, we expect will in fact improve and.
And then third we will still have a significant portion of our volume in 2021 that will be on 14 nanometer and that will have any.
An increasing portion of the equip.
The equipment fully depreciated. So we have some real tailwinds and yeah. These are things that you know we do have anticipated you know six.
Fall between 18 months ago. So those are all kind of in line the only real net positive is.
You know the decision on NAND and then you know we have some some headwinds when we migrate more and more of a volume from 14 to 10 that'll work against us step as we anticipated as we planned.
And you know the competitive environment from where we are today versus what we had assumed when we laid our longer term numbers have not dramatically different. So I think the biggest wildcard now, it's Matt and that obviously surprised us a little bit because in the second.
In the second half I should say just the mix of the dynamics of the business that I'd characterize or.
More more covert related and what are the implications of that.
On 21 and beyond that I'd say, there's probably as much chance of positive tailwinds as oppose to negative headwinds on that front. So we've got some real tailwinds you know some headwinds net net.
Maybe yeah, I'd characterize it maybe a little better position today than where we weren't we laid it out and in May of 2019.
Thanks, that's very helpful.
Well, maybe maybe just a couple of thoughts if you want to close.
Good call out.
Yeah, well first off thanks for joining us I'd, just say through a very challenging market environment, we expect to grow revenue this year by.
$1.8 billion.
And free cash flow by one and a half to two and a half a million dollars above what we laid out back at the beginning of the year. So despite all the inherent challenge as well.
Well, well deliver a stronger year and we'll have a better product portfolio as we go into next year.
Second you know we are relentlessly focused on delivering up.
Predictable cadence of leadership products and as I said in the prepared remarks.
We have a great product line up through 2022, the fact that we're working really hard on 23 at this stage I think it's a relatively a good good position to be in.
Third.
We continue to extend our reach and accelerate our growth by they didn't these key technology inflections, such as cloud Fiveg intelligent and autonomous edge computing, an AI. So I think we're transitioning more and more of our resources into real strong growth characteristics and.
Yeah last thing I'd, just say is we're incredibly grateful for the dedication and resiliency of Intel employees. The partners that we work with in our collective efforts to continue to retain a health and safety environment, while delivering for our customers. So we are we are collectively inspired by.
Yeah, our purpose, which is simply to create world changing technologies that are enriched the lives of every person on Earth and <unk>.
And I can't imagine a time, where that purpose could be more important that has been during the course of this year. So thanks for thanks for joining us and we'll we'll talk to you soon thanks, Bob and thanks, everyone for joining the call with that operator, let's go ahead and close the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yeah.
[music].