Good day, ladies and gentlemen, and welcome to the Intel Corporation 4th Quarter 2014 Earnings Conference Call. Thank you for your patience. We do apologize for the delay as we were experiencing a technical issue. At this time, all As a reminder, today's conference is being recorded. I would now like to turn the call over to Mark Henninger.
Thank you, Jamie, and welcome everyone to Intel's 4th quarter 2014 earnings conference call. By now, you should have received a copy of our earnings release and the CFO commentary that goes along with it. If you've not received both documents, they're available on our investor website intc.com. I'm joined today by Brian Krzanich, our CEO and Stacy Smith, our Chief Financial Officer. In a moment, we'll hear brief remarks from both of them followed by the 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 refer to our press release for more information on the specific risk factors that could cause actual results to differ
materially. Also during
this call, we'll use any non GAAP financial measures or references. We'll post the appropriate GAAP financial reconciliation to our website, intc.com. So with that, let me hand
it over to Brian. Thanks, Mark. The 4th quarter marked a strong finish to a great year. We began 2014 expecting roughly flat year over year revenue and operating income. Instead, the company's full year revenue grew 6%, setting an all time record of $55,900,000 At the same time, operating income rose 25%.
When I became CEO, I said 2 imperatives for the company. 1st, develop a more outside in view of markets to ensure we go to where the markets are heading and second, increase our velocity or pace of innovation in a purposeful direction. Over the last year, we've made meaningful progress against these imperatives, which helped us meet and exceed many of our top goals. I'd like to take a moment to review the year. In the PC client group, our goal was to stabilize the PC business.
We expected revenue to be down by a low single digit percentage and for operating profit to be roughly flat year over year. Instead, the year closed with a 4% increase in revenue and a 25% increase in operating profit. Our focus on reinventing the computing experience and leaving no segment unserved from the low end to the high end contributed to these results. We launched Broadwell on the world's first 14 nanometer manufacturing process. While we did have some startup challenges that contributed to roughly 6 months delay, yields have steadily improved.
The end result is a family of Core M and 5th generation core processors that are the 2 in ones, Ultrabooks, Chromebooks and Mini PCs. We began the year with high expectations for the data center growth. We said we would capitalize on the growth of the cloud and big data by diversifying customer segments and product leadership. We initially forecasted revenue growth in the low to mid teens with operating profit growing faster than revenue. We exceeded those high expectations and grew revenue 18%, while operating profit expanded by a remarkable 31%.
In the Mobile and Communications Group, we set a goal to ship into 40,000,000 tablets in 2014. This goal is intended to establish Intel architecture in the marketplace and scale the supply chain and attract developers. I'm pleased to report that we shipped into 46,000,000,000 tablets, becoming one of the industry's largest merchant silicon providers We also began shipping our 2nd generation LTE baseband known as 7,260. We're proud that the company reached these milestones, but we have more work ahead of us. A key goal for Mobility is to improve To that end, we just qualified the first SoC in our Sofia lineup.
Sofia is a low cost Integrated applications processor and baseband chip. As it ramps, it will progressively reduce the build material costs that adversely affected our gross margins in the mobile business. We also struck landmark agreements with Rockchip and Spreadtrum to expand the development and distribution of IA products for phones and tablets. Similarly, we grew other adjacent services by using IP from our core clients. For example, our Internet Appointments Group Grew 19% in 2014, passing the $2,000,000,000 mark for the first time.
The recently launched RealSense 3 d Camera Technology is another example of extending our IP. RealSense is redefining imaging in a variety of competing devices. It's Oakley opening ceremony and SMS audio, along with our own products like the Basis Peak and the Curie module, a computer the size of a button. Intel is in a very different place today than we were just 12 months ago. We are participating in a broader range of devices and we are innovating in emerging segments.
These are the trends we'll build on in 2015, bringing us closer to our vision that if it's smart And connected, it is best with Intel. Our work isn't done, but our progress against our imperatives leaves us increasingly confident in our strategy. With that, let me turn the call over to Stacy.
Thanks, Brian. To reiterate what The 4th quarter was a strong finish to a great year. Revenue of $14,700,000,000 was a record for the company and was up 6% from the prior year. The strength of our product portfolio can be seen in our gross margin of over 65% and in our profitability. Operating income grew 25% and earnings per share, which also benefited from the passage of the R and D tax credit, grew 45% from a year ago.
From a market perspective, we saw nice unit and revenue growth in the PC client group segment with revenue up 3% and operating profit up 18% on a year over year basis. The Data Center Group benefited from the build out of the cloud, data analytics and our strong product portfolio. The company saw a modest increase in net inventory levels quarter over quarter as we are efficiently managing capacity, while ramping Broadwell on 14 nanometer. And the worldwide PC supply chain appears to be healthy with inventory levels appropriate as we enter the Q1. These results for the Q4 completed a strong year for Intel.
Recapping the 2014 financials. For full year 2014, revenue of $55,900,000,000 was up 6%, operating income of $15,300,000,000 was up 25% And earnings per share of $2.31 was up 22% from 2013. Gross margin of approximately 64% in 2014 is up about 4 points from 2013. Spending on R and D and MG and A was $19,700,000,000 in 2014, up $1,000,000,000 from 2013, driven primarily by increased R and D spending and higher profit dependent spending. In 2014, both our PC business and our data center outperformed our expectations at the start of the year.
PC Client Group revenue grew by 4%. We saw PC Client Group platform volumes grow 8% from a year ago and inclusive of tablets, we saw 18% unit growth. Operating profit for the PC Client Group segment was up 25% over the same horizon. We saw robust growth in our data center business with Additionally, in comparison to 2013, the Internet of Things segment achieved revenue growth of 19%. The Software and Services operating segment was up slightly.
Our NAND business grew at a fast pace. And although revenue was down for the Mobile and Communications Group, We grew share in tablets. The business continued to generate significant cash with $20,400,000,000 of cash from operations in 2014. Total cash balances at the end of the year was roughly $14,100,000,000 Down approximately $6,000,000,000 from a year ago. We purchased $10,100,000,000 in capital assets, down from our prior outlook of $11,000,000,000 as we found efficiencies, optimized the manufacturing network and increased our factory utilization.
In addition, we paid $4,400,000,000 in dividends. In November, we announced a dividend increase to $0.96 per share on an annual basis effective for the Q1 of 2015. We repurchased about $10,800,000,000 of stock in 2014, up from $2,100,000,000 in 2013. Our net cash balance, total cash less debt is approximately $340,000,000 and inclusive of our other longer term investments is more than $4,000,000,000 This is down by over $5,500,000,000 from the start of the year. As we look forward to the Q1 of 2015, we are from the Q4.
This forecast is in line with the average seasonal decline for the Q1. We are forecasting the midpoint of the gross margin range for the Q1 to be 60%, plus or minus a couple of points. Consistent with the business drivers discussed in the November Investor The 5 point decline from the 4th quarter is primarily driven by higher platform unit costs on 14 nanometer products, Higher factory startup costs and lower platform volumes. Turning to full year 2015, We're planning for revenues to grow in the mid single digits. We are forecasting the midpoint of our gross margin range at 62%, plus or minus a couple of points.
We are forecasting R and D and MG and A spending for the year at $20,000,000,000 plus or minus $400,000,000 and we are forecasting capital spending of $10,000,000,000 Strategy in action as we enter 2015. First, we are growing again across a broad range of products and markets. 2nd, we continue to invest in our core competitive advantages of Leadership IP and Leadership Manufacturing. These competitive advantages are becoming increasingly valuable and increasingly rare. 3rd, we are in a great position to benefit from the build out of the cloud and Data analytics as we enter 2015 and we expect these trends to drive growth again this year.
And last, we continue to execute our strategy of both investing in our business and also generating return for our shareholders via the dividend and the buyback. With that, let me turn
it back over to Mark. Okay. Thank you, Ryan and Stacy. Moving on to the Q and A, as is our normal practice,
Our first question comes from Chris Danely from Citigroup.
Thanks guys. And Brian in all sincerity congratulations on a great year for yourself and the company. I guess the first question is on gross margins. Can you just talk about, I guess, it's for Stacy, the trend in gross margins after Q1? And embedded in that, do you think that the second half 15 gross margins can be equal to the second half of twenty fourteen gross margins.
And for this year assuming Something close to normal, can we assume gross margins would be up in 2016 on an apples to apples basis?
Hi, Chris. This is Stacy. Yes. I'll just start this by saying I'm not going to forecast 2016 gross margins in January of 2015. We'll probably talk about those in November.
So You're getting a little ahead of me. In terms of the June what's happening in the gross margin, it's very With what we talked about in the November investor meeting and to specifically answer your question, yes, I expect that the second half gross margins will be back above the midpoint. We've forecasted 62% for the year. We're at 60% in Q1. I think the second half will be above that midpoint, the first half will be below.
This is all what I told you in November. The big drivers for us here are 14 nanometer. As 14 nanometer becomes a larger mix of our products, We're mixing up in terms of our costs. That is higher than normal in the beginning Of the year and then it will come down and catch up to prior technologies by the time we get into the back half. We have some increase in startup costs And then we'll get some good news associated with getting back some of the impact associated with tablets.
So we get back about half of the impact from 2014 into 2015. In terms of whether that will match the back half of twenty 14. I'd say that the only thing that I'd point to is 2015 is the year where we have start So it's going to be an overhang through the year and you know our cadence is kind of every other year. So probably adjusted for that we're going to be in the same kind of range.
Great. And then for my follow-up question for Brian just on the MCG business. So Brian, I guess we're still losing a little more than $1,000,000,000 a quarter, but you said that those losses will go down. Any color you can provide on that? Anything you can give In terms of your overall goals or goals for the mobile business this year either in units or profitability or anything else there?
Sure. Sure, Chris. So what we said for 2015. So if you remember step back known in this market, be considered a serious player and get the developers attracted, both the hardware and software developers Interested in IAA. And so that's we set went out, set a goal, a unit level goal, so we knew we were serious and we brought parts That were not necessarily designed for this segment and that's where the bond cost deltas came from.
For 2015, we feel like we've done a very nice job now of establishing ourselves. We're one of the top producers of So looking in this segment, and our goal right now is from a unit perspective is we think we can just grow roughly at what So we don't need to go out and necessarily outpace the market or anything like that for this year from a growth perspective. Instead, we're going to focus on 2 segments and that is, 1, as you just said, getting Our cost profile is down making it so that we're much more cost effective and as a result getting the loss out. Stacy and I committed to drive $100,000,000 out of this business for 2015. We believe they have a solid plan to go do that.
That's based on a couple of things. One part of this reorganization was to drive efficiency to get the consistency across the platform to be utilized and to get the efficiency of Of people, of hardware, of software, of all of that. The other one is as we move into the second half of this year, especially Sofia, which we said was designed for this segment and has no BOM adder or difference, It really starts to ramp and you saw we've already internally qualified our first Sofia, the 3 gs version. We said the next version, the LTE version would be in the first half of next year and they'll ramp through the year. So as those come in, they take a lot of that cost delta And that's we're feeling fairly good about the $800,000,000 The other place you saw The Dell Venue 87000 is a great example.
It was won best of innovation at CES and best of show at CES. And it's Showing a thinnest tablet with real innovation at a $3.99 price where people can start to make money in the tablet Based a little bit now again. And so we think the combination of the right products plus real innovation like that will allow us to make real progress. Thanks.
The next question comes from Mike McConnell Pacific Crest Securities.
Thank you. Looking at the balance sheet, Stacy, there was a pretty significant Spike in receivables in Q4 and DSOs look like they're pretty elevated relative to levels we've In the last couple of years, could you kind of explain what was going on there with the receivables?
Sure. And actually I think DSOs still are in a healthy range, but The timing the quarter was a little bit more back end loaded than Q3 was and so we ended the quarter with more receivables. It was as simple as that. We We started with we didn't have a terribly strong October and the quarter strengthened as we went through.
Okay, great. And then just looking at linearity for DCG, given you've got a new product family, we've got Operating system from Microsoft that's going to be expiring this year. Could you give us any color on how We should expect linearity on a quarterly basis for DCG this year, if it will be any different than what we've seen in the past?
So, yes, I think we always caution you. The PC market, I think we had data that says it behaves roughly seasonal. With DCG, you have to be careful because you have 5 to 10 very large cloud customers that based on their buying patterns can really change The quarter to quarter trend, so I tend to hesitate to tie too much to seasonal and DCG. When you look at the results over the course of 2014, it was robust unit growth that was great revenue growth, 18% revenue growth. As we said in the investor meeting, we think that the underlying trends that are driving that continue into 2015 and we put a forecast out there that said in excess of percent growth that's what we still think.
Thank you.
The next question comes from Rish Srivastava from BMO Capital Markets.
Hi. Thank you. Brian, I just wanted to continue with On the mobility side, based on the drivers that you laid out, should we then expect that the recovery in the operating losses Should be more back end loaded. And then you mentioned that tablets you expect to grow with the end market. And most at least I'll speak for We expect almost no growth.
So is that how you guys are thinking about the tablet market? And then I had a quick follow-up for you Stacy.
Sure. So let me give you the how we view the market and then I'll let Stacy talk about how the $800,000,000 is laid out through the year and then you can talk about the margins too. I've seen forecasts that are At or near 0, as you say, I've seen forecasts that are slight decline. I've seen forecasts that have, I'll say, 10 to low teen growth in tablets and it's kind of varied as The 4th quarter went through even. So that's why we've kind of said we'll grow at the rate that the market does.
I don't think I want to necessarily shrink. So unless the market shrinks significantly, I think we would then probably try and target more of a flattish. But in general, I think saying that we're going to grow up market tells you I'm not going to try and outgrow the market is the message I'm trying to send. And whether it's minus 5, 0 or plus 5 to 10, I call All of that kind of flattish to grow with the market?
Yes. And on the linearity of the 800,000,000 Yes. There's really at the highest level three things that are improving our profitability this year. So first is bringing Sofia into the product mix. That helps us both from the standpoint of the SoC costs that Sofia has and the contra revenue dollars So with the material asset that we've been providing which we don't plan to provide with Sofia.
That is back end loaded. We're bringing Sofia into the Product family kind of as we speak, but it becomes really significant volume for us when we get into the back half. The second one is the LTE the ramp of LTE to offset some of the investments we've been making there. That ramp is underway now, but I would expect the back half volume to be higher than the first half. So that also is a little bit more back end loaded.
And then the third is, as we've said, we're shifting the investment profile And that's more linear across the year. So those are the 3 items and 2 of those 3 does put more of the improvement in the back half.
Okay. Thank you. And my quick follow-up for you Stacy is on the capital allocation side. Last couple of quarters you did a great job Bought back a lot of stock. But now if I look at the onshore versus offshore on the balance sheet, it's just a $2,000,000,000 delta.
Could you remind us in terms of the cash flow generated, how much is onshore versus offshore? And then the ramifications for stock buyback? Thank you.
Sure. It varies year by year depending on where we're Remember, we actually invest in factories around the world. So a lot of the onshore versus offshore will vary based on where we're starting up factories. But the majority of our cash generation is in the U. S.
We do generate a lot of cash and we certainly have the ability to Use that for any corporate purposes including a buyback.
Thank you.
Thanks, Ambrish.
The next question comes from Jim Covello from Goldman Sachs.
Great, guys. Thanks so much for taking the question. First question, Stacy, the CapEx is shifting around a little bit. Anything significant there? Are you just able to find a little bit of ability to save some money?
Yes. I would term it as a fairly significant reduction in CapEx for 2014 and we brought down we brought CapEx for $15,000,000 down to the bottom of the range. And it's a variety of things. When I look at the savings we had in 20 14, About half of it was due to call it basic blocking and tackling. We were able to negotiate some lower pricing.
We had some Non capacity related projects that we're able to push out of the year and we're always looking for those opportunities. And I think the manufacturing organization did a great Finding them. And then about half of it is as we progressed over the course of 2014, We learned a couple of things. One is our confidence in yields and our yield forecast went up. That's what we showed you in the November investor meeting.
Secondly, the manufacturing organization demonstrated the ability to start up factories more quickly than we had assumed at the beginning of the year. And the combination of that allowed us to shift out the 3rd HVM 14 nanometer factory that starts up now kind of mid-fifteen Out by 2 to 3 months and that doesn't sound like a lot, but given how capital intensive those factories are that actually gives us a much more capital efficient Ramp and we're able to generate some savings as a result of it.
That's helpful. Thank you.
And as a follow-up, Brian, I mean, could you just on the highest level maybe give us a sense of how you think the PC The market stands today entering 2015 compared to how it was entering 2014. Some of the ODM data would suggest We exited 2014 a little weaker, but that may just be a function of that weak October that Stacy had mentioned in terms of linearity and things. Maybe it really is more similar than we thought even though the quarterly data isn't quite as good in 2014 as
it was in 2013, but maybe if you could offer
Yes. So I'm not sure of all your statistics that you just threw out there, Jim, but let me just give you kind of Our view of the PC market. I think when we look at Q4 and then again as you look at 2014 overall, It was a very strong it played out exactly as we forecasted and had predicted. Q4 ended up being very much a seasonal quarter. We saw demand in the more mature markets stronger, especially on the consumer side Then in the emerging markets, and as Stacy mentioned, our inventories as we exit Q4, we're very with where the inventories are.
So remember as we entered exited Q3 and kind of entered Q4, There was some concern there might have been a little inventory. We feel like we've burned that off through the system, especially a lot of that was down at the low end. And as we exit Q4, we're very comfortable with the inventory. For me, as I look out into now 'fifteen, I look at it and say, okay, we've got Core M, which has just really hit the As we entered into the holiday season, we saw great thin fanless 2 in-one devices at all price points That I believe will stimulate usage there. We've got the Broadwell U, which is the first of the Really the high volume Broadwells just hitting the market.
We've got something dozen systems in Q1 that will be coming out On Broadwell, you saw us introduce RealSense at CES. We have, I think, 7 or 8 systems in the Q1 coming out with RealSense And that combination, so I look at the amount of innovation, all of the OSs were on and the availability and really optionality a Consumer has for OS or an enterprise. And the price points, you've got PCs From Chromebooks down to 199, Windows Systems $249,000,000 all the way up from there to the real innovative systems like Sprout. I look at it and say The innovation and the options of the PC market have never been better. So I'm feeling pretty good about where we are in the PC market.
If you remember, our is based even still on flat units and a slight decrease in ASP. So we're still even though I've told you all there's all this innovation and there's That we've still been relatively conservative and said it's a flat unit year and a slight decline even in ASPs
And if I could just emphasize one point on Q4. I think we characterize it as pretty normal From an in demand standpoint, we undershipped demand some in Q4. So there was an inventory burn. And what we now think happened as we look There was a bit of inventory particularly Bay Trail lower end systems. When we started the quarter that led to some weakness in the 1st few weeks and then it caught back up as we worked our way through the quarter and burned through that inventory and then we saw it behave a bit more normally from a shipment pattern.
It's really helpful guys. Thanks so
much and good luck.
Thanks Jim.
The next question comes from David Wong from Wells Fargo.
Thanks very much. You talked about blocking and tasking to bring down CapEx, but your 10,000,000,000 2014 CapEx and then your 2015 plan is almost $1,000,000,000 below $10,700,000,000 to $11,000,000,000 in every year 20 11 to 2013. So are you on a permanently higher level of capital efficiency? And if that's the case, what would your long term CapEx as a percent of revenue be?
No, I'll say, David, the fact that we were at 10% and 14% and we're at 10% and 15% Doesn't change my long term view. If you think about what I showed in the investor meeting, I showed that we've kind of been between 10% and 11%, we're at The low end of that for a couple of years, I still think that's the right range for us. Within that, 2 thirds to 3 quarters Is manufacturing capacity related and then the rest is non manufacturing CapEx.
Okay, great. And when do you expect to offer 10 nanometer capability to foundry customers?
We are timing on 10 nanometers. We I'm not going to come out with when we'll be introducing our 10 nanometer to the marketplace in general probably until the end of this year. So we'll give as we go through the year Probably by the investor meeting in November, we'll give you an outlook on how and what timing is for 10 nanometers.
Thanks very much.
The next question comes from Stacy Rasgon from Sanford Bernstein.
Hi, guys. Thanks for taking my questions. I think first I just want to it sounds like the slightly weaker PC volume you saw in Q4 is not Changing your 2015 of the market at all. If the inventory burn that you saw in the channel was at the low end, we saw ASPs come up, I guess, because You were losing some of that low end shipment. What does that suggest for your ASP trend next quarter as potentially those and I guess I should ask do you Those inventory trends going back the other way and what does that mean for pricing as we move into next quarter?
Does the low end start to come back for you?
Yes. It's Len, I'll take that. So first off, I'll say the ASP good news that we saw in Q4 really had Three elements to it. One element was the fact that we saw some inventory burn on Baytrail. So our mix within notebooks was a little bit higher.
Think of that in rough numbers that's about a third of it. And about 2 thirds of it is associated with server. We just had a very strong quarter in terms of server and our server mix is starting to look Better starting to improve some. So that's about 2 thirds of it. In terms of the impact on Q1, it's not jumping out on the margin recon.
So you should take from that that we're expecting Pretty benign ASP environment as we go into the year and it also doesn't pop out on the year recon. So it's Not a big driver of gross margin next year based on what we can see today.
Got it. And for my follow-up, I want to ask maybe a more general Question on 14 versus 22. So for 14 nanometers, you've shown a lot of charts showing normalized cost For transistor dropping below trend, obviously wafer cost is going up quite a bit, but your density seems to be increasing even faster and that's going down, but that's a normalized basis. At the same time, we've had yields that obviously have taken a bit longer to get into place. We have factory ramps that seem to be hitting More than normal in the first half of the year, would you say that the all in cost of the lifetime of 14 nanometers actually is going to turn out to be lower than the all in cost of 22?
Hey, Stacy. I would take you back to the graph I showed at the Investor Meeting because I actually a non normalized cost that showed Broadwell Relative to other products at the same stage of manufacturing. And so what that chart shows is Sure enough. In the first half of this year, so the early stage of the Broadwell ramp because of some of the yield issues that we've talked about, It is higher. It's on a non normalized basis, it's a higher cost.
But by the time we get into the back half of the year on a non normalized basis, Broadwell actually is less expensive than those other products at the same stage of their life.
So you think if I integrate that curve over the lifetime, The integration will be lower?
Hey Stacy, we'll go ahead
and answer that question. But I just want to remind you we're trying to take 2 questions per person please.
Sure. Thank you.
So honestly, I haven't done a volume weighted ramping or a volume weighted Cost comparison, I've just looked at it in the curves that I showed you. So I guess a lot of it depends on how much volume happens after we get to that Point of parity and improvement. But I think that the cost per transistor and the fact that we are investing that in lower die sizes and more features, We think we're getting super high performance and very cost effective product on 14 nanometer.
Got it. Thank you, guys.
Thanks, Stacy.
The next question comes from Reuben Roy from Piper Jaffray.
Thank you. First question for Brian just around Sofia and some of the commentary that you had on expectations for a solid ramp in Just qualified internally, I believe, is the chip qualified on network? And can you talk about design win traction at this point?
Sure. So we have let me start. There's a series of Sofia products. There's the Sofia the first of the products is the Sofia 3 gs, Basically, it has a 3 gs modem. The second product will be a Sofia LTE modem.
What we said was a 3 gs modem version, the Sofia 3 gs Has finished its internal qualification, which means that we've gone through and made sure that the apps processor is fully functional, the modem is working, All of that work is done. It's electrically and logically functional. We are in the process now of what we and we've got Several design wins and I'm just never able to go and tell you, but it's with all of our major OEMs And partners plus some. We are in the process now of going out to The carriers and getting the carrier certifications. And that's why we said it actually that's the difference, the time difference between Ramping a product or qualifying the product in Q4 internally and before our customers can ramp in the first half is A lot of that qualification and getting it out there into the rest of the world.
Same thing will happen. We said we would qualify internally In the first half the LTE with a ramp of the second half is that same process that's going to occur.
Thank you
for that, Brian. Just a quick follow-up for Stacy on the data center side, solid year for ASP growth. And I think over the last A few years you've been averaging kind of mid to high single digit ASP growth. Can you talk a little bit about the drivers behind that If you think that's sustainable over the next couple of years. Thanks.
Yes. So I think I've said in the past, I view ASP growth in the data center product line As being much more akin to capacity additions. So as the performance of the machines go up as people move up in terms of One way servers to 2 way to 4 way servers. We see that as an increase in ASP. But it really is from the standpoint of a CIO an increase in capacity that they go and buy.
How sustainable it will be? I don't know. But it is a segment of the market where as we bring technology in and that technology brings benefit to the customers and increases their capacity and decreases their operating costs. We get paid for advancing technology faster than others can do it. I don't know, Brian, if you want to add anything to that.
I think you covered it well.
Great. Thanks, guys.
Thanks, Ruben.
The next question comes from John Pitzer from Credit Suisse.
Yes. Good afternoon, guys. Brian, Stacy, nice job on the quarter. My first question, Stacy, is a follow-up on gross margins. You've given us Q1 and you've told us that second half is going to be above that kind of full year guide at 62%.
I'm kind of curious relative to how you see the first half playing out, is Q1 Going to be the trough? Or do you have more sort of non operational things like startup costs in the June quarter that could actually have gross margins go down again
Backed Q1 to be the trough for the
year. That's helpful. And then for my follow-up, Brian, one of the things that happened when PC penetration slowed Was that mix actually got better than I think a lot of us from the outside looking in thought. Do you think that now that tablet Penetration growth seems to be slowing that we could see some stabilization of mix or even some mix up or how do you view the tablet market As unit growth begins to slow relative to mix.
That's an interesting question, John. I think that Almost like the PC. If you really look back at the PC, the PC began to kind of bifurcate. You did see systems coming in at lower and lower price Right. And you saw kind of the bottom of the PC market go from the $500 range to as we said now you can go out there and get a good system $249,000,000 all the way down to $199,000,000 with Chrome.
I think and then you saw but at the same time, as you said, we saw record core i7 and the gaming PCs are hitting record levels and so the high end kind of did very well as well and we've been working on filling in that middle. I think the same thing is going to happen on tablets. You are going to see a robust low end of the I go to Shenzhen. I see what's coming out of China right now. And there are some good low cost tablets that are going to come out and continue to drive probably that Average ASP system down into the $700 range.
At the same time, I think you see systems We've got them coming with all of our major OEMs, Lenovo, Dell, HP, systems with real innovation, things like the RealSense Snapshot, thinner and lighter, longer battery lives, better screens, edge to edge screens. People are willing, if you bring the innovation, a $3.99 tablet, maybe $2.99 to $3.99 tablet is not an unreasonable price if you bring a Performance or capability that's new and innovative. So I think we'll get that same kind of effect, yes, In the tablet space that we saw in the PC space as well.
Perfect. Thanks guys. Appreciate it.
Thanks John.
The next question comes from Ross Seymore from Deutsche Bank.
Hi, guys. Thanks for letting me ask Stacy, a couple for you actually. The first one is on full year R and D spend. It looks like you're growing that in line to Slightly even faster than the midpoint of the revenue side of things. Can you just give us a little bit of detail why the R and D is going to be up about 6% year over year, especially given it's Either the tick or the tack year where some of the expense goes up into COGS?
Yes. There's It's 2 things to point to. So first of all, we are making increases in R and D investment in areas Brian and I have looked and believe we're going to get a significant payoff on those investments. So specifically, data center group, The Internet of Things Group added a bit more towards process technology. And then we're offsetting some of that with decreases in investment in other areas I think you've seen the MCG segment being top of that list and some efficiencies across our product engineering group.
I'd also point to the second phenomenon, which is The acquisition of Axia, which is going into the data center group and increases our product or improves our product portfolio there in the networking space Is bringing along some R and D costs associated with that. And so that's part of what is adding to the R and D spending next year.
And I guess as my follow on and somewhat similar, we talked a little bit about this at CES, but Stacy, I wanted to get your view. Broadwell is launching in the 4th quarter and then Skylake, it sounds like you want to continue to have that be on time in the I guess the early part of the second half of this year. To the extent that the Broadwell Duration is shorter than normal. What sort of business implications, whether it be on the revenue, the COGS, etcetera line should we think of to hit the financials throughout the year.
Well, this is Brian. Let me first kind of So how we're looking at this? I mean, we're not going to slow Skylake down. We said it will be the second This year, I don't want to slow it down because it brings a lot of innovation, a lot of new capability to this market. We think we've managed between the SKUs of what SKUs we're bringing out on Broadwell to really refresh the 2 in-one devices, the Chromebooks.
We wanted to bring Core M out, which I think in the 1st part of this year with the Chinese New Year, the back to school season, having these super thin and light devices is going to be clinical. So missing that By doing something else with Broadwell would have been a mistake. And I think getting that volume is a good thing. We think we've managed the transition on the number of SKUs of Broadwell will have and how we'll transition the market to Skylake now moving forward From a margin or COGS standpoint, but remember they're on the same technology, it's the same piece of silicon, it's the same factory.
All we do is change the piece of glass in the scanner to get a different product. So there's not Change or revamp of our factories that needs to occur for this. Yes, that last point is important. They're both 14 nanometer products for us. So it doesn't change our factory And just generally, the faster we bring out new features and cool stuff to the market, the better off we are.
The next question comes from C. J. Muse from Evercore ISI.
J. Muse:] Yes, good afternoon. Thank you for taking my question. I guess First question, Brian, I wanted to, I guess, clarify a comment you made earlier. I think you said that you were driving $800,000,000 out of the business in mobility in 2015, Including reorg to drive efficiencies.
And I guess my question here is does that include also the benefit of lower contra revenues?
Yes. That's an all in number.
Yes. That's so it's the efficiencies we'll gain from the organizational structure. We're doing continued just, I'll call it, fundamental cost reduction, getting the right PMICs in there, reducing the board count, board layers, that kind of, I'll call Basic engineering and the introduction increased percentage of Baytrail cost reduction at the beginning And then introduction of Sofia in the second half, which has no contra revenue. So you put all of those together No add up to that $800,000,000
And the ramp of LTE. That's the 13. And the
ramp of LTE.
Yes.
Great. And then I guess as my follow-up, can Can you provide, I guess, some additional color on the Rockchip and Spreadtrum side? Would love to hear what milestones perhaps we should be watching for?
I think let's start with Rockchip. On Rockchip, we've actually been working with them on their first It's an enhancement to the 3 gs. So it's a Sofia 3 gs R, you'll see it. It's got some enhancements to the graphics and some other functionality. I think you'll see that in 2015, they've already got their first silicate out.
You'll have to go talk to them. Again, part of it is they have a certain level of independence. They're going to ramp and launch that product when they feel ready. But It's the first silicon is out and going out there validation and certification. So We're right on schedule.
I'd say actually we're slightly ahead of schedule with Rockchip. And we'll continue to bring designs and next We'll move to LTE just like ours and then keep moving on just right in line with ours just a little bit maybe a quarter or 2 after our temporary product as well. From a Spentrum, we've that deal closed more in the second half of the year. We've started to work with them with the product definitions done. We're on exactly what their Sofia will look like and we'll progress through that through this year.
But the relationship and Kind of the model of having them produce Sofia derivatives with additional Features or additional capabilities targeted towards their specific market and channels is exactly the same Methodology that we'll take.
Very helpful. Thank you. Thanks, C. J. And operator, we're going to go ahead and take 2 more questions, please.
The next question comes from Matt Ramsay from Canaccord Genuity.
Thank you very much for taking my question. Brian, I wanted To ask on DCG, obviously a really big quarter in December, up about $1,000,000,000 from the March quarter. It's currently lumpy. You guys talked a bit about it being lumpy with the cloud customers. Maybe you can talk about what part of that big Jump in revenue from September to December was from first time purchases of Grant Lee.
And I guess the longer term question I'm asking is the health of the enterprise server market To some weaker trends we saw earlier in the year and a recovery in the back half of twenty fourteen? Thanks.
Yes. This is Stacy. We're not I'm going to get that granular, I don't think Matt in terms of the breakout of the DCG revenue. I would say what we saw in Q4 was We saw strength in enterprise and then we continue to see those robust growth rates
And Brian, as a follow-up in the mobile group, obviously great work in hitting the target on the tablet units. Maybe you could talk a About the market reception and the health of the channel for those products, particularly since a lot of those are Chinese OEMs, with sort of the set
Sure. I'd let's see. I'd tell you that market reception in the channel so far for the Intel tablets has been very strong. There is a strong brand value just in the Intel tied to a tablet, no matter who is the manufacturer. The tablets we've made with Lenovo and Dell and many of the, I'll call it, major OEMs have been selling very well.
And you saw the great reception in the Dell Venue 8, for example, 7000 got at CES. I'll call it the more Broad products that are coming out of China, more of the Shenzhen marketplace, So far, they've been selling quite well. And the number I'd say the number of OEMs that are working with us in that space And the amount of innovation and breadth that they're bringing to these products has surpassed even what our expectations were. As we show them things like RealSense and WideEye and WideGig, all these capabilities, Both in the tablet and the PC space, we're seeing a lot of innovation coming out of that Chinese market, Chinese manufacturer space.
Thank you very much.
Thanks, Matt. And operator, please go ahead and introduce our last questioner.
The final question comes from Vivek Arya from Bank of America Merrill Lynch.
Thank you for taking my question. As my first one, Brian, How important is the recovery in emerging markets to maintaining your expectations for a flattish PC growth? And how are you balancing the push there in terms of the low cost tablets versus PCs?
Sure. So if you remember Vivek, what we said for the year was we'd be roughly flat in units. We also forecasted A roughly similar worldwide economic or worldwide demand scenario is what we're seeing today. So we did not build in A big recovery or big resurgence of the emerging markets into our 2015 model. So we are not dependent on an emerging market recovery or return In order to make our numbers for 15.
The next question you asked is what about tablets and the low end tablet. And I'd really say it's the low end tablet and the emergence of the tablet in that space versus the PC. And we think that If I took a look at that, the tablet is probably taking a little bit more out of the tablet than the PC. I think people still Are going to use the PC for their high end usages when they have to have the keyboard, when they have to have the higher end compute. And for the low end kind of I want to look at the material, I want to watch a video, I want to scan my data.
It's the phablet and the tablet that are kind of battling it out for the user in that space, I'd say. And you see the So bottom line, we're not expecting an emerging market recovery. We're not building our forecast on that. And so That's why we were feeling comfortable with our current PC forecast.
Got it. And just as a quick follow-up, you mentioned the ramp in discrete LTE. I know you have done very well at Samsung. Any more progress there? And just the broadly customer diversification on your D chip for this year?
Thank you.
Yes. We continue to win other customers. We don't Talk about customers until the products are lost, but we're pretty comfortable with the design wins we're getting. You see it as you said, there's some in Samsung, there's some in Lenovo. You'll see them coming into Rockchip and Spreadtrum in the second half of the year with their parts, their Sofia parts And there are several others.
We just aren't going to talk about those until they're ready to announce the products.
Thank you.
Thanks, Vivek, and thank you all for joining us today. Jamie, please go ahead and wrap up the call.