Good day, ladies and gentlemen, and welcome to Intel Corporation Second Quarter 2014 Earnings As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Mark Henninger, Head of Intel Investor Relations. Sir, you may begin.
Thank you, Syed, and welcome, everyone, to Intel's Q2 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 Conference.
Before we begin, let me remind everyone that today's discussions contain forward looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the risk factors that could cause actual results to differ materially. Also, if during this call, we'll use any non GAAP financial measures or references, we'll post the appropriate GAAP financial reconciliation to our investor website intc.com.
So with that, let
me hand it over to Brian.
Thanks, Mark. The Q2 exceeded our expectations. The improving economic environment, PC refresh, form factor innovation and the end of life of Windows XP combined to drive better than expected demand. Conference. In fact, microprocessor volume in the 2nd quarter was an all time record.
From the most powerful supercomputers to the smallest energy efficient embedded machines, The breadth and strength of our results suggest that our reach is extending. The PC Client Group's results reflect the 3rd consecutive quarter of year over year unit growth. In Q2, both the desktop platform revenue and the notebook platform revenue grew year over year. The installed base of PCs that are at least 4 years old is now roughly 600,000,000 units And we are seeing clear signs of a refresh in the enterprise and small and medium businesses. While there are some signs of renewed consumer interest and activity.
The consumer segment remains challenging, primarily in the emerging markets. The Baytrail family of SoCs has been a standout that has helped us expand into new segments. Baytrail's performance allows us to deliver a much smaller and lower cost atom based core in our Pentium and Celeron brands for the first time. Our Baytrail SoC volume in desktops and clamshells more than doubled over the last quarter and now represents more than 60% of our Pentium and Celeron mix conference call. This is enabling our growth at lower price points and in new segments like Chrome based systems without sacrificing margin.
The data center business had a strong quarter with 19% growth year over year, leading to all time record revenue of $3,500,000,000 Following last quarter's launch of the Ivy Bridge based Xeon E7 Processor family, We saw strong NP volume and a richer product mix and ASP mix. Cloud, Demand and revenue growth in several segments demonstrated the growing reach of Intel technology beyond CPUs for PCs and servers. Our Internet of Things Group grew 24% year over year and set a revenue record as the retail and manufacturing conference. NAND revenue grew 20% and McAfee revenue grew 5%. Finally, we are squarely on track to our 40,000,000 unit tablet goal, shipping 10,000,000 units in the 2nd quarter.
We also achieved some important milestones during the quarter. We qualified the 1st Broadwell based Core M processors. And at Computex, we highlight the form factor innovation that 14 nanometer Core M product family will enable. Systems like our Mama Mountain reference design, a fanless detachable 2 in-one that is razor thin at 7.2 millimeters and weighs just 24 ounces. We also announced a landmark strategic relationship with to accelerate and expand our SoC roadmap for the value and entry tablet market segment.
In our foundry business, announced that Panasonic Join the growing list of companies that will use our leading edge 14 nanometer process technology. While I'm pleased With the 2nd quarter results and the strength in the enterprise and small and medium businesses, we're watching for signs of software in consumer PCs in the second half of this year. Additionally, we have important work to do in the months ahead. We are working towards qualification of our 7,260, of Category 6 LTE product with carrier aggregation early this quarter. And later this quarter, we'll launch our next generation Haswell based conference call.
We also expect the first 14 nanometer Broadwell core M processor based systems including Famas 2 in-1s will be on shelves for the holiday selling season followed by broader OEM availability in the first half of twenty fifteen. And Sofia, Our integrated baseband and apps processor for smartphones and tablets remains on track for Q4 of this year. All of this work is critical to growing the business. Along with our earning results, we announced a $20,000,000,000 increase to our buyback authorization and intend to pursue a sizable repurchase of stock over the second half of the year. Stacy will talk more specifically about our plans, but this change to our capital structure and allocation is a direct result of our ongoing commitment to delivering shareholder value and the thoughtful stewardship of our owners' capital.
With that, let me turn the call over to Stacy.
Thanks, Brian. The 2nd quarter came in above the expectations we provided in the April earnings call and consistent with the revised outlook we released on June 12. It was a good quarter representing financial growth and solid momentum as we enter the second half of the year. Focusing on our second quarter results, Revenue came in at $13,800,000,000 up 8% from a year ago. Both the PC client group and the Data Center Group achieved better growth than we expected at the beginning of the quarter.
PC Client Group revenue was up 6% from a year ago. We saw PC Client Group platform unit volumes grow 9% year over year and inclusive of tablets, We saw almost 20% unit growth. PC platform average selling prices declined 4% on a year on year basis. Our data center group revenue grew 19% from a year ago with platform volumes up 9% and platform average selling prices up 11% over the same period. Looking beyond the PC and Data Center businesses, the Mobile and Communications Group is down 83% from a year The underlying dynamics are consistent with what we shared at the Investor Meeting last November.
We are ahead of our expectations in tablet volume conference. The Internet of Things Group is up 24% year on year. We continue to see robust growth across segments with particular strength in the retail and manufacturing segments. Gross margin of 64.5 percent was up almost 5 points from the Q1 and 1.5 points above our original Q2 guidance. The 5 point increase relative to the Q1 is due to lower 14 nanometer startup costs, higher platform volumes and lower platform unit costs.
Spending came in at $4,900,000,000 in line with our revised outlook provided on June 12. Net income for the Q2 was $2,800,000,000 up 40% from a year ago and earnings per share was $0.55 up 41% from a year ago. The business continued to generate significant cash with over $5,000,000,000 of cash from operations in Q2. We purchased $2,800,000,000 in capital assets, paid $1,100,000,000 in dividends and repurchased over $2,000,000,000 of stock. Total cash balance at the end of the quarter was roughly $17,000,000,000 down approximately $1,700,000,000 from the prior quarter.
Our net cash balance, total cash less debt is approximately $4,000,000,000 and inclusive of our other longer term investments Our capital allocation philosophy is to first invest in our business, Our business generates healthy free cash flow through economic cycles. But as a result of this capital allocation philosophy, We have brought down our net cash balances, plus longer term investments from over $23,000,000,000 in 2010 to around $7,500,000,000 today. We plan to continue our journey of returning cash to our shareholders By adjusting our capital structure to further bring down our net cash balances. The intention is to repurchase $4,000,000,000 of stock in the 3rd quarter with additional buybacks in Q4. This strategy Enables the sufficient liquidity for our operations and provides strategic flexibility to invest in our business, while continuing to return cash to our shareholders.
As we look forward to the Q3 of 2014, we are forecasting the midpoint of the revenue range at $14,400,000,000 up 4% from the 2nd quarter. This forecast is in line with the average seasonal increase for the 3rd quarter that we have seen over the last several years. We are forecasting the midpoint of the gross margin range for the 3rd quarter to be 66%. The 1.5 point increase from the 2nd quarter is primarily driven by lower platform unit costs and higher platform volumes. This is partially offset by lower Conference.
Turning to full year 2014, we are planning for revenue growth relative to last year that is approximately 5%. We are forecasting the midpoint of our gross margin range at 63%, up 2 points from the midpoint of the outlets provided on April 15. This increase is primarily driven by lower platform unit costs, higher platform volumes, partially offset by lower platform average selling prices. As I reflect on the first half of twenty fourteen, I believe the strategies that we put in place for this year are playing out nicely to extend the reach of Intel Technologies across the spectrum of the smallest embedded devices to the most powerful supercomputers. We have seen better than expected trends in the overall PC market with strength in both non consumer and desktop segments.
We are enabling innovative 2 in-one devices and lower price points and we are growing our market segment share. We have brought new products into the data center, which drive a strong return on investment for our customers to upgrade their infrastructure and we are benefiting from both our product lineup and the build out of the cloud. The Internet of Things business is growing fast as we bring intelligence to more and more devices. And we are making investments in communications and tablets that benefit the breadth of our businesses and set us up for improving financial results going forward. As a result of these trends And our execution, our financial results are improving.
We are generating free cash flow and we are returning more of that cash to our shareholders. With that, let me turn it back over to Mark.
Okay. Thank you, Brian and Stacy. Moving on to the Q and A, as is our normal practice, We would ask each participant to ask one question and just one follow-up if you have one. Syed, please go ahead and introduce our first questioner.
Thank you. Conference. Our first question comes from Vivek Arya from Bank of America. Your line is open. Please go ahead.
Thank you for taking my question. I have the first question on the PC side and the second one on smartphones. So Brian on the PC side, obviously good growth in enterprise. And the obvious question is how long does that last? And then I think you had mentioned in your comments that the consumer has not yet recovered.
And the industry has That's right. Lots of things, different form factors, price points, etcetera. But it has not seemed to revive the consumer. So what will it take to revive the consumer Because that will be an important factor for next year on the PC market.
Sure. So Let me try and answer your questions. The first one was good growth on the enterprise side, small and medium business, how long will it last? We think it's driven by multi factors. It's driven by the good form factors, the 400,000,000 or the 600,000,000 systems 4 years or older, New price points and Windows XP end of life.
So all of those things are coming together to drive this. We see it at least lasting through this year we believe and that's built into our forecast. So that's conference. As far as we're looking out today, the second part of your question was what does it take to reinvigorate We've got a lot of things lined up for the second half of this year to work on that. Everything from marketing To really we talked about in the call the core M Broadwells.
Those are going to allow really a whole new class of system as we go out through the holidays and into next year where they're 2 in one devices, but they now become fanless, ultra thin, very portable, long battery conference. We believe that will bring another class of system into the market as well, Along with just an overall general refresh of many, many of the form factors, we think that all of those things We'll start to move it, but that is part of why we've put this caution on we're still going to watch as The consumer trend goes through the second half of this year.
Understand. And as my follow-up, you have said previously that you plan to bring a baseband production in house right at TSMC today. But I think you've said in the past that you plan to bring it in house sometime late next year 2016. Is that still an important milestone? Are you on track to do that?
And importantly, will it require any incremental CapEx or OpEx? Thank you.
So yes, we're still it is still important to bring the baseband And it's always important, one of the real advantages of Intel is an integrated device manufacturer, an IDM. And we believe that the integration of the process Technology and the design and our leadership in Moore's Law just gives us a real advantage when you look at that whole ecosystem. So it's always critical for all of our products to move them inside as fast as we can. And yes, we're still targeting towards The end of 2015 or beginning of 2016 to move those products inside.
And I'd just say to the last part of your second question, From an OpEx standpoint, it's in our run rate. We're investing in the modem technology today. And from a CapEx standpoint, conference. It won't meaningfully move the needle in terms of CapEx.
Okay. Thank you.
Thank you. Our next question comes from Joe Moore from Morgan Stanley. Your line is open. Please go ahead.
Great. Thank you. It was really nice gross margin guidance. And if I look back Historically, a couple of years ago and I think 4 years ago, you had some gross margin headwinds in mid year when you ramped all of the fabs on the new process at once. And Obviously, you don't seem to be seeing those headwinds in Q3.
Is that am I thinking about that the right way? And is there still some cost of ramping 14 nanometer that's still ahead of us?
Yes. So yes, you're thinking about that the right way. And I think if you do the algebra and you look at our Actual gross margin in Q1 and Q2 and the projection for Q3, you're going to come up with a number in Q4 that comes down a Few points from what we're forecasting for Q3. We haven't locked in on the forecast yet, but it's down a bit. And that is exactly the phenomenon of what you said.
When we get to Q4, We're ramping multiple 14 nanometer factories simultaneously. We think we'll see a little bit of an increase in cost in Q4. And in addition in the 4th quarter Because our 14 nanometer product, Broadwell is a family of products, we'll still see some pre PRQ that will cause reserves to go up a little bit in Q4 is our best prediction at this time.
Okay. Great. Thank you. And then separately looking at the Hi, back. What's the time frame of the $20,000,000,000 repurchase?
And can you talk about what's kind of the optimal net cash level that you'd like to maintain on the balance sheet?
Yes. Great question. Let me answer the second one first, because I'm not actually giving you a ton of clarity on the time line to the $20,000,000,000 But the Conference. If you think about this as a multiyear focus that we've had, I think you can see this playing out. And if you go back to 2010, as I said in my prepared remarks.
And you look at net cash plus some of the other investments that the Treasury Group makes, yes, we had a net cash balance that was running in the mid to high 20s back then. We brought it down to sub-ten as of Q2. I think it's really a And along the way, we've stress tested our business in terms of cash generation through things like the economic downturn and it's increased our confidence that We generate free cash flow even in kind of macroeconomic situations that are less favorable. So we're taking the next step there Cash balances down further. From my perspective as CFO, if we're targeting kind of with the definition of cash I just gave, conference.
Something around 0 net cash, it still gives us a positive gross cash balance. We have plenty of cash for Strategic reasons and operational reasons, that feels like a pretty comfortable number. And then to do that, we'll $4,000,000,000 of buyback in Q3 on top of the $2,000,000,000 that we executed to in Q2. We'll do another Sizeable buyback in Q4, TBD exactly the size of that. That will get us pretty close And then you can do the math of cash generation next year and kind of figure out how in your model We'll go through the $20,000,000,000 but I think we'll go through a chunk of it just over the next 6 months.
Great. Thank you very much.
You're welcome.
Thank you. And our next question comes from John Pitzer from Credit Suisse. Your line is open. Please go ahead.
Hi, Brian Stacy. Congratulations on Strong results. Brian, I guess my first question is just whether or not you can go into a little bit more detail into DCG and with ASPs being up 11%. I know you gave Some color in your commentary, but I'm kind of curious to what extent was that a better mix of enterprise? Was it hyperscale mixing up even more than they did in in the calendar Q1.
And to the extent that you said that Grantly doesn't come until this calendar quarter, I'm kind of curious as to how you see that ramp playing out and how accretive that might be to the data center business.
Sure. I'll start and then Stacy can add in since you've got a mix of The product and then how the financials roll into that as well. I think if you just take a look, what we said, if you look back at the remarks, We said almost all of the segments of the enterprise were up 15%. That was a mix of Volume in ASPs across the board there. We're correct that Grantley doesn't go until this quarter, but we did continue to launch the E7 during this quarter If you just take a look at the data center volume in general, it tends to be a bit lumpy.
There are big orders as people fill out their data centers, Whether it's an HPC order or a cloud order or an enterprise order, they tend to come in big pieces. And so as we move into the Grantly launch, we'll have to see how the customers make place their orders And what the volume is. So we don't look at it as on a quarterly basis when we look at something like a Grantley launch. We really look at it over a longer period of time. We don't try and look at it that closely on a quarterly basis.
Brian? If I may just add a couple of things, John. So in In terms of the Q2 ASP uplift, as Brian said, it's a combination of things. But one thing you need to keep in mind, we are shipping and selling Grantly day into cloud and HPC customers and we saw the E7 moving into production. So you had a combination of things in the second quarter.
And I think where Where Brian was taking is we're really happy with that 19% growth rate in the 2nd quarter, but we're not we're expecting a nice robust growth rate when we move into the But not 19%. We think there was some specific purchasing going on with some of the large cloud providers that Probably don't repeat exactly as we get into the back half.
That's helpful, Stacy. And then, Stacy, going to the Solving the algebraic equation for Q4 gross margins, it kind of implies gross margins could be down as much as 400 basis points sequentially if I'm doing the math right. And And that would be about 2x kind of the hit you saw as you were ramping the 22 nanometer node about a year ago. And I'm just kind of curious, Is that because you're ramping more volume? And there's clearly been a lot of speculation about how 'fourteen is going and how Broadwell is going in the popular press.
So I'm wondering If you can comment whether or not the margin trends you're seeing in the calendar Q4 are kind of as expected and generally just kind of characterize How that 14 nanometer broadwell ramp is going from your perspective?
Sure. And I'll let Brian come in on the So first, I think we have to be careful not to get trapped in the rounding here because if you're at 0.2 on gross margin, you get to a different answer for the Q4 number. I'd expect it to be down a bit, but there's nothing conference. Untoward there other than the fact that we're ramping multiple factories at once and that we'll still have some the way Broadwell is rolling out as a family of products. We'll have some preproduction bills that will cause reserves to go up.
So I guess I'd be cautious It will be down some, but I wouldn't hit any alarm bells. There's nothing beyond that that's happening in the Q4. In terms of 14 I'll let Brian take that more from the operational standpoint.
Yes. 14 nanometer, it's going along exactly As we said in April, we said we would during this quarter qualify and we did qualify our 14 nanometer product and we actually are shipping product today to our customers and partners. We said we would have products on shelves for the holiday season and we continue to work with our partners and we're on schedule to have product on shelves in the holiday. We talked to you about this. We focused on Core M, which is the Broadwell part that we think really highlights The power of 14 nanometers and the Broadwell architecture.
As I said, it will be the 1st class of PC The core level PC products that are fanless, we talked to you about the Mama Mountain product 7.2 millimeters thick, 24 ounces in weight, fanless, those are going to be devices that we think will start to transform how people think about A 2 in one device and the PC versus the tablet. That's what we focused on. The rest of the products as we said, we'll launch and ramp as we go To 2015.
Great. Thanks guys and congratulations again. Thank
you. Our next question comes from Jim Covello from Goldman Sachs. Your line is open. Please go ahead.
Hey, guys. Congratulations. Thanks for letting me ask a question. We've you guys, Stacy, have been Real helpful in giving us some idea on the algebra for the gross margins in the Q4. If I do the same on the revenues, it looks Like kind of flattish revenues, which would be a little bit below seasonal.
You guys have done a great job executing versus your plan in the last couple of quarters. You leaving Some room for conservatism in there? Or is that more of a function of kind of the XP end of life, Which Brian referred to sort of playing itself out. Thank you.
Sure. I wouldn't say conservatism. It's exactly what Brian said, which is we've seen some nice indications of strength in enterprise and mature. And we can see those selling through. What we're seeing from our customers is more optimism on the back half than we've seen in the last couple of years for the consumer segment, but we won't quarter.
And I think if you look at the last few years, you'd see a flattish Q4 is also being roughly seasonal. So I think nothing unusual there. And we're really watching carefully what happens in the consumer segment. We've got some great devices coming to the market. And to add on Brian's answer earlier, one of the things that's really exciting is the price points that we're enabling with Bay Trail in terms of touch enabled clamshells.
We think that those will We should share and drive excitement in the market, but we just have to watch
it. And Jim, the only thing I would add is what I said was We believe the XP end of life kind of replacement will at least play through the end of the year. That's As far as we've looked at it, it could go beyond that. It could have I'm not what I'm not doing is predicting on 15 yet. And that was really I want you to walk away with I think that's the end of it versus we just haven't really started to put our predictions and our estimates for 15 together yet.
That's Very, very helpful and I'll leave it there on the questions. That's great. Thank you.
Thanks, Jim.
Thank you. Our next question comes from Ross from Deutsche Bank. Your line is open. Please go ahead.
Hi, guys. One clarification I think might be helpful to people. Can you just give us a rough idea in your PC client group? How much of that is The commercial side and how much is consumer?
Of the overall you're saying how much is of the business?
In terms of the So I'll give you some high level numbers. I actually haven't looked at it this way in a while, Russ. So I'll put an asterisk It was kind of 60% plus business and 40% consumer. And those numbers have shifted. It's 60% plus Consumer now and 40% business.
Just in rough numbers, I think that's true for the market.
And that is our estimate. I mean, it's Very difficult to track this down to the percentage because you especially small medium business, they go into the same place consumers do a lot to buy a system. So tracking where did that system go and end up is a bit difficult, but sixty-forty is probably not
I realize you have the dominant market share, but it's within good enough for government's work to have that sort of approximation?
Yes, that would be indicative of our mix. I mean, our mix is going to look like the market's mix for the most part.
Got you. And then getting off that topic to one that's a little more specific to you guys. Stacy, you talked in an earlier question, I think John asked about the gross margin in the 4th quarter and how much it was implied being down. When you have those multiple fabs ramping at 14 nanometer, can you walk us through what duration is of that higher cost inventory working its way through before the lower cost benefits actually start to kick in?
It's probably a couple of quarters just is the way to think about it. The first wafers that from qualification for sale, you have the phenomenon of a big factory that's fully equipped with pretty small amounts of volume going through it. But we ramped the factories pretty fast. So within a couple of quarters, we're getting to the point that the factories are And then the cost would continue to come down for another 12 months or so after that.
Great. Thank
you. Thank you. And our next question comes from for David Wong from Wells Fargo. Your line is open. Please go ahead.
Thanks very much. With the current schedule for the Broadwell ramp on 14 nanometers, what Your expectations for 10 nanometer timing and will there be a follow on 14 nanometer family after Broadwell or you go straight to 10 nanometers?
So let me try and answer your question. There's a series of products that are on 14 nanometers. We always remember to do a TikTok kind of products plus we do a refresh of the Atom line typically. So we have Cherry Trail Coming in at the end of this year and ramping in the first half, we have Broxton, which is the follow on Adam product as well. And then the talk or the real architectural shift on 14 nanometers is Skylake, which is also scheduled for 15.
We've done no changes or shifts to our 10 nanometer schedule, but we won't really talk about 10 nanometer schedules Until next year.
Okay, great. And could you give us any numbers on your 4 gs baseband unit shipments or revenue for June and the growth momentum Going into September for 4 gs basebands?
Yes, low. LTE and This is pretty consistent with what we showed at the investor meeting. We're just moving into qualification of LTE, as Brian said in his remarks, it's a little bit later than we thought. So we kind of thought it was going to be the end of Q2. It's now going to be early part of Q3.
And then we'll see a ramp that is offset. It's going to be more towards the end of this year, early next year. And in the meantime, the market is transitioning hard away from the 2 gs, 3 gs platform to LTE. So that part of the curve is consistent with what we saw and you can see it in our overall revenue results in the Q2 for the segment.
Great. Thanks.
Thanks, David.
Thank you. Our next question comes from Michael McConnell from at Express Securities. Your line is open. Please go ahead.
Thanks guys. Looking at just the traditional enterprise segment of DCG is encouraging to see that recovery here in Q2. Regarding sustainability with Grant Lee kind of coming out this fall and And then Microsoft planning to end of life Windows Server 2,003 in July. Can you comment on kind of the Sustainability within that bucket within DCG, are you getting more confident that we could see multiple quarters of recovery there please?
Sure. I'll start and Stacy can jump in. When you take a look at the data center in general and this gets back to that comment that we made earlier about just the lumpiness of each one of these segments. We said that we believe we can continue to grow the data center in the low double digits Out into time. Of which the enterprise is a portion of that.
As we said, this quarter was extremely strong in the Enterprise and we don't necessarily there was a lumpiness or kind of a pattern to the orders where customers have came in and made some purchases. What we've built into that low Double digits for the whole data center is a enterprise that's in the mid ish Single digits growth over time. So that's more what we've projected. We do believe Grantly will be a good product. The enterprise though we think is still going to grow at about that mid range.
Okay. And then just for my follow-up, I wanted to ask about market share in Q2. If I look at PCG, Volumes were up about 4% year over year. IDC just reported about a 2% decline in overall PC sales and you You had some pretty optimistic commentary on volumes for Baytrail on the desktop and the notebook side. So that growth relative to the market that outsized growth, was that mostly market share gain?
Or is it something else to do with maybe inventory build, etcetera?
We are gaining some share and it's not just from the traditional competitors. I think we're seeing at these price points some shift back of tablet where we're shipping a really nice 2 in 1 type clamshell, touch enabled clamshell into these price points. So that's a piece of it. And then I think the other piece is if you're as you look at this in terms of year on year comparisons, if you recall Last year, what we saw is our customers were managing inventories very, very lean. I think they had very little confidence in a back half Seasonal selling season.
And so part of it is just the year on year comparison. What they're doing now is putting in more of a Normal build for a more seasonal back half and last year that was not the case. So it's a combination of those 2 things. Thank you.
Thank you. Our next question comes from Stacy Rasgon from Sanford Bernstein. Your line is open. Please go ahead.
Guys, thanks for taking my questions. I had a first question on the tablets and the Contour revenue. Presumably, you've got tablets ramping Into Q3 and into the back half, but you're not calling out contra revenues as a contra revenues as a margin driver for Q3. Is this a function of the tablet volume or is this a function of contra revenues rolling off? I think they were supposed to start to decline as we go through the year.
Any color you could give us on that would be helpful.
Comments on the contra versus margin discussion. We are on schedule For our $40,000,000 we did $10,000,000 in Q2. So we did roughly $5,000,000 in the first Quarter 10 in the second quarter, so you can kind of break out how the rest of the $40,000,000 come in Q3 and Q4, Clearly Q4 being probably the bigger of the 2 quarters remaining. We did say that we would continue to drive down on our costs and hence the contra revenue and we're continuing to do that. Baytrail adds to that capability.
As we exit this year, We said that we're on schedule with Sofia. Sofia is a fully integrated part really designed for this segment. That allows us to move into 15 with a much, much better cost structure and really drive down the contra revenue to near 0 on those I'll let Stacy comment on how contra is reported versus the margin.
Yes. So the You're getting into a little bit of a, I think a math issue here Stacy. Let me walk you through it. First, we saw more or less a full point Margin in Q2 associated with that ramp of tablets. If you think about the volume curve that Brian just laid out, Let's take a precise number of $40,000,000 just to anchor.
Yes, we did $15,000,000 in the first half that says we did $10,000,000 in Q2. That says you have $25,000,000 to do in Q3 and Q4. Let's say it's $12,500,000 per quarter. It's not really that linear, but just take that for the sake of argument. The Change isn't that great.
So you're really into a change in gross margin dollars. It doesn't add up to something that's significant or else it would have been on that gross margin
Got it. So you're close to the run rate anyways. I get it.
Yes, exactly. So you saw the big change in Q1 to Q2 where it was kind of a full point of gross
For my follow-up question, I wanted to dig into mobile a little bit. I don't want to take away from the results of the rest of the business, which arguably look quite strong. But at this point until it picks up there really isn't much of a mobile business to speak of anymore. I was wondering if you could give us more of a feeling for how mobile presence fits Into the long term goals, is this are you in this for the I guess the profit pool that's available? Or is this a strategic imperative for the rest of your businesses to succeed here.
I guess what milestones should we be looking for? And how do you see the loss rate in This business trending I guess into the second half and into 2015 as presumably some of the new products from 4 gs hopefully start to ramp.
Sure. So I'll start this and again Stacy can jump in kind of on the profit side. The answer to your question Stacy is a bit of yes to both. Clearly, we don't go into businesses to lose money and we believe that over time we can make this a profitable business. We have some ground to make up Some of the early products Clover Trail and Bay Trail that were really targeted towards clamshells and almost the netbook era down into the space to get there quickly.
And as we turn into Sofia next year and you'll see a family of products in Sofia Including some from Rockchip. You'll see us really targeting this space and that's how we become profitable But aside from that, this is we believe a strategic area for us. We are seeing we've To PCs, for example, especially 2 in one devices, it's going to probably start with Chromebooks. Chromebooks are best when they're connected. And so the always connected requirements going to drive modems into there for example.
But you can go from the PC Down through tablets, phones and into the Internet of Things in the industrial space where you're looking at a pump that's out in the middle of the desert someplace or wherever. It's going to want a 2 gs or 3 gs connection probably to get that data back into the system. So we believe modems and connectivity in this space is critical to almost every segment of our business. But we also believe that we can be in this mobile space and make money. We just got to get our products there and get the right price structures.
Well said. Let me I'll specifically answer the second part of your question too. So and just looking at it from the reciprocal from the If we don't have the ability to integrate in comps, I think 3, 4 years from now, we are locked out of large segments of the market. So it's a critical capability. That said, we acknowledge that's a big loss.
And And our goal and our plans would suggest that we'll have a significant improvement in this segment next year. It won't be profitable, but we should be able to improve it nicely next year and then stay on that trend. That's what we're driving the business to.
Got it. Thank you, guys.
Thanks, Stacy.
Thank you. Our next question comes from roman chah from Nomura Securities. Your line is open. Please go ahead.
Thank you. Great quarter. I was hoping for some more color on the PC client business here in Q3 specifically how you're projecting business versus consumer PC?
We don't break out that level of detail. Did you mean Q3 or did you mean Q2?
Q3.
Yes, we don't break out that level of detail. We don't even forecast it as segment level much less at a consumer versus enterprise inside the segment. I guess I'd say from a market trend standpoint, we would expect that the same market trends that we've seen, which is Conference. Relatively stronger enterprise, relatively stronger mature markets are kind of the more dominant factors in the quarter. None of that is new news.
That's just what we're seeing now and so we're continuing those trends.
Okay. Thanks. And my follow Conference. On the buyback and trying to figure out the pace of the $20,000,000,000 repurchase. Stacy, you shared with us that Roughly $6,000,000,000 is in U.
S. Cash, which is about a third of your total cash balance. If I just flow that through to Cash flow, it would imply roughly $2,000,000,000 a quarter in U. S. Cash flow before $1,000,000,000 in dividend and the CapEx commitments.
So I'm just I'm struggling to see how you can fund this $20,000,000,000 buyback without going into a net debt position. I appreciate your perspective on that.
Conference. I think it was a little hard to follow that math on the fly, so I apologize. But the way I would look at it is we'll do $4,000,000,000 in Q3 that, as you mentioned, comes out of U. S. Cash.
As we get into the back Half of the year, I expect that I'm generating cash and a reasonable amount of cash is available to me in the U. S. Just Simple math, net of any cash generation, I'll still have a couple of $1,000,000,000 in the U. S. I'll generate some cash that gives me a reasonable amount
Brian, just going back to the 14 nanometer Broadwell, the availability to OEMs in the first half of twenty fifteen seems to be about a year late. I understand you made comments about core M in April and that's on track. But what's driving the delay for the broader And the follow-up is what does that do if anything to the cadence of TikTok? Thanks.
Yes. I wouldn't have said we're a year late. I'd tell you we're 6 months. We targeted Broadwell M, The Core M, because we really feel like it's the product that highlights The real power of 14 nanometers and Broadwell, right? It's the one that's going to really target the It will be the technology that brought the fanless PC to your laptop.
Every one of these Process nodes that we do takes if you take a look at it as going all the way out through the mobile products, the desktop The server products, the Atom products, it's always a year and a half of product launch to be honest with you, every one of these. By the time you get to the E7 version, I mean, look, we're still launching the Haswell server products this quarter. And that's a technology that's more than 2 years old. So That part in the broader availability of more SKUs out into next year, 6 months, yes, It's not a year. And you'll see a series of products through next year.
Right now, we are So it's always a shift between our customers and OEM partners' availability and readiness to do a new Thank you and our readiness of the product. They'll move as we move through the year next year. I think what's key to me capability, right, to be able to launch, we have a set of criteria that we use on every technology. So to be shipping to customers, it's met That quality requirement, those yield requirements and that's we're shipping to customers today and you're going to have product on shelf.
Okay. And just as a follow-up, does that delay Skylark by 6 months?
Skylake? We're still looking at the actual launch date. It's we've said it's in 2015. So it's a pretty broad window there. We're trying to pin down and I think as we go through the second half of this year, we'll pin down exactly when Skylake conference.
Again, it's going to be a as we launch these other Broadwell products, when do the OEMs, the Consumers, everybody, when are they ready for Skylake? That will drive it as much as anything on the process readiness and the product readiness.
Conference. Thank you. Thanks Hans. And operator, we'll go ahead and take 2 more questions.
Our next question comes from Christopher Rolland from FBR Capital Markets. Your line is open. Please go
Hey, guys. Great quarter. Thanks for letting me ask a question. I missed a brief segment there, so forgive me if this was asked. But On PC guidance and operating profits for the PC segment, you guys previously said down.
I think it was mid single digits there And op profits were flat. And I guess given the strong results here and guidance, can you update us for the year?
Sure. Well, I would say that guidance is no longer valid based on what we saw in the first half. So Yes. On the PC market, when you if you go and look at some of the 3rd parties out there, you get a range of estimates. And actually, they're fairly divergent at this point.
But Yes. Some of the ones I was looking at earlier today kind of show a PC TAM that's flat maybe down a little bit once you adjust for things like Chromebooks and 2 in ones and and Detachables. I don't think we'd be far off of that from the standpoint of our view of the TAM. And then we'll see, We believe some unit growth based on the things we talked about earlier, more normal inventory levels and more importantly And that will equate to some revenue growth for us. We haven't gotten more granular than that and I probably won't get more granular than that at this point.
We'll just watch the results
Okay. Last time I looked, I think Gartner was down maybe 3%. So that discrepancy is growing pretty Dramatically there, I would say. Yes.
So just one caveat. And it has gotten really confusing because we see these form factors all coming together. And so you have to get really precise about what you call a PC client. In our PCCG results, we would include Chromebooks, We will include 2 in 1, things like the Microsoft Surface. We will include detachable.
So, the definitions become pretty important conference here in terms of what are they counting versus what shows up in PCCG.
Okay, great. And then on the 4% sequential growth for next quarter, Maybe you guys can give us a little color on to sort of force rank perhaps the segments where you see the most strength.
Hey, Chris. We'll go ahead and answer that one as a courtesy, but I just want to remind everyone we ask people to ask just one question and one follow-up. Thanks.
And I'm sorry, say the question again.
Yes. Just some color on the 4% sequential growth for next quarter, how that sort of shakes out between the segments?
Yes. Again, we're not going to provide that level of granularity. I would just step back and say it's roughly seasonal based on what we've seen in the last several years and
Operator, please go ahead and introduce our last question.
Thank you. And our next question comes from Ian Ng from MKM Partners. Your line is open. Please go ahead.
If you target the next node, it seems the window is closing here to go after some new 14 nanometer customers.
So, I mean, you saw we signed up Panasonic this quarter. There we're still in discussions with several other We have already started carrying the learning though we've had on 14 nanometers From all segments, both from our own efforts into the mobile space, our partnerships with our current Turning that off into the 10 nanometer space. And we already have people that are talking to us about 10 nanometer foundry. But I guess I wouldn't have said that the 14 nanometer window is closing. I mean, if you still take a look at the 14 nanometer technology relative to what Anything else is available out there.
We're still the only company on the planet who's shipping a FinFET transistor of any geometry. And we're clearly the only people out shipping 14 nanometer products. So I think our leadership is we've got some window where people could
Okay. Thanks, Brian. And then housekeeping for Stacy, domestic versus overseas cash, Is there a mix there? And should there be a repatriation holiday? Would that free up even more cash for buybacks and dividends?
Or are those already being invested overseas?
So there is a mix and we disclose it. If you look at domestic cash and this is not taking into account some of the longer term investments, it's on the order of 6,000,000,000 like to see a more comprehensive tax reform for corporations that bring down our Yes, we're a big manufacturer, so the manufacturing credits become important. We think those help us create jobs here in the U. S. The cash piece for us is less Important that it is for maybe others because remember, we generate cash all over the world, but we also make investments all over the world.
We have factories In Ireland and Israel and China and the U. S. And so we consume cash. So we don't end up with the same kind of trapped cash problem that companies do that have minimal
Conference. Thanks. We'll take it
up with the politicians then.
Sounds good.
Thanks, Ian. And Thanks to the rest of you as well for joining us today. Syed, please go ahead and wrap up the
call. Thank you. And ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect.