Good day, ladies and gentlemen, and welcome to the Intel Corporation First Quarter 2014 Earnings Conference Call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mark Henninger, Head of Intel Investor Relations. Please go ahead, sir.
Thank you, and welcome, everyone, to Intel's are in the same period. By now, you should
have received a copy of
our earnings release and the CFO commentary that goes along 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 are 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 are in the same period 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 will differ materially. Also during this call, we will
be using non GAAP financial measures or references. We'll post the appropriate GAAP and financial reconciliations to our website, intc.com. So with that, let me hand it over
to Brian. Thanks, Mark. 2014 is off to a solid start are in the quarter. Even as challenges remain in the consumer client segment, we saw continued improvements in enterprise clients, driven by increasing form factor participants are in the range of $1,000,000,000 are up year over year with all time record core
volume and mix.
Our data center revenue grew 11% year over year and the enterprise segment was again and positive currency rates up 3% over last year, while cloud, networking and storage were all up in excess of 20%. We have all time record NAND revenue driven by the data center and particularly the cloud. And McAfee reported record Q1 bookings along with an 8% year over year increase in consumer bookings. Perhaps more importantly, we made progress against our most critical strategic objectives, and I'd like to take a few minutes to highlight that progress. In PCCG, where we're working to reinvent continuing new form factor innovation, longer battery life and OS of choice, we saw in line volume increased more than 20% sequentially in a seasonally down quarter.
We're now expecting more than 70 2 in line designs for the back to school selling season and many will be offered at $6.99 or less. These trends in in combination with renewed interest in Windows 8 from our customers are encouraging. At the same time, we are ramping more than 130 items, microarchitecture, notebook and desktop designs is our Baytrail M and D platform, significantly increasing our presence are in the value segment. And we exit the quarter with market segment share leadership on Chrome Systems and saw positive traction in small form factor and all in win continuum. In DCG, The new E7 line, which features the largest memory footprint in the industry, saw a particularly strong reception from enterprise as a result of its high speed, real time data analytic capability.
We also announced an important strategic alliance with an investment in Cloudera, Which is designed to accelerate Hadoop Innovation and Penetration, particularly on IA. We've broken out NCG results for the first time this quarter. In order to achieve long term success in all of our market segments from 2 in ones all the way through to the Internet of Things, we're making the investments necessary for leadership and you can see these investments in in MCG's results. For example, at Mobile World Congress in February, we announced multi year, multi device agreements with Lenovo, Asus, Dell and Foxconn to expand the availability of Allen based smartphones and cameras. We set an aggressive goal of shipping 40,000,000 tablet SoCs this year, and I'm happy to say we've tolled more than 90 designs on Android and Windows and shipped 5,000,000 units in the Q1, placing us squarely on track to that goal.
Our first LTE solution, The 7,160 is now available in the Samsung Galaxy Note 3 Neo and the ASUS Phone Tab 7, in addition to the previously announced Samsung Galaxy Tab 3. Our Cap 6 LTE solution was 7,260 are on a combination of phones and power, along with module vendors like Huawei and Sierra Wireless. We demonstrated Sofia, our first integrated apps processing baseband after adding it to the roadmap late last year. Participants are on track to ship the 3 gs solution to OEMs in Q4, 2014 with the LTE version We're looking to extend Intel technology into the fast growing world of interconnected devices. We completed the acquisition of BASIS.
ASUS provides access to new world class technology and a team of proven innovators. We also shipped our first shipped this time. And in the Technology and Manufacturing Group, who's worked to advance Moore's Law is foundational to our long term success. Participants are in the participants will take advantage of our world class package and assembly capabilities and Alterra's leading edge programmable logic. Taken together, these milestones give me confidence that the pace inside our company and our progress with our customers is accelerating.
We made a lot of changes. We have more work to do, participants are in the position of the company. I'm confident that we will continue to transform and realize our vision, that if it competes, it does it best with Intel. With that, let me turn the call over to Stacy.
Thanks, Brad. The Q1 came in consistent with expectations, demonstrating financial growth and a solid start to the year. For the Q1, revenue came in at $12,800,000,000 up 1% from a year ago in line with expectations. PC client group revenue was down 1% from a year ago. We saw PC client group platform unit volumes grow 1% year over year and inclusive of tablets, we saw high single digit unit growth.
PC platform average selling prices declined 3% on a year on year basis. Our data center group revenue grew 11% from a year ago, with platform volumes up 3% and platform average selling prices up 8% over the same period. Participants are in the revenue results of our new segments. The Mobile and Communications Group is down 61% from a year ago. The underlying dynamics are consistent with what we shared at the Investor Meeting last November.
We are seeing a decline in our future phone and 2 gs3 gs Multicon business as we are in the midst of transition to integrated LTE solutions. In addition, the ramp in tablet volume is being offset by an increase in contra revenue dollars. Participants The Internet of Things Group is up 32% year on year. We continue to see robust growth across segments with particular strength point of sale devices in retail and automotive in vehicle infotainment systems. Gross margin of 60% was were down 2 points from the 4th quarter and one point above our guidance.
Spending came in at $4,900,000,000 $100,000,000 above our outlook, primarily driven by a current period charge relating to ongoing litigation. Operating income for the Q1 was $2,500,000,000 up 1% from a year ago and earnings per share was $0.38 are down 5% from either. As we look forward to the Q2 of 2014, we are forecasting the midpoint of the revenue range At $13,000,000,000 up 2% from the Q1. This forecast is in line with the average seasonal increase for the 2nd quarter. We are forecasting the midpoint of the gross margin range for the 2nd quarter to be 63%.
The 3 point increase from the Q1 is primarily driven by lower factory start up costs as we ramp 14 inches This is partially offset by the increase in pallet volumes and the related pressure revenue dollars. Turning to full year 2014, we are still planning for revenues to be approximately flat to 2013. We expect TC client group revenue to decline in the mid single digits and the data center group revenue to grow in are low double digits. We are forecasting the midpoint of our gross margin range of 61%, up one point from the outlook provided in January. This increase is primarily driven by lower unit costs across both our PC and tablet products and lower non production manufacturing costs.
We are forecasting spending for the year at $18,900,000,000 This $300,000,000 still expect capital spending to be flat to 2013 with the midpoint at $11,000,000 The Q1 was a solid start 2014, reinforcing our view of the underlying market trends. The PC market has stabilized and on a year on year basis, we saw unit growth are in the 2nd quarter in a row. In the data center, we continue to see robust growth rates in the cloud segment and the enterprise segment grew in the Q1. These trends led to data center growth of 11% year on year. We are winning design and ramping our tablet volume rapidly and we have design wins in LTE that will result in a second half revenue ramp.
Our Internet of Things business grew over 30% in the Q1 on a year on year basis. And we are driving significant innovation in this area as we invest to extend our architecture into the very low power space and acquire IP and capabilities. At IDF Beijing 2 weeks ago, we showcased the broad range of products we are bringing to the marketplace. These products range from servers in the data center to innovative PC form factors like attachables and all in ones to tablets to phones and to wearables. This is our strategy in action.
If it computes, it does the best with Intel Incentive. With that, let me turn it back over to Mark.
All right. Thank you, Brian and Stacy. We're getting a little bit of feedback that some of you may be having a hard time hearing us. So I'm trying a different mic here and we'll hope that that's better. Moving on to the Q and A, as is our normal practice, we'd ask each participant to ask one question and a follow-up if you have one.
Jamie, please go ahead and introduce our first questioner.
Participants The first question comes from Chris Danely from JPMorgan.
Hey, thanks guys. A question on gross margin. So it's going up nicely in Q2, but if you look at the yearly guidance, it looks like it's dropping in the second half. Can you just participants
Sure, Chris. This is Stacy. I'd be happy to. Let me I'll do the walk kind of from Q1 Q2 and then I'll give you a sense of what I see in terms of the pluses and minuses as we move into the back half of the year. As we go into the Q2, so we ended Q1 at 60%.
We're forecasting Q2 at 63%. The big driver there is we get have about 2.5 points of good news associated with the fall off of 14 nanometer startup costs. So it's pretty consistent with what we've been talking about and what you've seen from us in the past. We'll get a little bit more good news associated with Q2 being a bit up in terms of volume, so that's about 0.5. And then we get 0.5.
In Q2 associated with lower platform write offs as we qualify those first 14 nanometer products towards the end of the quarter. And then there's a bit of an offset as we ramp tablets and we start to see some of the associated contra revenue dollars with tablets. We saw some of that in Q1, but we'll see a bit more in Q2. And so that's about a half a point offset. So I guess it's the 63% for Q2.
And then, yes, the math, If you triangulate a 61% for the year, I would say that we have a gross margin in the back half of the year that's in the low 60s. I I think the plus that we see going in is, we expect seasonally stronger volume in the back half. So that gives us a little bit of a plus. On the minus side, it's 2 things. 1, the tablet volume is back end loaded for us.
Again, as you'd expect, it's are primarily consumer product. So we'll see in the back half of the year the ramp of tablets and the associated contra revenue dollars. So that's a bit of an offset. And then, we'll also see costs coming down from Q1, Q2 to Q3. And then in Q4, We'll see a lot of volume coming out of multiple factories on 14 nanometer and so you get a bit of a mix up in cost for those early wafers Coming off of 14 nanometer.
And again, that's a phenomenon you've seen from us in the past. We would expect that to come down pretty rapidly after that, but the Q1 tends to be pretty expensive.
Got it. Thanks. And for my follow-up, maybe just give us your take on the PC space. Just Talk about how the market is feeling now versus your expectations 3 months ago? And then any impact from the expiration of Windows XP either And your expectations for Q2 or with what happened in Q1?
Sure. I can give you Kind of an overall look at how we see the PC market. This is Brian. In general, if you look at Q1 and even participants are playing out as we pretty much expected. We continue to see strength in the enterprise, and that's pretty much across the board everywhere.
Consumer still remains a bit weak for us. Emerging markets starting to strengthen a little bit in the consumer, but participants The rest of the world still showing some weakness at the consumer level. We think what's driving the kind of overall stabilization It's a series of things that started to play out in Q4 and we see them playing out into Q1 and we think throughout this year. Some of it is it's a mixture of things from, yes, there is Windows XP. It is a part of this equation.
We don't think it's The driver, you look at the form factors that we're bringing out, the price points that we've been able to enter, you're seeing strong PCs fees down in the $200 range now. Haswell really coming to market as we enter into Q1 and into Q2. You saw the 130 atom designs that we have out there. So it's a series of real vectors that are
The next question comes from Jim Covello from Goldman Sachs.
Great, guys. Thanks so much. Just one point of clarification first. Participants The segment the year over year segment numbers, is that apples to apples or does that include this year's reclassification, but it's versus last year's old reclassification. No, no, no.
It's apples to apples. Apples to apples. Okay, great. Everything got restated. Great.
Terrific. Thank you. In terms of the contra revenue support going forward for the Tablets. Can you talk about the pushes and pulls as we maybe go into 2015 or whatever period you want to talk about are going forward about what would cause you to continue to do that versus maybe cutting that off. That will obviously be a critical part of our model as we start to look forward into next Yes.
I'll be happy to Jim. Let me even back up and give you again restate the strategy of what we're doing here participants and Brian can come in over the top of some of the technology. But what we're doing is we're taking Baytrail, which is a product really designed for the And we made the decision to take it broadly across different segments of the tablet market this year. It brings along with it at least over the course of the 2014, a higher bill of materials and that's kind of independent from the SoC cost. It's the power management subsystem.
It's the Motherboard that it goes on, it's the memory solution, those kinds of things. And so, we're providing some contra revenue to offset that bill of material delta Over the course of 2014. Now as we said, we're doing value engineering with our customers and our partners. And so we're bringing down that bill of material over the course of 2014 independent of any changes to our SoC. I'll I'll pause it and actually let Brian if he wants to come in over the top on any of the technology.
I think Stacy has absolutely got it right. We have a series of improvements that have already started to kick in, in some cases around our power management systems, the number of layers in our motherboards, the memory system integration, all of those things we've worked on and actually have started to see the advantages already And our costs.
So I think on a like dollars per unit, it comes down pretty dramatically over the course of 2014
and it should be relatively small, if at all,
as we get into 2015. And at are in the range of $0.15 and it's again the enablement we're doing around the bill of materials. And then we also have new products coming into the marketplace like Sofia that's targeted at the low end. And in 2015, you'll see Broxin, which have been assessing more for the mid range to high range of the market coming into our product portfolio. So the combination of all that gives us A better cost structure with our own products and a better cost structure overall with the bill of materials as we enter 2015 and then work through
Terrific. Thanks so much. Good luck.
The next question comes from Ambrish Srivastava.
Hi. Thank you. I had a question on BCG Stacy. Just to make sure it's apples to apples, the guidance that you provided for this year as well as for the long term trigger, does that change now that you have a common infrastructure part also within that group?
Yes. So interesting what we're doing here Amrish is we're actually now restating the segment to match how we've been talking about this segment. If you go back to the investor meeting presentations over the last couple of years, we've included the communications infrastructure piece set because we do view it as part of the server market. So you need to go back to Kirk's Original presentation, I think it was 2 years ago, 2011, and you'll see it's kind of clearly laid out in that long term CAGR. Brian and Renee have now organized the company more in line with that.
So we have all of that under one group and so we've redone our segments as a result. I'll also say for Q1, just because I don't think you can see this anywhere else, but the DCG year on change, it still would have been 10 plus percent. So it's worth about a point of growth in Q1. So it yes, I think we're We're pleased with the growth rate with and without, I guess is how I'd say it.
Okay. That's helpful, because you're right that the last Analyst Day also you did have that piece in there when it was not part of DCG. My follow-up then is a quicker one on the MCG side. Are we looking at this revenue run rate bottoming out here Now you're going to the back half. You also talked about CAT 6 shipments.
I think Brian you were at IDF or somewhere in Shanghai or in China. So is this the bottom for this segment in the quarter? Thank you.
Well, I think you'll see 2 phenomenon as we move Into the back half. So as we said, so we're seeing that on the comm side that transition from 2 gs, 3 gs. So we're seeing a troughing of that business. And as we move into the back half, We'll see the LTE, particularly the 7,260 coming to market. So we'll start to see, I think, a nice ramp in revenue on that segment.
We'll have significant unit growth in tablets, but remember that contra revenue isn't just a gross margin impact. It's actually a subtraction from revenue. And so that will kind of mute the revenue growth
for the segment because you have that negative as
we get into the back half and ship more tablets. To the prior question, I expect that to abate as we get into 2015, but you'll definitely see that in the back half of twenty fourteen.
The next question comes from Christopher Rolland from FBR.
Hey, guys. Thanks for taking the question. So I think
a lot of us were surprised
to see Q1 notebook platforms up year over year as you guys alluded to. Why is third party data off here perhaps in ODM data off so much. I imagine some of that's market share, but what might be the rest there?
Let me give the wonky finance answer and then I'll turn participants are going to talk about our notebook strategy and kind of how that's playing out across the products. But from a year on year comparison, from our billing standpoint, You have to remember that Q1 of 2013, there was a big contraction in the worldwide supply chain in terms of inventory levels. And I think that impacted our billings. So we're, I think, getting the advantage of a good year on year comparison point there. We still expect for the year The units are down in the low single digits.
And we'd love to be wrong on that, but that's our view of the market. I think that's pretty aligned with the 3rd parties.
Yes, I would agree with that. And that's not to say that inventories have grown. Actually inventories are in very good shape as we look across the entire supply chain both within Intel and outside. So we think inventories after that correction in the beginning of 2013 are actually normalized now participants will probably stay. And as Stacy had said and as we said in the call, You're seeing us in all price points in this space.
So you're seeing Bay Trail and even core products down at lower price points. You also see us getting gaining market share in chrome over this time period. So we're in a significant percentage of the Chrome systems out there. So there's a variety of things that are allowing us to get some are upswing a bit in the mobile market as well.
Great. Thank you. As a follow-up, so at one point there was Baytrail TM and D for tablet, mobile and desktop. Are is The M and D still accounted for in PC and T and tablet. And with that 8% ASP decline that you guys had In mobile, was that natural or is that a mix in of Baytrail M?
Thanks.
Yes. Great question. So the first answer is Yes. The M and D would be included in PCCG's results. The T is included in MCG's results and would be in the tablet volume that we're talking about.
And yes, the notebook ASP that you saw was Exactly consistent with our strategy. We're bringing Baytrail in there. It's got the right cost structure. It's actually the volume was a little ahead of what we thought in Q1, it's enabling us to grow units a bit and maintain and grow profitability. And the overall company's gross margin look pretty good too.
Participants are ready.
The next question comes from Doug Friedman from RBC.
Thanks for taking my question guys. And A few of the things that you've guided to, we've really never seen in the history of Intel and that being OpEx dropping rather are really in the back half of the year. Can you give us a little bit of color on what you're doing to make that happen?
Yes. I mean, we're as we said a quarter ago, we're bringing employment down over the course of the year. In particular, we're are driving for some efficiencies in the engineering organization. They're happening a little later than we thought, but and Renee are driving for is to get more output and more products and more derivatives for the engineering And that will result in some efficiency as we get into the back half.
And I guess for my follow-up also another sort of spending question And that being on the CapEx, I believe there was a change to the longer term roadmap on your move to get to 4 is $50,000,000 and yet we're not seeing really any change on your CapEx spending. Is there a change that we should be thinking is possible in the future. How would you talk about your CapEx? In the past, you talked about maintenance and then the other, if you could give us an update on that?
The 450, let's start with that assumption. We haven't changed. We said that actually our 450 is similar in the latter half of this Decade, right? So, we're still saying that. You're going to see gives and takes on 450 spending.
These are long drawn out programs over Multiple years. And so I think you don't grade the whole program by one shift and when we buy a tool or when we move out Some spending in some cases. And don't forget any time we do that, you typically have just more 300 millimeter that you're going to go spend money on. We continue to hold our forecast flat for CapEx. We're comfortable with the CapEx where we're at to maintain our business is based on the demand we're seeing for our core products.
Great. Thanks for taking my questions.
Thanks, Doug.
The next question comes from John Pitzer from Credit Suisse.
Yes. Good afternoon, guys. Congratulations. Stacy, a question on gross margins. Has Full year expected impact for tablets changed at all.
And if memory serves me correct, that was 150 basis points. And if I do the math right, would that alone account for about 2.5 percentage points of decline in Q3, Q4. Am I doing that correctly?
So the answer to your first Question is that our expectations haven't changed. I mean, there may be the second decimal may have changed, but directionally it's the same. And as Brian said in his prepared remarks, we're actually feeling pretty good about the line of sight we have across the customers, the kind of longer term agreements we have in place and the design wins that we know are coming to market as well as the Q1 volume. In terms of the impact in the second half, I haven't done the math that way, but Manager Matt says you're probably not too far off because it's 150 basis points more or less for the year and it's back end loaded. So it's going to be in that kind of a range.
I did do the math for the back half saying that is kind of the that as long as well as the Q4 cost of 14 nanometer out of multiple factories Is the thing that kind of keeps us in the low 60s as opposed to higher. So I think your math probably is pretty close.
Perfect. Thanks, guys. And as my follow on, Brian, can you talk a little bit about The expectations around the Grantley product launch, Nihalem clearly drove good growth in DCG. Romley was a little bit more mixed. What's the expectation for Grantley?
And is there a concern of a pause of buying in DCG ahead of the launch? And how do you manage that?
We look at the Grantly as a great product. It's I don't think there will be a pause. We factored that into all of our forecast, the launch dates. Those haven't moved. I don't see it as being a shift.
Customers typically light up their products around our product launches and they have several months to work around those and forecast theirs as well. So I don't see a stall in our business based on what we see with the forecast right now.
Perfect. Thanks guys.
Thanks
The next question comes from C. J. Muse from ISI Group. J.
Muse:] Yes, good evening. Thank you for taking my question. I I guess first question, since you announced a vision for being a larger foundry at your Analyst Day, I'm curious What you've learned in your discussion with potential clients in terms of what may be bigger opportunities than what you initially thought and perhaps what could be bigger purchase charges. And I guess as part of that, as you think about offering those foundry services to potential How you think about maybe some of the changes you need to do in terms of tool sets with Fab 42? Participants So let's answer the first part first.
I'd say the interest since we opened up the foundry has been high. These interactions just getting people comfortable with what the technology is are understanding what the process the silicon technology incorporates, what the design tools are, what IP we have to offer, where they can go 3rd party IP, all of those kinds of interactions, those have been ongoing with many customers. And then you start the business discussions around pricing and availability and all of that. So I'd tell you that the uptake has been is strong. We've been in many, many interactions.
As far as what does it tell us about what needs to change within Intel, I I think we still have a lot to learn about how to be a good foundry. Ultera, who's really kind of our lead premier customer, I'd say, big customer, has really been helpful. They've helped us see where we're strong and where we're not and what it takes to become strong in those areas. They're making good progress on their products. I don't think there's a lot of change from a technology standpoint that's outside the changes purchases we're going to make say at 10 nanometers for our own products.
We're driving the lower power, more mobility, able to integrate better all of those things into our own products, integration of memory capabilities, that's driven by our own need to move into those mobile purchases and that's helping us with the same roadmaps that are being required by the foundry partners. Fab 42 is purely a capacity driven based on demand will trigger that as we trigger demand both either internally or from the foundry. Remember though the foundry partner signed up today is probably 2 years 18 to 24 months before first silicon And probably 30 to 36 months before they really have ramped to any volume. And Fab 42 is probably 12 to 18 months When you'd be able to bring it into capacity. So the 2 have much look at you'll have overlap.
And I would just add, just reading into your question, maybe I'm reading too much CJ. If you're viewing the foundry business as we would have a Specific foundry factory, it's that's probably not the case. These are these will be run side by side with our own products and taking advantage of the same Technology that the same technology and technology features that we need for our product line. That's correct.
Yes, very helpful. If I could sneak in a second one here. In terms of integrated LTE, you've talked about When you will foresee that, but curious when you expect to bring that in house at Intel? We'll bring that in on our Battling back and forth on how fast we can bring it in and at what impacts that has. Very helpful.
For 14 nanometers Technology there. Great. Thank you.
The next question comes from Blayne Curtis from Barclays.
Hey, good afternoon guys. Thanks for taking my question. Maybe actually kind of follows up on C. J. Spire question.
The MTG business that you're now breaking out, it's Pretty clear, it's losing $3,000,000,000 $3,500,000,000 How do you think about this business? Obviously, you're trying to ramp the product set. You are a bit behind. You're entering from the low end and that pricing seems quite tough. You're facing some You consider the strategic enough that you would consider continuing to run this as a
loss? So
you asked several questions in
participants are in the line with the line of questioning. Okay.
So let me start to kind of parse it apart. Absolutely, this is a strategic business. So let's just start with that. We think this is critical and we kind of said this in our prepared are statements. It's critical from 2 in one devices down to the Internet of Things.
You look across the connectivity requirements have a roadmap to get to profitability in that business. The milestones that I look at and so I'll give you those for yourself to Scott, we have the 7,160, the current LTE version out there. We're the 2nd in LTE, we have the 7,260 launch this quarter. I think that's critical there. Again, we're closing the gap with our competition.
We're bringing out leading edge Cat 6 capability with carrier aggregation. That's a critical milestone. That puts that closes the gap and puts us are firmly in the LTE capability. The next one is Sofia. You look at the Sofia's at the end of this year with 3 gs integration And then the first half of next year with LTE integration, remember those products weren't even on our roadmap 6 to 7 months ago.
So that shows that we are acting quickly, integrating and bringing those products to production. Then after that is as Stacy said earlier, Broxton, which is our internal 14 nanometer product that's targeted towards the mid to high level. And as we bring that into the second half of twenty fifteen and into twenty sixteen, there will be various levels of integration on that. So when I look across this, those are the milestones I look at, because those are what drives that along participants are just basic cost reduction capabilities we talked about for this year as we get out of this contra revenue into 2015. Those products then parties place us firmly in leadership capability from the low end to the high end with integration.
And those are the milestones to me that will lead to profitability long And I'll
just add to that. Yes, I think you left it off because it was so obvious, but the 40,000,000 tablets is one of the things I see Brian Just laser focused on. And as we've talked about before, it gets us into the kind of 15% to 20% range of your total Market, it gives us a big enough footprint that we start to see people developing on our architectures that becomes a self sustaining kind of ecosystem as we're bringing these other products to the marketplace. So don't lose sight of that one, Blayne.
Yes. Thanks. And then just as a second question, in terms of Broadwell timing, you had the 1 quarter slip. It seems like no change so far. Are there any more hurdles in terms of yields or anything before this product is ready to ship in the back half?
Well, as we said, we qualified for start of production this month. We will qualify for shipment to customers Towards the end of this quarter, those are the first two milestones. We've passed one of them. Then our you'll start to see our customers bring products to market as we progress into the second half of this year. These things are hard.
There are always yield improvement efforts that we have and cost reductions that we're going through. But I think we're past the first of the 2 big milestones by turning on the production internal. And we have the next Big one at the end of this quarter with certifying to ship to customers. We don't see any roadblocks. We don't see any issues.
But that's still out there at the end of this quarter.
Great. Thanks.
The next question comes from Stacy Rasgon from Sanford Bernstein.
Hi, guys. Thanks for taking my question. For my first one, I wanted to dig a little bit into the mobile and Wireless Group. So you've talked a bit about having, I guess, developing leadership products, leadership position in order to drive profitability. We're looking at this right now though.
So we had the business fall more than 50% sequentially. You have your 7,160 which is shipping, but apparently it's not really are driving
much volume. We have
the 7,260 which is forthcoming, but we really haven't heard much about design wins and you launched at Mobile World Congress without really saying very much there. We have Sofia coming, which absolutely is integrated, but it's being made at TSMC for the next few years, which means you lose any potential benefits From your own process technology and you would seem to be well behind what the market leaders are shipping in terms of 4 gs. Just what should we be looking for Over what time frame should we be looking for the ramp? I guess what I'm asking is how can we get confidence that we are going to actually see the revenue ramp that I guess is built into the short term expectations for this year and then going forward to make sure that you can actually get profitable business, which is obviously would be driving quite a bit of upside to where the models are today.
Sure, Stacy. I'll start and then Stacy can jump in. Remember the 7,160 we gave you a series of products that it's shipping in And on the 7,260, which will qualify this quarter, we gave you a list of OEM partners that have committed to that platform. So we're fairly confident that the ramp in the second half of this year will continue on that product and it is a leadership product. Sophia, you're right, is built at TSMC.
We went for speed and integration And it was simply quicker to get to market with a competitive product from both a price and performance. We actually believe that the IA core will give us better performance than the competition. And the competition is at that same node At TSMC. And it's 3 gs at the end of this year and LTE in the first half of next year. We then told you that in the second half of next are in the same period.
And again, we're debating whether it's the second half or the first quarter of 2016, but we'll move all of that internal on to 14 nanometers. It's really based on other products that we have moving in at that time and just overall resources, right? We have A lot going on, the ramp of Broadwell, the ramp of Skylake in the second half of next year, plus bringing these products inside. But I'm very confident that when you do that plus you add in Broxton, which is targeted towards the mid to high range and again is integrated with leading edge LTE. Participants are in the range of $1,200,000 and $1,000,000 to $1,000,000 that continue the level of carrier aggregation and product leadership.
We're fairly confident that we can continue to grow this business and turn it profitable over that time.
And let me just Coming on the question about the long term profitability. It sounds basic, but it really stems from our manufacturing leadership. For 2 years ahead of the rest of the industry in extending, it gives us the ability that as we target our products into the right space from a power standpoint, We will have power advantage, a performance advantage and a cost advantage. That really is our strategy playing out. You're seeing the first products hitting That seem over the course of this year and into early next year.
Bay Trail is a really good product. For the high end of the market, you'll see products coming into the market are more targeted at the mid range and lower end of the market next year, but that's how the strategy plays out. I would say for 2015, I would expect to see a reduction in the loss, not profitability, but a reduction in the loss will feel pretty good when we get there and then we'll keep driving towards the long term profitability goal.
Got it.
Did you have one follow-up, Stacy?
I did. I did. I'd like to drill in a bit more actually are in the table at efforts now. So we're obviously subsidizing and I get the idea of reducing BOM cost in order to make up for the deficiencies with the idea being that you can drive improved products down the road. But at the same time, if you look at the tablet market where it is today, You're obviously not going to be going after Apple anytime soon.
Maybe there's a little bit of volume at Samsung. But I mean, if you take those guys out, Curious to know like what kind of economics and pricing you see from that market long term? And are the I guess the total revenue The tool that's available, even if you were to succeed at your goals, why does that make it a worthwhile effort to actually go after? Or is this simply, as you said, strategic? Is this an attempt to limit further penetration of tablets into the core market?
So I'll start and Stacy is welcome to jump in. You've asked a question that has kind of multiple questions built into it. Let's start with what we told you was we've got multiple OEM partners building tablets and phones on our products and we gave you ASUS and Dell and Lenovo and Samsung on those products. If you look at the tablet business overall, it's broken up into a series of segments. And you're right, there is a large percentage of them that are $2.50 and below, products like Sofia are is specifically designed for that segment.
And our dual core, Sofia, already performs quite well against Quad Core Systems. As we move into next year, we'll bring Quad Core Sofia based products out as well. And so we believe that we can stay very cost competitive and have a performance leadership. Remember, Intel has 2 assets. We have our silicon technology, but we also have our architecture.
And one of the things an OEM gets When they build with Intel technology is that they can go into any OS. They can build a single platform and move that onto Chrome, onto Android, onto Windows. And that's a very unique participants that we provide to OEMs for flexibility. So we believe with a product like Sofia as we Bring that into the market next year. We can absolutely compete in those spaces and make money.
You're probably not going to make as much revenue dollars and as much margin dollars as the PC business, but we think this is still critical. And it's critical For a variety of reasons. Part of it is simply the scale. You want to have those units. You want to have a presence in all areas of computing.
And the second one is developer attention. You want developers creating new products doing innovation on your architecture. This is a space that's got innovation. We are going to bring some of that innovation to this market. You're going to see some tablets as you go into the end of this year.
We showed them at CES. Some of the highlights where you have 3 d cameras, you have perceptual computing capabilities for gaming, all of those kinds of things can change the tablet market along with the PC market. So we believe that we can bring a lot of the innovation that we do in the PC down into the tablet space. And again, that keeps the developers are developing and interested in our platform. I think for all of those reasons, we want to be in this space and we will be in this space From now on.
I would just add one thing as I was very complete. We don't fear the low end of the market. You You look at how we play out in PCs. You can drive a lot of unit growth by participating in PCs now that are $199 to $2.50 We can have the cost structure because of our manufacturing leads that participate nicely there. And you see that as markets mature, They also segment.
And so we have if you look at our PC business, we have great demand and profitability at core i7s and That stands down to Bay Trail at the Adams site. So I it's a kind of misconception to think that We only want to play at the high end. Our manufacturing leadership can give us the cost structure to play profitably at the low end as well.
Thank you, guys.
Participants. Thanks, Stacy. And operator, we'll go ahead and take 2 more questions.
The next question comes from Ross Seymore from Deutsche Bank.
Participants. Hi, guys. Thanks for letting me ask a question. Back on to the PC client group for a second and on to the ASP side of the equation. Between the desktop and the notebook, obviously, there's very different dynamics.
Do you see a point in which the notebook side starts Do you see a point in which the notebook side starts flattening out and starts to act like the desktop side where ASPs have been up strongly both last year year over year in Q1. Is or is that pressure to the low end going to persist and so we shouldn't think of are flattening out anytime soon.
No, I actually think more about the 2 markets together. I think you have this range of devices that are computers and they range from a high end all in one down to $199 participants are very low cost notebook computer that's being sold. And I think what we're seeing is kind of strength at both ends of the market. And if you look at our pricing over the last 3 years, it's been pretty dead flat on average across the PC market. You You can see from our gross margin forecast for 2014, I'm not expecting ASP to be one of the big drivers.
So you can take from that that we continue to see a pretty benign pricing environment. So that's how I think of it, Mark. I don't know Brian if you have.
No, I would agree. I don't see it behaving any differently moving forward.
And I guess my follow-up switching over to the OpEx side. It's good to see the headcount coming down in the second half down versus the first half, but you're still Significantly elevated versus your target model. I know you're not going to guide for 2015 with any specifics whatsoever, but can you remind us If you do end this year with lower headcount than you ended the prior year, so you're going into the year down year over year, is the tick tock of process engineering moving from R and D into COGS, a headwind or a tailwind in 2015? And are there any big moving parts that we can think about for that year's OpEx versus this year's?
Yes. It's the reciprocal to what happens to gross margin. So, in a year like this year where you see start up costs coming down, That means that the engineers that were working on 14 nanometer that were being classified as cost of sales now moved to 10 nanometer and they're being classified as R and So next year, you should see gross margin some headwind in terms of gross margin and some tailwind in terms of the R and D spending.
Thank you.
Thanks, Ross. And operator, can you go ahead and introduce our last question?
The final question comes from Mark Lipacis from Jefferies.
Participants. Thanks for taking my question. First one, Brian, when you talk about the 40,000,000 unit bogey on tablets will be able to see the taxonomy of that a little bit? To what extent do you think this is Windows versus Android? And what's the class of products you think will represent the mode or the mean like where do you think your sweet spot is going to
be this year on tablets?
Sure. So our mix of OSs reflects pretty much what you see in the marketplace. I think, depending on how you look at it, it's probably something on the order of 90% Android, 80% Android, 10% to 20% Windows, our percentages look very much like the marketplace. So if Windows continues to grow and gain traction, I think our percentage would just align directly do that. So you can you don't separate what we ship from what's basically in the marketplace.
We are leadership capability on all of the participants now. As far as what is the price point, again, it reflects fairly close to what the marketplace is. You see us in systems below $100 now. The majority of the systems are say $125 to 2.50 fee somewhere in there. And then you see us in some of the upper end systems $2.50 to 400 dollars.
And so but the majority is in that, I'd call it $125 to probably $2.50 range.
Thank you. And then as a follow-up, the did you discuss like Do you expect to have the Android tablets ramping in volume this quarter? Are you going to be should we expect to see the Baytrail Android products at Computex this year when do we really see the material ramp in the Android products? Thank you.
Sure. Absolutely. You can go out to the store are available today and buy an Android. In fact, I'd love you to go buy what the $40,000,000 will sell. But yes, you can buy Android.
It continues to ramp through this quarter at Computex will show a series of Android and Windows based tablets And they just continue to ramp through this year, but they're on shelves today. I saw them
in the store this weekend. The majority of the 5,000,000 for example are Android. Just as Brian said, it more or less follows the distribution between Windows and Android.
Thank you. That's helpful.
Thanks, Mark, and thank you all for joining us today. Jamie, please go ahead and wrap up the call.
Ladies and gentlemen, that does conclude the conference today. Again, thank you for your participation. You may all disconnect. Have a good day.