Good day, ladies and gentlemen, and welcome to the Intel Corporation fourth quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require audio assistance during the conference, please press star then zero to reach an operator. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mark Henninger, Director of Investor Relations. Please go ahead, sir.
Thank you, Jim, and welcome everyone to Intel's fourth quarter 2013 conference call. By now, you should have received a copy of our earnings release and the CFO commentary that goes along with that. If you've not received both documents, they're currently 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 Q&A. 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 specific risk factors that could cause actual results to differ materially.
Also, if during this call we use any non-GAAP financial measures or references, we will post the appropriate GAAP financial reconciliation to our website, intc.com. With that, let me hand it over to Brian.
Thanks, Mark. Q4 was a solid finish to a year of transitions, both for the computing market and for Intel. We spent the year building a foundation in important growing segments of computing, and as a result, we are better positioned as we enter 2014. Importantly, the beat rate of innovation inside the company has also improved. I'll touch on each of these themes, but I'd like to start with our results. The company's revenue was down 1% for the year, driven by a declining PC TAM. The PC Client Group was down 4% for the year, but the business began to stabilize and actually grew a bit in the fourth quarter, achieving all-time record Core i5 and Core i7 unit shipments. The desktop business was particularly strong in Q4, growing 11% over last year. In the Data Center, we finished the year up 7%, with record server units and revenue.
Cloud was up 35%, storage was up 24%, and high-performance computing was up 18%. Enterprise, however, fell short of our expectations for the fourth quarter and the year, as we overestimated the rate of recovery among corporate buyers. In our other businesses, the Intelligent Systems business, we saw growth of 21%, with retail up 16% and transportation up 21% for the year. Networking grew 31% for the year. Rounding out the list, our NAND and McAfee businesses grew 15% and 4% respectively, both achieving record revenue. When I spoke with you in November, I shared my vision. If a device computes, it does it best with Intel, from the Internet of Things to the Data Center. I outlined the areas that are changing to make that vision a reality.
Among the changes was a shift towards a more outside-in view of our industry and an intense focus on bringing innovation to market quickly. Last week at CES, there was evidence of our progress as we demonstrated technologies that weren't on our roadmap just six months ago, technologies that we expect will be available this year. We showed you Edison, an Intel-based platform for Internet of Things, in the form of an SD card. We unveiled several innovative wearable solutions, and we announced Intel device protection technology to harden IA-based Android for the enterprise. Our disclosure in November of a new smartphone and tablet roadmap that will include SoFIA, our first IA SoC with integrated comms later this year, is further evidence that we are innovating and bringing products to market at a faster pace.
Looking ahead, 2014 will be an exciting year as we build further on this new foundation. We have established a goal to grow our tablet volume to more than 40 million units, with an emphasis on the value segment. After finishing 2013 with more than 10 million units and a strong book of design wins, we're off to a good start. We also exit the year having made important strides on our 14-nanometer process technology. Yields improved significantly in Q4, putting us squarely on track to begin Broadwell production later this quarter. Our customers and partners also continue to evolve the computing experience. By the time we enter the back-to-school selling season, we'll have nearly 70 unique two-in-one designs with outstanding battery life and performance across a range of price points and form factors.
Later this quarter, we'll launch Ivy Bridge-EX, which will bring the largest generation-to-generation improvement in MP server performance since 2010. Our work to improve our velocity and position the company for the future of computing isn't done, but our recent progress is testament to what's possible when we focus and bring all of Intel's assets to bear. We're building on a foundation upon which we'll compete for years to come, and we're beginning this year in a better position than we began last year. With that, let me turn the call over to Stacy.
Thanks, Brian. The fourth quarter came in consistent with expectations, with a return to financial growth, and was a solid ending to a challenging year. For the fourth quarter, revenue came in at $13.8 billion, up 3% from a year ago. PC Client Group revenue was flat from a year ago. Our Data Center Group grew 8% from a year ago. Relative to our expectations at the beginning of the quarter, we saw higher PC Client Group revenue, partially offset by lower growth in our Data Center Group.
Gross margin of 62% was flat to the third quarter and one point above our guidance. Operating income for the fourth quarter was $3.5 billion, up 12% from a year ago. Earnings per share was $0.51. For full year 2013, revenue was $52.7 billion, gross margin was 60%, operating income was $12.3 billion, net income was $9.6 billion, and earnings per share was $1.89. While the PC market was down on the year, we saw the market stabilize in the back half of the year with fourth quarter PC units up from a year ago. Additionally, we saw strong tablet growth in the back half of the year, and inclusive of PC and tablets, our unit growth in the fourth quarter was up almost 10% from a year ago. We decreased inventory levels by almost $400 million in the fourth quarter.
Across the worldwide supply chain, inventory levels continue to be healthy. Gross margin of approximately 60% in 2013 is down two points from 2012, driven by higher 14-nanometer factory startup costs. Spending on R&D and MG&A was $18.7 billion in 2013, 35% of revenues, down from the forecast at the beginning of the year, but higher than our long-term model. Operating income was $12.3 billion, down 16% year-over-year. Earnings per share was $1.89, down 11% from a year ago. The business continued to generate significant cash, with almost $21 billion of cash from operations in 2013. Total cash balance at the end of the year was roughly $20 billion, up approximately $2 billion from a year ago. We purchased $11 billion in capital assets, paid $4.5 billion in dividends, and repurchased over $2 billion of stock.
As we look forward to the first quarter of 2014, we are forecasting the midpoint of the revenue range at $12.8 billion, down 7% from the fourth quarter. This forecast is in line with the average seasonal decline for the first quarter. We are forecasting the midpoint of the gross margin range for the first quarter to be 59%. The three-point decline from the fourth quarter is primarily driven by higher platform write-offs as we start pre-production builds of Broadwell and 14-nanometer, and overall lower platform volumes in line with seasonal trends. Turning to 2014, we are planning for revenues to be approximately flat. We expect the Data Center Group revenue to be up in the low double digits and the PC Client Group revenue to be down in the mid-single digits. We are forecasting the midpoint of our gross margin range at 60%, flat to 2013.
We expect startup costs to decline, partially offset by the impact of tablets as we ramp our volume and provide contra revenue support to our customers. We are forecasting spending for the year at $18.6 billion and expect capital spending of $11 billion, both of which are approximately flat to 2013. Within the flat spending, we're advancing the strategy of the company by shifting investments towards the data center, tablets, and low-power SoCs. The fourth quarter was a solid finish to a challenging year. Financially, the fourth quarter of 2013 was better than the fourth quarter of 2012. More importantly, we're making changes that continue to improve our competitive position. For devices that compute, our vision is, if it computes, it does it best with Intel. Towards that end, we are well on our way to reinventing the personal computer.
With all-in-ones, two-in-ones, convertibles, and detachables, the amount of innovation in the PC market is unprecedented. Building on this leadership, we will start production wafers on Broadwell, our 14-nanometer product targeting these form factors, in the first quarter. In the tablet market, we launched the Bay Trail SoC and have started to expand our footprint and market segment share in this growing market. In the Internet of Things market, we are bringing new architectures like Quark and Edison to build on our current leadership position. We are uniquely situated to benefit from the other end of the compute continuum as the infrastructure that supports all these devices expands. Our data center business continues to see robust growth as a result of the build-out of the cloud and the explosion of devices that compute and connect to the internet.
In 2013, we extended our leadership at the high end of the data center with the launch of the Ivy Bridge-based Xeon product line. At the low end of the data center, we extended our leadership with the launch of Avoton, targeting the micro server market. We plan to build on this foundation as we launch the Haswell-based Xeon family in 2014. At the foundation of this innovation, we continue to advance Moore's Law faster than the rest of the industry. This gives us the world's highest performance and lowest power transistors and will result in a growing cost advantage over time. With that, let me turn it back over to Mark.
All right. Thank you, Brian and Stacy. As we move on to the Q&A, as is our normal practice, we would ask each participant to ask one question and just one follow-up if you have one. Jamie, please go ahead and introduce our first questioner.
Ladies and gentlemen, if you have a question at this time, please press the star key and then the one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, to ask a question, please press star one. The first question comes from Mark Lipacis from Jefferies.
Thanks for taking my question. At the analyst day, you addressed your view on transistor density and your expectation for leadership on that vector. I have to say, in discussing that idea with investors, there's a consensus view that seems to be that Intel has an inherent wafer cost disadvantage relative to TSMC that neutralizes or more than neutralizes your transistor density advantage. The argument is that TSMC ships more wafers and therefore has more, better purchasing power than you and has lower labor costs, and net they have just a big, huge advantage on wafer cost that you should have too hard of a time to overcome. My question is: do you think that's a fair view? Can you help us talk to the relative elements of the wafer cost and how you think you can compare?
Any kind of help that you can give us on the cost dimension would be extremely helpful. Thank you.
Sure. This is Brian. I think the first thing to remember is that what really counts in all of this is transistor cost. What we really talk about in our Moore's Law curves and when we talk about transistor density is driving a consistent cost reduction of the transistors. Wafer cost is one segment of that. I'm not going to comment on TSMC's wafer cost versus our wafer cost, but we feel confident that our relative level of scaling and our internal wafer costs are such that we believe we have a leadership position in transistor cost. Remember, when you're talking about any product, whatever it is, a logic product that's a low-end microprocessor for a wearable or an Internet of Things or a high-end Xeon server, you're talking about the number of gates and hence the number of transistors required to put that logic device together.
It doesn't matter whose technology it's on to some extent, it doesn't matter what node. The more cost-effective those transistors are, whether it's $500 million or $3 billion, the lower the product cost is. That's really what we focus on and why we focus on transistor cost. I think we stand by what we said at the investor meeting.
Thank you. If I could have a follow-up. There's been some news reports about the Fab 42. Could you help us understand what's going on, how we should think about what's going on there? Thank you.
Sure. I'll start, Stacy can talk to you about any of the financial discussion of it. You start these construction projects, we've talked about it in the past, you have to start them three years roughly in advance. They're very complex, some of the most complex, if not the most complex construction projects you can imagine. You start those three years in advance to when you're ready for operation. We started this one about three years ago. If you go back and look three years ago, our view of the PC industry and PC growth, it was much more robust than what has played out and is our forecast today. What we've done as we've brought it online is we've been very conservative with how we manage the project.
We've brought it up until the shell is complete and facilitated from a construction standpoint, we've held back putting equipment in until we see the demand requirement. That's really what we've done. We've done that in the past. I've been in Intel's manufacturing for 30 years. You can go back in time, we did that fairly frequently. That's what we've done with Fab 42 as well. We've held it back until the demand requirement comes about.
Yeah. I don't have a lot to add to that. I would just say that the financial impact of this is actually pretty minimal. As Brian said, we built a shell, but we didn't equip it, and we did that before we need it. We will ultimately use it. The economic cost is just the time value of the money, which is a pretty modest cost. This is pretty normal for us. We actually always want to have some pre-positioned space to grow into as the market grows. As Brian said, it's three years to construct one of these things, so it's economically quite detrimental to get caught short, and the cost of having a little bit of extra space is pretty high. Doesn't impact depreciation, doesn't impact gross margin.
Thank you.
You're welcome.
The next question comes from Ross Seymore from Deutsche Bank.
Hi, guys. Thanks for letting me ask a question. I guess the first one is on DCG. Can you give us a little more color on what happened in the fourth quarter, especially given the confidence that you had as recently as November and the growth there? What gives you confidence, given the fourth quarter miss in forecasting still low double-digit growth in 2014?
Yeah. Let me take that. This is Stacy. If you look at the trends in the fourth quarter, I think the trends actually reinforced the growth rate among cloud, high-performance computing, networking, storage. They all came in consistent with what we thought. Brian went through a lot of the year-on-year growth rates there. Still very robust growth rates. It actually increased our confidence in that. What we saw very specific to the enterprise was we did return to growth. It was a little bit less growth than what we had thought as we entered the quarter. We kind of step back and look at what happened there, we think there's two elements that hit us. One was we had a pretty robust growth rate in Q3.
We entered Q4, we saw that there was more inventory out in the world than we knew when we started the quarter, so that had to be burned off. Secondly, we saw a tapering off in order patterns across certain customers in certain segments at the end of the quarter. We think that that was driven by the government shutdown and the uncertainty around the debt ceiling, because when you look at the customers and the segments, it's pretty clearly in those segments. We had a range around growth rates for 2014 in the investor meeting. We said 10%-15%, based on a slower growth in enterprise in Q4 and maybe a slower recovery in enterprise over the course of 2014.
I'd say we're now at the lower end of that range, so we're more at the 10% range than the 15% part of that range.
Great. I guess as my follow-on, switching gears a little bit to the OpEx side, you guided sequentially flat, but it looks like if you just hold R&D as part of that sequentially flat for the full year, it seems to imply that R&D as a singular expense will be coming down as the year progresses. Is that math correct? If so, what's driving that decline throughout the year?
Yeah, that math is correct. I think Q1 will be the high point in terms of quarterly spending. It'll come down quarter by quarter. We'll be bringing employment down over the course of the year. Beyond that, as we talked about at the investor meeting, we're going to be making some significant new investments in things like the data center, tablets, low-power SoCs, those kinds of things. Even beyond the headline number, there's going to be a significant shift in investment over the course of the year. You have the math right, and it's going to be due to just shifting on projects and bringing down employment over the course of 2014.
Great. Thank you.
Thanks, Ross.
The next question comes from Glen Yeung from Citi.
Sorry, thanks. Brian or Stacy, either one. To what extent could you be misreading the enterprise server market in the sense that the virtualization curve is probably now over, and maybe you don't see the recovery in enterprise server with the economy that one might normally see?
I think we'd say there is some impact. As Diane showed you, we're showing a long-term growth rate in enterprise that's less than what it was three years ago. I think she'd say there is some impact associated with the virtualization curve having played out. That doesn't stop the fact that we think that there's growth in the enterprise segment. We've just changed our view for 2014. We think the recovery just plays out a bit slower than we would've thought a quarter ago.
Okay. Then kind of similar question, but on the PC side, to what extent do you think that the strength you're seeing, relative strength you're seeing in PCs today, is a function of the software transition at Microsoft? Does it therefore end in April, or do you think this is a more sustainable recovery?
As we said in our script that what drove a lot of it was desktop. We're seeing the mature markets, enterprise be the strongest with the emerging markets still flat to slightly down. Our view that if you look out from a PC perspective, was that we forecast with a relatively cautious and careful view looking out. We compared against the third parties. We think we're in line with what third parties have forecasted as well. Some of the contribution to fourth quarter was the XP transition, which is really what you're talking about. We don't think that was the only thing. As I said, a lot of the growth came from desktop, but the desktop was largely enterprise in the mature markets. That really, we think, has to do with a lot of great form factors that are coming in.
The all-in-ones, the great innovation that's coming in there. We saw some of the highest units of Core i5 and Core i7 in the enthusiast area. I think those are some great gaming platforms. We think there's a lot more to the desktop growth. We also introduced the Haswell-based NUC, which is the smallest form factor desktop machine that you can have. It's those kinds of innovations that are driving this desktop growth as much or more than the software transition.
That's great. Thank you very much.
The next question comes from Stacy Rasgon from Sanford Bernstein.
Hi, guys. Thanks for taking my questions. I want to dig into the full-year guidance a little bit. There's something I don't understand. You just basically took your Data Center guidance down for 2014 by a little bit. It doesn't sound like you're improving your full-year PC guidance at all. You're still saying single digits, yet you didn't take your full-year revenue outlook down. What's making up the difference? If there's nothing making up the difference, why didn't you take the full-year revenue guidance down?
Yeah, I think, Stacy, you're assuming a level of precision around approximately flat that doesn't exist. Approximately flat can encompass a little bit up, a little bit down. If you think about the Data Center being $10 billion, if we're at the higher end of the range versus the lower end of the range that we've put out, you change the full year on a $50-plus billion business by a few hundred million.
Is the bias more to a little bit down versus a little bit up, at least more than it was in November?
At this point, again, you're assuming a level of precision that I think isn't appropriate when you're talking something that will play out over the next 12 months. We had a positive data point on PCs. We had a little bit of a negative data point on one element of the enterprise. Our tablet momentum looks good. You just look at it, I'd say our view is pretty consistent with what it was back in November.
Yeah, you don't book any revenue on the tablets, right?
Stacy, thanks for the question. We're going to move on to the next questioner.
Okay.
The next question comes from Christopher Danely from J.P. Morgan.
Mr. Danely, you may be on mute. We can't hear you.
Is that better?
Yeah, that's better. There you go.
One of these days, I got to figure out how to work my own phone.
Yeah, technology's tough.
Tell me about it. Anyway, my first question is on gross margins. You gave us the Q1 and the full-year guidance. Can you just talk about how things are supposed to trend after Q1, and then maybe also talk about some of the levers on gross margins up or down?
Sure. I'll anchor it on Q1 and then give you a sense of how I see it playing out over the course of the year, since we've provided specific guidance for Q1. We've guided Q1 at 59%, coming down from Q4. We're at 62% in Q4, so down to 59. The elements there that bring us down, we have about a point and a half down associated with the start of production on Broadwell prior to its qualification for sale. You've seen this from us in the past, that build will be reserved out until we reach the formal qualification date. Then we're about a point down in Q1 as a result of it just being a seasonally lower quarter. Yeah, I think you'd understand and expect both of those.
60% for the year or so, algebra would say an improving gross margin over the course of the year. I think when we get into the back half of the year, we have a gross margin that's back into the low 60s. When I think about the headwinds and tailwinds to that, the tailwinds are that we expect that we'll see a falling off of 14-nanometer startup costs. We talked about that at the investor meeting, and I think that's consistent with what you'd expect from us. We see volume and unit costs getting better over the course of the year, and reserves will get a bit better as we progress through the year. Again, we have this Broadwell reserve in the first quarter.
The big offset to that are the $ that we're providing in terms of $ contra revenue for tablets that we also talked about in some depth at the investor meeting. We're not seeing a lot of those in the first quarter. They really build over the course of the year. We have the positives that I outlined, and then you'll see that offset as a result of those temporary $ contra revenue that we're providing to our customers as we take our tablet product line broadly through the different OS's and price points.
Great. For my follow-up, I guess it's on that question. On the tablet strategy to get to 40 million, you're saying it's going to be a 1.5% hit. Let's say you guys get into the second half of the year, and you're not quite to the 40 million, if it's a pretty significant shortfall. Would you consider canning that strategy? I guess I'm just wondering what the commitment is if the volumes aren't there, but the cost is there by the end of the year.
Sure. This isn't a price reduction as a normal price reduction would be. It's not where you're just simply reducing. It's truly a BOM cost equalizer. Remember, a lot of our 40 million tablets in 2014 will be based on Bay Trail. Bay Trail was originally designed for Atom-based PC segment and the upper-end tablet. What we're doing here is doing a BOM cost delta relative to what the mid and lower-end tablets require. Those are things like Bay Trail may require more layers of a printed circuit board for the board itself, more components on the board, and tighter power management controls, and things like that. We have a whole program to reduce those throughout the year, so that gives us confidence that as we go through the year, the BOM cost delta will shrink.
If the volume didn't show up for some reason, and I'm not going to say that that's what's going to happen, but I'm confident it will. If it didn't, it's on a per-unit basis, the spending on that contra would be reduced equivalently.
I'd just add, as Brian said, we're doing a lot of enabling across the industry to take the BOM cost down. Keep in mind, these are costs at the system level, not at our chip level. It'll vary a lot by SKU, but to give you a sense, for a Bay Trail platform, from the beginning of the year to the end of the year, we think that that BOM penalty drops by more than half. It just gets better out in time, and then when we get to the Broxton generation, we think it's de minimis.
Yeah, both Broxton and SoFIA-
SoFIA, yeah
are just specifically designed to eliminate that delta.
Got it. Okay, thanks a lot, guys. That's very helpful.
Sure.
Thanks, Chris.
The next question comes from Tristan Gerra from Baird.
Hi, good afternoon. If we look at tablets and smartphone, what type of units do you need to reach for that business to start having a material impact in gross margin from a standpoint of higher utilization rates and excluding the contra revenue impact and offset?
You were asking tablets and phones?
Yeah. Just looking at the 40 million units target for this year.
Yeah
What type of volume do you need to get in order for gross margin to stop appreciating from the rest of the business if you exclude the contra revenue impact?
Yeah. It's hard to say. Maybe I'll bridge back to our strategy here. Our strategy is that we're gonna use our process technology lead. We'll have leadership products that also are competitive or maybe even leadership in terms of cost. I showed some data at the investor meeting that just showed the die size as we progress from Bay Trail to Broxton to SoFIA, you can get a sense of the kinds of cost structure that we're gonna have. On a per unit basis, I don't think it causes or on a percentage basis, I'm not envisioning a situation where it causes the gross margin percentage to go up. You can definitely get to a space once we get through these contra revenue enabling dollars where every unit we sell is accretive on our gross margin dollars per unit.
It's utilizing factories that we have in place for PCs. It's a nice adder at a gross margin dollar per unit standpoint.
Okay. A quick follow-up. You talked about enterprise desktop being strong. Any color that you can provide in notebooks in terms of whether it tracked in line with expectation and whether was it more driven by consumer or enterprise?
It was pretty much in line with expectations. We didn't see any surprise on the notebook side. We saw overall PC units a little bit higher, that was really desktop. It was, as Brian said, broad-based across desktops. It was all-in-ones and corporate and consumer. Everything was just a little stronger on the desktop side.
Great. Thank you.
The next question comes from John Pitzer from Credit Suisse.
Yeah, good afternoon, guys. Congratulations on the solid result. Brian, I guess my first question, relative to the seasonal guide for the March quarter, is there any sort of granularity you can give us between sort of the PC Client Group, the Data Center Group, and kind of other IA? I guess the reason why I'm asking the question is, I get in the absence of knowing, just guiding to seasonal makes sense, but you do have Bay Trail Android tablets in Q1 that you didn't have in Q4. Then when you look at availability of SKUs in the PC Client Group, you actually have a lot better availability of kind of the SKUs I think people like in Q1 versus Q4, both of which would kind of argue for better seasonality. Maybe if you can give us a little granularity, that'd be helpful.
Sure. Let me try and see if you can add some of the financial detail. Part of it is, let's go back. It's seasonality off growth from Q4, right? A stronger Q4. It's a good quarter. I don't want to say that just growing at seasonality is not a good thing. Second thing I would say is, you're right. On the PC, we do see a lot of the 2-in-1s come in. Also Q1 is just, there's not a lot of events that happen that can drive upsides, like holidays and things like that. One of your comments, you said we'll start seeing Bay Trail Android tablets. Most of the Bay Trail Android tablets really start showing up more in Q2 than in Q1. That's, again, purely, remember, we made a shift. Our original program for Bay Trail was all Windows.
As we came in through the midpoint of the year, we said, "Let's shift and make it Windows and Android." Our OEM partners as well are targeting more towards Q2. It's just, when do you go and start putting back in that back-to-school event, which is the next seasonal place where upsides usually occur.
Yeah. The only thing I'd add to that, I guess I'd say I certainly hope you're right and it's better than seasonal, and we have all the ability in the world to respond to that. That ends up being a good answer. The thing you want to keep in mind as you work through seasonality over the course of the year is that these contra revenue dollars that we're providing to the customers for tablet enabling, that will come off of revenue. It's a gross margin hit, but it'll also be a decrement to revenue while we support them. It's not so much a Q2 issue, but as you get into the back half, it's going to be one of the minuses out there.
That's helpful. Then, guys, just relative to DCG, at the Analyst Day in November, you talked about your expectation for enterprise kind of being, I believe, a 7% or 8% type long-term grower. I know relative to Glen's question around virtualization, you answered that. I guess my question is, have you taken into account sort of cloud and enterprises kind of offloading infrastructure into the cloud? I know at the Analyst Day, you talked about two-thirds of cloud growth being consumer and not business. If you start to lose dollars in enterprise to cloud, is it kind of a one-to-one loss? If you lose it to enterprise, you'll just make it up in cloud? How do I think about that dynamic?
I think it's close enough for government work. If that's how it plays out, it should be dollar for dollar or close enough that you don't care. One of the phenomenon that we've seen is that we've seen the mix in the cloud actually moving up. If you look at the ASP impact inside of servers, John, it's more driven by cloud than anything else right now. They're buying a richer and richer mix. That's why I think you're probably pretty close if you start to see an offload that way. Utilization rates inside of enterprises tend to be pretty high on the kinds of things that they move into the cloud. I think you're pretty close to one to one.
Thanks, guys. Helpful.
The next question comes from Alex Gauna from JMP Securities.
Thanks so very much for taking my question. I was wondering if you could talk about how you see Asia specifically, and what's going on for you with the holiday build there and how that's factoring into your Q1 expectations. Thank you.
Like we said in Q4, we saw Asia continue to be soft. We've built in a seasonal growth. We don't expect anything big to shift there. We see Asia continuing to-- they'll have that same seasonal growth as well. The forecast stands. We don't see anything different occurring there, so to speak.
Is there any evidence within your build and your ODM build into the server market that, I know some of that's coming back to service data center, but what about the opportunity in Asia for them to become a stronger data center enterprise customer going forward?
Certainly. If you look at one of the places we look at for data center growth, and we are seeing it for both. It's across enterprise, cloud is growing very well. A lot of the cloud growth is driven out of Asia. We absolutely see Asia as a growth area for the data center in general.
Yeah. Exactly. I would just say on the client side, we think what we're seeing in Asia is just the tablet penetration rate increase that's offset by a couple of years from what we saw in mature markets. That's why I think we're seeing some stabilization and improvement in mature markets that's ahead of emerging markets, is we've just reached a saturation point on tablet penetration, and in the emerging markets, it's still increasing. It's much more of a client phenomenon than a data center phenomenon.
Would you expect the lag in Asia to be driven more by Bay Trail later on in the year or Haswell?
Hey, Alex, I appreciate the question, we're trying to give it fair for everybody.
Yeah, thank you.
Limited to.
Okay.
Thank you.
Thank you. That's helpful.
The next question comes from Vivek Arya from Bank of America.
Thanks for taking my question. First, on the smartphone or tablet space, I think it is true that Intel has a manufacturing lead. Do you think your cost reduction efforts and then the Moore's Law advantages ever progress faster than the ASP declines in this space? In other words, do you think Intel can be sustainably profitable in the mobile space, which is maturing?
Yes. We absolutely do. You saw at the investor meeting products like SoFIA, which really are going to be put onto 14-nanometer, are fully integrated all the way through, with a 3G option or an LTE option, and that LTE is with carrier aggregation. Those kinds of products, we believe, are very cost competitive. In fact, leading from a cost position. In addition, we don't talk a lot about, but we are already in that low-cost Asia market. We are in Shenzhen. We are working with ODMs there. That's actually where a lot of the innovation's coming out of for some of these cost reductions on tablets and where we're getting the cost reduction ideas. We're in that market now. We sold out of that Shenzhen low-cost market in Q4. We'll continue through it through 2014.
With products like SoFIA on leading-edge technology, we're very comfortable that we can get into those very low price points.
Okay. Thanks, Brian. As for my follow-up, there seems to be this race to provide 64-bit capability in application processors, and I think you guys have always had the 64-bit support with Atom like, in fact, all your products. The question is, what do you think is the value proposition of 64-bit, and how can you leverage your 64-bit capabilities to win market share in mobile?
Sure. You're right. All of our products have always been 64-bit, including Atom. OEMs who build with our products now can already go out and start to utilize 64-bit. We're out there working with the OSs, all of the OSs and OEMs to go enable that. The real usages and the values are going to be in those high compute areas, things like video, things like media transfer, media manipulation. All the classic things around computing that you saw drive the compute cycles on PC and people are doing more and more with tablets and phones are going to be the same things that drive 64-bit utilization on these mobile devices. I think you'll also see it in security. All of those things are going to drive a desire for 64-bit.
Great. Thank you.
The next question comes from Mike McConnell from Pacific Crest.
Thanks. I wanted to ask about, again, going back to enterprise and DCG. Since you said that some of the fall-off late in the quarter was due to some of the government issues, shutdown, debt ceiling, et cetera, and now that the debt deal has been reached, have you gotten any feedback from some of these enterprise customers that they're feeling more comfortable now to start to re-spend?
The headline here is that the first half of the year, we saw an enterprise market that was declining. We got into the back half of the year, it was growing. It was just growing a little less fast than we thought, and recovery was a little less fast than we thought. My expectation is we'll see that segment pop back to the normal rate. We were just a bit ahead of ourselves in terms of how fast the enterprise market was going to recover and grow. We have a little bit more of a cautious view of that as we progress through 2014. The short answer is yes, I'd expect that piece to come back. I still believe we'll be at the lower end of the guidance.
We probably were just a little overheated in Q4.
I understand. My follow-up would be, just Stacy, can you remind us about linearity in DCG, I guess? Would we have to wait till the second half of 2014 to see the re-acceleration, or do you think we could still see growth in the first half of the year? Thanks.
You'll see year-on-year growth rates. Remember DCG, the order pattern, particularly with some of these big cloud customers, can be very lumpy. When you step back and look at it on a year-on-year basis, we'll see year-on-year growth rates just progress through the year.
Sequentially, though, as well? Is that second half?
Sequentially would be more based on normal seasonality. Again, for DCG, my litmus test is always year-on-year growth rates, tends to be a more meaningful indicator.
Thanks, Mike.
Operator, we'll go ahead and take two more questions.
The next question comes from Hans Mosesmann from Raymond James.
Thank you for letting me ask a question. Brian, real simple. If you can you split out the types of servers that you sent or shipped in the quarter via enterprise networking, if you can provide that level of granularity? Thanks. Or split.
Yeah. We don't provide that level of granularity, but if you go back to Brian's prepared-- This is Stacy. You go back to Brian's prepared remarks, what you heard a lot of data on year-on-year growth rates across cloud networking, high-performance computing, and then I'm giving you for the enterprise piece, it was growth, it was just a lower level of growth than we thought. If you go back to the investor meeting stuff and then take what Brian showed you, what you'll see is for all those other segments was very consistent with how we modeled it. Enterprise growth, a little bit less growth.
Okay. As a follow-up, the Broadwell SoC timing still second half of 2014?
Yes. I said that we've made great progress on our 14-nanometer yields. We were actually very happy with the results that we got out of Q4. We're squarely on target for our second half launch and for, as Stacy said, starting production in Q1.
Okay. Thank you.
Thanks, Hans. Operator, if you can go ahead and introduce our last question.
The final question comes from Jim Covello from Goldman Sachs.
Thank you so much, guys. I appreciate it. I know that on the pickup in desktops, you had said it wasn't all corporate refresh, but obviously some of it was. Is there any chance that enterprise just had a fixed budget and so more of it went to the corporate refresh in the fourth quarter, and so they had a little bit less to spend on the data center, and that could account for some of the delta there?
We don't have a signal that suggests that, Jim. From what we've heard from the OEMs and the customers is more around, like as Stacy said, a little bit of inventory coming into Q3 and into Q4, then the government shutdown. If you looked at the order pattern, it really followed that from what we could tell from our position as well.
I'd just add to that, as Brian said earlier, we had record shipments in the desktop on the Core i7. We know that SKU's not an enterprise SKU at all. That's a consumer SKU.
Right.
Our data as we look across was consumer was strong, all-in-ones were strong. A lot of i7 was strong. A lot of things that we know don't go into enterprise were strong. I don't think that was the driver of what happened in the client side of enterprise, and we don't have any data points that would suggest that was what happened on the server side of the enterprise.
Could you help out?
Yeah, if I could just quickly on the follow-up on the tablet. Could you give us some perspective on the design wins that are not being supported by the contra revenue? In other words, sort of maybe a split between design win activity that is supported by contra revenue versus ones that aren't.
Yeah. We can't go into specifics of each one.
No, sure. Maybe just percentages or something.
I'd say the majority of the projects that we have in 2014 use some level of contra revenue to bring their BOMs or their bill of materials, want to make sure we don't use our acronyms everywhere, their bill of materials to parity.
Okay.
It really is very SKU-by-SKU dependent. It's not a fixed number out there. We work with each OEM, and that's how I'm comfortable that we're going to work this out over the next year or so. We work with each OEM, depending on what, are they targeting a high-end SKU, a mid-range SKU, a low-level SKU? What type of display and graphics and all of those things they want to put in that system. We have a delta in BOM that we're working out, and so we go and work with them on that. It's literally at that level, SKU by SKU.
Terrific. Very helpful. Thank you.
Thanks, Jim. Thank you all for joining us today. Jamie, please go ahead and wrap up the call.
Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.