Good day, ladies and gentlemen, welcome to the second quarter 2013 Intel Corporation earnings conference call. My name is Jamie, I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, 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, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mark Henninger, Director of Investor Relations. Please proceed, sir.
Great. Thank you, Jamie, welcome everyone to Intel's second quarter 2013 earnings 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 available currently at 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 discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Also, if during this call we use any non-GAAP financial measures or references, we'll post the appropriate GAAP financial reconciliations to our website, intc.com. Lastly, I'd like to highlight a change we'll be making to our earnings release process, starting with the third quarter earnings announcement on October 15th, 2013. To ensure the timely and controlled release of information, we plan to make our results available on our IR website, intc.com, about a minute after the market close and no longer distribute quarterly financial results through a newswire service. With that, let me hand the call back over to Brian.
Thanks, Mark. It's great to have a chance to speak to you all on my first earnings call as CEO. The last two months have been exciting for me. I've spent the majority of my time meeting with customers, employees, and my executive team. I've heard a wide variety of views about our industry and Intel, how we're positioned, where we're strong, and where we can improve. I've had the opportunity to share my vision and strategy for our company and lay out my expectations as we move into the new era with an updated set of priorities. Those conversations leave me more enthusiastic and more confident than ever about our opportunity as a company. Intel has unmatched assets in process technology and architecture, a powerful brand, and talented employees that are producing some remarkable results. Let me give you a few highlights from the second quarter.
There were several significant milestones in mobility. First, we unveiled details about our next generation Atom architecture, codenamed Silvermont. The Silvermont architecture will deliver up to a 5x reduction in power at the same level of performance or up to a 3x improvement in performance over our prior generation of architecture. Silvermont is unique in its ability to span the market's appetite for computing, from ultra-mobile devices to the data center, and it supports both Windows and Android. The Silvermont platform will underpin our products for tablets, two-in-ones, and desktops, as well as our phones and micro server products for the data center. The products will be Bay Trail, Merrifield, and Avoton, respectively. At Computex, we launched the Haswell family of processors, which deliver the biggest improvement in battery life in Intel's history, making no compromises, high performance, two-in-one devices that make all-day battery life a reality.
Haswell, along with Bay Trail, will power the more than 50 different two-in-one devices in the pipeline, including the very first fan-less Core designs. During the same week at Computex, we also announced a landmark tablet design in the Samsung Galaxy Tab 3. The Galaxy Tab 3 will use an Atom SoC and our LTE solution, signaling important progress in the tablet space. The data center strategy is continuing to pay dividends. Our cloud and storage business each grew their revenue more than 40% year-over-year. Networking grew more than 20%, and the high-performance computing business won 98% of all new systems entering the TOP500 list. In fact, the number 1 system on the TOP500 was all Intel for the first time since 1997, using a combination of Intel Xeon CPUs and Xeon Phi accelerators.
Finally, our investments and expertise in process technology continue to be the foundation of our industry leadership. With 22 nanometer defect density and throughput times at record low levels and 14 nanometer on track to enter production by the end of the year. Together, these accomplishments highlight to me what's possible when we focus our resources on the right objectives, and we hold ourselves accountable for results. At the same time, I understand that we've not always lived up to the standard that we've set for ourselves. Intel was slow to respond to the ultra-mobile PC trends. The importance of that can be seen in the current market dynamics. The traditional PC market segment is down from our expectations at the beginning of the year, while ultra-mobile devices like tablets are up.
Even more important, there will always be another next big thing. It's our job to continue to scan for emerging trends, unlocking, participating in, and shaping these nascent markets. Doing that will require some changes at Intel, which we have begun. Just a few weeks ago, I announced a significant reorganization. The changes we made flatten the organization, improve decision-making, and will contribute to a culture of even greater accountability. These elements are critical in the fast-paced, ultra-mobile environment. In addition to the organizational changes, we have made several strategy and priority changes that will allow us to focus and win in that environment. These changes will drive a greater emphasis on our Atom-based products, bringing the full weight of our process and architectural leadership to the Atom family.
We will move Atom even faster to our leading-edge silicon technology and focus on the SoC integration of key components like graphics, communication, and other devices. This does not mean we will lessen the value or leadership of our Core product family, but rather make Atom an equal player in technology leadership for the ultra-mobile space. Both product lines will be driving Intel's future. Some of the changes we're making are subtle and some are more transformational. In general, you're likely to see us making moves and adjustments in the market before you hear us talking about them. We'll of course have a substantive update for you at the investor meeting in November. What I can say now is that all of the changes are focused on value creation. Our company has a strong record of cash flow generation and returning that cash to our owners.
I recognize that we are the stewards of our owners' capital. That tradition will continue. I'm excited about what lies ahead. Intel is a company with extraordinary assets at its disposal. I'm looking forward to making the most of those assets in an environment where the pace of innovation and market transformation is faster than it's ever been. With that, let me turn it over to Stacy.
Thanks, Brian. I'd like to take a few minutes to walk through our second quarter financials and our expectations as we head into the back half of the year. We can get right into Q&A. The second quarter results came in as expected. Second quarter revenue came in at $12.8 billion, up 2% from the first quarter. The core business came in as expected. We saw some softness in our baseband business. At a segment level, the PC group grew 1% sequentially, and the Data Center Group grew 6%. As expected, inventory levels across the worldwide PC supply chain grew slightly as customers began building Haswell-based PCs. Inventory levels are still being managed well below historical averages based on uncertainty heading into the back half of the year.
For the third quarter of 2013, we are forecasting the midpoint of the revenue range at $13.5 billion, up 5% from the second quarter, which is at the lower end of the historical range as a result of our expectation that our customers will continue to operate with lean inventory levels exiting the third quarter. Moving to gross margin. Second quarter gross margin of 58% was in line with our guidance and up two points from the first quarter as a result of the qualification for sale of additional Haswell products and higher volume. As expected, the reduction in excess capacity charges in the second quarter was offset by an increase in 14-nanometer startup costs.
For the third quarter, we expect gross margin to increase three points to 61% as we qualify our Bay Trail product line for sale, increase our volume, and start to see factory startup costs come down. For the second quarter, spending was in line with expectations at $4.7 billion. For the third quarter, we are forecasting an increase to total spending of $100 million. The reclassification of spending on process engineers from cost of sales to R&D increases our spending, but we expect this will be mostly offset by spending reductions across the company. These spending reductions allow us to reduce our spending forecast for the year to $18.7 billion. Operating income for the second quarter was $2.7 billion, with earnings per share of $0.39. Taking a look at the balance sheet, total cash investments into the quarter at $17.4 billion, up slightly from the first quarter.
In the second quarter, we generated approximately $5 billion in cash from operations, paid approximately $1 billion in dividends, purchased almost $3 billion in capital assets, and repurchased over half a billion dollars in stock. While our first half financials played out as expected, the overall PC market segment for 2013 is expected to be weaker than we forecasted at the beginning of the year. Our expectation is now that revenue will be approximately flat to last year. As a result, our gross margin forecast for the year is now 59% versus the prior forecast of 60%. Additionally, we have reduced our forecast for capital spending by $1 billion to $11 billion. We have an unprecedented lineup of products coming to market in the second half of this year across all the segments of our business.
Haswell delivers a historical increase in battery life across a diverse lineup of ultra-mobile form factors like two-in-one convertibles, tablets, and other touch-enabled devices. In the second half, we will launch Bay Trail, which will further extend our product line across screen sizes and price points in both tablets and PCs. In our phone business, we are on track to ship multi-mode data and voice LTE baseband solutions, as well as our next generation applications processor, code-named Merrifield, by the end of the year. In the data center, we have new micro server and Xeon-class products coming to market in the second half. This leadership product portfolio is built on an extending manufacturing lead, which gives us the world's highest performing, lowest cost, and lowest power transistors.
Building on this leadership further, we are on track to start production on our 14-nanometer process technology in the back half of this year. With that, let me turn it back over to Mark.
All right. Thank you, Brian and Stacy. Moving on to the Q&A. As is our normal practice, we'll ask each participant to ask one question and a follow-up if you have one. Also, we are experiencing some network interference, so I'll ask all the participants to speak slowly and clearly, and if we're not able to hear you, we will ask you to repeat the question. Jamie, if you could 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 Glen Yeung from Citigroup.
Thanks for letting me ask a question. First one is on the second half of the year on your outlook there. If I look at your guidance for the year and your guidance for Q3, the implication is 7% sequential growth in revenues for the fourth quarter, and I wonder, that's obviously high relative to historical norms, kind of like numbers we saw back in the early part of the last decade, and I wonder what gives you the confidence there. Is there something about the mix? Obviously, new product, but is there also something about the mix maybe between Data Center and client?
Yeah. Hi, Glen, this is Stacy. I guess I'd say this, it's a little early to get that specific about Q4. At this point, I'd expect seasonal, which is a little less than what you said, but still gets us into that kind of flat year-on-year revenue growth. I think the tail for us will really be written in the back half of Q3 when we start to see how our customers are putting in place inventory in anticipation of that fourth quarter selling season. Right now, our view on that is fairly cautious. We expect that they'll continue to run lean inventory levels, but the reality is we won't know that until we get into late August, early September.
That's when you'd normally start to see them putting in the supply line that also aligns with other things in the industry. We think that's when we're likely to really get a sense of Q3 and the momentum into Q4.
All right. Makes sense. Okay, the next question is for Brian. First of all, Brian, congratulations on your new role. The question is, now that you're in that role for a couple of months, as you say, you've talked to customers. Today, Intel has very good products in mobile, tomorrow will have arguably the best products in mobile, anyway they do today. I wonder, in your discussions with customers, if you think that that's enough, if the customer base is now open to accepting an x86-based processor in what has traditionally been an Arm market, or does it matter?
Okay. As Mark said, it was a little hard to hear you on our side. We're having some network issues. Let me try to answer your question. The question is, can x86 go into these ultra-mobile markets, how do the customers view that? My answer would be, they are more than willing to accept it, the fact that x86 works on both Android and Windows is a real advantage to our OEM base. They look at that and say that they can have one architectural design, one set of products, and use both operating systems. It's a unique feature that we are able to provide. It's more been a focus by Intel of actually going in and designing for those markets and moving our products in there.
You really see that with Haswell and Bay Trail, Haswell on the Core side and Bay Trail on the Atom side, really being designed for those ultra-mobile products. We talked about Haswell producing the first fanless Core products out there in the market in any kind of real volume. Bay Trail really being designed for the much lower price points that you see these tablets, even down to the entry-level tablets. The fact that it's x86 is an advantage, actually, because we've been able to produce both Android and Windows on our product now.
Great. Thanks so much.
The next question comes from Vivek Arya from Bank of America Merrill Lynch.
Thanks for taking my question. Brian, first of all, how should we think about ASP trends in the PC segment? I think you are declining 3% sequential declines in Q2, and you're guiding to another 50 point gross margin hit from lower ASPs in Q3. Why are you not seeing more of an uplift from the rollout of Haswell?
Yeah. This is Stacy. I'll take that one because it was in the CFO commentary that I put out. You should think of it as a mix shift for us and share win at the low end of the market. I think if you look at our first half results, you'll see we came in pretty much in line with what we thought, but during a time where the TAM was somewhat weaker than we thought. I think the offset there, the plug is that we gained some share at the low end, and so we have a bit more mix at the lower end, and then due to share win in that particular segment of the market.
Great. Thanks, Stacy. As a follow-up, why are we not seeing more benefits from the decrease in 14-nanometer startup costs? Like when I look at the uplift we should expect this time, they're not as much as uplift we have seen in prior cycles when the startup costs have
decrease. I think your guidance implies a sequential gross margin decline in Q4. If you could just walk us through the puts and takes, I would appreciate that.
Yeah. I'm sorry, we are having networking problems. Let me just make sure I got your question. You're asking, simplifying, what are we seeing in terms of the startup cost trend relative to prior, and what are the puts and takes for Q4? Is that what your question is?
Yeah, relative to gross margins. That's right.
Relative to gross margin. Sure. The startup cost trend, it's directionally the same as what we've seen in other generations. It will be the same shape. Generally the same impact on gross margin. You see the peak in startup costs in the second quarter. They'll come down some in Q3, then we'll get a bigger benefit in Q4, then they'll come down a bit more in the first half of next year. It's a comparable trend. In the fourth quarter, the puts and takes, let me just do the gross margin progression across the year. We were at 56% in Q1. We hit our forecast in Q2 of 58%. We're expecting a few points of increase in the third quarter to 61%.
As I think about Q4, I think we have a couple of tailwinds, I would expect volume to be up some. We should get some good news associated with startup costs. The offset in Q4 is going to be, we should be well into the build of Broadwell, doing the build on the pre-qualification material. My sense is we'll have an increase in inventory write-offs in the fourth quarter, that'll offset some of those good news. Net of all that, I expect gross margin in the fourth quarter to be at or maybe a little bit higher than where we are in Q3, and we'll provide that forecast in another 90 days.
Just so that we don't get lost in code names, that product is our lead product on 14 nanometer, that kind of aligns with being in manufacturing in the back half of the year on 14 nanometer.
Okay. Thank you.
Welcome.
Thanks, Vivek. If I can remind the participants to please speak slowly, we apologize for the network issues we're having.
The next question comes from Christopher Danely from J.P. Morgan.
Thanks, guys. Hey, Brian, you said in the press release and the spiel up front that you're taking in a wide variety of views from customers and people at the company and stuff like that. Could you just give us your opinion on what has surprised you and maybe how your view has changed and what you think has been important out there?
Sure. I don't know if anything really surprised me. I think the things that were positive for me is that our customers, especially, they want Intel to get into this expanding ultra-mobile market. They are looking for Intel to be stronger and have a better and more capable product line up in there, and they're excited about the products that we have coming, the Haswell and Bay Trail. I'd say, the key message that they've been giving us is, "We really want you there. We see the products coming. We want even more, and we want a faster line up following those." That you heard in my speech today and in the earnings release that we're really putting a much, much stronger effort on Atom and driving our SoC integration, and pulling it forward to the leading edge.
I'd say that was the major point or major comments I got back from our customer base.
Sure. Thanks. As my follow-up, you guys are guiding for some decent growth here in the second half of this year. If we go back to last year, you were essentially flat in the second half, can you just give us your sense of what's driving the confidence that things are going to be better for you guys in the second half of this year, versus the second half of last year?
I'd say it's a couple things. I'd also say, what we're guiding for Q3 is sub-seasonal growth, it's off of an okay Q2, not a gangbuster Q2. I don't think it's a wildly optimistic forecast. In terms of the tailwinds that I see, first and foremost is the product cycle. Haswell is a great product for Ultrabooks and two-in-ones, as Brian said, with Bay Trail coming to the marketplace, we're going to be hitting price points in the touch-enabled segment of the PC market that we've never touched before. We'll be able to do that profitably. We'll start to gain share in tablets.
We've got our first big tablet wins out in the marketplace, with Bay Trail, we think, again, we enable other designs to come to market at price points that are going to be, I think, nice year-end consumer price points. The second tailwind that I'd say is, we expect generally an improving macroeconomic climate as we go into the back half. I think that's aligned with most economists. In the first half, the U.S. was a little bit stronger than we had thought starting the year. China was a little bit weaker, generally I'd expect a improving macroeconomic environment in the back half.
Thank you.
Thanks, Chris.
The next question comes from John Pitzer from Credit Suisse.
Good afternoon, guys. Thanks for letting me ask the question. Brian, although early, the initial read we're getting on Bay Trail with your partners is pretty positive, and I think that's driving a concern in the investment community with whether or not Bay Trail is going to be so good that it starts to cannibalize as well. I guess I'd like to get your thoughts on how you can segment the market properly. To what extent do you think you're a slave to market forces, and to what extent do you think you can bring applications that are MIPS-attentive into the ecosystem and secure the core business, even as you try to get more aggressive in Bay Trail and Atom?
Sure. First, let me tell you, our view right now on Bay Trail is that we don't believe it'll be cannibalistic in that nature. We believe what it really does is allows us to get into these markets that we're not in a big way today. That, as Stacy said, are these sub-$400, sub-$300 in some case, clamshells and touch-enabled convertibles and two-in-one devices. Tablets, $199 and below. Some you're going to see even lower, below $150 and much below that as we go through the holiday season. Bay Trail really, first and foremost, we believe, gives solid performance, solid battery life, relative to the competition, in price points and markets that we're simply not in in a big way today. We're looking at it mostly as an expansive.
The other thing that I'd make as a point is, Haswell, as we said, is the largest battery life improvement in Intel's history, along with great performance. It's providing products that have Core-level performance that will be fanless for the first time. We still believe that there's a strong drive for performance in segments of this market that look for high-def video performance, gaming, all of the things that if you actually look at a lot of the tablet usage even, people are doing more and more, and definitely in these two-in-one and convertible devices, people look for that kind of application. We believe that Haswell allowing us to go down into those better price points and lower powers will give us the performance option to keep people up into those regions.
If I can just add a couple of data points on that, in terms of what we've seen over the last three years. First off, just to reinforce what Brian said, there still is a big gap in terms of performance and features between the best of Bay Trail and the Core i3, i5, i7 segment of our product line. If you look at the last three years, even in a time where the market's been relatively weak, the Core i5, i7 volumes have been very healthy. If anything, we've seen a larger mix overall to Core, over that time period. It says there still is this healthy segmentation in the marketplace where Bay Trail will play, it will start to expand us into markets where we don't play today.
Because of the cost structure, we think we can do it with more dollars per unit than we would be able to do if we were going after that segment, say, with Celeron or even with some of the low end of the Pentium roadmap. It's a powerful product from that perspective, John.
Better to have a product like Bay Trail that we can play no matter where it goes, rather than miss that market, which, if you look over the past, was more the case.
Helpful, guys. As my follow on, Stacy, several years back, you put out a long-term gross margin target of sort of 55%-65%, I think for most of the time since you've put that target out, you've been operating near the higher end of that range. I'm just kind of curious, as you start bringing Bay Trail, Merrifield, put a renewed effort into the Atom space, should we think that the next 3 years, that range is going to be more directed towards the lower half, or are there other puts and takes within that gross margin range?
As you probably anticipate, I'm not going to get pinned down inside the range. I'm still very comfortable with the 55%-65%. I think the second half is a great proof point. From Q1 to Q3, we're going to quadruple our tablet volume. We're running a 61% gross margin at the company level. As Brian said, the market's going to go where it's going to go. We've got some great products that give us cost structure to go after and profitably, I'm still confident in that gross margin range. We'll talk more about the specific segments when we get to the investor meeting.
Thanks, guys. Appreciate it.
Sure.
The next question comes from Stacy Rasgon from Sanford Bernstein.
Hi, guys. Thanks for taking my question. First, on the annual revenue guidance, your prior guidance had total revenues up in the low single digits as well as total units up in the low single digits. With the new guidance of relatively flat revenue, does that essentially imply flat total units? If so, how important is the Bay Trail launch and Bay Trail volumes, to actually achieving that type of a unit target?
Apologies, Stacy, let me restate your question, make sure I'm answering correctly, because that was a little garbled in the middle, and it's not your fault. We're just having some issues on our part. I think what you're asking me is kind of defend my flat revenue forecast and give you a sense of what's going on in client versus other segments of the business, and in particular, what's going on with units. Is that where you were going?
Yeah, that's it. Then if the guidance does actually imply flat units correlated with your revenue, how important is gaining Bay Trail volume in the back half to achieving that type of a unit outlook?
Yeah. Okay. Let me go there. First I'd say, we would actually expect that overall compute units, so tablets up through PCs, they'll be down some this year. That's consistent with a flat revenue forecast for the company. Let me just kind of walk you through and I'll just start with what you've seen from Gartner and IDC of their view of the year. We're pretty aligned with those numbers in terms of our view of the classic PC market. To get to then our units, you have to make some adjustments to that. First off, in their classic view of PCs, that would not include some of the ultra-mobile devices, i.e. the Microsoft Surface Pro. You'd add that in to get to our PC Client Group units. We think we're gaining some share in tablets, so that's a little bit of an offset.
Netbooks for us is declining pretty significantly. That's not in the PC Client Group segment, that's in the other IAG segment. Then, as I said earlier in my prepared remarks, we think we gained some share, so that also gives us a little bit of help. When you net all that out, you'd say our units and our revenue for the PC Client Group is down year-over-year. It's just not down as much as the headline number that you see from Gartner. You start there, and then the offsets to that, the places where we're growing, is Data Center Group, which we think grows in the low double digits. If you do manage your math on that, it's 20% of our revenue. That adds a couple of points of growth to the company. NAND is probably worth a point on its own.
They look to be having a good year. You have some other smaller things, but you net that out against a PC Client Group that's down a bit, and you get to flat for the year. Just kind of in rough math, that's how I'm viewing the different segments.
Got it.
Did that answer your question?
No, that's very helpful. As my follow-up, if I could carve into the data center a little bit. Looks like you're still looking for low double-digit growth in this business. That seems to be unchanged from the last couple of quarters. Does that not imply a very significant ramp, both quarter-over-quarter and year-over-year? In the ballpark of 15%-20% sequentially, as well as year-over-year in the second half. Can you give us some, I guess, where your confidence comes from that you're going to get that kind of growth in the data center in the second half? Is it all macro or is it something else? What drives that?
Sure. This is Brian. I'll answer that one. Yes, we're still confident in the second half growth of our data center business overall. As we mentioned, we're seeing strong growth in the cloud, the high-performance computing, our networking, and our storage. We think those continue through the second half of this year. What was down, as Stacy mentioned, was the enterprise data centers were down a bit in the first half. We think as the macroeconomics continue to improve through this year, that picks up a bit. When you put that all together, we believe that absolutely, our view is that we can continue through this year with that low double-digit growth.
The enterprise had to have been down more than that, right? You said that a hard drive or storage and networking, and all this other stuff was up 20%-40%. I think your total data center business in the first half year-over-year is just flat to up a little bit. That enterprise piece had to have been down quite a bit year-over-year in the second half. You're saying that you're going to see a very significant reversal of that trend in the second half?
From a wonky finance standpoint, realize there's also a kind of prior period comparison thing going on. In the first half of last year, we were in the steep part of the ramp for Romley. In the second half of this year, we'll be launching other versions of Ivy Bridge into the data center. The short answer to your question is yes, I would expect some pretty steep quarter-on-quarter and year-on-year comps in the back half of this year. That is what we're planning for. Stacy, we're going to have to move on from there.
Okay. Thank you, guys.
Sure.
The next question comes from Ross Seymore from Deutsche Bank.
Hi, guys. Can you hear me okay?
We can. Thanks, Ross.
Great. First question is for Brian. On that focus on the ultra-mobility side of things, can you talk a little bit about what that implies for the OpEx for Intel? The OpEx is elevated as a percentage of sales versus where it's been historically, mainly on the R&D side. My understanding is the majority of that spending is for the mobile effort. Is your efforts to expedite that process likely to mean more OpEx to deliver those better results? Maybe a follow-on to that is, when do we get either results on the top line happening or you rationalize some of that OpEx? Thank you.
Sure. Let me start. The simple answer is no, we're not going to increase our OpEx spending. In fact, what we've really been focusing on is managing that as well. What you're going to see, remember, as we move our architecture more and more to an SoC, a lot of the work we do bridges between Core and Atom. As we pull Atom forward onto the leading-edge technology, again, that allows a lot of the architectural work to be in alignment and be shared amongst the two products. We believe that we can move faster on Atom and into this ultra-mobility space without having to change or increase our OpEx. Absolutely, that's the current model that we're working under. From a when will you start to see it?
Some of these changes have been started a while back, you see Bay Trail coming out towards the end of this year. That's a product that is on that Atom Core that is truly industry-leading. We talked earlier about a lot of the benchmarks coming out showing it very strong against the competition, if not leading the competition in many of the metrics. We believe that you'll start to see some of this just naturally over the next six months as Bay Trail ramps up and gets into production. We have a series of products after that, you'll see more and more acceleration. Don't think of this as a one-time shift where you'll see a digital move. Look at it as a constant pushing of the accelerator down, the thing just gets faster and faster as time goes by.
You'll just see more and more strength of that Atom line as time goes through here. You'll look back and say, "Wow, it's obvious. The Atom line has truly become strong, and they've got share in the tablet space.
If I could just add to that, and give you a little bit of sense of where we're trying to go. You, I'm sure, noticed we brought down the overall spending forecast for the company. We know that we're running hot in terms of spending as a % of revenue. We've been very consciously making investments in that space. What I've seen of Brian in his tenure is he's very focused on driving that efficiency and bringing it down. We'll come down a few points between where we were in Q2 and the end of the year in terms of spending as a % of revenue. The expectation is we can come down more next year.
Great.
Yeah. Go ahead.
No, go ahead.
Well, my point was just going to be to reemphasize what Stacy just said, is that my answer for why OpEx won't go up is, just take a look at what we've done moving into Q3, right? The efficiency and structure that we put in, both the reorganization that we did and flattening and decision-making, and just the cost savings that we've already put in through efficiencies in both the OpEx and the CapEx that you saw. We expect that same level of efficiency to keep moving forward, even as we make this transition. To me, those are not separated. Those go hand in hand, actually, as you become more efficient.
Thanks for your patience with the audio. Ross, do you have a follow-up question?
Yeah, I do. Switching gears again for BK, but on the foundry side of things. I think Paul described it that you're no longer crawling on the first quarter conference call. I know that's a business that's near and dear to your heart, given your prior job. Can you give us some benchmarks that we should watch for to deem the success or lack thereof that Intel plans to have? Generally speaking, can you explain how your strategy in foundry may be any different than the prior CEO?
Sure. You have to remember that even when you sign up a foundry customer, it's 18 to 24, sometimes even longer, 30 months before that foundry customer is able to start producing product, especially when they move from one foundry to another, as they do go through their design cycle and their product qualification. You should think that even the customers that we've already signed up, that you've heard about in the press, those revenues and that impact on Intel's bottom line is still a ways out. Any changes we'd make in strategy or additional customers we'd make now will have that same timeline. I think, again, Paul said it right. You want to kind of crawl, walk, run, not necessarily because that's what we should do in order to manage it.
It's more, you really want to make sure that the systems and the customer support models that you have are in place to handle the volume that you're really taking on. Since we haven't been a foundry business all our life, we wanted to go and make sure we really knew what we were doing there. We are moving from, I'd say, that crawl space to at least the walk space. I think that the philosophy we have moving forward is that we're going to treat every one of these customers that come to us and come talk to us about foundry opportunities individually, and look at them from a strategic standpoint, what size of business they bring, and whether their products can really take advantage of our process leadership. We don't take a look at this as separating out the do we wills or won'ts.
We're taking each customer individually and looking at them as an opportunity and what is the right thing for the shareholders from bringing value to the shareholders with this technology that we have.
Thank you.
The next question comes from David Wong from Wells Fargo.
Thanks very much. You mentioned moving Atom even faster to the leading edge. Can you give us some detail as to when we might see 14 nanometer Atom products in the market? Similarly, you talked about 14 nanometers going into production end of this year. Does that mean the first 14 nanometer Core products will launch in the first quarter of 2014?
Okay. You asked a couple of questions. We're not going to give changes to the roadmap or any kind of product schedules here from a what will happen as a result of this strategy. We'll try and bring those updates to our investor meeting that happens in November. As far as our 14 nanometer Core launch and just our general product launch, I think what we said so far is first half of 2014. We're not ready to give any specifics beyond that.
Okay.
I gave you a pretty strong hint with the fact that we'll be taking pre-qualification reserves. You can sense that those are going to be material, so we'll be well into production in the fourth quarter.
Excellent. Thanks, Stacy. Just one other. Is the lower CapEx plan due to lower spending on 14 nanometer and 10 nanometer, or lower on 450 millimeter, or both?
It's a variety of things, David. As we said on the call, our view of the overall market is less now than it was when we started the year. I think you've seen us trying to be very responsive to changes in demand and get the balance right. As our view of the market changed, we saw some opportunities for things that we thought we were going to put in place this year that we no longer have to put in place. It's across the board. It's no one thing. Similar to what you saw in Q1, where we found opportunities to drive more reuse, here we're finding some opportunities to push some capital out of the year.
Some of it is 450, not based on schedule changes, it's just based on some efficiencies that we're able to find and shortening the time it takes us to install certain things and that kind of stuff. Some of it is M&E for 14 nanometer, some of it is space, just a variety of kind of small things that added up to $1 billion.
Okay. Thanks very much.
Sure.
Thanks, David. Operator, we have time for two more questions.
The next question comes from James Covello from Goldman Sachs.
Great, guys. Thank you very much for taking the question. Just to follow up on the CapEx, does the new $11 billion forecast still include a full $2 billion for the new shell, or is that some of what has gotten pushed out?
Specific on the 450. That's a 450 question, Jim?
Well, yeah, that shell that you guys had articulated, there was sort of an extra $2 billion in the CapEx that was related to that 450 shell.
That one's down a little bit, but not a lot. It does change my round. I was rounding up to two, and now it would round to 1.5. In the scheme of the billion-dollar change, it's not the largest driver. It's not even that large of a driver. I think it's interesting when you deconstruct the CapEx and you just kind of get down to the level of CapEx that's in place for kind of current run rate. You take out the 450, you can take out some of the capital that's being spent, not necessarily for our current production, but things like IT and labs.
You take out some of the greenfield space that we've built in place, you get down to a run rate of CapEx, kind of in support of our current business that's in the mid-50s and $50 billion-$55 billion or so in revenue, in that range. That is, I think, a nice healthy level, a nice sustainable level, I can run at that level and generate a 60% gross margin. It feels pretty good from that perspective. As we said, we're continuing to try to balance the CapEx relative to the business size.
Sure. I'll use my follow-up on the CapEx as well. It's great to see the CapEx come down from the $13 billion originally to the $11 billion today. The first half spending is $49 billion, that would still imply pretty far below the $11 billion. Obviously, maybe a little more of that shell comes in the back half, that would be some of the increase in the back half CapEx. Can we get any kind of hope that potentially even $11 billion is a number that there's some downside to?
First, the linearity, yes, more of that shell, most of that shell, frankly, is in the back half of the year. That shifts the linearity, and you also see the 14 nanometer spending going up in the back half. It's kind of a back-half-loaded year. I think, as I said earlier, we will continue to look for the right balance between capital and demand. I want to stress, when you really deconstruct our CapEx, at kind of $7 billion-$8 billion of capital being spent to support a business that's in the mid-$50 billion in revenue, it's the right level of CapEx. I'm very comfortable with that. It's not putting in a bunch of incremental capacity, and it's a level that I can sustain a gross margin that's in that range that I've been talking about and kind of right at 60%.
Thank you very much.
Sure.
The next question comes from Tristan Gerra from Baird.
Hi, good afternoon. A few years ago when Atom first launched, I think you had mentioned that Atom was slightly lower gross margin, but same or slightly higher operating margin than the corporate average. Is that view still holding with the new products that you're launching?
This is probably a better conversation for the investor meeting. Keep in mind that Atom spans from servers to the PC segment of the market now, where we're enabling these 299 price points to phones, to tablets, right? It's worthwhile to have a deeper discussion about the different segments. As we articulated earlier, generally, when you're looking at the predominance of our volume, the core business, when Atom is price point replacing a Celeron or a Pentium, we're doing it at a better margin $ per unit than we were selling Celeron into that space. We're enabling lower price points. From that perspective, it's a great product. It lets us kind of fight on the front foot and go after markets profitably that we struggled to go after before. I'll save the rest probably till the investor meeting.
Okay. That's useful. On this call, there's been obviously a good amount of discussion about your diversification into ultra-mobile. If we look at the core business, the ramp of Haswell and the Ultrabooks obviously hasn't been enough to bring back PC unit growth this year. Should we have the view that PC is basically past the peak, continues to decline, and if not, what catalyst do you see going forward? Why what hasn't worked so far could work later in revitalizing PC growth going forward?
Let me see. We had a hard time hearing that one because of the break, the networking problems we're having on this end. Let me try and repeat it and make sure. I think the basic of your question was, PCs have continued to decline. You've introduced Haswell. You're still forecasting a back half decline. What gives us confidence that we'll be able to turn that around or make any change in that? Did I capture your question correctly?
Yeah, that's correct. Thank you.
I'll answer first, then Stacy can jump in. My answer would be simply, Haswell has been not a single product launch. Let me first start with Haswell. We launched the quad-core products in the second quarter. As we go into the third quarter, the dual-core products, which go more into those lower price point regions, is actually going out to the market. It's a staggered launch, which is a little bit different than we've done some other products. We're just now really starting to see the ramp of Haswell into the consumer's hands. I think it's really way too early to say, "Here's where Haswell is." You're just going to see as we move into the second half, these fanless devices with Haswell.
As we move forward, Bay Trail and 14 nanometers as we move into next year, you can imagine will drive prices and battery life and the number of fanless devices up even more. That would be my first answer. The second answer I'd tell you what's different moving forward, again, we've kind of talked about this, is Bay Trail. Bay Trail is going into some of these same classic PC devices that you see today. The clamshells where they've got touch-enabled clamshells coming down into the $300 range. You're going to see convertible clamshells where you can detach or flip, and it acts as both a tablet or a PC in the sub-$400 range, right around $400. As we move into next year, those price points will continue to drop.
The fact that PCs, especially with Bay Trail, are going to move down into this, let's call it $200-$400 range, is going to shift that market, we believe, as well. That's different than what's been out over the last few years. You've got fanless Haswell, you've got Bay Trail coming in, all of those things allowing devices that haven't been allowed in the past with our designs.
Thank you very much.
Thanks, Tristan. All right. Thank you all for joining us on the call today. Again, our apologies for the audio challenges that we've had. Jamie, can you please go ahead and wrap up the call?
Thank you. Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.