Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Intel Corporation Earnings Conference Call. My name is Jamie, and 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 and instructions will be given at that time. 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, and welcome, everyone, to Intel's Q2 2013 earnings conference call. By 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 and A. Before we begin, let me remind everyone that today's discussion contains forward looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Also, 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 Starting with the Q3 earnings announcement on October 15, 2015.
To ensure the timely and controlled release of information, we plan to make our results available on our IR Web site intc.com about a minute after the market closed and no longer distribute quarterly financial results through a Newswire service. With that, Let me hand the call back over to Clint.
Thanks, Mark. It's great to have a chance to speak to you all on my first earnings call as CEO. The last 2 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 Q2. There were several significant milestones in Mobility.
First, we unveiled details about our next generation Adam architecture code named 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 underpin our products for tablets, 2 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 Aventon respectively.
Then at Computex, We launched the Haswell family of processors, which delivered the biggest improvement in battery life in Intel's history, making no compromises high performance 2 in 1 devices that make all day battery life a reality. Haswell along with Baytrail will power the more than 50 different 2 in-one devices in the pipeline, including the very first fanless Core Designs. During the same week at Computex, we also announced the 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 storage Cloud and storage business each grew the revenue more than 40% year over year. Networking grew more than 20% and high performance computing Business won 98% of all new systems entering the top 500 list. In fact, the number one system on the top 500 was all Intel for the first time since 1997 using a combination of Intel Xeon CPUs and Xeon PHY accelerators. And 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 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, improved 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 Adam based products, bringing the full weight of our process and architectural leadership to the Adam family. We will move Adam 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 Adam an equal player in technology leadership for the Ultramobile 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 We'll see us making moves and adjustments in the market before you hear us talking about them, but 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 and that tradition will continue.
I'm excited about what lies ahead. Intel is a company with extraordinary assets at its disposal And 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, Bran. I'd like to take a few minutes to walk through our Q2 financials and our expectations as we head into the back half of the year, then we can get right into Q and A. The 2nd quarter results came in as expected. 2nd quarter revenue came in at $12,800,000,000 up 2% from the 1st quarter. The core business came in as expected, but 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, but inventory levels are still being managed well below historical averages based on uncertainty heading into the back half of the year. For the Q3 of 2013, we are forecasting the midpoint of the revenue range at $13,500,000,000 With lean inventory levels exiting the 3rd quarter. Moving to gross margin. 2nd quarter gross margin of 58% was in line with our guidance and up two points from the Q1 as a result of the qualification for sale of additional Haswell products and higher volume.
The reduction in excess capacity charges in the 2nd quarter was offset by an increase in 14 nanometer start up costs. For the Q3, we expect gross margin to increase 3 points to 61% as we qualify our Baytrol product line for sale, Increase our volume and start to see factory start up costs come down. For the 2nd quarter, spending was in line with expectations at 4 point $7,000,000,000 For the Q3, we're forecasting an increase to total spending of $100,000,000 The reclassification of Spending on process engineers from cost of sales to R and 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 $18,700,000,000 Operating income for the Q2 was $2,700,000,000 with earnings per share of $0.39 Taking a look at the balance sheet, Total cash investments ended the quarter at $17,400,000,000 up slightly from the 1st quarter. In the second quarter, we generated With $5,000,000,000 in cash from operations, paid approximately $1,000,000,000 in dividends, purchased almost $3,000,000,000 in capital assets and repurchased over $500,000,000 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 $1,000,000,000 to $11,000,000,000 We have an unprecedented lineup of products coming to market in the second half of this year across all the segments of our Haswell delivers a historical increase in battery life across a diverse lineup of ultra mobile form factors by 2 in-one convertibles, tablets and other touch enabled devices. In the second half, we will launch Baytrail, which will further extend our product line across screen sizes and price points in both In our phone business, we are on track to ship multimode data and voice LTE baseband solutions as well as our next generation applications processor code named Maryfield by the end of the year.
In the data center, we have new MicroServer 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 and A, as is our normal practice, we'll ask each participant to ask 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.
The first question comes from Glenn Young from Citigroup.
Thanks for letting me ask a question. First one is on the second half of the year on your outlook there. If If I look at your guidance for the year and your guidance for Q3, the implication is 7% sequential growth in revenues for the 4th 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 there's also something about the mix maybe between data center and client.
Yes. Hi, Glenn. This is Stacy. I would characterize 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 Listen to that kind of flat year on year revenue growth.
And 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 4th quarter selling season. And 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 and so we think that's when we're likely to really get a sense of Q3 and the momentum into Q4.
Got it. Makes sense. Okay. And the next question is for Brian. First of all, Brian, congratulations on your new role.
The question Now that you're in that role for a couple of months and as you say you've talked to customers, today Intel has very good products And mobile and tomorrow will have arguably the best products in mobile, they do today. And 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 in our 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, but Let me try to answer your question. The question is can X86 go into these ultra mobile markets and how the customers view that. And 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. So it's a unique feature that we are able to provide. It's more been focused by Intel of actually going in and designing for those markets and moving our products in there. You really see that with Haswell and Baytrail.
Haswell on the core side and Baytrail on the Adams side really being designed for those Ultra Mobile Products, we talked about Haswell producing the 1st fanless core products out there in the market in any kind of real volume. And then Bay Trail really being designed for the much lower price points That you see these tablets and even down to the entry level of tablets. And so 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. Brian, first of all, how should
we think about ASP trends in the PC segment? I think you outlined 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.
Yes, 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 mix shift for us and share win at the low end of the market. Yes. 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.
Thanks, Stacy. And 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 are not As much as top 50 have seen in prior cycles when the start up costs have decreased. And I think your guidance Implies sequential gross margin decline in Q4. If you could just walk us through the puts and takes, I would appreciate that.
Yes. And I'm sorry that we are having networking problems. So 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?
Yes, relative to gross margins, that's right.
Relative to gross margin, sure. So the startup cost trend is directionally the same as what we've seen in other generations. It will be the same shape, Generally, the same impact on gross margin. So, you see the peak in start up costs in the Q2. They'll come down some in Q3 And then we'll get a bigger benefit in Q1 and then Q4 and then they'll come down a bit more in the first half of next year.
So it's a comparable trend. In the Q4, the puts and takes, so 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 Q3 to 61%. And then as I think about Q4, I think we have a couple of tailwinds, so I would expect volume to be up some.
We should get some good news associated with start up costs. And then the offset in Q4 is going to be, we should be well into the build of Broadwell, so doing the build on the prequalification materials. So my sense is we'll have an increase in inventory write in the Q4 and that offset some of those good news. Net net of all that, I expect gross margin in the Q4 to be at or maybe a little Higher than where we are in Q3 and provide that forecast in another 90 days. And just so that we don't get lots in code names, That product is our lead product on 14 nanometer.
So that kind of aligns with being in manufacturing in the back half of the year on 14 nanometer.
Okay. Thank you.
Welcome.
Thanks, Vivek. And 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 Denali from JPMorgan. Yes. Thanks, guys.
Hey, Brian. You said in the press release and the shpiel upfront that you're taking in a wide variety of views from Customers and people of 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 in what you think has been important out there?
Sure.
So 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 light up in there and They're excited about the products that we have coming, the Haswell and PayTrail. So 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 lineup following those. And so that You hear you heard in my speech today and in the earnings release that we're really putting much, much Stronger effort on Adam and driving our SoC integration and pulling it forward to the leading edge. So I'd say that was the major Point or major comments I got back from our customer base. Sure. Thanks.
And then as my follow-up, Yes. So 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. So can you just give us your sense of why 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.
Yes, I'd say it's a couple of things. And I'd also say what we're For Q3 is sub seasonal growth. So, it's off of an okay Q2, but not a gangbuster Q2. So, I I think it's a wildly optimistic forecast. In terms of the tailwinds that I see, 1st and foremost is the product cycle.
Haswell is a great product for Ultrabooks and 2 in-1s. And as Brian said, with Baytrail 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 and we'll be able to do that profitably. And we'll start to gain share in tablets. We've got kind of our first big tablet wins out in the marketplace. And with Baytrail, we think again we enable other designs 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, but generally I'd expect improving macroeconomic environment in the back 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 It is pretty positive and I think that's driving a concern in the investment community with whether or not Baytrail is going to be so good that it starts to cannibalize Has well. And so 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 Vic, a slave to market forces and to what extent do you think you can bring applications that are MIPS intensive into the ecosystem and secure the core business even as you try to get more aggressive in Baytrail and Adam?
Sure. So first, let me tell you, our view right now on Baytrail is that we don't believe it will 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. And that, as Stacy said, are these sub $400 sub $300 in some case, clamshells and touch enabled Convertibles and 2 in one devices and tablets, dollars 199 and below. Some you're going to see even lower, below 1 50 and much below that as we go through the holiday season.
So Bay Trail really, 1st 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. So we look 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 improvement in Intel's history along with great performance and it's providing products that have core level performance that will be fanless for the first time. So we still believe that there is 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 2 in 1 and Convertible devices, people look for that kind of application.
So we believe the 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 few years. First off, just to reinforce what Brian said, there There was a big gap in terms of performance and features between the best of Baytrail and the core i3, i5, i7 segment of our product line. And if you look at the last 3 years even in a time where the market has been relatively weak, the core i5, i7 volumes have been very healthy and if anything we've seen A larger mix overall to core over that time period. So 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. And 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.
So it's a powerful product from that
And at the end of the day, the market will go where the market goes and better to have a product like Baytrail 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. And then just my follow on Stacy, Several years back, you put out a long term gross margin target of sort of 55% to 65%. And 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, Maryfield, put a renewed effort Into the admin 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% to 65%. I think the second half is a great proof point. We're going to be from Q1 to Q3, we're going to Quadruple our tablet volume. We're running at 61% gross margin at the company level. As Brian said, the market is going to go where it's going to go.
We've got some great products that give us the cost structure to go after and profitably and I'm Still confident in that gross margin range and 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? And if so, How important is the Bay Trail launch and Bay Trail volumes to actually achieving that type of a unit target?
So apologies, Seth. Let me restate your question, make sure I'm answering it 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?
Yes, that's it. And then if the guidance does actually imply flat units, correlated with your revenue, How important is gaining Baytrail volume in the back half to achieving that type of a unit outlook?
Yes. Okay. Let me go there. So first I'd say we would actually expect that overall compute units, so tablets up through PCs, they'll be down some this year. And that's consistent with a flat revenue forecast for the company.
So 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. But to get to then our units, you have to make some adjustments to that. So, first off, in their classic view of PCs, That would not include some of the ultra mobile devices, I. E.
The Microsoft Surface Pro. So 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. Net books for us is declining pretty significantly. That's not in the PC Client Group segment, that's in the other IAG segment.
And then as I said earlier in my prepared remarks, we think we gained share. So that also gives us a little bit of help. But when you net all that out, you'd say our unit and our revenue for the PC client group It's down year over year. It's just not down as much as the headline number that you see from Gartner. So 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. So that adds a couple of points of growth to the company. NAND And it's probably worth a point on its own. They look to be having a good year. You have some other smaller things, but you kind of net that out against a PC client group that's down a bit and you get to flat for the year.
So just kind of in rough math, that's how I'm viewing the different segments. Did that answer your question?
No, that's very helpful. And as my follow-up, if I could carve into the data center a little bit. So you are still 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? I mean, in the ballpark 15% to 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, and 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 macroeconomics continue to improve through this year, that picks up a bit. And 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 hard drives or storage and networking and all this other stuff was up 20% to 40%. I think your total data center business in the first half year over year is just flat to up a little bit. So, That enterprise piece had to have been down quite a bit year over year in the second half. So you're saying you're going to see a very significant reversal of that trend in the second half?
Yes. And 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. So 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.
And 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?
You 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 and D side. My understanding is the 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?
And 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. So let me start. The simple answer is no, we're not going to increase our OpEx Spending and in fact what we've really been focusing on is managing that as well. What you're You're going to see and remember these as we move our architecture more and more to an SOC, A lot of the work we do bridges between core and Adam. And as we pull Adam forward onto the leading edge technology, Again, that allows a lot of the architectural work to be in alignment and be shared amongst the 2 products.
So we believe that we can move faster on Adam and into this ultra mobility space without having to change or increase our OpEx. So 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 and you see Bay Trail Coming out towards the end of this year, it's a product that is on that Adam core that is truly industry leading. We talked earlier about A lot of the benchmarks coming out showing a very strong against the competition, if not leading the competition in many of the metrics.
And so we believe that you'll start to see some of this just naturally over the next 6 months as Batrails ramps up and gets into production. We have a series of products after that and you'll see more and more acceleration. So 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 and the thing just gets faster and faster as time goes by. And so you'll just see more and more strength of that ADAM line as time goes through here.
And it will be kind of just You'll look back and say, wow, it's obvious that the Atom line has truly become strong and they've got share in the tablet space. Yes.
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 percent of revenue. We've been very consciously making investments in that space. What I've seen of Brian In his tenure, he is very focused on driving that efficiency and bringing it down.
We will come down a few points Between where we were in Q2 and the end of the year in terms of spending as a percent of revenue and the expectation is we can come down more next year.
Great. Thank you.
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 Just take a look at what we've done moving into Q3, right? And 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. So To me those are not separated. Those go hand in hand actually as you become more efficient.
Thanks for your patience with the audios. Ross, do you have a follow-up question?
Yes, 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 Q1 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?
And generally speaking, can you explain how your strategy in foundry may be any different than the prior
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. So 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. And any changes we'd make in strategy or additional customers we'd make Now we'll 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. And 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 the 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 kind of really take advantage of our process leadership. And so we don't take a look at this as separating out the do we will's 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 ATOMY 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? And similarly, you talked About 14 nanometer is going into production end of this year.
So does that mean the first 14 nanometer core products were launched in the Q1 of 2014?
Okay. So let me you asked a couple of questions. We're not going to give changes to the roadmap or any kind of product Scheduled here from 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 our just our general product launch, I think what we said so far is First half of twenty fourteen. And we're not going to 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 kind of sense that we're well and those are going to be material. So we'll be well into production in the 4th quarter.
Excellent. Thanks, Stacy. And just one other. Is the lower CapEx plan due to lower spending on 14 nanometer and 10 nanometer or lower on
It's a variety of things, David. As we said on the call, our view of the overall market It's 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. And so as our view of the market changed, we saw some opportunities for things that We thought we were going to put it in place this year that we no longer have to put in place and it's across the board. It's no one thing.
Similar to what you saw in Q1, 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 $450,000,000 not based on schedule changes, but 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 and E for 14 nanometer, some of it is space, but just a variety of kind of small things that added up to $1,000,000,000
Okay. Thanks very much.
Thanks, David. And operator, we have time for 2 more questions.
The next question comes from Jim Covello from Goldman Sachs.
Great guys. Thank you very much for taking the question. Just to follow-up on the CapEx, does the new $11,000,000,000 forecast still include a full $2,000,000,000 for the new shell or is that some of what has gotten pushed out? Specific on the $450,000,000 is that the $450,000,000 question, Jim? Well, yeah, that shell that you guys had articulated, there was sort of an Extra $2,000,000,000 in the CapEx that was related to that $450,000,000 shell.
That one's down a little bit, but not a lot. It does change my round. I was rounding up to 2 and now it would round to 1.5, but it's in the scheme of the $1,000,000,000 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 $450,000,000 you can take out some of The capital is 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 and you get down to a run rate of CapEx kind of in support of our Current business is in the mid-50s $55,000,000,000 or so in revenue in that range. That is I think a nice healthy level, a nice level and I can run at that level and generate a 60% gross margin. So it feels pretty good from that perspective. And as we said, we're continuing to try to balance the CapEx relative to the business size.
Sure. And if I
I'll use my follow-up on the CapEx So it's great to see the CapEx come down from the 13 originally to the 11 today. The first half spending is 4.9. So that would still imply pretty far below the 11. Obviously, that shell maybe a little more of that shell comes in the back half. So that would be some of the increase in the back half CapEx, but can we get any kind of hope that potentially even 11 is a number that there's some downside to?
So first, the linearity, yes, the more of that shell, most of that shell frankly is in the back half of the year. So that shifts So linearity and you also see the 14 nanometer spending going up in the back half. So 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. But I want to stress, when you really deconstruct our CapEx, It kind of $7,000,000,000 to $8,000,000,000 of capital being spent to support a business that's in the mid-fifty 1,000,000,000 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 We can sustain gross margin that's in that range that I've been talking about in kind of the 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 Adam first launched, I think you had mentioned that Adam was slightly lower gross margin, but same of 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 And keep in mind that Adam spans from servers to the PC segment of the market now Yes, we're enabling these $2.99 price points to phones, to tablets, right? So there's 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 Adam is price point replacing a Celeron or a Pentium, we're doing it at a better margin dollars Per unit, then we were selling seller into that space and we're enabling lower price points. So, 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 tried to go after before.
I'll save the rest probably till the investor meet.
Okay. That's useful. And then on this call, there's been obviously a good amount of discussion about your Diversification into Ultramobile. If we look at the core business, the ramp of Haswell and the Ultrabox Obviously, it 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 and why what hasn't worked so far Could work later in realizing PC growth going forward.
So let me 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 Part of your question was or 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?
Yes, that's correct. Thank you.
I'll answer first and Stacy can jump in. My answer would be simply Haswell has been not a single product launch. So let me first start with Haswell. We launched the quad core products in the Q2. As we go into the Q3, 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. So we're just now really starting to see the ramp of Haswell Into the consumers' hands, so I think it's really way too early to say here's where Haswell is. And you're just You're going to see as we move into the second half in fanless devices with Haswell. As we move forward, Bay Trail in 14 nanometers as we move into next year, Well, you can imagine, we'll drive prices and battery life and the number of fanless devices up even more. So that will 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 Baytrail. Baytrail 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 And as we move into next year, those price points will continue to drop. So the fact that PCs, especially with PayTra are going to move down into this, let's call it $200 to $400 range is going to shift That market we believe as well. And that's different than what's been out over the last few years.
So you've got Sanlitaslo, 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. Thanks, Tristan. All right. Thank you all for joining us on the call today. And 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.