Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Intel Corporation Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Mr. Trey Campbell, Director of Investor Relations.
Thank you. Please go ahead, sir.
Thank you, operator, and welcome, everyone, to Intel's 2nd quarter earnings conference call. By now, you should have received a copy of our earnings release and the earnings presentation. If you've not received both documents, they're available on our investor website, intc.com. The earnings presentation is also available in the webcast window for those joining us online. I'm joined today by our CEO, Bob Swan and our CFO, George Davis.
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. A brief reminder that this quarter we have provided both GAAP and non GAAP financial measures. Today, we will be speaking to the non GAAP financial measures when describing our consolidated results.
The earnings presentation and earnings release available on intc.com include the full GAAP and non GAAP reconciliations. With that, let me hand it over to Bob.
Thanks, Trey, and thank you all for joining our call. Amid a very challenging environment, cloud and network infrastructure and PC capabilities have been vital in allowing businesses and people to continue to work, learn, stay connected and provide critical goods and services. Those trends contributed to a very strong quarter in which we generated $19,700,000,000 in revenue and delivered $1.23 in earnings per share. We exceeded our guidance by $1,200,000,000 on the top line and $0.13 on the bottom line. Our data centric businesses grew 34% and drove approximately 52% of the company's revenue and our PC centric businesses grew 7%.
I continue to be amazed by our employees and supply chain partners who have diligently worked to keep our business operating at a high level during this unprecedented challenge. COVID-nineteen has driven redesigned workflows and added additional environmental stress that I know has strained employees and ecosystem partners as they try to maintain productivity in this new world. I want to thank our employees and partners for their incredible contributions. Our primary focus continues to be ensuring the safety and well-being of our global workforce, delivering for our customers and helping the communities in which we operate. On each earnings call, I give updates about our progress against 3 key priorities, accelerating the growth of the company, improving our execution and continuing to thoughtfully deploy your capital.
Let me give you a few thoughts on each. We're transforming the company to accelerate growth. That means not just playing defense, but position our business to grow share in the largest market opportunity in our history. We've built scale businesses indexed to key technology inflections such as cloud, AI, 5 gs and the intelligent and autonomous edge. We see a world where everything increasingly looks like a computer including our homes, our cars, our cities, our hospitals, our factories and now even our schools.
In this new world, our opportunity set becomes more than just the CPU. It's more and more Intel silicon inside more and more computers so we can have a larger impact on our customers' success. That diversity is one critical factor in driving today's results. I'll highlight a few examples from the last 90 days. AI use cases are becoming pervasive and we are embedding AI capability into all our products.
Our Xeon platform is foundational for data center AI with value, scalability, built in AI acceleration and inference leadership. This quarter, we launched our 3rd generation Intel Xeon Scalable Processor, Cooper Lake, which is the 1st mainstream server CPU, pfloat16 support, which increases AI throughput by reducing the amount of data required for the same accuracy. Developers can use and test latest Intel optimized versions of TensorFlow and PyTorch to train their models using bfloat16 and the Intel distribution of OpenVINO to deploy optimized inference from cloud to edge. In Q2, both our cloud and comm service provider businesses grew more than 40% year over year as critical cloud delivered applications continued to scale and 5 gs build outs accelerated. Leading cloud service providers including Alibaba, Baidu, Facebook and Tencent announced they are adopting our 3rd Gen Intel Xeon Scalable Processors into their infrastructure and services.
Also this quarter, Azure introduced several new Xeon Scalable Instances, including general purpose and memory optimized Azure virtual machines. We were also excited to be part of an industry first with Rocklatan's full scale commercial launch of its mobile carrier service. This service is the world's 1st end to end fully virtualized cloud native mobile network and it's powered by Intel Processors and FPGAs from the radio access network to the 5 gs ready mobile core. Compute capabilities are moving from the cloud to the edge and catalyzing a vast array of new usages and market opportunities. The largest opportunity we see at the edge is the $230,000,000,000 $2,030 TAM for ADAS, Data and Mobility as a Service Technologies.
Since the last call, we acquired Moovit, a leading mobility as a service solution company. Combining Moovit's market leading ADAS and AV technologies with MoveIt accelerates our ability to become a full stack mobility provider and truly revolutionize transportation. The most important demonstration of the power of our technologies is the commitment of our customers and we are excited this week to announce a significant design win with Ford. Design win to date in 2020 include multiple new ADAS production programs representing cumulative volume of over 20,000,000 units. We're also driving incredible innovation for our customers across a wide spectrum of PC use cases.
This quarter, we introduced 3 new additions to our 10th gen processor family extending our leadership in gaming and business. The core SNH series processors for desktop and mobile gaming deliver speeds out of the box reaching up to 5.3 gigahertz, making them the world's fastest gaming processors. And our new 10th Gen Intel Core vPro Processors delivered uncompromised productivity and hardware based security for commercial PCs. Q2 also marked the launch of Lakefield featuring our new Intel Hybrid technology, which is a hybrid CPU architecture for power and performance scalability. We also continue to work on improving our execution.
Intel employees and our supply chain partners have role modeled teamwork in navigating difficult conditions while working to support customer upsides during the crisis. We have made significant progress in increasing our capacity and improving our supply while delivering $2,000,000,000 above our plans through the 1st 6 months of the year. We're on track to return to more normal levels of PC inventory as we work through the second half of the year. Acceleration of our next generation products continues. We now expect to increase our 10 nanometer based product shipments for the year by more than 20% versus our January expectations.
Customer demand for our family of 10 nanometer based SoCs for 5 gs base station designs is also very strong. We delivered a full mode of performance improvement within our 14 nanometer base products by optimizing our product and process together and the power of our intranode improvements continues with our next generation 10 nanometer based client product Tiger Lake. Tiger Lake delivers breakthrough performance in CPU, graphics and AI and will be shipping to customers in a matter of weeks. We are also targeting initial production shipments for our first 10 nanometer based Xeon Scalable product, Ice Lake for the end of the year. And we have a pipeline of exciting new product architectures for 2021 led by Alder Lake for client and Sapphire Rapids for server.
Both products will start initial production shipments in the second half of twenty twenty one. Let me provide some updates on our technology roadmap. We continue to demonstrate proof points of our breakthrough advanced packaging technologies. Our Lakefield product, which I mentioned earlier, delivers scale production of our 3 d packaging technology, Foveros, combining both 10 nanometer and 22 nanometer capabilities in a disaggregated architecture. This quarter also marked a significant milestone in our data center GPU technology.
Successfully powered a petaflop scale GPU with high bandwidth memory using our advanced embedded multi die interconnect bridge or EMID 2 d packaging technology. Turning to our 7 nanometer technology, we are seeing an approximate 6 month shift in our 7 nanometer based CPU product timing relative to prior expectations. The primary driver is the yield of our 7 nanometer process, which based on recent data is now trending approximately 12 months behind our internal target. We have identified a defect mode in our 7 nanometer process that resulted in yield degradation. We've root caused the issue and believe there are no fundamental roadblocks, but we have also invested in contingency plans to hedge against further schedule uncertainty.
We're mitigating the impact of the process delay on our product schedules by leveraging improvements in design methodology such as dye disaggregation and advanced packaging. We have learned from the challenges in our 10 nanometer transition and have a milestone driven approach to ensure our product competitiveness is not impacted by our process technology roadmap. Our overarching priority is to deliver product leadership for our customers and we are taking the right steps to produce a strong lineup of leadership products. We will continue to invest in our future process technology roadmap, but we will be pragmatic and objective in deploying the process technology that delivers the most predictability and performance for our customers whether that be on our process, external foundry process or a combination of both. Our advanced packaging technologies combined with our disaggregated architecture give us tremendous flexibility to use the process technology that best serves our customers.
As an example, our data center GPU design, Ponte Vecchio, will now be released in late 2021 or early 2022 utilizing external and internal process technologies combined with our world leading packaging technologies. We now expect to see initial production shipments of our first Intel based 7 nanometer product, a client CPU in late 2022 or early 2023. We are also focused on maintaining an annual cadence of significant product improvements independent of our process roadmap, including the holiday refresh window of 2022. In addition, we expect to see initial production shipments of our first Intel based 7 nanometer data center CPU design in the first half of twenty twenty three. Finally, while process technology is very important, it is only one of the 6 technology pillars that drive differentiation in our products.
You will hear more about advances across all 6 technology pillars process, packaging, architecture, memory, interconnect and securitysoftware at the upcoming Intel Architecture Day. Last, we are focused on the thoughtful allocation of your capital. We are investing to grow our capabilities even as we deliver significant free cash flow this year. Since 2015, we have grown R and D spending by more than $1,000,000,000 while divesting non core assets and reducing overall spending as a percentage of revenue by 9 points. We also look for opportunities to augment our product lines and speed the pace at which we can grow the company.
As discussed earlier, we acquired MoveIt this quarter, investing approximately $900,000,000 to dramatically accelerate our capability to capitalize on $160,000,000,000 Mobility as a Service opportunity. We also announced a $250,000,000 investment in Jio Platforms, a high speed wireless connectivity and digital services provider to help fuel digital transformation in India. Our purpose to deliver world changing technology that enriches the lives of every person on earth has never been more essential. But the global problems we face are bigger than any one company can solve alone. That's why we established 2,030 Corporate Responsibility Goals which call for a collective response to revolutionize health and safety, make technology fully inclusive and help address climate change.
We've also committed more than $50,000,000 and extended our expertise, global reach and influence to combat COVID-nineteen as well as social injustice. The early results of our pandemic response technology initiative which we announced earlier this week underscore Intel's unique ability to partner and collectively solve critical problems. In closing, I want to thank all our employees who are working through this challenging time to deliver our purpose and support our customers.
Thanks, Bob, and good afternoon, everyone. The atypical seasonal effects of COVID related demand for mobility products and data center infrastructure continued in Q2, resulting in record Q2 revenue for CCG, DCG and memory. Revenue came in at $19,700,000,000 up 20% year on year and $1,200,000,000 higher than Guide. Data centric revenue of $10,200,000,000 up 34% year on year represented 52% of our total revenue, an all time high. Strong demand for NAND and 5 gs networking solutions and richer server mix drove most of the upside versus our expectations.
Q2 PC centric revenue was $9,500,000,000 up 7% year on year on strong notebook PC sales enabled through increased manufacturing supply on capacity additions over the past year. Gross margin for the quarter was 55%, slightly below expectations and higher product cost from faster uptake of our 5 gs ASIC products, which are margin dilutive relative to the company average and also continued acceleration of 10 nanometer products overall, partially offset by a shift of costs from cost of sales to R and D related to 7 nanometer product timing. As a reminder, we expected an approximate 3 point reduction in gross margin in the 2nd quarter on the effect of pre PRQ reserves for our Tiger Lake client product. This is largely a timing item with respect to the full year as we benefit from the $0 units in our initial sales of product, which will begin this quarter. Operating margin of 31% in the quarter was approximately flat versus last year as spending efficiency offset lower gross margin.
Q2 EPS was $1.23 $0.13 above our guide as stronger than expected operating results from notebook, memory and a richer mix of server products along with higher gains in our trading asset portfolios offset increased costs from our 10 nanometer acceleration and the effects of a discrete foreign tax item. In Q2, we generated $11,200,000,000 $1,000,000,000 up 92% year over year. We returned $1,400,000,000 to shareholders via dividends. As a reminder, we paused our share repurchase program in Q1 as we felt it was prudent to do so in the current economic environment. We expect to complete the balance of our $20,000,000,000 share repurchase program and return to our historical capital return practices when market dynamics stabilize.
Moving to segment performance in Q2. Data Center Group revenue of $7,100,000,000 was up 43% from the prior year coming in higher than expectations with strength across our customer segments. Year over year platform volumes and ASPs were up 29% and 5% respectively. DCG adjacencies also delivered significant growth with revenue up 118% year on year on strong adoption of 5 gs networking solutions. While year over year comparisons for DCG benefited from a weaker Q2 2019, revenue in the quarter came in at the 2nd highest level ever for DCG and the highest revenue ever in our cloud business.
Revenue year over year was up 47% in cloud, 34% in enterprise and government and 44% for communications service providers. Operating margin was 44%, up 8% year on year on higher revenue and high end compute mix. We see increased competition this year, but we've also seen strong customer response to our product portfolio and now expect to end the year with market share that is somewhat higher than our original expectations. Our other data centric businesses were up 14% year over year, primarily on the NAND dynamics in Q2, despite significant COVID headwinds impacting demand in our more GDP sensitive businesses, IoTG and Mobileye. IoTG revenue and operating income declined 32% 76% respectively, primarily on lower revenue from industrial, retail and vision segments.
Mobileye revenue was down 27% and operating income turned to a modest loss as the decline in global auto sales more than offset continued ADAS penetration and new IQ program launches. NSG's record quarterly revenue of approximately $1,700,000,000 was up 76% year on year on strong NAND bit growth and improved pricing. Q2 was an all time record for quarterly revenue for our memory business. The business also returned to profitability this quarter generating approximately $300,000,000 in operating income. PSG revenue grew 2% year over year on cloud strength, which was partially offset by weaker demand from Embedded and Communications segments.
Operating income was up 54% on richer product mix and improved unit cost. CCG revenue was $9,500,000,000 in Q2, up 7% year over year driven by notebook demand and higher modem and Wi Fi sales, which more than offset lower desktop volumes. PC unit volumes were up 2% year over year on higher notebook demand and increased supply. We expect our share to improve throughout the remainder of the year as we begin to recover unit share in notebooks utilizing our smaller core products, which we have not been able to fully serve given the strength of demand for our large core products. Operating margin was 30%, down 12 points year on year as higher unit costs associated with the ramp of 10 nanometer products and the pre PRQ reserves ahead of our Q3 TigerLINK launch more than offset the benefits of higher revenue.
Moving now to our Q3 outlook. Based on demand signals from our customers, we expect continued strength in cloud andcommsinfrastructure and consumer notebook PCs in Q3. But we expect that the weak economic environment will impact our commercial PC business, particularly the desktop form factor and also drive lower demand for the enterprise and government segment in DCG and in IoTG and Mobileye. As a result, we expect total revenue of $18,200,000,000 with PC centric and datacentric businesses down mid single digits year over year. In Q3, we expect the PC TAM to be down high single digits year over year on OEM inventory drawdown, softer desktop demand and the effects of the global recession.
Gross margin is expected to be approximately 57%, down 3.5 points year over year as the accelerated ramp of 10 nanometer products and lower platform revenue more than offset NAND margin improvement. We are expecting a tax rate of approximately 15.5% in Q3. This is approximately 2 to 2.5 points above our previous expectations, primarily due to a lower FIDI benefit in the year, a temporary reduction in R and D tax credits in California and the effect of a push out of a foreign grant. The higher tax rate is reducing our EPS in the quarter by approximately $0.03 versus our prior rate expectations. As a result, Q3 EPS is expected to be approximately $1.10 per share.
Moving to full year, we are providing full year guidance although visibility remains somewhat limited into the Q4. Still, we do expect some part of the company's first half outperformance will be additive to our estimate for full year revenue. We are now forecasting revenue of $75,000,000,000 and EPS of approximately $4.85 We expect our PC Sentry business to be flat to slightly down against the PC TAM that is down mid single digits year over year. Following a very strong first half of the year, we expect demand trends to moderate in the second half as weaker global GDP and the maturing Win 10 commercial refresh drive a lower PC TAM. Again, we also expect to increase our market segment share as we have greater supply for entry PC designs.
Additionally, we are forecasting lower modem revenue in the second half. We expect revenue from our data centric businesses to be up approximately 10% for the full year on strong cloud demand and increased 5 gs build outs. After significant cloud expansion in the first half and into Q3, we expect capacity expansion to moderate as CSPs move to our digestion phase. We are also planning for an increasingly competitive environment as we move into the second half. We expect continued global GDP related impacts to our IoTG and Mobileye Businesses in the second half of the year.
Overall, our implied first half, second half revenue contribution is an anomalous 53% to 47% as opposed to a more typical year with undisturbed seasonal buying patterns of 46% 54% respectively. Gross margin is expected to be 58% for the year, down 1 point versus our original expectations for the year and 2 points lower year over year. This change is being largely driven by higher costs from higher than expected demand for our 10 nanometer products and the push out of a government grant for our memory business. These effects coupled with softness in our IoT businesses more than offset the stronger overall demand, improved mix in DCG and the shift in some spending between OpEx and cost of sales related to the product timing delays Bob discussed earlier. Spending for the year is expected to be approximately $19,700,000,000 or 26 percent of revenue, down 1 point year on year.
Full year spending is up versus our January expectations on higher R and D expenditures, including the previously discussed shift between OpEx and cost of sales and costs related to COVID, partially offsetting the cost reductions on the modem exit and other portfolio actions as well as ongoing SG and A productivity gains. The resulting operating margin is 32%, down 1 point year over year. The tax rate is expected to be 14.5%, reflecting the impact of discrete items and the lower FIDI benefit. Full year EPS of $4.85 is $0.15 below our January expectations as increased server and notebook PC demand and slightly higher equity gains are more than offset by COVID related impacts to IoTG and Mobileye, higher product costs from accelerating 10 nanometer, a higher tax rate and the impacts of improving our liquidity by raising additional debt and temporarily pausing our share buyback. The combination of our liquidity actions and the higher tax rate alone impact full year EPS by more than $0.15 We expect 2020 CapEx of approximately $15,000,000,000 and free cash flow of approximately $17,500,000,000 To conclude, I'd like to join Bob in thanking our employees worldwide.
Very much appreciate the hard work of our employees and contractors who delivered excellent results in the face of a very difficult environment. With that, I'll hand it back to Trey and we'll get to your questions.
All right. Thank you, George. Moving on now to the Q and A, as is our normal practice, we would ask each participant to ask just one question. Operator, please go ahead and introduce our first caller.
Our first question comes from Vivek Arya with Bank of America. Your line is now open.
Thanks for taking my question. I wanted to dig into the competitive and the financial implications of the 7 nanometer delays that Bob you mentioned. So on the competitive side, by the time you come out with 7, TSMC is planning to be on the 3 nanometer node. So we'll still be a generation ahead. So what's the market share implication of that?
And then related on the financial side, what's the CapEx and gross margin implications and even pricing implications if you stay on 10 nanometer longer next year. And I guess the bigger question that a lot of investors would have is, at what point Intel should just consider outsourcing a lot more to foundries so that you can keep in line with the state of the art and manufacturing technology? Thank you. Yes.
Thanks, Vivek. I mean, first, our primary focus is on ensuring that we're delivering leadership and annual cadence of leadership products each and every year for our customers in a predictable manner. So what we talked about today is a strong lineup for 2020, 2021, 2022 for both client and server. And we feel very good about that lineup. And our expectation on 10 nanometer, much like what we're able to do on 14 nanometer is to get another node of performance within that within 10 nanometer in and of itself.
So we feel very good about our product roadmap through 2022. That being said, as we think about that next generation of products in late 2022 and 2023 beyond, we need to make sure that we continue to deliver strong performance. And our priorities in the ideal world is leadership products on our process technology, so we capture the economic benefits of IDM. But the focus will be leadership products. So to the extent that we need to use somebody else's process technology and we call those contingency plans, we will be prepared to do that.
And if we do, there's lots of moving parts, but the economic implications in the event that we decide to move to somebody else's foundry with our scale, how do you get ASPs in line with our costs, continue to deliver leadership products so we capture attractive ASPs and reduce the amount of capital that we have to deploy to build a foundry on an older node or on a last gen kind of process node. So in the aggregate, for the last couple of years with the real focus on product leadership, we've been engaging with the ecosystem in a much more holistic way. We've been designing our products and advancing our packaging technologies so that we have much more flexibility to decide if, when we will use our fabs or somebody else's to deliver that annual cadence of leadership products. We feel very good through 'twenty two timeframe and now we're evaluating the optionality that we have on 'twenty three and beyond.
Vivek, let me just comment on your question around what we're going to see what we might see next year. Next year is still going to be as it was when we talked about Alaska in May of 2019 is still going to be largely a 10 nanometer with some 14 nanometer year. And the dynamics there are as we're coming into it with having moved a little bit further along the yield curve as we've seen more demand for 10 nanometer products in 2020 than we had expected. So we're not going to update 2021 at this time, but I think we're more concerned about what the global economy is doing than where we are on 10 nanometer.
Thank you. Thank you. Our next question comes from C. J. Muse with Evercore.
Your line is now open. J.
Muse:] Yes, good afternoon. Thank you for taking the question. I guess a follow-up question on 7 nanometer delay. I guess curious, how should we think about the implications for CapEx and required capacity adds at 10 nanometer and 14 nanometer? And then just to circle back on the comment around contingency plans after 'twenty 2, considering your first data center CPU will launch in first half 'twenty three, are you suggesting that that could be fabbed out and not be built internally at Intel?
Thank you.
I think the first part of your question, with 2022 being a in essence a full array of 10 nanometer products. The expectation is all else equal a little more 10 nanometer spend and less 7 nanometer spend, provided we decide to continue to do all of our production inside. In the event we decide that we're going to leverage 3rd party foundries more effectively, we would have a little more 10 and a lot less 7. And that's kind of the optionality that we've tried to build in as we evaluate the future of Moore's Law. Invest in technology development leadership in the event we're not there and there's a better alternative, be prepared to take advantage of it.
Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is now open.
Yes. Hi, guys. Thanks for letting me ask the question. Sticking on the same topic of 7 nanometer. Bob, if you could just help me understand yields are 12 month behind where you would expect them, but the product ramp is only 6.
If you could square that circle, that would be helpful. But more importantly, you had multiple sort of push outs of 10 nanometer. You're identifying the 7 nanometer pushout today. What confidence level do you have that this is sort of a one and done issue and it doesn't turn in to a repeat of 10 where you kind of had multiple periods of push outs?
Thanks, John. I mean, first, product schedule slippage of roughly 2 quarters while process. We expect now to be roughly 4 quarters. The difference of the gap is driven by a couple of things. 1, a buffer in our planning process between process and product to make sure that we don't minimal disruption on customers because of process.
2nd, as I had mentioned in the prepared remarks, dye disaggregation and advanced packaging gives us the ability for a given SoC to do some stuff inside and some stuff outside and therefore further compress the product delivery in light of process slippage. So that's why we've been able to be confident in a 6 month product slip even though process was moving out 12 months. In terms of I think your second question was about we've seen this movie before maybe. And I think the important of our many lessons coming out of 10 nanometer, one of them was how do we ensure that we have contingency plans in the event that our advancements in process technology, as it gets increasingly complicated do not play out the way we'd hope. How do we make sure that we can continue to deliver leadership products for our customers on that annual cadence.
So I'm sure things won't play out exactly the way we want. We think we've dialed in a 7. But at the same time, what's different is we're going to be pretty pragmatic about if and when we should be making stuff inside or making outside and making sure that we have optionality to build internally, mix and match inside and outside or go outside in its entirety if we need to. And that's kind of one of our learnings coming out of 10 is in the event process doesn't move along as we expect, let's make absolutely sure with advanced contingency planning and real milestones that we can switch the best we can to leverage somebody else and not slip product schedules in light of process complexities.
Perfect. Thank you.
Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. I'm going to stick with the theme and ask about the 7 nanometer as well. I guess, Bob, it's great to hear that you're being saying you're going to be more pragmatic about internal versus external, but it seems like contingency plan 3 years down the road is how the external option is being treated. I think investors are frustrated with how long the mis execution on the manufacturing has happened. Are there steps where instead of being a contingency plan, you actually start making the external side the primary source before 2023, obviously on the design side more than the revenue side?
And maybe a follow-up if 3 to 5 years down the road, the 20,eighty, 20 external, 80 internal mix, do you think that changes?
Let me maybe I'll flip those around. Over the last couple of years, we've been talking about as we expand our capacity, evaluating more holistically when do we use 3rd party foundries rather than do everything ourselves. And we call that engaging in the ecosystem in much more holistic ways for a variety of different reasons. So we don't have to build everything ourselves as the capital associated with each node becomes a bit higher. So in general, I would say for planning purposes, we've been engaging with the ecosystem much more and all else equal, I would expect that roughly 20% to be a little bit higher as we focus on growing the business.
Your first question in terms of planning then, we have we feel like we have a real solid product roadmap again for the second half of this year, for 'twenty one and for 'twenty two. And that will do it on our existing 10 nanometer that's ramping fast than we expected. It yields in line with what we expected. So for the near term, we think we got a great lineup of products and we expect to fight and protect our share while expanding the role we play in a variety of different places in the industry. But now is when we're planning for 'twenty two, 'twenty three.
And we are evaluating now in light of where we are, where we think the industry, the competition of third parties are, evaluating now what's the best option for us to make sure that we can deliver an annual cadence of product leadership for our customers. And those decisions are not decisions that we'll make in 2023. Those decisions based on the information that we have along the way will be made long before then. Whether it's decisions about how much capacity we need to put in place or decisions about how do we leverage more effectively somebody else's process capabilities and factories so that we can get real good incremental returns on capital deployed.
Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is now open.
Hi, guys. Thanks for taking my question. I want to ask about the acceleration in 10 nanometer. Is this really because yields are getting better and there's higher demand or because you're trying to offset the 7 nanometer delay because it's hitting the margins big time, which doesn't really tie in my head to like yields getting hugely better versus where you thought they were going to be in January. So how do I think about the drivers of that 7 nanometer acceleration in light of the 7 nanometer 10 nanometer acceleration in light of the 7 nanometer delay given what it's doing to the margins?
Yes. Hey Stacy, this is George. Maybe I'll just cover it in general on the margin picture for the year, because it's clearly it's having an impact there. The acceleration is really definitionally tied to the fact that we're growing faster than we expected in 2020. And we're part of that growth is a higher mix on the PC side and I would say on the comms and 5 gs ASIC side, higher demand for products that are on 10 nanometer than we had forecasted for the year.
So it's why you're seeing a little less flow through on revenue than we would have expected for the year. It's a positive growth story in that. Again, we're seeing customers attracted to the 10 nanometer products.
But wait a minute. If I look at your annual guidance now versus where it was at the beginning of the year, it's higher, but it's actually lower in the second half versus what you had implied in when you first gave the annual guidance 6 months ago. How does that imply that demand is higher versus where you were now given you've actually lowered the second half?
It's the demand for 10 nanometer products within the mix of our overall revenue, Stacy.
Well, I think I'd start with our full year demand relative to where we were at the beginning of the year is our guidance is up by $1,500,000,000 in revenue. So that Yes,
but you just beat Q2 by 1.7.
Let me just finish. I think it's a good question, but maybe if you could give me a chance to answer it. So full year demand for the company is higher. Secondly, the yields for 10 nanometer, we've kind of said are in line with what we expected coming into the year through the 1st 6 months, and we feel pretty good about where we are on yields. 3rd, that the overall demand for our products on PC side and for the 5 gs SoC in the comm sector is higher than we expected.
That is part of contribution to the $1,500,000,000 of higher revenue for the year. And as we accelerate TEN faster, both because customers are demanding it more, the implications are that our margins all else equal will be lower. And George kind of highlighted those were the primary drivers of a one point decline. 10 nanometer products are ramping faster and our 5 gs comms business in the data center group is growing much quicker than we had anticipated. I put that I put ramping of 10 nanometer faster in the good category.
We feel we know margins are lower when we start a new node versus exit an old node. 10 nanometer margins are lower than 14 at this stage of the game. Ramping 10, we think, is a good thing for customers. We do take a dip in yield. If it's more of our growth than we had anticipated, all else equal, margins will be a little bit lower.
And that's kind of the updated guidance for the year. Higher growth in a more challenging market, more demand for our 10 nanometer products that we're ramping as we ramping yields as we expected with more volume, all else equal, will have a modest impact on our gross margin for the full year. Thank you.
Thank you. Our next question comes from Timothy Arcuri with UBS. Your line is now open.
Hi, thanks. I wanted to ask also on the same manufacturing topic. So I think, Bob, when you were talking about Ponte Vecchio, I think you said that you're going to package it internally, but it seemed like you were implying an external founded contingency even for this first GPU product. I guess my question is, did I read that right? And also I wanted to ask, George, what the long term implications are if you move to somebody else's fab?
What does this do to your 57% to 63% long term gross margin? And how does it impact free cash flow? I mean, obviously, it saves you on CapEx, but can it be accretive to free cash flow? Thanks.
Yes. On the on Ponte Vecchio, originally, the architecture of Ponte Vecchio includes an IO based die connectivity, a GPU and some memory tiles all kind of packaged together. That's kind of the design of Ponte Vecchio. From the beginning, we would do some of those tiles inside and some of those tiles outside and again leverage the packaging technology as a proof point of how do we mix and match different designs into one package. So that was the design from the beginning.
And again, when we talk about disaggregation, more flexibility, optionality in our designs, use some stuff inside, some stuff outside. Ponte Vecchio is really Ponte Vecchio on the data center side, in Lakefield on the client side were kind of our test products, both of one of which we've launched, the other one which is in development. So that design disaggregation gives us lots of flexibility. As we go forward now, we can think about whether we introduce Conte Vecchio with I should I think I said some of those tiles are inside and outside from the beginning. Now as we go forward, we can assess whether we swap out one of our tiles for a 3rd party foundry or not.
Again, that's the beauty and the value of this change in design methodology that gives us much more optionality and flexibility. So in the event there's a process slip, we can buy something rather than make it all ourselves.
And with respect to the long term outlook, first off, our long term margin outlook is not 57%. We've talked about it being well above that over time. But in terms of as we dynamically move potentially move product depending on where it is best provided. I think that certainly gives us more flexibility to optimize our capital spend, get a higher return on that capital spend and it should be accretive to free cash flow. So we talked a little bit about that actually back in May of 2019 that embracing the ecosystem and balancing some of our activity externally is going to be important as we look to improving returns over time.
Thank you. Our next question comes from Weston Twigg with KeyBanc Capital Markets. Your line is now open. Hi, thanks for taking my question. I just wanted to ask about the data centric revenue heading into Q3.
The mid single digit decline year over year implies a pretty big decline from Q2. You helped a little bit on the call, but I'm wondering if you could help us better understand the reason for that big quarterly drop. And kind of as an aside, you also mentioned increased competition in BCG in the second half, and I'm just wondering what exactly you're referring to on that side?
Yes. As you look at the data centric revenue, we'll see a number of factors at play. Obviously, year over year, you're going to see the impact of the fall off in IoT and in Mobileye. But what we're seeing in the DataCentric or the DCG side is, we think we peaked on cloud in the second quarter, and it was an all time record, so not a bad peak. We've probably peaked back in Q4 of 2019 on enterprise and government.
And while it was reasonably strong in Q1, it's you can see it coming down over the next few quarters. It may have it often has a little bit of a bounce in Q4, we'll have to see. And our comps provider, I would say we expect Q2 to have been a peak there and that will start rolling off start rolling off from there. So everything on the DCG side has got a step down from a very strong Q2 and probably continues down on cloud and comms as our current outlook. Does that help?
Okay. Yes, that's helpful.
And then the comment on increased competition in DCG in second half?
Yes. We had we expected based on the competition's product roadmap that we would see increasing competition in the second half of this year. We also thought we've been a little bit pleasantly surprised in the strength of our of the demand for our products in the first half of the year and it's continuing into the second half. So we don't think the impact will be quite as large competitively in the second half as we had thought. And And as I said on PC, we think we're going to actually gain share.
All right. Thank you very much.
It's we had when we guided back in January in the context of our guidance, we made that statement. So George is just reiterating that that we see a more competitive world and we'll be prepared to deal with it and we've factored that into our outlook for the second half of the year.
Thanks, Wes. Operator, I think we have time for one more question and then we'll turn the call back over to Bob to wrap things up.
Thank you. And our final question comes from Srini Pajjuri with SMBC Nikko. Your line is now open.
Thank you. George, I have a question about your guidance for the full year. I think it implies DCG declining again in Q4 pretty much in double digit sequentially. So just trying to understand, I mean, is it primarily because of digestion that you talked about? And also if you can talk about to what extent you have visibility into Q4?
Or are you just taking a conservative stance because you just simply don't have visibility into Q4?
I think as I said on the last question that we have a reasonable view that spending is going to be coming down in the cloud and in enterprise and even comms off of very high levels and we expect that to continue into Q4. And so again, I think when we look at the full year stronger than expected overall. This would be in many ways we're delighted to be as close to our forecast as we were given all of the things going on in the world. But again, we've seen very strong demand peaking for cloud in the Q3 excuse me, in the second quarter, peaking for comms in the second quarter. And it's just going to be a period of a little bit of digestion as one would expect.
Thank you.
Yes. Let me just kind of close out and where we began. First, over the last couple of years, as you know, we've expanded our TAM in the quest to play a much larger role in our customer success by investing in key leading technologies like 5 gs, AI and intelligence at the edge. And we feel pretty good about the investments that we've been making. And last year, we wrapped up our best year in the company's history entering 2020.
Obviously, this year has been an incredibly challenging year fronts. But at the same time, we expect 2020 to be the best year in our company's history, our 5th record year in a row, delivering better results than we expected in January at a time when the market is worse than we expected. So competitively, we feel stronger as we exit 20 20. 3rd point I'd make is our execution has improved. Capacity and supply is in place.
We're ramping a slew of 10 nanometer products across our portfolio. We are ramping 10 faster than we had planned and we have a strong leadership product, a strong pipeline over the next several years. And we believe we can deliver another node of performance on 10 nanometer itself. And our 4th point, at the same time, our 7 nanometer products will be delayed. We've pushed out the timing of the 7 nanometer node.
But along the way, we have taken steps on dye disaggregation, advanced packaging, deeper engagement with the ecosystem and contingency planning as a sign of strength, not as a sign of weakness that gives us much more flexibility to make the decisions on where is the most effective way to build our products to deliver that annual cadence of leadership for our customers. And we feel pretty good about where we are, though we're not happy. I'm not pleased with our 7 nanometer process performance. But as we sit here today, 6 months through the year, our people are safe. We're delivering for our customers.
The communities we operate in are better as a result of our presence and the passion of our employees for making a difference. And next 90 days from now, we'll talk more about our efforts to create world changing technologies that continue to enrich the lives of every person on earth. So thanks for joining us and we'll talk to you soon.
Thanks, Bob, and thank you all for joining us today. Operator, could you please go ahead and wrap up the call?
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.