Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Intel Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Trey Campbell, Head of Investor Relations.
Please go ahead, sir.
Thank you, operator, and welcome, everyone, to Intel's Q3 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 full GAAP and non GAAP reconciliations. With that, let me hand it over to Bob.
Thanks, Trey. Q3 2019 was the best quarter in our company's history. We generated $19,200,000,000 in revenue and $1.42 in non GAAP EPS, exceeding our guidance by $1,200,000,000 $0.18 respectively. We've achieved record revenue, both overall and in our data centric businesses while making continued progress on our strategic priorities. Simply put, our ambitions have never been greater.
We are growing share in a large and expanding $300,000,000,000 market opportunity fueled by the exponential growth of data, which is reshaping computing. I want to start with a recap of our May Analyst Day and our 3 priorities, accelerating growth, improving execution and deploying capital for attractive returns. First, growth. It starts with a core belief. We are at a key inflection point with the exponential growth of data creating massive demand for semiconductors.
Cloud workloads are diversifying, networks are transforming and more computing performance is moving to the edge. We've been on a multi year journey to reposition the company's portfolio to take advantage of this industry catalyst. Today, we have the product and technology leadership that uniquely positions us to capitalize on these trends and we're investing in the IP required to help our customers win the inflections of the future. The opportunity is massive. As we told you in May, we expect to generate $85,000,000,000 in revenue and dollars in EPS in 3 to 4 years.
But that doesn't happen just by saying it. Achieving this goal means delivering on our operational and financial priorities every 90 days. Growth starts with our core business where our workload optimized platforms are winning in a highly competitive marketplace. It's now been 9 quarters since the first Xeon Scalable Processor launched and we're proud to have delivered over 23,000,000 units as customers rely on Xeon to power their data centric workloads. In the Q3, leading cloud customers ramped our 2nd generation Xeon Scalable Processors with AWS, Google and Alibaba deploying instances based on Cascade Lake.
Customers including BP and TU Darmstadt selected our highest performance Xeon Scalable platform, the 9,200 series for their most demanding workloads. One key reason customers are choosing Xeon Scalable is the platform's built in workload acceleration for AI. With the combination of Intel Deep Learning Boost and AVX-five twelve technologies, we're seeing advantages of up to 9x in AI inference versus competitor CPUs. We also see cloud and enterprise momentum building for our breakthrough memory technology Intel Optane. This quarter, we announced a strategic collaboration with Oracle.
Oracle is incorporating the high performance capabilities of Intel Optane DC Persistent Memory into its next generation Exadata platform, which powers high performance database infrastructure at most of the world's leading banks, telecoms and retailers. And in client computing, we're excited that all our major PC OEM customers have ICE like designs with 18 already shipping out of a total 30 expected to launch this year. We recently announced the next generation of Intel ZMW and X Series Processors for high end desktops. These platforms lead the industry in bringing Intel deep learning boost powered AI acceleration into high end PCs and mainstream workstations for the first time. Available soon, these products deliver performance and value that give enthusiasts and creators more reasons to keep choosing Intel.
We've also embarked on a multiyear program called Project Athena that charts the course for the PC ecosystem to raise the bar on laptop innovation. Amazing devices like the Dell XPS 13 2 in 1 and the HP Elite Dragonfly that meet the Project Athena spec are already available. Our PC and server franchises are vital, but our ambitions are even greater. Extending our product leadership to power and increasingly 5 gs and AI enabled world. We have multi $1,000,000,000 networking and IoT Edge businesses delivering double digit growth and AI is driving significant revenue across our product portfolio.
We began investing 10 years ago in network IP, SoC capabilities and software so that we could drive workload convergence on Intel Silicon. Today, we achieved number 1 share in the network and silicon market with expected 2019 revenue of more than $5,000,000,000 growing at 12% this year. We're also well positioned for 5 gs deployments in 2020 and expect to grow our market segment share in wireless base stations to 40% by 2022. And we're ready for the next market inflection as 5 gs enables significant new IoT and edge growth opportunities that extend from in network and on premise edge equipment to smart connected endpoints. Winning here means blending the right compute performance per watt with the emerging killer apps of the edge, computer vision and AI inference acceleration.
These are the differentiating capabilities that have propelled our IoTG and Mobileye businesses to leadership share and a combined annual revenues approaching $5,000,000,000 The businesses are also growing quickly, up 18% year to date excluding Wind River. We're only at the bend of the curve in the edge opportunity and we're investing to lead. Finally, artificial intelligence. AI is becoming a pervasive use case. According to IDC, 75% of enterprise applications will use AI by 2021.
And that's why we're infusing AI in everything we build. But this isn't just about the future. We are driving meaningful AI revenue inside Intel now. With products spanning from the data center to the edge, we expect to generate more than $3,500,000,000 in AI driven data centric revenue in 2019, up more than 20% year over year. We're confident in our growth, but we also need to improve our execution on multiple fronts.
1st, supply. We've increased our output in response to stronger than expected demand. We've invested record levels of CapEx the last 2 years to expand our capacity and support our customers' growth. With that investment, we've increased our 14 nanometer capacity 25% this year, while also ramping 10 nanometer production. We expect our second half PC client supply will be up double digits compared to the first half and we expect to further increase our PC client supply by mid to high single digits in 2020.
But that growth hasn't been sufficient. We're letting our customers down and they're expecting more from us. PC demand has exceeded our expectations and surpassed 3rd party forecasts. We now think the market is stronger than we forecasted back in Q2, which has made building inventory buffers difficult. We are working hard to regain supply demand balance, but we expect to continue to be challenged in the Q4.
Our manufacturing process node execution is also improving. We have fabs in Oregon and Israel and volume production on 10 nanometer and will soon start 10 nanometer production in Arizona. Yields are improving ahead of expectations for both client and data center products. The Intel 10 nanometer product era has begun and our new 10th Gen Core ISOLITE Processors are leading the way. In Q3, we also shipped our first 10 nanometer Agilex FPGAs.
And in 2020, we'll continue to expand our 10 nanometer portfolio with exciting new products including an AI inference accelerator, 5 gs base station SoC, Xeon CPUs for server storage and network and a discrete GPU. This quarter we've achieved power on exit for our 1st discrete GPU, DG1, an important milestone. As we discussed at the May Investor Meeting, we are accelerating the pace of process node introductions and moving back to a 2 to 2.5 year cadence. Our process technology and design engineering teams are working closely to ease process design complexity and balance schedule, performance, power and cost. We are on track to launch our first 7 nanometer based product, a data center focused discrete GPU in 2021, 2 years after the launch of 10 nanometer.
We are also well down the engineering path on 5 nanometer. Last, a few thoughts on our capital deployment priorities. We are confident in our future and our Board has approved an additional $20,000,000,000 share buyback authorization. We have an excellent balance sheet, generate strong free cash flow and continue to invest in R and D and CapEx to grow. We've also returned 100 percent free cash flow to shareholders over the last 10 years.
At the same time, we're making trade offs. While we've increased R and D spending by more than $1,000,000,000 since 2015, we have reduced our total spending by 9 points over the same period. Additionally, we have established clear criteria for our big bets like Mobileye, 5 gs and memory and storage. Our ambitions are to play a larger role in our customers' success and generate attractive returns for our shareholders. And if we can't do both, we'll take swift action.
We are making great progress with our Mobileye acquisition. We've now shipped over 12,000,000 IQ devices this year, up more than 40% over the same period last year. And in the Q3, we delivered record revenue and secured 6 major new design wins totaling nearly 10,000,000 lifetime units. We've increased our investment in 5 gs, but we've also announced our 5 gs smartphone modem exit and the sale of the IMFT fab to Micron. We expect those to close in the Q4 and we continue to take steps to improve 3 d NAND profitability and reduce memory CapEx investments, while evaluating a variety of partnership options that can accelerate the path to profitability and improve returns.
We are confident in our multiyear business plan and consistent with that we are increasing our buyback commitment. We expect to repurchase approximately $20,000,000,000 shares over the next 15 months to 18 months. We'll fund the buyback from proceeds we generate from partnerships and or non core asset dispositions and by returning approximately 100% of 2020 free cash flow to investors. In summary, our energies are focused on accelerating our growth, improving our execution and allocating our capital wisely. Thanks to the team for a great quarter.
And now I'll hand the call over to George for more details on our Q3 results and business outlook.
Thanks, Bob, and good afternoon, everyone. We had an outstanding Q3 with record revenue of $19,200,000,000 approximately flat year on year and $1,200,000,000 higher than Guide. We saw record data centric revenue of $9,500,000,000 representing just under 50% of our total revenue, an all time high. DCG, IoTG, NSG and Mobileye all individually achieved record revenue in the quarter. PC centric revenue was down 5% year on year on a very tough compare.
Q3 operating margin was approximately 36%, one point ahead of our guide on revenue strength and spending leverage. Gross margin for the quarter was 60.4%, modestly below expectations as strong flow through of higher DCG revenue was more than offset by mix effects of higher than expected NAND revenues and one time impacts in NSG, including the absence of an expected grant associated with our NAND factory. Q3 EPS was $1.42 $0.18 above our guide. The results demonstrate strong top line performance, expense discipline, increased share buybacks as well as non operational factors like lower tax rate offset by the one time items in our NSG business. Year to date, we have generated 11 point $7,000,000,000 of free cash flow and returned $14,300,000,000 to shareholders.
Operating margin of 36% in the quarter was down approximately 4 points versus last year as ASP strength in our server and client businesses and lower spending were more than offset by NAND pricing degradation, changes in modem reserves, platform volume declines and higher cost as we ramp our 10 nanometer client products. EPS was up 1% or 0 point 0 $2 year over year as lower operating margin was offset by lower share count, the absence of one time impairments related to the IMFT joint venture and a lower tax rate. Our non GAAP tax rate in Q3 was approximately 11%, down 1 point versus last year and below our 13% guide as we reported a better than expected tax benefit related to our non U. S. Sales on our recently filed 2018 U.
S. Tax return as well as for the 2019 tax year. Let's move to segment performance. Our data center group had record revenue at $6,400,000,000 up 4% from the prior year and on our recently filed 2018 U. S.
Tax return as well as for the 2019 tax year. Let's move to segment performance. Our data center group had record revenue at $6,400,000,000 up 4% from the prior year and up 28% sequentially. These results beat our expectations with platform ASPs up 9% year over year on strong adoption of our highest performance 2nd gen Xeon Scalable products. Against the tough year over year compare, platform units were down 6%, while DCG adjacencies achieved 12% revenue growth driven by our connectivity solutions.
DCG Growth Segments, Cloud and Comms now represent over 2 thirds of total DCG revenue. Cloud revenue was up 3% year over year, returning to growth after a historic 2018 platform refresh as cloud service providers exited a 3 quarter capacity absorption cycle. Enterprise and government revenue came in ahead of expectations, growing 1% on strong mix and better China demand, while communication service providers revenue increased 11% on continued adoption and share gains of IA based solutions. We estimate in Q3 that the Enterprise and Government and Communications Service Provider segment benefited from trade related demand pull ins of approximately $200,000,000 in revenue from Q4. As a result of the strong top line performance, DCG achieved record quarterly operating income and operating margin of 49% was up 13 points sequentially.
Our other data centric businesses were up 13% year over year and Q3 marked IoTG's first $1,000,000,000 revenue quarter, up 9% year over year, underscoring Intel's expanding opportunity at the edge. IoTG operating income was down 4% year over year due to lower benefits from inventory reserves and a mix shift to lower margin products. Mobileye revenue and operating income were up year over year 20% and 29% respectively on continued ADAS penetration and new program launches. NSG revenue returned to growth, up 19% on continued bit growth, partially offset by year over year pricing declines. These pricing declines along with the one time impacts discussed earlier contributed to NSG's operating loss of approximately $500,000,000 PSG revenue grew 2% year over year on continued strength in wireless, partially offset by softness in cloud and enterprise.
And operating income was down 13% on segment product mix. CCG revenue was $9,700,000,000 down 5% year over year as ASP strength partially offset lower platform volume. DC unit volumes were down 10% versus Q3 2018 where we benefited from drawing down internal inventory to satisfy demand. We continue to be supply constrained in Q3, particularly at the value end of the market as higher than expected PC demand strength continues to outpace our supply despite the capacity additions that Bob discussed earlier. Adjacencies grew 10% year over year, driven by strong demand for modems and connectivity solutions.
Operating margin was 44%, flat year on year as lower revenue was offset by lower spending driven by the 5 gs smartphone modem exit. Year to date, we have generated $23,300,000,000 in operating cash flow and invested $11,500,000,000 in CapEx. We also returned 122 percent of free cash flow to shareholders through dividends and buybacks. During the quarter, we ramped buybacks purchasing 92,000,000 shares at an average price of $48.78 per share. Now moving to the full year outlook.
As a result of our strong Q3 operating performance and momentum into Q4, we are increasing our revenue outlook for 2019 by $1,500,000,000 to $71,000,000,000 We expect revenue from our data centric businesses to be flat to slightly up for the full year and expect our PC centric business to be flat to slightly down, both improving versus prior guidance. Operating margin for the year is expected to be approximately 32.5 percent, up 0.5 point from our prior guide. Full year expectations for gross margin unchanged at approximately 60%. We expect Q4 gross margin to be down 2 to 2.5 points sequentially as we continue to ramp 10 nanometer and we'll have sold through the previously reserved inventory consistent with prior expectations. Expectations for full year spending are unchanged, down approximately $900,000,000 year on year.
As a result, non GAAP EPS for the year is now expected to be $4.60 up $0.20 from our July guide on strong top line performance and tight expense control. We are raising gross CapEx by $500,000,000 to $16,000,000,000 as a result of increased 10 nanometer and 7 nanometer investments. And we are raising our free cash flow guide by $1,000,000,000 to $16,000,000,000 Let's turn to Q4. After adjusting for the impact of trade related pull ins in DCG, we expect Q4 revenue of $19,200,000,000 up 3% year over year and flat sequentially. Our data centric businesses are expected to be up 6% to 8% year over year on continued cloud recovery and sequential NAND pricing growth.
Our PC centric business is expected to be flat to slightly down year over year. We expect Q4 operating margin of approximately 33.5% and a tax rate of 13.5%. EPS is expected to be $1.24 down sequentially on lower gross margin, lower below the line non operational benefits and a higher tax rate. In summary, we are very pleased with the company's strong operating performance and we will be very focused over the quarter on delivering a record year. With that, let me turn it back over to Trey.
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.
Certainly. Our first question comes from the line of C. J. Muse from Evercore. Your question, please.
Yes, good afternoon. Thank you for taking the question. I guess a question on the data center side. I guess just to square up the numbers, it looks like you're suggesting DCG up maybe 5% year on year. So can you speak to the accuracy of that?
And then I guess bigger picture, the comm service provider side, clearly a very large source of strength for you guys, up 11% year on year and now representing more than 40% of the mix. So curious if you can kind of speak to the most important drivers of that business and how you're thinking about growth over the next 1, 2, 3 years? Thank you.
Yes. Thanks, C. J. First, we gave a DC centric guide of 6% to 8%. And yes, I would we didn't give DCG specifically, but I would say it's a little bit lower than our 6% to 8% data centric growth.
So you're in the ballpark. On comms service, the comms, this has been an extremely important aspect of the business for a number of years now where we've seen the programmability at the networks with NFV and software defined networks, an opportunity for us to migrate the networking environment to IA architecture. So we've been doing this for a number of years. It's been a source of growth for us over time. And in the quarter, the 11% growth was significant in and of itself, but remember last year's Q3 was also up in the mid to high 20s.
So we continue to make great progress. What we see going forward in this business is really a big opportunity in 5 gs. So next year, you're going to see our good progress has been on 3 gs and 4 gs. Next year, we see real design wins that we've achieved, real growth as we go into it, 5 gs world where we continue to see what we characterize as cloudification in the network, more and more compute moving from the cloud and data centers out to the network and edge. And that's been an opportunity for us that we've been investing in over the past and we expect to be a big source of growth for us going forward.
Thanks, C. J.
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your question, please.
Yes. Good afternoon, guys. Congratulations on the solid results. I want to stick with DCG, Bob. If you look impressive that ASPs were up 9% year over year, especially as the mix shifts towards the comms business, which I believe tends to be lower ASPs.
It's also happening in the quarter where you're seeing your competitor ramping their next generation chips. So I guess I'm trying to understand, what's the power of the Xeon Scalable upgrade cycle you referred to in your prepared comments, what inning are we in, in your mind? How much of an ASP lift can that give you? And do you anticipate any unusual pricing action as competition heats up in this market?
Boy, was that your one question, John?
Multiple parts.
Yes. Okay. So first, I'd say in our obviously, we're well into Skylake, but the transition now is into Cascade Lake. And that's a higher performance SKU. In the quarter, the high ASPs were really driven by particularly cloud customers really moving to the highest end product within the Cascade Lake family.
So we're seeing that transition from Skylake to Cascade Lake. And within Cascade Lake, real high performance SKU that's our highest performance ASP. So that mix dynamic in Q3, I don't expect that to stay where it is. I think we'll go to more of a balance as we go into Q4 next year. And in terms of competitive dynamics, I would just say that we've got a great lineup of products.
We
at Cooper Lake as
we talked before. We're really excited about ice at Cooper Lake. As we talked before, we're really excited about Ice Lake Server coming out in the second half of next year. And we realize that it will be a more competitive environment, and we've tried to capture that in essence in how we think about 20 20s both demand equation, but also the margins that we flagged a little bit on the on our Q2 call or back at Analyst Day, I think. So good quarter, good momentum first half to second half, high performance SKUs driving real high ASPs, even though you're right that the ASPs with comps have a tendency to be a little bit lower.
Perfect. Thank you.
Thanks, John.
Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please.
Great. Thank you.
I wonder if you could talk to the shortages a little bit more, and I guess in the context of how much you said you brought 14 nanometer capacity up. And I realize demand is better, but it seems like it's a few points better and yet the shortages are intensifying. Can you just talk a little bit about that? And when do you think we'll be in a position where you don't have those tensions in your business anymore?
Yes. Thanks, Joe. First, I'd just kind of try to put it into context. Over the course of the last 3 years, I guess, we've grown the business by about 20%. So $13,000,000,000 in revenue over the last 3 years and the practical reality is we didn't anticipate that kind of explosive growth 3 years ago.
So we didn't have the capacity in place to deal with it. And we've been working our tails off for the last 12 months to ensure for our customers that we wouldn't be a constraint on their growth. From the last 2 years, I think as you know, we've spent over $30,000,000,000 in CapEx to both have more capacity for 'fourteen, while we also begin to ramp 10. My prepared comments, I said we added 25% wafer start capacity twenty 18 to 2019. Our first half to second half unit volume will be up double digits.
So we're making good progress throughout the course of the year. But our expectations were in the second half, we would be back in a supply demand equilibrium. And the fact of the matter is we're not there because the demand profile that's resulted in our 1,500,000,000 dollars higher revenue is just higher than we had anticipated. So we have more work to do to meet our customers' demands in the Q4 and going into 'twenty. As we see Q4, we're still going to be constraining our customers' growth, which is absolutely where we do not want to be.
But with the higher demand, we will be constraining the growth in the Q4. But as we go into 2020, our expectations are we'll add another 25% capacity, both for 14 and 10, and that we will have, particularly for PC client, we expect to be able to do mid- to high single digit unit volume growth next year. And that we don't expect the market to grow that fast, but we got to have just more inventory buffers, so we're there when our customers need us. So Q4 will be a little challenging. In 2020, we expect to be able to rectify things.
Thank you.
Thanks, Joe.
Thank you. Our next question comes from the line of Ambrish Srivastava from BMO Bank of Montreal. Your question please.
Hi, thank you very much. Bob, I wanted to go to the priority and the cadence that you talked about bringing it back to 2, 2.5 year. Is that because my understanding is that they were just simply laws of physics that were causing the cadence to stretch out. So what problems have the engineers and the process folks solved out there? And or is it just limited to the 7 nanometer and then you would revisit that again?
Thank you.
Yes, it's a good question. Last, back in our Analyst Day, we tried to go through this in quite a bit of detail, both, one, kind of our lessons learned coming out of the challenges we had with TEN and how we're capturing those lessons learned as we think about the next 2 generations. But first, our focus and energy is right now around scaling 10. And as we said, we feel very good about the capacity we put in place, the products we have coming down the pipeline and the yields that we're achieving almost week on week improvement over the last 6 months. So for 10, we feel really good.
2nd, when we put the design rules in for 7 nanometer, we were less aggressive in terms of density. Our learning from going from 14 to 10 is with the benefit of hindsight, we were just we tried to scale at a 2.7 factor. And that was that ended up putting too much invention or revolutionary nodes into the fab environment to meet those kind of hurdles. And the learning from that is we just can't hit those kind of really aggressive targets when, to your point, the dynamics are getting increasingly challenging. So lots of learnings out of 10, our transition to 10 that we incorporated into 7.
The design rules, there's less complexity. And for the last couple of years, we've been working with EUV. Litho has been the challenge. We've had EUV that we've been working with for a few years now, and we expect to use EUV as we scale 7. And we indicated that our first product will be 2 years from this quarter.
So Q4 of 2021, our first 7 nanometer product will come out. And our expectation is that we'll get back on a 2 year cadence in 7 and beyond. So lots of learnings out of 10 nanometer that we've incorporated. And we said back in May and we reiterated today, we expect to be back to a 2 to 2.5 year cadence going forward, at least for the next few nodes.
Our next question comes from the line of Pierre Ferragu from New Street Research. Your question please.
Hey, thank you for taking my question. I'm asking one question, but medium 2 buckets. I'm very sorry, your breakout So my question is really about your competitive landscape. So your main competitor in the X86 ecosystem has produced in the last few months a lineup of client wins and design wins. That was slightly impressive in the data center and also in the design wins in pieces.
And so my question is, what's your perception on the evolution of your competitive landscape in the last 3 months? Are things playing a bit in line with what you had in mind and what you were expecting when we spoke over the summer? And then how much of like the footprint you have in the data center, do you think you could lose competition with that in mind?
Pierre, let me kind of reframe that. I think you were talking about competition and how we feel about that now, maybe
both at the PC and the data center level. And maybe I'll jump in on the PC because I think the year over year compare on Q3 is could be causing some concern. Just a reminder in Q3 of last year, we had basically drawn down more than a week and a half of inventory, which went into the channel. And so when you do compares year over year on Q3, PC looks a little bit like on demand. Really, as we look over the last 90 days, we haven't seen any difference in our view of the competitive dynamics.
We are clearly being impacted significantly on the value end of the market, which is a supply issue for us. It's one of the reasons why we're building volume capacity, continuing to build volume capacity into 2020 because we think it gives us an opportunity to compete for those units again next year. Bob, I don't know if you want to comment on the DCG side.
Yes. I'll try because I'm not exactly sure I got the question. But in terms of competitiveness, if that's the question. Look, it's a more competitive world. And in that world, we just raised our full year outlook by $1,500,000,000 and increased our operating margin.
So yes, I think competitively, nothing has really changed in the last 3, 6, 9 months relative to what we expected. And the only thing that's really changed is our performance. But we do know that going into next year that our role is to dramatically expand the role we play in our customers' success. So we're expanding the product, the architectures, the packaging technologies, the process capabilities and the software that we build so we can continue to deliver better and better product performance for our customers. And I'd just say that we feel really good about where we are, but we're not complacent
Thank you.
Thank you. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question please.
Hi guys. Thanks for taking my question. I was wondering if you could tell us within your enterprise cloud and comm businesses in DCG. In the quarter, how much of each of those was driven by China? And given the $200,000,000 pull forward across enterprise and cloud that you mentioned enterprise and comm that you mentioned, Was that beef in enterprise relative to your expectations more or less than $200,000,000
Yes, I think, Stacy, you've got the numbers right. Dollars 200,000,000 was on the enterprise and government and comms area. And that's I would say it was more in line with our expectations. Once you take out that 200 number, we had expected it to come up a little bit. The growth year over year was definitely above our expectations.
And So by more than $20,000,000
Yes, that was a fairly big number for us relative to our expectations.
So how much of enterprise was China then?
Well, look, I think in terms of the makeup of the business for data center, you got roughly 2 thirds is cloud and comms and roughly 1 third is enterprise and government. So that, as you know, has changed dramatically over the years as we've continued to grow our presence in the cloud. And as I mentioned earlier to Joe's question, I think, gained share in comms. So now we're in kind of a 2 third, 1 third state. And enterprise and government was across the board in DCG in the quarter, the strength was much higher than we anticipated back in July.
We had a first half to second half acceleration, but the acceleration was just more than we expected. And yes, I would say we saw strength across the board. But as we look at the E and G growth in particular, we're trying to determine what is kind of what has a tendency to pull in versus what can we count on as we project things forward. And our best guess on our stronger performance is of the $1,200,000,000 that we were over, roughly $200,000,000 of that particularly related to enterprise and government and particularly related to China. Thanks, Stacy.
Thank you. Thank you. Our next question comes from the line of Timothy Arcuri from UBS. Your question please.
Thanks so much. Bob, it sounds like for 10 nanometer, it sounds like Ice Lake is still on track for the second half of next year and it sounds like the 7 nanometer GPGPU is still on track for 2021. You did talk though for the first time about 5 nanometers. So can you talk a little bit about how you think of make versus outsource? And really what I'm after is sort of anything sacred or if going to a foundry partner to make CPU or maybe even like a chiplet strategy, if that would eliminate a significant piece of your competitive disadvantage, would you consider that or is that sort of off the table for now?
Thanks. Yes. Well, I mean, first to the comment, yes, nothing new about process relative to what we said at Analyst Day. Ramp 10, 2 year cadence for 7 and our expectations that the cadence going forward will be more a 2 to 2.5 year timeframe. Intently focused on N Now and 7 for the product you mentioned in the 4th quarter.
So we're investing to recapture process leadership going forward. At the same time, we're going to be extremely open minded about how do we ensure that we're building the best products and where we build them is something that we'll always evaluate. I think as you know with the other foundry players, they've been a source of our capacity over the years. And our expectation is to the extent that they can do something to support our growth better and or for peak kind of demands, we're always going to look at how do we evaluate the opportunity set that's going to position us best to meet our customers' demand for the growing diversity of products that we have in our portfolio.
Thanks, Bob.
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.
Hi guys. I wanted to ask on gross margin. A year ago on your Q3 call, Bob, you gave some directional commentary on what you thought for the out year for 2019. Today, as we look into 2020, you have a lot of moving parts with 2 nodes ramping, 10 nanometer, 7 nanometer yields, competition, lots of moving parts admittedly. But I was hoping at least versus maybe the Q4 exit rate this year that you could give some puts and takes on how you're feeling about next year's gross margin?
Hey, Ross, this is George. Maybe I'll take that. Actually, there's with respect to 2020, there's no material change to my characterization on the last call, where we were talking about 58% outlook for Q4 and 57% in 2021. And the question was, well, should that those good proxies for 2020? And my point was, we think we'll be closer to 60% than to those numbers.
But if you want to think about tailwinds and headwinds going into 2020 that we look at as we think about that number. So tailwinds will be obviously we're going to have lower modem in the mix next year. Memory is starting to come out of that deep down ASP period, and we think volumes are going to be up as we get a little better supply and demand situation. The headwinds that we're very mindful of is obviously 10 nanometer ramping is can be a little bit of a headwind on margins and also competitive impacts on ASPs. So those are the things that we'll continue to look at, but as we look at those today, no material change at all from my previous comments.
Yes. I would probably just, I guess, echo, in all the complexity and all the moving parts. George kind of flagged the where I'd characterize the 4 things that we're really dialing in on. 1, going into next year, mix is going
to be
better because our modem volume will be lower and our NSG profitability will be better. So mix is going to have a mix has been a drag on 20 nineteen's gross margin, and it will be a big contributor as we go into 2020. And secondly, in the first half of twenty nineteen, we had a lot of the O cost or cost of sales related to pre PRQ 10 nanometer product. So that will not repeat itself. So those two things are good favorable things.
The third thing is just George flagged this, I just simplified as no transition. And for us, no transition next year is going to be 14 nanometer will be a little better in terms of its profitability. Yields won't be dramatically different because we're extremely mature, but depreciation levels will be lower because a lot of these tools have been fully depreciated because we've been on that node for so long. So for the node transition, 14 will be a little bit better. Our expectation is 10 nanometer yields will continue to improve.
But at the same time, the mix of 10 versus 14 will be a little bit of a weight. So no transition will work against us. And we also we've tried the best we can take into account competitive dynamics as we exit this year and go into next year in our quest to play a bigger role in our customers' success. We're going to compete to protect our position and expand the role we play. So those are the 4 things.
And lots of complexity and lots of moving parts. But we a year ago, we dialed in 2019 pretty well. Now we got to dial in 2020 as well.
Thanks for all the detail.
Operator, I think we'll have time for 2 more calls.
Certainly. Our next question comes from the line of Vivek Arya from Bank of America. Your question please.
Thanks for taking my question. Bob, you mentioned you're still facing some capacity shortages. I wanted to understand how you're planning capacity for next year. What proportion will be 14? What will be 10?
And will that mix require a higher or similar level of capital intensity as we saw this year?
Yes. I mean, our intention next year is to not be a constraint on our customers' growth, 1st and foremost. And given that, what I indicated is we expect to increase capacity by 25 again. So we believe that data center, we've been in pretty decent shape. But for client, we just want to get to mid single digit kind of unit output mid to high single digit unit output.
So one, we can meet what we expect customer demand profiles to be, but also so we can rebuild buffer levels of inventory, so we can deal with these peaks, etcetera. So we're trying to put the capacity in place that we think will meet customer demand and try to give us the inventory buffer that has been depleted over the course of the last 9 months or so. In terms of capital, I would just say we'll probably give you more detail on that come January. But George kind of laid out back in May a multi year view of capital and wasn't any dramatic changes from kind of where we are now. So obviously that will be a function of growth.
I would just add one thing to remind everybody is that in 2019, we made a major shift from spending capital in the memory area to moving that capital over to expand our both our 10 nanometer and some 14 nanometer. We continue to add capacity in 14 nanometer and began adding capacity at 7 nanometer as well. So we are very focused on getting the capacity in place that will allow us to take the word shortage out of our quarterly discussions.
Okay. Thank you. Thank you. Our final question for today then comes from the line of Harlan Sur from JPMorgan. Your question please.
Good afternoon and great job on the quarterly execution. Last time we had a cloud and enterprise spending digestion pause was first half of twenty seventeen. It's kind of the same setup as this past year, right? Similar to 2017, DCG had strong second half growth. And in fact, back in 2017 it kicked off what was a 4 or 5 quarter period of strong spending by your cloud customers.
Do you guys get a sense in discussions with your customers that the spending reacceleration is sustainable for the next few quarters? I mean, if I look at things like compute workload growth that continues at a strong pace. Workload themselves are getting more complex. And so just wanted to get your views on sustainability of the strong growth profile in DCG into next year?
Yes. Joe, I think the trends, the macro trends that we see haven't subsided at all. And that is this insatiable appetite for the creation of data and the need to compute, process or move, make that data more relevant. Those macro trends have been very attractive for the long for a while, and we expect those to continue. But to your point, the our experience with the cloud providers as they go through big buying cycles and then relatively long digestion periods.
And what we did experience last year was a gangbuster year, but it's been 3 quarters coming into the Q3 where they went through digestions. And what we started to see in the Q3 was, particularly for high performance compute, started to see them come back into the market to really begin to purchase a little bit more. So how long that cycle lasts is going to be a function of several variables. But their end demand seems to continue to be relatively strong. And therefore, the need to add capacity, we think, will follow their end demand given they've been out of the market a little bit for about 3 quarters now, up till Q3.
Yes. Thank you.
Thanks, Harlan. And we're going to hand the call back over to Bob for some closing comments.
Yes. Look, thanks for joining us. We feel great about the quarter. It's we're looking at we had a record quarter. We're both raising our outlook for the full year.
The market we see, the trends we see are as big as they've ever been, and we're really focused on continuing to deliver for our customers. 10 nanometer areas now, we're ramping a multitude of products. We have increased confidence in 5 nanometer. And as we mentioned, for 7 and 5, getting back to a 2.5, 2 year cadence is what we're focused on and we're confident in the future. And you've seen both in the 1st 9 months of the year as well as with our higher share buyback that we're putting your money where to work to reduce the float because we think there's a disconnect between the intrinsic value of the plan we shared with you back in May and how we're trading.
So with our balance sheet, we're taking advantage of that. So thanks for joining us. Thanks for your questions, and we'll talk to you soon.
Thanks, Bob and George. And thank you, everyone, for joining the call today. Operator, could you please go ahead and wrap up the call?
Certainly. Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.
Good day.