Good day, ladies and gentlemen, and welcome to the Intel Corporation 4th Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr.
Mark Henninger, Head of Investor Relations. Sir, you may begin.
Thank you, Chanel, and welcome, everyone, to Intel's Q4 2016 earnings conference call. By now, you should have received a copy of our earnings release and the CFO commentary that goes along with it. If you've not received both documents, they're available on our investor website, intc.com. I'm joined today by Brian Krzanich, our CEO and Bob Swan, 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 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 non GAAP financial measures when describing our consolidated results. The CFO commentary and earnings release available on intc.
Com include the full GAAP and non GAAP reconciliation. And finally, I'd like to remind everyone that we'll be hosting our Annual Investor Meeting here at our Santa Clara headquarters on Thursday, February 9. If you have any questions about the event or logistics, please contact Investor Relations. With that, let me hand it over to Brian. Thanks, Mark.
I'd like to cover 3 things with you today before handing off to Bob. A brief review of our results for the year, an update on the transformation of the company, and a look ahead at 2017 and Intel's future. First, the review of our results. Q4 was a strong finish to a record year in which we grew revenue 7% and net income 9%. The client computing group, data center group, Internet of Things and Intel Security all grew in 2016 with DCG and IoTG setting full year revenue and volume records.
The acquisition of Alterra added 3 percentage points to our overall growth rate. In the data center, cloud service provider revenue grew 24%, while enterprise revenue was down 3% for the full year. Additionally, we are very excited that comms service provider revenue grew 19% And across all of our customer categories, adjacency revenue grew an incredible 21% with strength in Ethernet Controllers, Omni Path Fabric Controllers and Switches and Network ASIC. IoT revenue was up 15% for the full year, driven by strength in the video, retail and industrial segment. In Q4, we launched new Apollo Lake and Kabi Lake product and we won key designs in automotive and video.
Our memory business finished the year with record quarterly revenue, while full year revenue was down 1%. This was an investment year for the memory business, but NSG operating margins improved meaningfully in the Q4. We're now shipping 3 d NAND from our Fab 68 and we just qualified our 1st 3 d Crosspoint based Optane SSDs, which we expect to ship for revenue in the Q1. And our 3 d cross point memory dims are sampled to datacenter customers. The client computing business achieved impressive results driven by strong execution and higher ASPs as customers bought a richer mix of Intel core product.
This was also a breakout year for CCGs wireless communications product line. Our 7,360 LTE modem ramped into high volume and we shipped record Wi Fi units. I'm very proud of the client computing business and what this team has delivered in 2016. Our strategy of delivering consistent product leadership, segmentation and differentiation paid off. We achieved record I7 units and overall core mix in 2016 and client computing revenue was up 2% for the year despite a declining PC market.
The Programmable Solutions Group was up about 7% on a non GAAP basis over Alterra's 2015 results. PSG saw strength across many segments with particular strength in compute and storage. The Programmable Solutions business sampled the industry's 1st and only 14 nanometer FPGAs this year, known as Stratix10. This product line has the largest demand pipeline in Ultera's history. The integration of Ultera into Intel was an important milestone and what was a transformative year for Intel.
This team did a great job of meeting integration objectives while continuing to deliver new products and grow the business. In 2016, we took other important and in some cases difficult steps to position the company for future success, improve the alignment of our resources to our strategy and accelerate our transformation to the company that powers the cloud and billions of smart and connected devices. Our restructuring initiative focused on our investments on the product and technologies that will fuel our growth. And that work combined with improvements in 14 nanometer costs drove a 30% operating margin improvement in our client business. Our decision to establish McAfee as a separate independent company was another transformative move.
This transaction will give McAfee the flexibility to invest independently, tighten our focus and allow Intel to share in McAfee's future success as the market demand for world class security product continues to grow. And finally, looking ahead to 2017 and Intel's future, I'm confident we're making the right investments to compete and win, not only in the segments where Intel is strong today, but also in new areas that are poised for growth driven by the emerging flood of data. By 2020, the average person will generate about 1.5 gigabytes of data per day, while smart and connected devices of the future will produce data at many times that rate. Autonomous cars for example will generate about 4,000 gigabytes of data each day. The resulting explosion of data is creating tremendous opportunity.
But data alone isn't valuable. It's the transmission, aggregation and analysis of the data that results in value and impact. Intel will play a central role in those steps because our products are key to turning raw data into high value insight and information. Our investments in advanced research and development are making this all possible, while significantly expanding our TAM at the same time. These investments are creating opportunities in segments from autonomous driving where we are uniquely positioned to be the compute engine in the vehicle and the data center to 5 gs where we are building on our momentum in 4 gs to establish leadership to artificial intelligence where we are providing the industry's most complete range of products to accelerate all AI solutions from the edge to the data center.
We're already seeing signs of progress. In autonomous driving, we are winning key designs like BMW, Delphi and Baidu. In 5 gs, we are leading in the definition of standards, prototyping and field trial. Our network business saw strong growth as infrastructure moved to Intel architecture in anticipation of 5 gs. Our design wins and network virtualization innovation position us for leadership share in the wireless access market.
Other proof points of our progress include important partnerships with AT and T, SK Telecom, Korea Telecom and Verizon and the announcement earlier this month of the industry's first global 5 gs modem. Finally, in artificial intelligence, we believe we have the industry's strongest product portfolio. Intel processors power well over 90% of servers deployed to support machine learning workloads and we are winning the vast majority of AI solution based on strong product performance and customer value. Wrapping things up, I'm very pleased with Intel's performance in 2016. We have important work to do in 2017 as we continue to transform the company, but the progress we've made leaves me increasingly confident in Intel's growth and Intel's future.
And with that, I'll hand it over to Bob.
Thanks, Brian. The 4th quarter was an outstanding quarter. Revenue was up 10%, operating income was up 11% and EPS was up 4% year over year. Revenue set an all time record of $16,400,000,000 and operating income was $4,900,000,000 4th quarter operating margin was 30% flat year over year. Gross margin of 63% was down 2 points primarily driven by couple of one time events related to product warranty cost and long term IP agreements.
Direct spending came in at $5,400,000,000 up 4% year over year and down 2 points as a percent of revenue. Earnings per share of $0.79 was up 0 point $100,000,000 up 4% year over year. During the Q4, the worldwide PC supply chain remained healthy and we saw some inventory burn during the quarter. Client ASPs were up 7% year over year and core mix was at an all time high as a result of the success of our segmentation strategies and strength in gaming and high end systems. This segment had another quarter of significant profit growth with operating profit growing 30% from a year ago as the business continues to benefit from lower spending, richer product mix and continued improvements in 14 nanometer unit cost.
The data center group had record revenue of $4,700,000,000 up 8% year over year. In the 4th quarter, we continued to see robust growth in the cloud and comms service provider segments of the business, which both grew approximately 30% year over year, partially offset by a 7% decline in the enterprise and government segment over the same horizon. The Data Center Group had operating profit of $1,900,000,000 down 14% year over year. Operating margin was impacted by the 2 one time items I referred to earlier and the ramp of 14 nanometer on our server products, which we expect to generate continued cost improvements over time. Our Internet of Things business achieved record revenue of 7 $26,000,000 growing 16% year over year driven by strength in both retail and industrial segment.
Operating profit for the business was $182,000,000 up 37% year over year. Our memory business had record revenue of $816,000,000 up 25% year over year with strong demand for data center SSD solutions with demand signals outpacing supply. We've made great progress ramping Fab 68 with yields and unit costs well ahead of expectation. This segment had an operating loss of $91,000,000 largely driven by cost associated with 3 d Crosspoint and startup costs for our memory capacity. The Programmable Solutions Group had revenue of $420,000,000 and operating profit was $80,000,000 Our Intel Security Group business had revenue of $550,000,000 and operating profit of $103,000,000 Turning to the full year 2016, revenue grew 7%, operating margin grew 11% and EPS grew 9%.
Operating margin percent improved by 1 point gross margin was approximately 63% flat to 2015. Spending was $21,000,000,000 or 35 point 4% of revenue down 1 point from 2015 primarily from the restructuring programs we began earlier in the year. Operating profit for the year was $16,500,000,000 earnings per share for the year was $2.72 up $0.23 from the prior year. In 2016, the business generated record cash from operations of $21,800,000,000 We purchased $9,600,000,000 in capital assets, paid $4,900,000,000 in dividends and repurchased about $2,600,000,000 of stock. Total cash balance was $17,100,000,000 down $8,200,000,000 Total debt was $25,300,000,000 Our net cash balance, total cash less debt and inclusive of our other longer term investments is approximately negative $2,300,000,000 Now let me turn to guidance.
First some context. 1st, our guidance assumes a stable macroeconomic environment, but we have taken a more cautious view of PC consumption versus 3rd parties, particularly in our outlook for the emerging markets including Russia, China and Latin America. 2nd, for the data center, we continue to expect similar growth rates in the cloud and comm segment, but we are not expecting an improvement in enterprise. This gets us to an expectation of high single digit growth in the data center business. 3rd, as a reminder, we have one last week as a result of the inclusion of an extra work week in 2016.
And last, we have assumed the Intel Security transaction will close in Q2 and our full year guidance reflects one full quarter of the group's consolidated results. We have lots of work to do to close this out and in the event the close happens at the end of the second quarter, we would update our full year guidance by approximately an additional $500,000,000 of revenue and $100,000,000 of operating income. As we look forward to the Q1 of 2017, we are forecast in the midpoint of the revenue range at $14,800,000,000 up 7% year over year and down from the 4th quarter. This is at the lower end of our seasonal range and reflects an expectation of lower core brand mix and ASP coming off a strong holiday selling period for gaming and other premium PC system. For the Q1, we expect operating margin percent to increase 4 points year over year, gross margins to be flat at approximately 63 percent and spending to be $5,300,000,000 down 1%.
We expect EPS to be approximately $0.65 up 20% year over year. Turning to the full year 2017, we're expecting revenue to be roughly flat. Revenue is expected to grow in the low single digits after excluding the Intel Security Group from both years. We expect operating margin percent to be up 1 point year over year with flat gross margins and direct spending as a percent of revenue down 1 point versus 2016. Let me provide a bit more detail on our year over year direct spending.
Our restructuring plans are on track including reducing our headcount by approximately 15,000 heads and generating gross savings of $1,600,000,000 We are reallocating investments from CCG to higher growth segments and are continuing to invest in areas that extend our leadership position in Moore's Law and expand TAM opportunities such as memory and autonomous driving. We anticipate the net benefit of these actions to result in an additional point of improvement in direct spending as a percent of revenue in 2017. We expect EPS of approximately $2.80 of 3% year over year. In 2016, we had a fairly significant gain from our iCap portfolio. Our 2017 guidance assumes that we'll have gains roughly in line with 2016 levels.
The capital spending forecast for 2017 is $12,000,000,000 up $2,500,000,000 from 20 16 as we continue to ramp our memory capacity. In closing, 2016 started out slow but finished strong. Our CCG business is focused and executing extremely well in a declining market and provides scale that's required to advance Moore's Law, generate significant cash flows and enables investments for growth. Our growth oriented businesses were up 15 to that power the cloud. We are excited about our plans for 2017 as we continue with our transformation and we look forward to sharing more details with you at our Investor Day in February.
With that, let me turn it over back to Mark.
Okay. Thank you, Brian and Bob. Moving on now to the Q and A, as is our normal practice, we would ask each participant to ask one question and just one follow-up if you have one. Please go ahead and introduce our first question.
Our first question comes from the line of Chris Danely of Citigroup. Your line is now open.
Hey, thanks guys. Just digging out on the segments. So the CCG operating margins were, I think, the highest on in the last few years. CCG was kind of the lowest in the last few years. Can you just talk about the trend in operating margins for those two segments for this year given the guidance?
Yes, Chris, the TCG performance, a couple of dynamics that are driving the kind of record margins. 1, higher ASPs on the strong mix that Brian referred to. Secondly, real strong unit cost. It's been on 14 nanometer for a while. So we expect that to continue.
And then constrained investments in the CCG business as we focus more on invest in heavier in the higher growth businesses. So real good performance and those are the dynamics that we're expecting in 2017. On the DCG front, good in kind of Q4 and then project forward, nice ASP performance in the quarter as we migrate from Haswell to Broadwell and as we think about Skylake in 2017, we expect that to continue. Unit cost in BCG is a little bit higher because we're coming off more great unit cost performance on 22 nanometer. But as we migrate to 14 nanometer in the earlier stages of that cycle unit costs are a little bit higher.
And then we're increasing our investments in DCG on a year over year basis. So dynamics are relatively good. The one, I referred to it a little bit earlier, but in terms of Q4, we had a couple one time items that really weighed on the profitability or operating margins of DCG that we think are well bounded and do not expect to continue in 2017. And just quickly, one, we entered into a long term cross license agreement and patent purchase agreement, took me in the comm space in the quarter and ECG was impacted by a portion of that cost in the quarter. But secondly, and a little more significant, we had a we were observing a product quality issue in the Q4 with slightly higher expected value rates under certain use and time constraints.
And we established a reserve to deal with that. We think we have it relatively well bounded with a minor design fix that we're working with our clients to resolve. So those 2 one timers in the 4th quarter weighed on DCG margins and we do not expect that to continue in 2017.
Great. Thanks.
Do I get a follow-up?
Yes, please go ahead, Chris.
Okay. Maybe just expand on the PC market. What do you see driving the strength here? How sustainable is it? Any thoughts on PC unit growth for this year?
So this is Brian. I can start and then Bob can add in. If you take a look Bob mentioned in his portion of the talk of, hey, we've taken a slightly more conservative view of 2017 than 3rd parties for what we see the overall PC unit market as. And we had extremely strong record core i7, just record core mix in the Q4 that we've as we look at Q1 and we look at 2017, we've factored a little bit of caution into that as well. Those two things put us in the PC market at a unit level in the mid single digit decline, that's better than if you went back a year or so ago, we were in the high single digit, depending on how you looked at it and where you counted some of the 2 in-one devices.
So it is starting to get better, but I don't think we're back into either 0 unit or positive unit. But as Bob said, what we've really been focusing on in that space is how do you make money? How do you sell up? How do you do a better business performance in that kind of market? And we're comfortable that we can continue that into 2017.
And Chris, the only thing I'd add is, we think it's as Brian said, our outlook is a little more conservative than the 3rd parties. Our view is that's probably the right posture and the right caution to have as we go into the year. And obviously, the team has done a great job Chris. Thank you. And our next question comes from the line of David.
Thank you. Thank you. And our next question comes from the line of David. Thank you.
Thank you.
Thank you. Thanks Chris.
Thank you. And our next question comes from the line of Joe Moore of Morgan Stanley. Your line is now open.
Great. Thank you. I wonder if I could ask about the DCG commentary of being up high single digits. Obviously, that's a little bit more conservative than the longer term numbers you had talked about. And I guess as you think about that, is that is there an element of the cloud spending that you think is causing the enterprise to be weaker?
Or maybe just give us some the qualitative underpinnings for that change?
Sure. So let me start and then again Bob can kind of jump in on this one. As we said, we took a look at the 2017 view on enterprise to be relatively equivalent to what we saw in 2016, which says that enterprise continues to decline. I think that's certainly some of that is that it's moving to the public cloud, it's moving to those areas at a faster rate than I think we expected. It's also been a little bit slow about developing private clouds and we're working with several partners like Microsoft Azure and others around the private cloud segments as well for the enterprise.
But if you take a look at the long term, we still see this as the growth engine and still getting into that double digit regime. Remember for us, enterprise is now less than 50% of our overall data center business. And the areas that are growing even faster or as fast as cloud in most cases are the networking and storage space, which we have very low market share in still and it's a great opportunity for us. And then the emerging areas like silicon photonics, Omni Path Fabric, Rack Scale Design and 3 d Crosspoint. And those areas are really what we've always forecasted to be the growth engine of the data center group as we exit go towards the back half of this decade.
So for us, our view is this is anytime you're going through a market transition, you're not going to get the cloud to enterprise mix perfect. And this is an anomaly right now that we've forecasted we think accurately and adjusted for the way it is. But our long term growth was actually based on other factors and we're still very, very confident in those growth areas. I don't know if Bob wants to add.
No, I think you that's perfect. Nothing to add. Thanks.
Great. Thank you for that. That's great. And then separately on the PC market, the ASP growth that you guys saw over the course of 2016, 16, is that strictly mix shift and kind of strength in the higher end segments as you've been talking about? And any thoughts on your ability to continue that price momentum over the course of this year?
Sure. Yes, it's mostly, if not in almost every case, all mix shift and it's our customers buying up and a great example was the case SKUs, the enthusiast, the 10 core systems that we've put out there and they've barred away exceeded our original sales forecast for people who are out there buying 10 core gaming systems. So we do believe that that market, that enthusiast market will continue. We factored a little bit more caution into this as we go into the 2017 in the Q1, some of that seasonality, holiday people tend to buy a lot of gaming systems and some of it's just how much more can people buy up and so how much more growth in ASP can we see, but we don't see a decline or anything of the average ASPs.
And the only thing I would add is as we think about the full year, the second half comps get a little bit tougher on ASPs because of the strong ASP performance throughout the course of the 2016. So that's probably the only other dynamic that I would add.
Great. Thank you very much.
Thank you. And our next question comes from the line of Ross Seymore of Deutsche Bank. Your line is now open.
Hi, guys. Thanks for letting me ask a question. I guess the first one on OpEx and it's more of a conceptual one for you, Brian. On flat revenues, it's great to see some OpEx leverage on there. But I think some people are hoping for a little bit more as you had the restructuring only halfway done and then the McAfee sale that's pending.
So can you talk conceptually how you balance the desire to reinvest versus the desire to get the profitability up to your long term targets?
Sure. I'll let Bob talk about the McAfee financials and how that affects OpEx. It is a little complex with Q1 into Q1 target there. But let's just talk about it in general. What we always said is that we were going to go through the program that we went through at the end of last or the middle of last year, which we called ACT, just continued through the end of last year 2016 and we said would be completed about the middle of 2017.
And we always said there'd be some mix between taking that to the bottom line and reinvesting it in those growth areas. And so as we've done acquisitions like Nirvana or artificial intelligence, we want to invest in those businesses now to bring them on to our silicon, integrate them into our software stack. And so we're going to make those kinds of investments in key areas. We said the key areas around artificial or data center in general, we have rack scale design, we have 3 d cross point, we have artificial intelligence around IoT and we're making big bets around autonomous driving. And so you see us making like the investment in here, the investments with BMW.
And that's really when you take a look at autonomous driving and why are we doing that, it's around data and data centers again. Remember, every one of those high definition maps is going to require data centers. They're going to require small data centers at the edge. So it's all around are we understanding and managing how data is going to flow in that system. And then memory itself and we're going to go make those investments around 3 d cross points and really bringing that and 3 d NAND to market in a big way.
And so we'll balance between those and I think you'll see some mix of bringing it to the bottom line. But if I can invest and think I can turn that into additional profitability in the future, I'm going to go do that.
Yes. The only thing I'd add is just to maybe make it a little simple for people as we look at our full year guidance that we gave and then we extract out 3 quarters of McAfee. At the macro level, we're looking at low single digit growth and mid single digit EPS growth. So that's kind of the year on year apples to apples dynamic. On direct spending itself, we'll be down roughly half our guidance implies will be down roughly $500,000,000 year on year.
And that's just a function of 3 things. 1, continued benefits from the restructuring actions that we took in 2016 and continue to execute on in the first half of twenty 17. Secondly, obviously the direct spend of McAfee kind of goes away. And third, as Brian mentioned, during this transformation, we continue to make the investments in the higher growth businesses. We will continue to invest in 5 gs and ADAS and then we'll continue to invest in Moore's Law as we bring 10 nanometer to life in 2017 and continue to invest in 7 nanometers.
So net net the implications of all that for direct spending was 1 point down as a percentage of revenue in 2016 and another point down as a percentage of revenue in 2017. And then the only other thing I would add is in terms of the milestones that we employ during the course of the year for these big bets, we'll continue to build milestones and to make sure those bets that we're making are turning out in the medium and long term the way we expect.
That's very helpful. I guess as my follow-up, you talked about the ASPs and answering a prior question. I wondered about the competitive intensity in the PC market. You're taking a more conservative tact than the 3rd party vendors are forecasting, but your primary x86 competitor is coming out with a new architecture for the first time in many, many years. So I wonder whether it's on the ASP or the unit or the market share side, how you're factoring that into your forecast for the year?
Sure. I would tell you that we always look at this environment and say there's going to be a competitive risk in the environment. And we're always focused on really our own product roadmap and making sure that we have the highest performance product. So when we look at 2017, we still believe that our product roadmap is truly the best ever it's been. And as we look at the Kabi Lake and as it really ramps up through 2017, where it came out really just at the end of 2016 and now we'll ramp with many more SKUs and higher performance products as we go into 2017.
And then we showed at CES, the first working 10 nanometer Cannon Lake product, which we're still planning to ship by the end of this year and really ramp into 2018. We still believe that our roadmap and our leadership will continue to give us the performance that our customers want and desire. And so that didn't necessarily factor into that more cautious forecast. That forecast was really much more a function of where we think the PC market really is overall.
Great. Thank you, guys.
Thank you. And our next question comes from the line of Stacy Rasgon of Bernstein Research. Your line is now open.
Hi, guys. Thanks for taking my questions. I had a question first on the guidance for next year. Unless I'm doing the math wrong, to get to 280, I need a fairly sizable reduction in share count. So is that true?
Could you tell
us, how you're thinking about shares for next year? Are you intending to use the cash from McAfee to buy
back shares to get to that number?
First, in essence, the guidance year on year doesn't really anticipate any dramatic change in our share count. I think philosophically, our approach is to offset dilution from our comp based programs. So all else equal share count relatively flat year on year. I think the one thing worth noting is we in our iCap portfolio in 2016, we had a fairly significant gain. And what I indicated in the prepared remarks is we expect roughly in 2017 that gain to be in line with what 2016 generated.
But I think just in terms of implied share count in our guidance, it's essentially flat year on year. Okay. So
you
talked
about like a
mix of the OpEx. So you talked about like a mix of the restructuring, the cuts versus the reinvestment. But I mean if I throw the McAfee cost back in, you've actually got OpEx going up fairly sizably year over year and your employee count is actually up year over year even though you supposedly had a pretty big, a layoff. So I guess can you talk a little more specifically about exactly what the additional spending is going on? Is it people versus technology versus something else?
Where is it going? And do you view those investments as looking to open up new markets versus being defensive in nature or maybe a mix of both?
Yes. In terms of the type of cost, maybe twofold. Yes, people and yes,
technologyMoore's
Law at the macro level and that expresses itself in higher depreciation year on year. So in our guide, our depreciation is up quite a bit and a portion of that will flow through direct spending. Again, on a more macro basis at the risk of maybe repeating myself. We are investing more in ECG and in particular, bringing some of these adjacent products that Brian referred to market. We continue to invest in memory and particularly 3 d the 3 d cross point product and we continue to invest in IoT.
So those three businesses are getting a disproportionate share of the investment because those are the businesses that we've seen really strong growth in 2016 and we're counting on continued growth in 2017. The second area and again we talked about this a little bit, but we see real opportunities in autonomous driving that play to our strengths and our capabilities. And we will we are making a step function increase in our investments to position ourselves very well for that industry in that market as it evolved. And then again 3rd, 7 nanometer technology investment and spend associated with building a new pilot line in 2017 is also an additional investment. So we're executing on our restructuring programs that was, we took out roughly we made the tough decisions in 2016 that resulted in roughly 11,000 fewer people as a result of our restructuring program.
We're not quite done, but I'd say we're on track. At the same time, we're making investments both in technology and people to strengthen and enhance our competitive position in the areas that we see as real opportunities for us.
Hey, the only thing I would add Stacy is more of a blunt answer to your question is, if you take a look at the areas that we're talking about, in almost every case, these are new and expanding TAMs for us. So even when you look at the places where we're going in the data center and this was my point earlier about enterprise versus cloud. Enterprise is now less than 50% of our total makeup for the data center group. And the cloud is growing great and that will continue. But if you look at the areas, the majority of the rest of the growth for the rest of this decade in the data center alone, it's networking and storage where we have very low market share today.
But we're bringing things like software defined networking and NFV to those. And so that's growing and expanding TAM as those markets move to Intel architecture. And then it's going into rack scale design, Omni Path Fabric, silicon photonic. Those are all again new either nascent or expanding TAMs for us. Autonomous cars in the IoT space are new and expanding TAMs for us.
5 gs is a TAM that's brand new that'll be really being built out over the rest of this decade. And then memory, if you still if you look at the large part of the investment we're making at 3 d Crosspoint, which really rearchitect memory and storage and will create a new market in our mind. And we believe we're unique in having that technology. So to me when I look at the investment, they're all focused around data, they're all in support of how the data center ecosystem works and they're all in either expanding or new TAMs for Intel. And so that's why I see the growth in those areas.
It's not just enhancing the technologies that we already have. We'll do that, but the new investments are really focused on the new area.
Got it. Thank you guys.
Thanks, Steve.
Thank you. And our next question comes from the line of John Pitzer of Credit Suisse. Your line is now open.
Yes, good afternoon, guys. Thanks for letting me ask the question. Brian, my first question, I want to go back to the DCG ASPs in the December quarter. They were up 4% year over year, which kind of reverses, I think, a 4 or 5 quarter trend of ASPs going down. I know that you've had some mix headwinds that have been driving blended ASPs down.
I'm kind of curious what happened in the Q4 to drive ASPs up? And do you think it's sustainable? Is this just what we would expect to see the Q1 of the Broadwell launch and then it normalizes going forward? Or how do you think about ASPs from here?
So I'll let Bob start with this and then I'll come in and talk a little bit about the macro view of this.
Yes. 2 dynamics in the 4th quarter that where we had higher ASPs. 1, the continued transition from Aswell to Broadwell is helpful. And then as we project forward, the next transition to Skylake, we believe will be helpful as well. So those dynamics where we're delivering better performance for our customers, we're able to capture some of that in ASPs and we saw a little bit of that in the Q4.
And secondly, in the comms and network space, which is a share gain opportunity for us in DSG, getting those clients to move up the stack in terms of the high performance server CPUs is the second dynamic, both of which we think are helpful as we exit 2016 and go into 2017.
Yes. And the only thing I'd add John is, we'll as we go back into the second half of this year, do this Skylake transition and that is a technology that will increase performance and the performance for cost to our customers. And one of the largest improvements in a long time, if not ever on the data center. So we expect typically when that happens, people see the value in that and they tend to have they tend to buy up, they tend to buy the better SKUs. So we to my view, this trend of higher mix should continue.
That's helpful. And then maybe as my follow-up, Brian, relative to the full year guide, you're kind of expecting a pretty significant drop in free cash flow this year with the increase in CapEx and you highlighted that CapEx is going to the nonvolatile memory group. I'm just kind of curious given that that business even though it made some improvements in losses in the calendar 4th quarter is still in sort of a loss position. I'm assuming the higher CapEx is going to be a headwind to getting to profitability. But I guess how do you think about the path to profitability, the longer term business model in memory and what it might do to the DCG growth rate longer term if Crosspoint is successful?
Sure. So let's talk about memory in kind of a big picture, John, and then we can I'll let Bob talk a little bit about how the CapEx weighs and what our kind of view on CapEx is in this space. But we are in this space for one reason, because I understand it's a cyclical business that tends to have it tends to be fairly difficult from a price has some of the best performance and best cost in the market. Our current version of 3 d NAND has a 15% price or cost value over the competition. And our next version, 2nd generation has even a higher when you look at it on a density basis.
And so we believe we're going to be able to bring differential cost and performance in 3 d NAND that will give us a unique position. And that combined with our knowledge of the data center should allow us to really provide compelling product for data center SSDs. 3 d Crosspoint is very different in that it's a unique technology that bridges between memory and storage. And we believe it can re architect how big data applications, artificial intelligence applications where you want large amounts of data being brought up compute as you can, will really transform not only the architecture of those systems, but the performance of those systems. And we've demonstrated on stage even on client systems using these types of SSDs on an equal price, you can get 5x to 7x performance improvement using 3d Crosspoint as a large memory storage kind of combination.
So we're investing purely because we believe we have this differential technology. And that's why we're in this business. I think if I didn't have that differential, not sure if the business that Intel would necessarily be in, right. But with that leadership and we believe we can sustain that leadership, we believe it's a good business and a good investment. I'll let Bob talk about how long and how we view the capital.
John, the CapEx dynamic first kind of at the macro level of $2,500,000,000 year on year, driven by 2 things. 1, memory obviously, but also in 10 nanometer capacity online. If I just go down a level to memory, roughly $1,600,000,000 CapEx in 2016. Expectations that will be roughly $2,500,000,000 in 2017 as we bring the incremental capacity online. And as we look at memory specifically in 2018, we think it begins to drop off a little bit, as we focus that capacity on 3 d NAND and increasingly 3 d Crosspoint.
Perfect. Thanks guys. Appreciate it.
Thank you.
Thank you. And our next question comes from the line of Vivek Arya of Bank of America Merrill Lynch. Your line is now open.
Thanks for taking my question. Brian, I'm curious with this new U. S. Administration, there's a lot of interest in using U. S.-made products.
And since you have fairly sizable fabs here in the U. S, I'm wondering how you can take advantage of this environment or if you're interested in making a bigger push in your foundry business?
Well, we're always open for business in foundry and we're always interested. Remember, we said our foundry strategy was really to be on the leading edge. So because we can get paid for our technology and it really allows us to use our unique differentiation in that space. Beyond that, I would just tell you that we've always been proud. I mean, it's not a new transition or a new strategy for Intel.
We've always been roughly between a little bit more than half to 2 thirds of our capacity in the U. S. We're the 2nd largest exporter in the U. S. And we're proud of that position.
But other than that, there's no real shift in our strategy right now.
Got it. And as my follow-up, back to DCG, there seem to be 2 moving pieces. You have this declining, but very profitable enterprise part, but a faster growth, but perhaps less profitable networking and cloud and other areas. Is that fair characterization? And do you envision a point at which the non enterprise parts become dominant enough so you can actually see an acceleration in DCG back to your traditional double digit type growth rate?
So, but let me start and then you can see. I think our view is that enterprise will continue to decline. A lot of that is those workloads moving to the cloud. It will get to a point though where it starts to stabilize. And those because there are still things that workloads that will want to be in a private cloud.
At the same time, we believe as the world becomes connected, cloud will grow at a much, much faster rate. And I made a point in the prepared remarks where if you look at the cloud of today being mostly based on people, the average person will generate about a gig and a half of data a day. An autonomous car when those things start hitting the road and we've started to build these data centers for some of the trials we're working with. I mean, you're talking about petabytes of data that you're having to deal with and 4,000 gigabytes a day off the average autonomous car. You put couple of those on the road and you need petabytes of storage to handle that.
So we do believe that the cloud will move at a faster rate as these connected devices become basically more available. That said, the cloud is becoming bigger than the enterprise. We said enterprise is now less than 50%. And we believe the other areas that will grow networking and storage, the adjacencies like Omni Path Fabric, Silicon Photonics, Rack Scale Design, which we're working with our partners on, it really lowers the cost of the system and re architect how the rack is laid out. And 3 d Crosspoint should dramatically that will drive the growth for us as we go through the rest of this decade.
We believe when you add those up together, this thing will go back to double digit. When exactly that is, because it's pretty hard we're trying to grow these new nascent areas and manage the decline of enterprise. It's going to be hard to call exactly when, but we do still have a strong belief and we believe the products are very compelling that these will drive us to double digit growth long term.
The only thing I'd add Brian is on the like for like product, ASPs have a tendency to be lower to the cloud service providers, but at the same time the cloud service providers really value performance. And in terms of the mix of their product, they'll value performance in the higher end products more than maybe enterprise as a whole.
Thank you.
Thank you. And our next question comes from the line of Ramesh Shah of Nomura. Your line is now open.
Yes, thank you. I just had one question. I noticed that you didn't raise the dividend in January. And Bob, I'm curious if your view on capital returns, buybacks and dividends is different than what Intel has done historically.
Yes. I think historically, the philosophy around 1st and foremost to invest in organically and our capabilities has always been the first priority that'll be the same. Secondly, we'll continue to look at M and A that will strengthen our capabilities. So that's no different than the past. 3rd, in terms of capital returns, our expectation has been and I think we'll continue to think it this way going forward as it relates to dividend, grow it in line with non GAAP earnings, and have it be roughly 40% of the free cash flows of the company.
Those change around the margins over time depending on the CapEx intensity of the business, but I don't expect that to change and we'll continue to look at how we move the dividend in line with that philosophy. As I said earlier, in terms of the more holistic capital returns bucket, we will continue to offset dilution, which I think is pretty consistent with what we've done in the past. And then 3rd, we have a great balance sheet. And I do think that opportunistically when it makes sense, reducing our outstanding float is an opportunity we have as we get closer to the net cash zero position that we've been tracking towards over the last 12 months since the Alterra acquisition. So philosophically no dramatic change, dividend in line with non GAAP earnings growth, but trying to stay in that roughly 40% free cash flow world.
And maybe if opportunities present itself, be opportunistic in share count without limiting our financial flexibility relative to the things that matter most, which is strengthening our business.
Thank you. Nice quarter.
Thank you. And operator, I think we have time for 2 more questions.
Okay. And our next question comes from the line of Harlan Sur of JPMorgan. Your line is now open.
Yes. Hi, good afternoon. This is Bill Peterson calling for Harlan. Congratulations on a nice quarter. Coming back to the storage market, trying to understand how you view growth this year.
It might have obviously good sequential growth in the prior quarter, but also overlaying that with the Optane qualifications that are going on in progress. How should we view that as in terms of the incremental growth driver in 20 17?
Sure. So if you take a look at it, as I said, this is a cyclical market. If you take a look at 2016, started out with an oversupply, came into the back half of the year with an undersupply really of capacity. We're entering 2017 with the continued tightness in supply that makes pricing stable to better. So we expect that at least right now the estimates are through the first half.
It's pretty hard to project out through the second half. And so we'll we've kind of kept the second half relatively calm and cautious. If you take a look at 3 d Crosspoint, as we said, we've qualified, we've started to ship DIM samples to the big cloud service guys. Those are targeted for 2018 revenue shipment. On an SSD basis, we'll start shipping for revenue this quarter.
And if you take a look at the full year, I think the estimate is it's around 10% of our total revenue is 3 d Crosspoint. And that'll be it could take off and it could be a little bit more than that. It could take a little while to qualify some things if it's a little off, but should think it's around 10% of the revenue and really ramping much, much more into 2018. What we're proud of is, you get past that first hurdle of getting the first one to production ready and starting to ship samples to the cloud guys and actually getting ready to start shipping SSDs for revenue to the client devices and all that. We're pretty excited about just getting to that point right now with 3 d cost points.
Appreciate the color. And just to add more
tactical, the full year for memory was down 1%, 2016 over 2015%. But the momentum that you saw is that supply chain dynamics that Brian highlighted changed and as we began to scale our own
2017, we feel pretty good about that growth rate in the
4th quarter. So with that going into 2017. We feel pretty good about that growth rate in the Q4 as we enter the New Year.
Great. Appreciate the color on that. Maybe a question on the programmable solutions. The group has shown sequential declines in the prior two quarters versus your main competitor that's shown sequential growth, albeit modestly. You've discussed taking share and now you have the 14 nanometer based product.
I wonder if you could provide some color on maybe why that group has lagged in the prior few quarters, but more importantly, how we should when we should see the inflection in the business and how to think about growth in that business this
year? Yes. So, let's talk about that. If I look at 2016, as we showed, we had about 7% growth over what Ultera had in 2015. If you take a look at it, there's a couple of big segments that are driving that telco, data center.
And we're starting to see and in the networking space as well. Those are kind of the big three segments. And we're we started to see as we went through the especially the back half of the year, good connection between our ability to go in and we're better together with Xeon and the FPGA as we go into that networking space. So again, as our footprint grows in networking and storage, I think it also gives us the ability to continue to bring both products to those markets. So we think in 2016, we actually gained share relative to the competition.
As we look out into 2017, we forecasted estimates and we believe we'll gain a little bit of share again in estimates and we believe we'll gain a little bit of share again in 2017. And remember these markets are slow moving. You don't grow 10% share instantly because the design cycles and design conversions are relatively difficult. It's again driven by data center, networking and the telco industry. And with Stratix10 as we said, largest design enablement in the history of Ultera.
So we're really excited. We believe it brings a performance and a cost to our customers that has it's truly industry leading and shifting. And so we are very comfortable or confident in that. But again, that will, really start to shift in the second half of twenty seventeen. And so I think that will be really driving growth in 2018.
And really if you think about these design cycles, that product will really continue to drive growth for probably the next 3 years plus, just because these cycles are fairly long.
That's terrific color. Thanks and congratulations on the quarter again.
Thank you. And Chanel, please go ahead and introduce our last questioner.
Okay. No problem. Our next question comes from the line of Blayne Curtis of Barclays. Your line is now open.
Hey, guys. Thanks for squeezing me in. I just want to ask Bob on the gross margin. Your full year is equal to the Q1. I was just maybe as you look in the back half, I just wanted to make sure I heard it straight.
It sounded like 14 on the server side may have some initial yields and that would be a headwind. But I'm just curious on the PC client as well. Maybe you could just talk about the puts and takes as you ramp in 10, but you still ship a lot of 14. As you're leaving a second half, what are the headwinds and tailwinds to gross margin?
Yes. The 2 headwind sorry, 2 tailwinds on the year on year flatter ASPs being a little bit better and we anticipate that more on the CCG side. And again, as I mentioned earlier, for DCG as we transition more from 22 to 14 nanometer all else equal, that will be a little bit of a headwind in the early stages of yield for server on 14 nanometer. The headwinds particularly are strong growth coming from memory and modem. So those two dynamics themselves, good growth, increasing profitability, good earnings.
However, they're at a lower margin. So the mix dynamic of those are real on a year over year basis. So good ASP, good unit cost, but mix is a challenge. And then year on year factory ramp, both 10 nanometer and memory, are a headwind for the full year, but it gets a little bit better in the second half, the dynamic to first half, second half, it gets a little bit better in the second half.
Thanks. And then just maybe a clarification. The $3,000,000,000 that you're getting from the sale, should I assume that, that goes to debt retirement like you have been using your cash flow? And then I guess you should get at some point this year potentially at the end of the year to that net cash 0. Should we think about buybacks at that point?
Yes. I
think the dynamics of the $3,000,000,000 the intention is that roughly $1,000,000,000 comes in line at time of transaction and that there's we will provide seller financing in the early stages. So we'll only get roughly $1,000,000,000 upfront. In terms of then just the net debt position during the course of the year, you can assume that we have some maturities in 2015 that we'll take out sorry, 2017 that we'll take out and we believe by the end of the year given those dynamics we'll be closer to a net cash a net cash zero position. In terms of that, that gives us the much stronger balance sheet and how we think about that, we'll continue, as I said earlier, invest in business, return capital to shareholders and opportunistically whether it's reducing outstanding float, that's one that we'll continue to look at and be opportunistic as opportunities present themselves.
Thanks, Blaine. All right. Thank you all for joining us today. Chanel, please go ahead and wrap up the
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.