Good day, ladies and gentlemen, and welcome to the Intel Corporation Q1 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 be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mike Henninger, Head of Investor Relations.
You may begin.
Thank you, Nicole, and welcome, everyone, to Intel's Q1 2016 earnings conference call. By now, you should have received a copy of our earnings release, CFO commentary and the announcement of our restructuring program. If you've not received all three documents, they're available on our investor website, intc.com. I'm joined today by Brian Krzanich, our CEO and Stacy Smith, our Chief Financial Officer. In a moment, we'll hear brief remarks from both of them, followed by the 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. And a brief reminder that this quarter we provided both GAAP and non GAAP financial measures following the acquisition of Alterra, now our Programmable include the full GAAP and non GAAP reconciliations. The CFO commentary and earnings release available on intc.com include the full GAAP and non GAAP reconciliations. With that out of the way, let me turn it over to Brian.
Thanks, Mark. Our results in Q1 were in the lower half of the range we set in January and reflect an extra work week in the quarter. Revenue increased year over year driven by an expanding business portfolio that now includes the Programmable Solutions Group formerly known as Alterra. Strength in our data center, Internet of Things and Programmable Solutions businesses partially offset weaker than expected PC revenues in our client business. I'll take a minute to review our Q1 results before talking about the restructuring program we're announcing today.
PCG revenue grew 2% year over year. We saw ongoing declines in the PC TAM, particularly in China and other emerging markets, which also led to greater than anticipated reductions in worldwide PC supply chain inventory. Declines in the PC segment were offset by a richer core mix and the 14th work week. The data center business posted another good quarter, growing 9% over last year on strong cloud and comms service provider demand, partially offset by ongoing softness in the enterprise. The Internet of Things Group grew a remarkable 22% year over year due largely to the performance of the video and retail verticals.
In the memory business, strong unit growth was offset by pricing declines leading to revenue that was 6% lower year over year. And in our security business, revenue grew 12% as this team continues to tighten its focus and execution. And finally, the PSG Group formerly known as Ultera got off to a great start. It delivered a revenue of $359,000,000 and after adjusting for $100,000,000 in acquisition related accounting charges, the business achieved mid single digit growth. And less than a quarter after the deal closed, shipping our first FPGA Xeon co packaged parts to customers in sample form.
These results tell the story of Intel's ongoing strategic transformation, which is progressing well and will accelerate in 2016. We are evolving from a PC company to a company that powers the cloud and billions of smart connected and computing devices. The data center and Internet of Things businesses are now Intel's primary growth engine and combined with memory and FPGAs form and fuel a virtuous cycle of growth. Last year, we achieved record revenue in the data center, Internet of Things and Memory businesses. We delivered a combined $2,200,000,000 in revenue growth and made up 40% of our total revenue and contributed the majority of our operating profit.
Today, we announced a series of actions that will build on the strength of those franchises and accelerate our strategic transformation. Through this initiative, we will intensify our investments in the products and technologies that fuel the growth in the data center, IoT, memory and FPGA businesses. And we expect it will result in an even more profitable client business. These changes will reduce our global employment by about 12,000 physicians by mid-twenty 17. We'll do this through site consolidation, voluntary and involuntary separations, project reevaluation and an intensified focus on efficiency across a variety of programs.
These are not changes we take lightly. We will be saying goodbye to colleagues who have played an important role in Intel's success. Yet acting now gives us flexibility, flexibility to continue to invest in those client segments that are growing, including 2 in-one, gaming and home gateways among others. Even more importantly, acting now enables us to increase our investments in areas that are critical to our future success. This restructuring program will allow us to expand our investments in the data center, the Internet of Things, memory and connectivity even as we reduce our spending run rate by roughly $1,400,000,000 by mid-twenty 17.
This is a comprehensive initiative. It's designed to create long term value by accelerating the fundamental long term change already happening at the company today. We will emerge as a more collaborative, productive team with broader reach and sharper execution. And we expect it to result in the highest revenue per employee in the company's history. Last, but certainly not least, we have one additional announcement today.
I'm happy to share that Stacy Smith will be taking on a broader new role within Intel and reporting to me leading sales, manufacturing and operations. Stacy has been a great business partner and a world class CFO. And I'm looking forward to continuing the partnership as he brings his leadership, his depth of knowledge and his breadth into these critically important areas for Intel's future. We expect this transition to occur over the next few months, following a formal CFO search that will assess internal and external candidates. Stacy will remain in his CFO role throughout the search and transition process.
Congratulations, Stacey. And with that, let me turn the call over to you.
Thank you very much, Brian, and I really appreciate the kind words. Revenue for the Q1 was $13,800,000,000 up 8% year over year. The quarter showed year on year growth and was in the low end of the range of our prior outlook. Within this, we are seeing growth in the data center, Internet of Things, security and programmable solutions groups, all of which helped offset a weak PC market. 1st quarter gross margin of 62.7 percent was approximately a point higher than our expectations driven by lower 14 nanometer costs.
R and D and MG and A was $5,400,000,000 down over $100,000,000 from our guidance. Operating income of $3,300,000,000 was up 13% from a year ago. The effective tax rate for the quarter was 18.4%, about 7 points lower than our prior outlook. Earnings per share of $0.54 was up 20% from a year ago. The Client Computing Group had revenue of $7,500,000,000 a 2% increase year over year.
This was below our expectations due to a weaker than expected PC market. Operating profit for the client computing group was $1,900,000,000 up 34% from a year ago. This improvement is driven by lower 14 nanometer unit costs on notebooks, lower overall total spending and margin improvements in our mobile products. Data Center Group had revenue of $4,000,000,000 delivering 9% growth on a year over year basis. Relative to our expectations, we saw a weaker enterprise business offset by strength in the cloud segment.
The data center group had operating profit of 1,800,000,000 dollars up 4% year over year as we ramp our 14 nanometer server product. Our Internet of Things segment achieved revenue $651,000,000 with year over year growth of 22%. We saw strength in both the retail and video display segments of our business. Internet of Things operating profit was $123,000,000 up over 40% relative to last year. Our Security business had revenue of $537,000,000 up 12% year over year.
Our Memory business had revenue of 557,000,000 dollars up 6% year over year. The segment had an operating loss of $95,000,000 as a result of challenging pricing, increased 3 d cross point spending and startup costs as we ramp 3 d NAND in our China factory. The Programmable Solutions Group had revenue of $359,000,000 When adjusted for the approximately $100,000,000 of deferred revenue and compared to Alterra's results from a year ago, the business achieved mid single digit revenue growth. Operating profit was a negative $200,000,000 This included over $300,000,000 in non cash charges for deferred revenue and inventory adjustments, while certain acquisition related charges. Excluding these charges would result in low double digit operating margin growth for this business.
We generated $4,100,000,000 of cash from operations in the Q1. We purchased $1,300,000,000 in capital assets, paid $1,200,000,000 in dividends and repurchased approximately $800,000,000 of stock in the Q1. Total cash balance at the end of the quarter was roughly $15,000,000,000 down $10,000,000,000 from the prior quarter as a result of closing the Ultera acquisition. Our total debt is approximately $25,000,000,000 consistent with our prior commentary on the financing plan for the Ultera acquisition. As we look forward to the Q2 of 2016, we are forecasting the midpoint of the revenue range of $13,500,000,000 After adjusting for the extra work week in the Q1, this forecast is in the low end of the average seasonal increase for the 2nd quarter.
We are forecasting the midpoint of the gross margin range to be 61%, plus or minus a couple of points. This decrease in comparison to the Q1 is driven by lower platform volumes. Turning to the full year 2016, we expect revenue growth in the mid single digits from 2015, down from the prior guidance. We are forecasting robust growth rates in the data center, Internet of Things, nonvolatile memory solutions and programmable solutions groups, which we expect to offset the decline in the client computing group. We now expect the PC market to decline in the high single digits in 2016 versus our prior forecast of mid single digit decline.
Our projection of the PC market remains more cautious than third party estimates. We are forecasting the midpoint of the full year gross margin to be 62%, a 1 point decrease from the prior outlook driven by lower platform volumes. Our execution to our strategy is driving growth. We are building on our strong position in client and are investing for growth in the data center, Internet of Things market and disruptive differentiated memory technology. The trends over the last 2 years demonstrate that we are well into this transformational journey.
From 2013 to 2015, the PC TAM declined 10%, yet Intel's revenue grew 5%, and our operating profit grew 14% over this horizon. But as Brian mentioned, we want to accelerate that execution. In order to do that, we're going to go through a significant restructuring over the next several months. The goal is to come out of this more agile, more efficient with more investment in our key growth initiatives and more profitable. When completed by mid-twenty 17, these actions will result in a 12,000 person workforce reduction and a $1,400,000,000 reduction to our spending run rate.
Relative to full year 2016, we are now revising our spending guidance down by over $700,000,000 to $20,600,000,000 We expect to realize over half of the total workforce reduction by the end of this year. In the Q2 of this year, we are taking a $1,200,000,000 restructuring charge on the GAAP P and L as an estimate for the related actions. These actions are significant, we don't embark on this lightly, but we are confident that they will build on the strong position we have across markets and accelerate transformation of the company that is already underway. I would like to end on a brief personal note by saying thank you to Brian for the upcoming new leadership opportunity. Intel changes the world with amazing technology and I'm proud of what we've accomplished and I'm excited about the opportunity that's in front of us.
With that, let me turn it back over to Mark.
All right. Thank you, Brian and Stacy. 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. Nicole, please go ahead and introduce our first questioner.
Thank you. Our first question comes from the line of Ross Seymore of Deutsche Bank. Your line is now open.
Hi, guys. Thanks for letting me ask the question. I guess, first and foremost, BK, if you can go into a little bit more about what led to the restructuring announcement, not only the one today, but there's been significant changes in the senior management over the last 3 months. So if you could just talk us through some of what's changed strategically in the company that's led to such a large amount of turnover so recently?
Well, sure. I mean, if you take a look at it so let's step back for a second and just talk about why are we doing the restructuring now and then we can talk about some of the specifics beyond that. So we've talked about this transformation that we're moving from a client centric, Intel has been typically known as the PC company to a company that is focused more and more on a much broader set of products and really focused around the cloud, right? And the cloud and all the connected devices that connect to that cloud and the connectivity that brings those devices to the cloud. And that includes the PC, but it's much more than that.
And so what this effort around the restructuring is, is to say it's time now to try and we've made enough progress, right? You take a look at it, 40% of our revenue, 60% of our margin comes from areas other than the PC right now. It's time to make this transition and push the company over all the way to that strategy and that strategic direction. So that's why we wanted to do it now. Let's talk then about the leadership changes.
There's really only been 3 leadership changes if we just take the last couple of quarters. We had Doug Davis, he's simply retiring. Those are personal reasons. It has nothing to do with his leadership or direction of the company. It's IoT.
We've talked about IoT as one of our growth segments. It grew 22% this quarter. So clearly performance in the group is strong. And he's staying until we find a successor roughly the end of the year, we think, something like that. Kirk chose Lee for some outside opportunities.
And the one with Stacy, Stacy and I have been working for several months, actually several quarters on what does he do next, how do we grow his both exposure to other parts of the company, but also let the rest of the company see his leadership style. And so, what we wanted to do is, as soon as we'd made the decision to go ahead and start a search and start looking for a CFO replacement, we wanted to be completely transparent, be very open about that and let everyone know. This is going to be an orderly transition. We are just going to start the search, see if Stacy is solid in the CFO seat in that meantime. But this gives him a chance to see other parts of the company.
If you take a look at the group manufacturing operations, which is everything from purchasing to the building construction and all and sales, it's roughly half the company in people. And so it's a really good opportunity to see how the real operations of the company work.
Great. Thanks for all those details. I guess my follow-up would be the full year guidance of mid single digit growth. When I put that together with the high single digit decline now that you have in the PC business, I'm having a little hard time seeing how if you take the seasonality of PCs out of the equation in large part, what would be the levers that would get you there in the back half of the year considering that a ramp to well into the $15,000,000,000 range and revenue seems to be a prerequisite. Are there some moving parts you could describe to us that get you comfortable with that number?
Sure. Let me kind of walk you through how we're viewing the year. And first, let me just put it at the highest level, right? What we're projecting for the year is overall growth and we think we'll see growth in the data center, growth in IoT, growth in memory, that's offsetting some and of course we've added in Ultera now into our product family. And so you take that and that's offsetting some of the weakness that we're seeing in the PC market.
Specific to the PC market, as we said in our prepared remarks, we're now expecting that the PC market is down in the high single digits. And when we started the year, we were kind of in the mid single digits decline. The linearity, so first you have to understand, the first half is impacted by the fact that as our customers view of the market came down, and if you recall, we were we had a more cautious view of the market than they did when we started the year, That they were bringing down inventory levels and that impacted us in Q1 and I think you'll see the same impact as we forecast a roughly seasonal Q2 that we'll continue to see those customers burning off inventory. We think that doesn't repeat in the back half. So that's a little bit of a tailwind.
I'd also say you want to be careful of we guided to mid single digits. That's a range. If you're mathematically trying to drive to a specific number there, you may be driving kind of more back end than what we're really anticipating. So just a caution there that that's a range. It's meant to be kind of directional of how we see the business.
All of that said, I just want to say, I think Brian and I are very comfortable with the back end and what's implied in our guide based on everything that we know.
Great. Thank you.
Thank you. And our next question comes from the line of Blayne Curtis of Barclays. Your line is now open.
Yes. Thanks for taking my question. We just wanted to follow-up
on the restructuring. Is it more an effort
to make the client more profitable? Are you really trying to drive revenue and reassigning maybe more employees than you're letting go?
So it is absolutely a situation where we're restructuring to be able to allow ourselves to invest at a faster rate in those growth areas. If you take a look at it, 2016 to 2015 in the areas of memory with our NAND technology, IoT, data center. Even before this action, we were investing more in 20 16 than in 2015 in those areas. This will allow us to even with the cuts, even with the dollar figures that Stacy's read out on the savings, it's allowing us to invest even more in those segments. And I always want to make sure, it's not just about cutting costs necessarily in the client area.
We think that we can become more focused. There are areas of the client space that are growing. 2 in ones are growing at are growing and we're gaining share in the set top box space. So we're doing very well in segments that are growing in the client space, in the PC space And we are going to continue to double down focus on those. So it's really a narrowing down and allowing us as a result also to invest more in those growth areas.
That's really what we're doing here with this restructuring. And Blayne, just
to make sure, if you look at the CFO commentary, just to give kind of make sure the financial answer is clear there, that the $1,400,000,000 in run rate savings is a net number. So I just want to be clear on that. That's what we expect to achieve and that is encompassing the fact, like Brian said, that we'll be increasing investments in a lot of different areas. Correct. Thanks.
And then I know mobile is within client, but I was wondering if that's a segment that you expect to contribute to growth this year and if you can just talk about your confidence in reaching the cost savings for the year?
Sure. Absolutely on schedule for hitting our Absolutely on schedule for hitting our committed $800,000,000 And just like last year, we'll shoot to do better than that. Mobile is absolutely continuing to grow for us as a segment and we're continuing to increase our profitability. If you look underneath the numbers here, you'll see that the profitability within the mobile space continues to improve for us this year over last year.
Yes, you can really see it Blaine in the CCG operating profit that's up over 30 percent, which is on roughly flat revenues, revenues that were up a little bit. And when you parse out the big contributions there, there's some ASP good news, but the really big chunks are the improvement in the margin on our mobile products and decreases in investments that we've talked to you about in the past that were all included in that mobile profitability. So you can you'll see this play out in the CCG profitability over the course of this year and you can see it in Q1. Great. Thanks, guys.
Thank you. Our next question comes from the line of Harlan Sur of JPMorgan. Your line is now open.
Good afternoon. Thanks for taking my question. I'm trying to see if you can be just a bit more specific on your full year view. Does the team anticipate double digits growth this year in PCG? And if I look at it fundamentally, I mean cloud and hyperscale CapEx looks to be up this year.
There seems to be a big upgrade cycle in networking with the move to 25 gigabit Ethernet. You guys are rolling out 14 nanometer Broadwell.
Can you guys just be
a bit more specific on expectations for DCG growth?
Sure. You did a great job explaining exactly why we believe that the data center will continue in double digit growth this year. And if you take a look at the numbers that Stacy has talked about, they incorporate double digit growth and it's for exactly those reasons. We believe we have great products that we're introducing with the Broadwell lineup. We've got we started shipping our 1st Xeon plus FPGA samples to customers, which was part of our additional gaining more footprint and more performance in certain segments of the data center.
We're shipping with Omni Path Fabric now. Later this year, we'll have silicon photonics. We've got 3 d cross point starting to be sampled and we'll start to ramp later this year. So we're very confident on our data center roadmap and we are still absolutely forecasting double digit growth in that space.
Great. Thanks for the insights there. And then on the Memory Solutions Group, I mean that's a business that grew 20% last year. I think it was up year over year, every single quarter last year. Obviously, it was down in Q1.
You guys mentioned aggressive price declines. Can you just talk about some of the trends that you're seeing there? Are the sharp declines more focused on capacity or performance optimized SSDs? And then you also mentioned your view on a strong growth outlook for the full year. So what drives the acceleration from the Q1 decline?
Sure. So let me start and then we can just talk about remember the majority of our memory spaces built into SSDs that are going in the data center. So you call those really those higher end performance class systems. What we're seeing, if you take a look at units, units grew quite nicely year over year and quarter over quarter for the memory group. You're right, we are seeing aggressive pricing in this space.
There's this the memory segment, the NAND segment especially tends to go in these cycles where there's overcapacity in the industry and aggressive pricing and then it shifts back to more normal pricing and then tight pricing, which is always very positive. So this is just a normal cycle. We think we've done a very good job of structuring the business that we ride through these with a high degree of confidence. And if I look forward, we believe the 3 d NAND technology that we're just beginning to ramp in our factories today and we're building out the Dalian factory for later this year startup gives us a real cost advantage in this space and will allow us to even be more profitable in even these kinds of environments. So we're still confident that this business will continue to grow.
We'll ride through this capacity situation within the industry and our 3 d NAND technology will position us very nicely as we move out of this and start up our Dalian factory in China.
And do you
find this in the operating margin, Harlan, when you're looking at that? Yes. There's part of it is the competitive pricing environment that Brian is talking about. But there's a big piece of that that is associated with the investments that we're making in 3 d Crosspoint and the startup costs associated with the factory in China. And it just points to, yes, it's cyclically a tough time and what we consider a very good business and we're investing in technology that we think gives us a very strong position as we go forward.
Understand. Thank you.
Thank you. Our next question comes from the line of Stacy Rexson of Bernstein Research. Your line is now open.
Hi, guys. Thanks for taking my questions. My first one on DCG in the quarter, so up 9% year over year, but that was with the extra week. Can you tell us what it might have been year over year without the extra week and why did pricing fall again this quarter?
Yes. So it's like we said when we started the quarter, that extra week was that week between Christmas and New Year's you look at where that 14th week fell. It's a relatively light week. It certainly had some impact. So I don't want to say none, but it's a little hard to figure it out on any given business.
Certainly had some impact on DCG though. In terms of the pricing, it's pretty simple in that it was the growth rate that we saw in the networking segment. So what you would see if at a constant mix, we would have seen ASP up in the data center, but the networking segment grew 60% year on year, which is exactly consistent with our strategy. And so what you see there is strong unit growth offset by a little bit of a mix down.
Got it. Thank you. For my follow-up, I just wanted to touch on channel inventories. So you had your notebook and desktop volumes, I guess, down kind of low single digits year over year. I think it's fair to say that PC builds in the industry were down quite a bit more than that.
And you suggest that you drained out, I guess, the channel drain on inventory. What happened with your own inventory in the channel? And how do you see that changing for the rest of the year?
You said own inventory in the channel.
The stuff you're shipping into the channel, because it seems like your performance year over year is quite a bit better than what the industry was. I mean, maybe it's some share gains, maybe it's the extra week, but you just said the extra week didn't amount very much. So can you explain the differential between your year over year unit shipment performance in PCs and what the market seems to be doing?
Yes. So I would point to 2 things relative to the overall, like what we saw from our customers. 1 is, yes, we had a 14th week that's going to make our compares different from IDC and Gartner for sure. But then the second thing is when you look at the results of our customer base, they would see a weaker quarter. And I think that's because they were catching up to our view of the market and bringing inventory levels So we saw we were impacted by 2 things, I'll put it like that.
We're impacted by a TAM that wasn't terribly strong and the fact that our customers were bringing their inventory levels down some. Thanks, Stacy.
Thank you. Our next question comes from the line of Amit Shah of Nomura. Your line is now open.
Yes, thanks very much. Stacy, you're below your run rate on CapEx in Q1. And I know you reiterated for the year, but curious if you're giving yourself flexibility in case the second half doesn't prove out to be as strong as you guys are anticipating?
No. What's going on there is that when you look at the two items that really dominate our CapEx this year, it's 10 nanometer capacity, so it's getting that first production capability in place. And it's the ramp of the memory factory in China and those are both back end loaded. So that causes the linearity to be off a little
bit. Okay. Thanks. And then just staying on the theme of CapEx with the restructuring, you guys are talking about site consolidation. And I'm wondering if longer term there will be an impact to the capital expenditures required to support the business and by extension free cash flow?
I'd say the same answer. When you look at those two items that are the majority of what we're spending the CapEx on, 10 nanometer and memory, neither one of those is impacted by the restructuring. So we haven't let our foot off the gas one bit on those two things.
Okay. Thank you.
Thank you. And our next question comes from the line of C. J. Muse of Evercore ISI. Your line is now open.
J. Muse:] Yes, good afternoon. Thank you for taking my question. I guess I had a follow-up on DCG. Thank you for the commentary around the pricing around networking.
But curious how we should think about the mix shift through as we go through 20 16. And here, curious in terms of presumably slowing enterprise and an uptick in hyperscale and what that means to ASPs? And then as you layer in ongoing growth in networking, how we should think about platform versus ASPs moving through the year?
Sure. A bit of a complex question.
So let me try and give you a lot of data that I hope will answer various parts of that question. So first, the simple answer. If you take a look at our forecast, we continue to forecast ASPs increasing through this year. So that's absolutely built into our forecast and we've modeled in things like you described, the weaker enterprise computing and the difference between the pricing segments. And I always remind people that let's just start at the very top is, when you take a look at the data center, it's not one product, right.
It's a family of products that really span from Xeon PHYs that sell for several $1,000 to the networking processors that are a few $100 at times. But within each one of those families, so whether you have networking or cloud or hyperscale or enterprise computing, our ASPs are increasing and that's mostly due to bringing in better products, people buying up the ladder in product and resulting in a higher ASP on average for any one of those segments. So you will see slight shifts in the overall data center ASP. We have a boomer quarter like this, like Stacy talked about and networking is a little bit higher or something like that. But if you take a look inside any one of those segments, ASPs are increasing and our forecast for the overall segment for the year is an increasing ASP.
And it's driven by people buying up the stock, and that's because we're bringing more performance for a better price, to those customers.
That's very helpful. And I guess as a quick follow-up, you outlined the cost savings, but it doesn't appear as though there's really anything on the COGS side. So curious if you see cost savings on that front as well?
Yes, certainly, we are equally focused on efficiencies in factory space. There's a little bit baked into the 2016 gross margin. I think you'll see a bit more of it kick in, in 2017. And just realize the labor cost in the factories is a relatively small component. The real opportunity for us is some of the other things around capital efficiency and how fast we convert over processes and things like that and that takes a little while to play
through. Very helpful. Thank you.
Thanks, C. J.
Thank you. And our next question comes from the line of John Pitzer of Credit Suisse. Your line is now open.
Good afternoon, guys. Thanks for letting me ask the question. I guess my first one, I wanted to get a little bit more into profitability within the data center group. Revenue was down about $309,000,000 sequentially, operating profit was down $411,000,000 sequentially. I know there's a lot of moving parts.
You had the extra week of OpEx that might not have been fully covered by revenue. And Stacy, you talked about, in your opening comments, the 14 nanometer ramp starting to hit there. But with this new narrative sort of declining ASPs because of mix, I'm kind of wondering if you could tell me how we should be thinking about operating profits in the business going forward. I think it was about 44% in the March quarter, down pretty significantly in the December quarter. Is this change in mix also having an impact on operating profits?
Yes. So John, you nailed it in terms of what's going on with operating profit in Q1. It's just the early cost of the ramp of the 14 nanometer server product. That's what's causing that to behave a little differently from revenue. And back to Brian's point, I would say no, there's nothing in the mix that per se would cause me to have a different view of the overall profit potential of this business.
So taking networking as the example that it does have a lower ASP than the Xeon product line does. It also has a very different cost structure than the Xeon product line does. So it doesn't cause us to be in a different space from overall operating profit percent.
That's helpful. And then maybe for my follow-up to Brian. You guys gave us your view for the PC market this year. I'm just kind of curious in lieu of the restructuring kind of how you're thinking about the PC market longer term? And specifically, there's lots that going on in the market that you probably can't control, but there's always sort of been this view at Intel that the best use of cash is to invest in the business and to innovate and innovation drives growth.
How do you kind of balance that innovation desire with kind of the realities of PC market? And how do you think about kind of the structural unit growth of PCs going forward? And do we run a risk at some point that PCs just don't provide the scale that you've talked about in the past to invest in other businesses like DCG and IoT?
Sure. So again, John, that's a bit of a two sided question. So let me start with the back half and then we'll move into the first half. So, first is, no, I'm not worried that the PC will shrink to a point where the scale won't get large enough to fund either the factories or the other innovations. In fact, we talked about the restructuring actually makes us more profitable in the PC.
That's allowing us to invest even more in those growth areas. Remember also those growth areas are growing and so they are replacing some of the volume in the factories as they grow. Now let's talk about the PC. You asked how do we take a look at the PC long term and how do we make sure we're making the right investments, which to me that's the key, right? That's what we've really tried to do with this restructuring is take a look at the areas that are growing, that we believe we can bring innovation to that will make a difference to the end user.
You're going to see more investments in 2 in-1s. You're going to see more investments in thin and light devices. You're going to see us push even harder on high end gaming systems, which are growing at a very fast rate and they tend to buy up the stack to the very, very top. And then we're continuing to gain share in segments like set top boxes, which are becoming more and more PC like in their capabilities, if you think about it from a hardware standpoint. So there are absolutely segments we'll continue to invest and continue to innovate in.
We have some very innovative systems in design right now that bring new functionality and new thinness and lightness to the market for the last second half of this year. And we'll do that. What we're going to do is make sure we're not doing or that we're doing this as most efficiently and not doing it spread out across all PCs and all form factors. And that's what we've really tried to do with this effort right now.
Helpful. Thanks guys.
Thanks John.
Thank you. Our next question comes from the line of Amit Daryani of RBC Capital Markets. Your line is now open. Yes.
Thanks a lot. I guess, just to start, could you guys talk about from the restructuring cost perspective, how much of that is going to be cash versus non cash and would all the cash outlays happen in the back half of this year?
You were a bit faint. I think you asked on the restructuring, how much of that is cash versus non cash and how does that play out over the year?
Yes.
Now you're loud and clear. Thanks. So I would say the restructuring charge is a mix of cash and non cash, but it's probably it's more heavily weighted towards cash costs. And it will be relatively front end loaded on the year, but some of it will extend over the course of the year and some of it frankly will extend into the first half of next year.
Perfect. And I guess if I could just follow-up, ASPs and the clients were up 19%. Just talk about how much of that was potentially CPU improvements on notebook and desktop pricing versus the lower mobility that may have had a better part to play there?
Yes. And if you look at the CFO commentary, we actually gave you desktop and notebook. What you'll see is that notebook was pretty flat from an ASP standpoint year on year. Desktop was up 6%, so that is one of the adders to profitability. And then the big difference is what happened in phones and that we talked to you about.
So that actually had a fairly significant impact on the overall ASP for CCG.
Perfect. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Vivek Arya of Bank of America. Your line is now open.
Thank you for taking my question. Brian, on the data center group, there's a lot of headlines from IBM, from the different arms, several vendors and even from some of your cloud customers like Google who want to try new architectures and I understand there is no near term impact. But longer term, how do you assess the competitive landscape and especially how do you think it plays out in the compute market where you are a very large incumbent versus the comps market where you are not the incumbent?
Sure. Good question, Vivek. First, I'll just tell you that having been raised by Andy Grove, always paranoid about the competition, always driving and we know that we live or die by the performance of our product. We believe if you take a look at our roadmaps, we have a strong competitive leadership that should allow us to continue to have the position in the market that we currently have. I think also you have to take a look at some of our strategy that is becoming much, much broader than just the CPU.
What we're trying to do is really provide top of rack to bottom of rack solutions that bring that work together and bring performance across the whole rack. And that starts with Rack Scale Architecture itself, which is a very unique architecture that will allow people to build racks in a much more denser and lower cost way to silicon photonics for within rack communication. Then we go to 3 d cross point and then you have our whole CPU architecture from networking, storage up through server. So we believe we're uniquely positioned to provide that whole rack viewpoint and have everything work together and come together to bring really performance that is just unbelievable. And that's what's key to really keeping our position is to own that is to understand that the whole rack from top to bottom.
And that really is our strategy when you take a look at it. In the other areas like you said, networking and storage and the telco area, those are areas that we're gaining share and we're as they move to software defined infrastructure and basically virtualized infrastructure, it plays right into the Intel architecture and really what we do best, which is general purpose computing. And that same architecture from top of rack to bottom of rack plays out in those areas as well like in the telco area. So we believe our strategy absolutely will maintain our position in that. But we're always paranoid and we're always realizing we get there by performance of those products.
Got it. Thanks for those details. As a follow-up, I know you probably have answered different pieces of this question, but perhaps if Stacy you could help us quantify what Intel's target operating margins are this year and or maybe even longer term because when I look at a lot of fabless semiconductor companies, they can get towards 20%, 25% operating margins. When I look at a foundry like TSMC, it's able to get close to 40% operating margins. So given sort of those bookends, where should Intel be after all these restructuring actions are taken?
Yes, let me give you some elements of it. And then I would expect we'll have a much more in-depth conversation on that at the next investor meeting. But I'll give you some insight into how Brian and I are thinking of this. 1st and foremost, we believe there's growth So just from a top line overall company standpoint, we think that there's significant opportunity to grow. And I think we've done a we've executed well in terms of growing over the last couple of few years even as the PC TAM declined.
And that's very consistent with our strategy is invest in the data center and memory and IoT and things like 5 gs where we think there's opportunity and focus our investments in the client that we've talked about. In terms of the overall model and the financial model for the company, I've given you this range of 55% to 65% gross margin as being kind of this most of the data points landing 3%. This year, we believe we're at 62%. So that's just 3%. This year, we believe we're at 62%.
So that just kind of continues. I don't see anything on the horizon that changes that in the near term. And then with these actions that we're taking, when we get to full realization and I want to stress, we do believe that this will give us an opportunity to reinvest in the business and actually accelerate growth. But if you just look at the cost side of it, it's 2 to 3 points of spending as a percent of revenue when we get to mid-twenty 17 and full realization that takes our spending as a percent of revenue even just based on your estimate of 20 16 revenue, it's 2 to 3 points, it takes it back down into the low 30s from a spending as a percent of revenue. And you can do the math from there and see kind of what we think we can achieve next year in terms of overall operating
margin. Okay.
Thank you very much.
You're welcome.
Thank you. And our next question comes from the line of Chris Danely of Citigroup. Your line is now open.
Hey, thanks guys. Just a quick follow-up on the last question on restructuring. So should we assume that total expenses will drop roughly 100 and $50,000,000 a quarter from 4Q 2016 to the Q2 of 2017? And then if you guys could break that out between how much of the savings would be on COGS versus OpEx?
So, no, I'm not going to give that level of granularity of forecasting by quarter in 2017, but I'll say and I want to be clear that the $1,400,000,000 is all OpEx. So that's an OpEx savings number that we think we get to by mid-twenty 17. And so just to kind of recap some of the financial data that we provided you. We get to that level by mid-seventeen, that's $1,400,000,000 in savings. That is a net number, so that's including some reinvestment that we plan to make.
We think that that's 12,000 physicians that get eliminated, which is a very difficult thing for us to go through, but that's what's in these numbers. We think we achieved half of those employment reductions by the end of this year. And overall for 2016, we've brought down our OpEx by $700,000,000 That is again due to this restructuring program. And we've added in a line that you'll see on the GAAP P and L of $1,200,000,000 in restructuring charges to achieve that. So beyond that, I'm not going to go into any more granular data.
I think that should be plenty. And now we want to go have the conversation with the employees and help them understand what this program means.
Yes, very fair response. And as for my follow-up, in terms of the growth opportunities that you guys are really pushing for, IoT, DCG, etcetera. I guess if you look at the margin profile of 2 of them, memory and basically cell phone processors, it's substantially below your current margins. So I guess my question is, why would you want to pursue to markets like that where the margin profile is so much lower than yours?
Sure. So let's dissect those. From memory, 1, we believe that if you take a look at our typical margins, they're better than cell phone margins on typical quarters. But also it's integral to the data center. So it really actually is this virtual cycle that especially as we move to 3 d NAND and then to 3 d Crosspoint as we've talked about 3 d Crosspoint and how that really rearchitects how memory and storage is played out in the server rack and in the data center overall, it's a chance to really very uniquely shift that whole infrastructure.
So we believe that's actually critical to our strategy in the data center and will bring a product with good margins. Let's talk about IoT. If you take a look at it, first, it's growing quite well. And if you take a look at the data center right, I mean the IoT right now, it grew 22% this quarter and it has PC like margins. So this is not cell phone chips.
They don't tend to be cell phone chips. If you take a look at the segments we're really going after, which are things like automotive or what I'll call autonomous vehicles, industrial and retail, they tend to be systems that have better amount of compute at the edge. They tend to have machine learning capabilities. These are systems and they tend to have a high degree of cons and more and more will move into 5 gs. So that link also between those products in IoT and 5 gs and the 5 gs infrastructure, we believe also plays into the data center and the whole data center strategy and will be critical that you can provide end to end solutions.
So if you're somebody out trying to build whatever that autonomous vehicle is, you need to be able to provide the 5 gs back end, but also the 5 gs out on the device, whether it's a car or drone or robot or whatever it is out there autonomously moving about.
And Chris, let me just on the margin point, I'd take you back to points that Brian and I have made at the investor meeting and in other places, which is remember and IoT is a perfect example of this. Those businesses lever IP that we create broadly for the company. And so our cost of entry in something like IoT actually is relatively low because we have the Atom core, we have the graphics, we're investing in the connectivity, we're investing in the wireless WAN for other businesses. And that's where we really get leverage in this model. And that's one of the reasons that the IoT profit margins have been as high as they have been.
Got it. Thanks guys.
Thanks, Chris. And operator, I think we have time for 2 more questions.
Thank you. Our next question comes from the
line of Ambrish Srivastava of BMO. Your line is now open.
Hi, thank you very much. I actually wanted to continue on IoT, Brian. Couple of years ago, you had laid out a 20% CAGR target for this. Then I think a year later, you had brought it down to mid teens. And yes, it grew very strong this quarter.
But last full year, it was the 7% grower. So the question is, what's the right way to think about the growth profile for this business? And what happened in the past? Was it a 1 year off event or kind of just help us understand the drivers and why it should reaccelerate and why the Q1 is not an anomaly? And then I had a quick follow-up.
Sure. I would tell you that I'd reiterate what I said, which is it's a mid teen type of growth rate. You got to take a look at this over the long haul. The IoT space is like similar to the embedded space of old to some extent into the FPGA space where you have especially where we're trying to go, where you're trying to go into products that require that higher level of compute, the machine learning and those capabilities. You have a design time, a design in time to win the design and then you have a ramp of that product.
And so those tend to take a little while. Autonomous driving vehicles are a good example. If you're out winning designs today, you're winning 2018, 2019 car designs. Those are what are being won today. So as you bring your products to market, that's what you're winning.
So I'm still believing that over the long term this will be a mid teens growth. It will have for the most part PC like margins and we've tried to pick the segments that play to our strength and also use the connectivity that we believe we're uniquely qualified to bring. Okay, thank you. And then my quick follow-up, Stacy. Rate for
the quarter for the reported quarter and then for the rest of the rate for the quarter for the reported quarter and then for the rest of the year? Thank you.
Sure. For the reported quarter, the big driver of the tax rate was a discrete item associated with one of the divestitures that we drove out of our security business and we got a one time tax benefit associated with that. And it's just tying back to the strategy, you can see the performance of the security business, both in terms of their revenue growth and their profit growth. I think the team there is doing a really good job of focusing in on a few key areas where we think we have competitive advantage and then driving them hard. And we've divested a few smaller businesses and we happen to get a tax benefit on one of them.
As we look at the year, so part of it is just what happened in Q1. And then the other part is we would expect to have a higher proportion of our profits and lower tax jurisdictions as we work our way through the year. It's, we'll bring down the tax rate a little bit.
Okay. Thank you. Thanks.
Thank you. And our next question comes from the line of David Wong of Wells Fargo. Your line is now open.
Thanks very much. A clarification of the commentary you gave earlier on your restructuring. Will there be any product lines or types of products that you'll be pulling out of in the future with all the cuts that you're making?
Yes, I'm sure that as we go through this and we finish the project evaluations, there will be some products that will exit from those as they define Murphy, who we brought into the company is doing a complete review of all of our products. And he's going to report back to me in the near future and give me a proposal for what those look like. So we don't have any that are set out today, but at the end, I'm sure there's going to be a few that are a part of that.
Okay. And related to that, does the restructuring affect your longer term expectations for technology transitions? And in particular, are you still hoping to get back to a 2 year tick tock cadence?
So, no, it does not have any effect on our technology cadence. It has not touched that at all. And Stacy talked about even our CapEx and how the CapEx that we're spending this year, which has not moved is mostly for either the 3 d NAND ramp or 10 nanometers. As far as Moore's Law, we are always constantly striving to get back to 2 years. We've given you a timing that's for 10 nanometers, that's more like 2.5 years.
We haven't talked about 7 nanometers. Partly it's still in definition and alignment. So we're not sure, but we're I can truly tell you we're constantly working to get back to 2 years. And I've tried to lay out that if you look at the history of Moore's Law, there have been anywhere from 18 months to 3 years in the length of cycles over the time. More importantly, what I always remind people is the leadership you have over the competition, which is always what's important, right?
All of these are getting harder and they get hard for everybody. And so you want to make sure also that your leadership gap, what you're able to do relative to the competition remains constant as well. Both of those are as important as the other.
Great. Thanks very much.
Thanks, David. And thank you all for joining us today. Nicole, please go ahead and wrap up the call.
Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.