Good day, ladies and gentlemen, and welcome to the Intel Corporation Q4 2015 Earnings As a reminder, this call is being recorded. Would now like to turn the conference over to Mark Henninger. Please go ahead.
Thank you, Sabrina, and welcome, everyone, to Intel's Q4 2015 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 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. Also during this call, we'll be using non GAAP measures and references. GAAP financial reconciliations are available in our earnings material, which was posted on our website intc.com in advance of this call. The forecast that Stacy speaks to today will be on a non GAAP basis.
With that, let me hand it over to Brian.
Thanks, Mark. Our results for the Q4 were consistent with expectations and marked a strong finish to the year. Taken as a whole, 2015 demonstrated the benefits of our strategy, which is designed to capitalize on the growing need for the infrastructure powering the smart and connected world. That strategy is also resulting in the evolution of our business model to focus on 3 key areas of growth: the data center, the Internet of Things and memory. Our results reflect that evolution.
Revenue for the year was nearly flat despite a significant decline in PC demand. 2015 was also a year of revenue record milestones, and I'd like to take a minute to review some of them with you. Even though the client computing group ended the full year down 8%, we were excited to see that we were able to grow sequentially in the second and third and fourth quarters. As of November, 14 nanometer products made up more than 50 percent of the client computing volume. And for the year, high end core i7 microprocessors and our k SKUs for gaming both set all time volume records, leading to a rich product mix.
In our security business, we've refocused the organization on endpoint technology where we enjoy a solid leadership position. And we've driven material efficiencies as we fully integrated the McAfee organization into Intel. Security revenue rose 6% for the year, while the organization's tighter focus drove a remarkable 44% improvement in operating income. The IoT Group grew revenue 7% in 2015 to $2,300,000,000 an all time record, as the retail, transportation and video segments all saw strong double digit year over year growth. In our NAND Solutions group, we introduced a revolutionary new class of memory called 3 d Crosspoint, the industry's first new memory technology in more than 2 decades.
3 d XPoint is a great example of our growth strategy at work, using our technology expertise to innovate and expand into profitably adjacent markets. We think it's a game changing technology moving forward. Our confidence in the technology led us to announce in the Q4 that we upgrading our Dalian China fab to manufacture both 3 d NAND and 3 d crosspoint with production
crosspoint with production beginning later this year.
For the full year, our memory business grew more than 20% to $2,600,000,000 another all time record. At the same time, the data center group grew 11% over last year to an all time record of $16,000,000,000 in revenue. Macro weakness weighed on enterprise demand and resulted in slower growth than we expected at the beginning of the year. However, DCG's overall performance highlighted the underlying trends driving data center demand as cloud and communication service providers revenue both grew more than 20% for the year. Within the cloud segment, 40% of our volume their needs.
And finally, just after our fiscal year ended, we closed our acquisition of Ultera. We're thrilled to welcome the talented Ultera to Intel. Combined, our 2 companies will deliver powerful synergies based on Intel's process technology leadership and the integration of Ultera's FPGAs. Wrapping up, our results over the last year leave me increasingly confident in our strategy. While our outlook for the Q1 reflects some caution about overall demand, particularly in China, we continue to expect solid growth in the business in 2016.
Because it provides tremendous return to our shareholders, we will continue to drive innovation and differentiation in our core PC business. This business provides a foundation of IP and a source of cash flow, but it's not the sole driver of our growth. Our future as a company will increasingly be a product of the virtuous cycle of opportunities in the data center, memory and IoT market segments. In fact, you can see the impact of that virtuous cycle in our 2015 results. DCG, IoTG and memory delivered nearly 40% of Intel's revenue and more than 60% of Intel's operating margin in 2015.
Additionally, these 3 adjacent markets delivered $2,200,000,000 in profitable revenue growth in 2015 alone. And as we look ahead to 2016, we'll continue to build on that strategy. Now with that, let me turn it over to Stacy.
Thanks, Brian. The Q4 was a strong finish to the year with record revenue at $14,900,000,000 We had record revenues in the data center and the Internet of Things businesses. Gross margin of 64% was up 2 points to outlook. Net income was $3,600,000,000 down 1% year over year and earnings per share was $0.74 flat over the same horizon. I would like to provide context behind our full year 2015 financials as it provides insight into how we are executing to our strategy.
Growth in the data center, memory and Internet of Things businesses partially offset a weaker than expected macroeconomic environment and a weak PC client market. Overall, revenue for the year was $55,400,000,000 which was down 1% from the prior year. The client computing group achieved $32,000,000,000 in revenue and was down 8% for the year. Within the client computing group, we achieved $1,000,000,000 in mobile profitability improvements over the course of the year, exceeding our goal. The data center business at about $16,000,000,000 in revenue grew 11%.
The memory business at over $2,500,000,000 in revenue grew over 20% and the Internet of Things business at about $2,300,000,000 grew 7%. Gross margin for 2015 was approximately 63%, down about 1 point from 2014. Higher unit costs as we ramp 14 nanometer were offset by an increase in ASPs driven by strong results in the data center business and a rich mix in the client computing business. Operating profit for the year was $14,000,000,000 down 9% year on year. Earnings per share for the year was $2.33 up 1% from the prior year.
In 2015, the business continued to generate significant cash with $19,000,000,000 of cash from operations. We purchased $7,300,000,000 in capital assets. We paid $4,600,000,000 in dividends and repurchased about $3,000,000,000 of stock. Total cash balance was 25,300,000,000 Total cash balance was $25,300,000,000 up over $11,000,000,000 year over year. Our net cash balance, total cash less debt and inclusive of our other longer term investments is approximately 6,600,000,000 dollars We issued about $9,500,000,000 of new long term debt to finance our acquisition of Ultera.
And in November, we announced an $0.08 dividend increase to $1.04 per share on an annual basis effective in the Q1 of 2016. The acquisition of Ultera was completed in early fiscal 2016, which means that 2016 guidance includes the expected results for the FPGA business. As I talk to our guidance for 20 16, it is important to note that we have excluded non cash and one time acquisition related charges for Ultera. The CFO commentary pre released before this call and available on intc.com includes the full GAAP and non GAAP reconciliations. For the Q1 of 2016, the midpoint of the revenue range is expected to be $14,100,000,000 This forecast, which includes an extra work week and the newly acquired FPGA business, is on the low end of the average range.
This outlook represents a soft start to the year as we remain cautious on the level of economic growth, particularly in China. We continue to believe the worldwide PC supply chain is healthy with appropriate levels of inventory. Gross margin for the Q1 is expected to be approximately 62% and spending is expected to be $5,500,000,000 Turning to the full year 2016, we are expecting revenue growth in the mid to high single digits relative to 2015. This outlook is higher than our previous guidance provided at the November Investor Meeting. This higher range is driven by the addition of the FPGA business, partially offset by some caution as a result of uncertainty in the macroeconomic environment.
Gross margin for the year is expected to be 63% and spending at $21,300,000,000 The capital spending forecast for 2016 is $9,500,000,000 up from 2015. As the economic useful life of our manufacturing equipment lengthens, we are extending the depreciable life of equipment in our factories from 4 to 5 This change in depreciable life drives approximately $1,500,000,000 in lower depreciation expense for the year. Inclusive of this change, we are forecasting depreciation expense to be $6,500,000,000 this year, down $1,300,000,000 from 2015. Our results demonstrate that we are transforming the company. We are pivoting towards the cloud with a diversified portfolio Client is still the largest segment, but the other businesses now make up about 40% of our total revenue and 20 15 marked the 1st year where these businesses made up the majority of our operating profit.
The data center business is growing fast and is now a $16,000,000,000 business. That growth is being driven by growth rates in cloud computing that were over 40 percent year on year. Our memory business grew over 20% year over year and is well positioned to disrupt the industry with the launch of 3 d Crosspoint Technology. Internet of Things business grew in 2015 and is expected to contribute more growth this year. And with the Alterra acquisition, we expect to broaden our product portfolio in the data center and Internet of Things businesses and enable even more innovation.
Most importantly, we are pivoting towards the cloud, diversifying our client business and
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. Sabrina,
please go
ahead and introduce our first questioner.
Thank Our first question comes from the line of Joe Moore of Morgan Stanley. Your line is now open.
Great. Thank you so much. The client average selling prices went up again for the Q2. Is that the same trend you saw in Q3, stronger high end? And what's your assumption for the ASP trajectory going forward?
Sure. I'll start Joe. This is Brian. It was the same type of trend we saw throughout 2015 with clients buying up the stack and you saw that our record revenue in Core i7 and the case SKUs which are really our top end SKUs. The forecast for 2016 has us relatively flat in this space.
So we don't know if it will continue, but right now we forecasted a flat on the ASPs for 2016.
And just to add Joe, so there was a client comment. In total we see ASPs up a little bit in 2016. You can see it in the gross margin recon. It's not as Brian said we're maintaining the client ASP but we are expecting that server becomes a larger percentage of the mix. And so we get some mix impact based on what's going on in server.
Okay. That makes sense. Thanks. Then for my follow-up, the depreciation change, was that something you had known about when you talked about the full year guidance at the Analyst Day? And what was it that prompted you to make that change now?
Yes. No, the depreciation change was not included in my forecast that I provided back in November. We were in the middle of the analysis. What prompted it was we did an in-depth analysis based on the cadence of moving from 1 process technology node to the next. We talked about that at the beginning of 2015.
And the 3rd wave of products and we kind of completed our long range planning in the Q4 and that's what triggered the change in the depreciation cadence. I'll also say so just to then tie this out you. In November, I was forecasting a 62% gross margin for the year. I'm now projecting a 63% gross margin for the year and the difference there is this change in depreciation. So you can kind of see it in that gross margin recon.
Great. Thank you very much. You're
welcome.
Thank you. And our next question comes from the line of Vivek Arya of of America Merrill Lynch. Your line is now open.
Thanks for taking my question. First, Brian, you mentioned that there is some uncertainty near term in the broader environment. I was hoping you could provide us some more color around that if possible by your different segments and perhaps by geography.
Sure, Vivek. It's the same type of trend we saw in 2015, emerging markets slower than the mature markets, U. S, Western Europe looking okay, China and the rest of Asia slow. It was both consumer and enterprise. I'd say it's a little bit heavier on the client side, so the PC side than the data center side, but we're seeing some of it on the data center side as well.
And those are the 2 big drivers, and it's all the same take
your take your full year sales growth number, OpEx is roughly about 35 ish percent or so of sales, which is in line with what you had given at Analyst Day. But I'm wondering what steps can you take to drive more leverage in the model? As an IDM, shouldn't the goal be to get to at least 30% plus operating margins? And so what steps can you take this year to help drive more leverage in the model? Thank you.
Sure. And first, let me if you'll bear with me, let me just take a second to detangle the 2016 numbers because with the extra work week, the Ultera acquisition, which includes some one time costs and the change in depreciation, it becomes a little hard to, I think, get to the bottom of what's actually happening operationally in the business. If you recall in the investor meeting in November, Brian and I talked about the fact that we were looking to reduce spending as a percent of revenue by 0.5 point. If you just take all of the adjustments out, so you don't adjust for the change in depreciation, you don't adjust for Ultera or anything like that, we're getting that 0.5. When we add all of that in, we're getting a bit more than the 0.5.
Improvement from 2015 to 2016 in terms of our projection. So we feel we're delivering what we committed to and when you put some of these adjustments on top of it, we'll deliver a little bit more. In terms of the opportunities there, we articulated and I'll let Brian come in over the top, but we articulated in the investor meeting of we're still committed to drive spending as a percent of revenue down. We're in the midst of a transformation right now. And so we are going through a period where we're weeding and feeding our portfolio.
We're making some disinvestments. But very importantly, we're investing in areas that we think are critical for the long term growth and health of the company and where we get lots of return, I. E, the data center, the Internet of Things, our process technology leadership, the memory business. And so we knew going into this year, it would be a time of elevated investment. We're delivering what we committed, but there's more to come in future years.
Thanks, Peter. Thank you.
Thank you. And our next question comes from the line of C. J. Muse of Evercore. Your line is now open.
J.
Muse:] Yes, good afternoon. Thank you for taking my I guess now with the Alterra deal closed, curious if you could provide an update on your server chip roadmap and strategy as we look into 2016 and beyond?
Sure, CJ. This is Brian. So let me just kind of give you a broad picture of Ultera and where we're at. So as you said, we just closed. We have just gotten through the employee integration.
Everybody's got a badge. You go by the signed out front, say, Intel now. Really excited. We're starting to dig into some of the product roadmaps. The good news is we've been working separate companies on the first of the server chips, which is a multi chip package.
So FPGA and our Xeon in the same package. That will actually start sampling to select customers in the Q1 of this year. And it will it will continue to sample throughout this year with production in 2017. Our roadmap will then we're still working on our roadmap beyond that of when do we integrate the full IP into our silicon, so basically monolithic guy. And we're now actually spending an equal amount of time on that same kind of a roadmap, an MCP or a multi chip package, followed by a monolithic die in the IoT space.
So it's we feel pretty good about the progress and we're already in the Q1 going to be circling to this the kind of leading edge cloud guys, if you can think
about. Very helpful. And I guess as my follow-up, you provided a $10,000,000,000 CapEx budget and now it looks like it's about $500,000,000 lower at the midpoint. Curious what has changed there? Is that principally capacity on the logic side as opposed to memory, given what we're seeing in the macro environment?
Thank you.
Yes. It's all logic for the most part and it's not as much a macro or testing the capacity or anything like that. It's just the ins and outs. As we went from the investor meeting into the actual firm forecast for 2016, the teams just sharpened down all the numbers and went through it in more detail. I don't think there's anything more to it than that.
I'll let Stacy comment if there's if he wants to give you any other light on this one. No.
Great. Thanks so much.
Thank you. And our next question comes from the line of Harlan Sur of JPMorgan. Your line is now open.
Good afternoon. Thanks for taking my question. On the data center business, it decelerated as the team has expected, but 5% year over year growth in Q4 was a bit more deceleration than what we were anticipating. So I guess two questions. Was it all enterprise that drove the weakness?
And do you expect to get back to a double digits growth trajectory in the March quarter? And is the team still confident about driving mid teens growth for DCG in 2016?
So, yes, there's a couple of things I want to talk about then on the data center. First, when you compare Q4 to Q4, you're looking at a comparative where Q4 2014 was one of our strongest quarters as long as I can remember with very strong greater than 20% growth for the quarter. So that quarter was a little bit of unique, so the quarter to quarter comparative is a bit tough. If you take a look at how the second half, which is really Q3 and Q4 kind of looked similar, Enterprise actually stabilized from the first half. So Enterprise was weak in the first half and tended to it got a little bit more stable in the second half.
And what we saw was the normal, the cloud guys tend to slow down in the Q4 because that's when a lot of the cloud they don't want to be upsetting the cloud infrastructure while the holiday seasons are on and people are buying things. And then we continue to see strong growth and strong share gain in the networking and telco side. We're absolutely continue to look out. And again, we're very careful to not look at it this on a quarter by quarter basis. We're looking at the long view.
And we're very confident that, yes, we'll continue into this double digit growth in the data center. It will continue to be fueled by the cloud in the first side and then secondly, by our growth in telco and networking as our share grows there. There's remember, we entered the year less than 10% share in that space, and there's a lot of space there for us to grow in the networking and telco space.
And let me just add one thing to the premise of your question. I don't think we were surprised by where we ended up in the data center. If you recall back in November, we talked about data center growth rate for the year being in the low double digits. That's exactly where we came in. Based on what Brian was just talking about in terms of the strength of Q4, 2014, we were expecting this to be a tough compare and that we'd have growth rates in the single digits.
Great. Thanks for the insights there. And then for my follow-up, the team is going to be launching its 6th generation v core product line for enterprise desktop PCs, I think next week. There also hasn't been a refresh of desktop for 2 years. So I guess the question is, what are you hearing from your corporate and enterprise customers as to the potential uptake of these new platforms relative to the very muted enterprise demand profile that we had last year?
As you said, the we kind of went roughly a year or so without a desktop enterprise upgrade. And especially when you combine coming back now with a refresh, that refresh being Skylake, the combination of Skylake's great performance and great graphics. We're past the Windows 10 launch, which is another positive in this space. We are hearing very good response as far as people's interest, the form factors you're seeing, right? You're seeing all in ones, you're seeing classic desktop platforms, you're seeing great graphics, you're seeing OLED displays.
Overall, it's just another segment where we think the best computing devices really the computing industry has ever built are going to be showcased. The excitement is there and we just got to get past the macroeconomics of enterprises saying we're going to do the upgrade.
Thank you.
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. First, I wanted to go to the equipment life extension. So I know you were hopeful that eventually you'd be able to get your node migration trajectory back from 3 years to 2. But this sounds like a fairly permanent change in terms of extending your equivalent lifetime.
So what should we take from this action in terms of how you view the potential improvement ability of your node migration trajectory going forward?
It's not an impact at all, Stacy. This is whether we're at 2 years or 2.5 or 3 wasn't going to dramatically shift that life expectancy like this. This is more about the amount of reuse and the efficiency and speed at which we can do the conversion. And so both of those numbers have improved. Now the cycle clearly doesn't hurt to have from this perspective the longer node cycle.
But independent of that, this is a change that was fundamental to the shift in reuse and rate at which we're able to move the tool from being able to run, say, 14 nanometers to 10 nanometers.
And I would also just add that's exactly right. The reuse is something that's been shifting over time. It gives us a lot of economic benefit. I'll give you the accounting answer here too, which is if we got to 7 nanometer or 5 nanometer and there was something that caused us to look at the depreciable life, the economic usefulness of the equipment, we would change it. But we're certainly not expecting anything like that.
But this is we go through this analysis every year.
And the only thing I would add to finish is, it's within the manufacturing side, one of our objectives is to continue to improve on those vectors that I talked about, the reuse and the speed at which we're able to do these transitions. And so we'll be constantly trying to get this to be a longer and longer number, if possible, independent of the notes because it just shows that we're becoming more efficient. Right.
Got it. Thank you, guys. For my follow-up, I just wanted to take a look at the extra week that's in Q4. How much of your guidance is actually coming from that extra week? Is it sort of the full, I guess, it'd be 7 point 5% or whatever it is?
Or is it less because that week is happening at the end of 2015 and beginning of 2016? And how should we think about how that may influence normal seasonality into Q2?
Yes, sorry. And maybe I didn't hear you right. And just I want to clarify, the extra work week is in Q1 of 2016, not Q4 of 2015.
Yes, yes. But I think it's like December 28 through January 4 or something. So how does that
A little earlier than that. And just the so the background on this is we go through this every 5 to 7 years because we're on a work week calendar over a 5 to 7 year period, we get out of sync with the actual calendar. And then we add in a work week in order to get back on sync. It's a little it's easy actually to quantify the spending associated with that extra work week because we've got lights on and factories running and we're paying people. The revenue associated with it is a little harder to calculate.
When you look at where the week actually falls, it's that week between Christmas and New Year's. Our fiscal year ended, I think, the day after Christmas. And so, it's that week between Christmas New Year's that tends to be a billings week that's dramatically lower than any other week we see during the year. So some revenue impact kind of hard to quantify it. The way I'd look at it though, when you look at our guide and you take out Ultera and you take into account any impact for the extra work week, what you'd see is that the guide for the Q1 is kind of at the low end of what we normally see from a Q4 to a Q1 is how I think of it.
Then you add Ultera back on top of that and you get to the revenue number that we provided. And just to be totally transparent, the revenue number for Ultera in Q1 is on the order of $400,000,000 So you can kind of do the math from there.
Thanks, Stacy.
Got it. Thank you, guys.
Thank you. And our next question comes from the line of John Pitzer of Credit Suisse. Your line is now open.
Yeah. Good afternoon guys. Thanks for letting me ask the question. Brian, the first question I have is on the DCG business. This quarter, the December quarter, you saw a modest drop in ASPs both sequentially and year over year, which is somewhat of an anomaly for that business.
And I guess I understand the mix shift as cloud grows faster than enterprise. I'm kind of curious, do you think this was a 1 quarter anomaly? Is this something we should expect more of as networking grows faster in 2016? And within the individual segments, are you still seeing customers buy up the stack?
Okay. So that's actually a great question, John. So for Q4, the decline or the decrease in ASP was mostly driven by the much higher growth rate in the networking, as you mentioned. And the fact that the percentage of Atom in networking tends to be a bit higher. And so if you look at networking as a whole, the ASPs in networking tend to be lower than say cloud or enterprise.
However, if you look at Q4's working ASP, so if you took out just that ASP and you compared that ASP relative to prior quarters, it was actually up as an average. So it has a lower average selling price, but that average selling price is increasing as more people buy and as NFV and SDN take off, more people tend to buy up to core because they're really searching for that performance. We do hope and expect this trend to continue into 2016 as we gain share in networking. The relative strength so then if you take a look at the cloud space and the enterprise space, we expect those to continue on the trends you've seen over the last few years. We don't expect any major shifts there.
But we have very strategic plans that continue to grow in the networking storage and especially around the telco and networking space as SDN and NFV really take hold. And you will see a slightly lower ASP from there, but we expect the ASP to continue to increase in that space as we bring more functionality. Does that answer
your question?
Yes, it does. It's very helpful. And then Stacy, you raised sort of the full year gross margin by about 100 basis points. But if I kind of do the math, a 1.5 $1,000,000,000 decrease in depreciation on a $60,000,000,000 revenue stream is more than 100 basis points. In addition, the Ultera gross margin was higher than your core.
And so I guess I'm trying to understand what are the offsets? Is 10 nanometer cost kind of coming in higher than expected? And if you could help us understand sort of the progression of 10 nanometer cost throughout the year, that would be helpful.
Sure.
And a great question and I know there's a lot of moving parts here. Let me just focus in on the depreciation change for a second. And I actually try to be very transparent. In the CFO commentary that was released, you'll see some of this written out, so you can always refer back to it. But the change in depreciation, you're right, in total is about $1,500,000,000 but only about half of that is flowing through COGS impacting gross margin in 2016.
And that's where you get to the kind of one point shift and that really is the primary difference. There's a few other moving parts but nothing that's material. That's the thing that changed from 62% gross margin forecast that we had in November to 63% gross margin forecast that we have today. The rest of the change in depreciation, about a quarter of it will flow through OpEx because remember all of the spending we do for research and development facilities actually flows through our research and development lines. So you see a little bit of a benefit there.
And then you have some of it goes into inventory and then ships out over time.
Thank you. You're welcome.
Thank you. Our next question comes from the line of Chris Danely of Citigroup. Your line is now open.
Hey, Thanks guys. Just another question on the weakness you're seeing. Can you just maybe go into some detail on when it started? Have you seen any stability? Is this just CPUs?
And in your full year forecast, are you implying that we get back to normal seasonality in Q2 through Q4?
Yes. So, I'd articulate that what we're seeing we have a cautious stance as we start the year. There's a couple of things that into that. Units were a little weaker for us in the client segment in Q4. As we worked our way through the Christmas selling season, what we saw is the sell through all the way to the end customer was a little less than we thought.
We made up for that with a rich mix. So that's why we ended up with a pretty good result, but a little, we're watching that carefully. And then, our team on the ground in China has gotten fairly cautious about what's going on in China right now. And as you know, that's the largest PC market. So we're just a little cautious on the growth rates there.
In terms of from here, I think Brian said it well, we're expecting this is the environment as we work our way through 2016. So against the backdrop of a somewhat weak macroeconomic environment, we kind of expect the year to play out kind of normally from here.
Okay, thanks. And then, as far as the Ultera revenue, I think you said 400,000,000 dollars I think that's down like somewhere in the mid teens or something like that sequentially. Why the conservative forecast? And then do you have any forecast for the year for the Ultera business?
Yes. So I'm not going to speak they have not they didn't release results for 2015 and so I'm really not able to talk about their results for 20 15. I can tell you from our perspective, we didn't see anything that was surprising in terms of what we've seen about their business levels. We actually expect some revenue growth as we go from 2015 to 2016. I'll give you kind of in total what we expect for Ultera.
It's a little north of $1,600,000,000 in terms of revenue. It's gross margin that as John was saying is a little higher than corporate average. So it gives us a slight mix, but because it's a relatively small business against the backdrop of Intel, it's not a big shift in our gross margin. And then we're expecting spending that's at a run rate of a couple of 100,000,000 dollars a quarter. In addition to all of that, there'll be a bunch of one time acquisition deal related costs.
There's amortization of acquisition related intangibles. You'll see all those in the GAAP number. I've excluded them from the non GAAP numbers I just gave you.
Great. Thanks guys.
Thank you. And our next question comes from the line of Ross of Deutsche
Bank. Stacy, one question on the OpEx side, back to that leverage question. You had a very useful slide at the analyst meeting about how you had disinvested in some areas and increased investments in another. I guess my next question is given that ability to do a substitution in the past, is there any limitation on that going forward? Or if you're going to keep spending more on some of the growth initiatives, is that actually going to be all incremental to the level we have now?
No. I think that's actually part of our DNA as we're pretty rigorous about trying to weed and feed where we invest and where we disinvest. As you referred to in the investor meeting, I showed up and down arrow chart and the magnitude of those shifts was on the order of $1,000,000,000 for some of the big movers as we added investments in some areas and subtracted investments in others. And I'll also say there's a point at which we expect that we get more and more leverage in businesses like the data center as well. So I think there's lots of opportunities for us to bring down spending as a percent of revenue as we go forward.
I guess as my follow-up question is just any more color you can provide on the channel inventory? You mentioned that the unit demand was a little weaker than you had expected. How is the channel looking right now? And what sort of expectations should we have for your internal inventory looking into this year?
Sure. So we believe that 2015 ended with, I'd just call it, very healthy inventories. In fact, one of the things we saw was a slight decrease in inventory levels as we exited the 4th quarter. And if you take a look at what we had originally projected and what would have been more an industry norm would have been a slight increase in inventories. We expect those kind of healthy inventory levels to extend 2016.
There's no sign that anybody's adding inventory or not moving off a cautious position on inventory. And that's what's been built into our forecast as well.
Yes. And to the question on internal inventory levels, I'd just say we ended Q4 with a little more inventory than I was expecting and a little higher than I'd like. 2 drivers there we saw, as I said, a little bit weaker units made up for us in rich mix, a little bit weaker units. And we saw yields get better on 14 nanometer and the combination of that left me with a little more inventory leaving Q4 than I'd like. You'll see it, if you look on a dollar basis will go up in Q1 as a result of Ultera.
So Ultera will cause the inventory levels to go up some. But when you look at it from a business standpoint, I think we'll kind of work through the inventory we have. And when we get into the back half of the year, we'll bring inventory levels down.
Great. Thank you.
Welcome. Thank you.
And our next question comes from the line of Blayne Curtis of Barclays. Your line is now open.
Hey guys, thanks for taking
my question. Stacy, the roughly $400,000,000 of voluntary, I don't expect you to report it going forward. Just curious, how does that fit into your reportable buckets? You just kind of level set us for the Q1 out. And then secondly, could you just talk about how you're integrating or not integrating Ultera?
I think I've kind of feel like I've heard both. It sounds like you wanted to keep the sales force separate, but just curious kind of where does that report under and how much integration are you going to do?
Sure. Look, I'll take the accounting question and then I'll have Brian give you his insight and philosophy on the whole integration. On the reportable segment, so actually I do plan to give you full visibility into Ultera. It's a relatively small business for us. It doesn't hit the SEC reporting requirement.
So it doesn't come across that threshold. But we just feel strongly that based on transparency and the size of the acquisition, we want to give you transparency. So you will see that in our financials going forward. I'll let Brian answer the integration question.
Yes. From an integration standpoint, I think what you've seen we've done with McAfee as we've integrated it into Intel Security and you saw the great results that we showed in the Q4. Those are somewhat an example of what happens as you integrate and you really get the focus on the business at a much higher level. Same thing for Alterra. We plan to fully integrate it.
It's going to look like a business group no different than say CCG that does PCs and modems or phones or DCG who does data center. It's called PSG, Programmable Solutions Group. It reports directly to me and it will be fully integrated. And it will be fully integrated. The sales force at the beginning, because the sales tend to be a bit more technical and a bit more like a field sales engineering type role.
We're keeping it separate. But that's something we're going to continue to evaluate. But the organization, the engineering already in the 1st 2 weeks, we've had really for me, I'm really pleased with the level of integration and help that we've done to get the products and roadmaps focused and integrated into our internal systems. So you should expect it to be fully integrated.
Thanks Blaine. And operator, I think we have time for 2 more questions.
Perfect. Our next question comes from the line of David Wong of Wells Fargo. Your line is now open.
Thanks very much. What might we expect in the way of new 14 nanometer data center processor families in 2016?
Let's see. I think we've got Broadwell Xeon, it's going to launch in the first half year of twenty sixteen. So that will be the first of the 14 nanometer or the next 14 nanometer in 2016 is that E5 on Broadwell. The rest of them we haven't put any other dates out there yet, Skylake SKUs and so forth.
Okay, great. And my follow-up, with startup and other charges, do you expect memory output in China in 2016 will be a positive or negative contribution to EPS? And should we expect a positive contribution in 2017 from the China fab?
So let me think. There will be some pretty significant costs and that's in the gross margin recon associated with the start up of the factory in China. And we'll be in production in the back half of the year, but we're just ramping production. So I think if you were just looking at 6 month time period, you'd say it's kind of negative and you can see it in the gross margin. It's a slight negative on the gross margin.
It doesn't change the fact that we make these investments and then we get this, what I would say, tremendous long term benefit out of making that investment. So that doesn't I don't want you to take from that that we're somehow less bullish on the transformational capabilities of what the team has managed to pull off at 3 d XPoint because we're actually quite bullish on that.
Great, thanks.
Thank you. And our final question comes from the line of Timothy Arcuri of Cowen and Company. Your line is now open.
Thanks a lot. I just had a question again on the depreciation change. I know, Stacy, you talked about it being due to reuse. But I guess relative to just the fundamental cadence of the migrations, your intent has been to get sort of back on a normal Moore's Law cadence. I just want to make sure that that's still the case.
Yes. So we've said that this is Brian by the way, not Stacy, that 10 nanometers would be closer to that 2.5 years than the 2 years that we would continue to strive to get back on 2 years. Some of that was how as we go to define 7 nanometers, what the complexity of technology looks like, whether EUV is ready or not. But absolutely, we're pushing to get back on that 2 year cadence.
Yes. I would just add, please don't take the accounting of the depreciable life to be somehow a signal that we're letting our foot off the gas on process technology cadence and process technology leadership. That's the heartbeat of the pretty clearly 5 years as we go forward. Right. Okay.
Pretty clearly 5 years as we go forward.
Right, okay, got it. And then just last question, so on the mobile group, at the Investor Day, you talked about another $800,000,000 improvement this year in the losses. Is this still the target? And maybe talk about the progress there and whether we could see any momentum for smartphone this year with 7,360?
Thanks a lot. So it's absolutely still the target. That has not changed one bit. It's a little early in the year to talk about progress. We have I'd tell you that we have a large percentage of that $800,000,000 already, I'll call it, planned out.
In other words, we have projects, we know what we need to do, introduce products, align which SKUs are coming and move dollars of dollars of it or something like that, not here in the second, 3rd week of the year. 7,360, it's out, it's sampling, the customers are going through their validations now at the systems where they are building up systems and out testing them on networks and so forth. And as far as the launches of those systems and the announcements, those are always up to our customers, and we don't make sure that we are the ones announcing that. And then what we've told you is that what's even as important is that we're on a yearly cadence now of our modem technology. And we're very confident on that as well for the next set of modems that comes out after the 7,360.
Thanks,
may all disconnect. Everyone have a great day.