英特爾 (INTC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Intel Corporation's second-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Mark Henninger, Head of Intel Investor Relations.

Sir, you may begin.

Thank you, Sayed, and welcome everyone to Intel's second-quarter 2014 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 have not received both documents, they are 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 will hear brief remarks from both of them, followed by Q&A.

Before we begin, let me remind everyone that today's discussions contain 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 risk factors that could cause actual results to differ materially.

Also, if during this call we use any non-GAAP financial measures or references, we'll post the appropriate GAAP financial reconciliation to our investor website, INTC.com.

So with that, let me hand it over to Brian.

Thanks, Mark.

The second quarter exceeded our expectations.

The improving economic environment, PC refresh, form factor innovation, and the end of life of Windows XP combined to drive better than expected demand.

In fact, microprocessor volume in the second quarter was an all-time record.

From the most powerful super computers to the smallest energy efficient embedded machines, the breadth and strength of our results suggest that our reach is extending.

The PC Client group's results reflect the third consecutive quarter of year-over-year unit growth.

In Q2, both the desktop platform revenue and the notebook platform revenue grew year-over-year.

The installed base of PCs that are at least four years old is now roughly 600 million units, and we are seeing clear signs of a refresh in the enterprise and small and medium businesses.

While there are some signs of renewed consumer interest and activity, the consumer segment remains challenging, primarily in the emerging markets.

The Baytrail family of SoCs has been a stand out that has helped us expand into new segments.

Baytrail's performance allows us to deliver a much smaller and lower cost Atom-based core in our Pentium and Celeron brands, for the first time.

Our Baytrail SoC volume in desktops and clamshells more than doubled over the last quarter, and now represents more than 60% of our Pentium and Celeron mix, and nearly 20% of our notebook mix.

This is enabling our growth at lower price points and in new segments like Chrome-based systems, without sacrificing margin.

The Data Center business had a strong quarter, with 19% growth year-over-year, leading to all-time record revenue of $3.5 billion.

Following last quarter's launch of the Ivy Bridge-based Xeon E7 processor family, we saw strong MP volume and a richer product mix and ASP mix.

Cloud, networking, high performance computing, and enterprise revenue all grew more than 15% in the second quarter.

Demand and revenue growth in several segments demonstrated the growing reach of Intel technology beyond CPUs for PCs and servers.

Our Internet of Things group grew 24% year-over-year and set a revenue record, as the retail and manufacturing sectors performed especially well.

NAND revenue grew 20%, and McAfee revenue grew 5%.

Finally, we are squarely on track to our 40 million unit tablet goal, shipping 10 million units in the second quarter.

We also achieved some important milestones during the quarter.

We qualified the first Broadwell based Core M processors, and at Computex, we highlighted the form factor innovation that 14 nanometer Core M product family will enable.

Systems like our Llama Mountain reference design, a fanless, detachable, 2-in-1 that is razor thin at 7.2-millimeters, and weighs just 24 ounces.

We also announced a landmark strategic relationship with Rockchip to accelerate and expand our SoC road map for the value and entry tablet market segment, and our foundry business announced that Panasonic joined the growing list of companies that will use our leading edge 14-nanometer process technology.

While I'm pleased with the second quarter results, and the strength in the enterprise and small and medium businesses, we're watching for signs of sell-through in consumer PCs in the second half of this year.

Additionally, we have important work to do in the months ahead.

We are working towards qualification of our 7260, a category 6 LTE product with carrier aggregation, early this quarter.

And later this quarter, we'll launch our next generation Haswell-based Xeon E5 platform, code named Grantley.

We also expect the first 14-nanometer Broadwell Core M processor-based systems, including fanless 2-in-1s will be on shelves for the holiday selling season, followed by broader OEM availability in the first half of 2015.

And SoFIA, our integrated baseband and apps processor for smartphones and tablets, remains on track for Q4 of this year.

All of this work is critical to growing the business.

Along with our earning results, we announced a $20 billion increase to our buyback authorization, and intend to pursue a sizeable repurchase of stock over the second half of the year.

Stacy will talk more specifically about our plans, but this change to our capital structure and allocation is a direct result of our ongoing commitment to delivering shareholder value, and the thoughtful stewardship of our owners' capital.

With that, let me turn the call over to Stacy.

Thanks, Brian.

The second quarter came in above the expectations we provided in the April earnings call, and consistent with the revised outlook we released on June 12.

It was a good quarter, representing financial growth and solid momentum, as we enter the second half of the year.

Focusing on our second-quarter results, revenue came in at $13.8 billion, up 8% from a year ago.

Both the PC Client group and the Data Center group achieved better growth than we expected at the beginning of the quarter.

PC Client group revenue was up 6% from a year ago.

We saw PC Client group platform unit volumes grow 9% year-over-year, and inclusive of tablets, we saw almost 20% unit growth.

PC platform average selling prices declined 4% on a year-on-year basis.

Our Data Center group revenue grew 19% from a year ago, with platform volumes up 9%, and platform average selling prices up 11% over the same period.

Looking beyond the PC and Data Center businesses, the Mobile and Communications group was down 83% from a year ago.

The underlying dynamics are consistent with what we shared at the investor meeting last November.

We are ahead of our expectations in tablet volume, with the billing increases being offset with an increase in contra revenue dollars.

We are seeing a decline in our feature phone and 2G and 3G Multicom business, as the industry transitions to integrated LTE solutions.

The Internet of Things Group is up 24% year on year.

We continue to see robust growth across segments, with particular strength in the retail and manufacturing segments.

Gross margin of 64.5% was up almost 5 points from the first quarter and 1.5 points above our original Q2 guidance.

The 5 point increase relative to the first quarter is due to lower 14-nanometer start-up costs, higher platform volumes, and lower platform unit costs.

Spending came in at $4.9 billion in line with our revised outlook provided on June 12.

Net income for the second quarter was $2.8 billion, up 40% from a year ago, and earnings per share was $0.55, up 41% from a year ago.

The business continued to generate significant cash, with over $5 billion of cash from operations in Q2.

We purchased $2.8 billion in capital assets, paid $1.1 billion in dividends, and repurchased over $2 billion of stock.

Total cash balance at the end of the quarter was roughly $17 billion, down approximately $1.7 billion from the prior quarter.

Our net cash balance, total cash less debt, is approximately $4 billion, and inclusive of our other longer-term investments, is closer to $7.5 billion.

Our capital allocation philosophy is to first invest in our business, then generate shareholder returns through our dividend, and then to return cash to shareholders via stock repurchases.

Our business generates healthy free cash flow through economic cycles, but as a result of this capital allocation philosophy, we have brought down our net cash balances, plus longer term investments, from over $23 billion in 2010 to around $7.5 billion today.

We plan to continue our journey of returning cash to our shareholders by adjusting our capital structure to further bring down our net cash balances.

The intention is to repurchase $4 billion of stock in the third quarter, with additional buybacks in Q4.

This strategy enables the sufficient liquidity for our operations, and provides strategic flexibility to invest in our business, while continuing to return cash to our shareholders.

As we look forward to the third quarter of 2014, we are forecasting the midpoint of the revenue range at $14.4 billion, up 4% from the second quarter.

This forecast is in line with the average seasonal increase for the third quarter that we have seen over the last several years.

We are forecasting the midpoint of the gross margin range for the third quarter to be 66%.

The 1.5 point increase from the second quarter is primarily driven by lower platform unit costs, and higher platform volumes.

This is partially offset by lower platform average selling prices.

Turning to full-year 2014, we are planning for revenue growth relative to last year that is approximately 5%.

We are forecasting the midpoint of our gross margin range at 63%, up 2 points from the midpoint of the outlook provided on April 15.

This increase is primarily driven by lower platform unit costs, higher platform volumes, partially offset by lower platform average selling prices.

As I reflect on the first half of 2014, I believe the strategies that we have put in place for this year are playing out nicely to extend the reach of Intel technologies across the spectrum of the smallest embedded devices, to the most powerful super computers.

We have seen better than expected trends in the overall PC market, with strength in both non-consumer and desktop segments.

We are enabling innovative 2-in-1 devices and lower price points, and we are growing our market segment share.

We have brought new products into the data center, which drive a strong return on investment for our customers to upgrade their infrastructure, and we are benefiting from both our product line up and the build-out of the cloud.

The Internet of Things business is growing fast, as we bring intelligence to more and more devices, and we are making investments in communications and tablets that benefit the breadth of our businesses, and set us up for improving financial results going forward.

As a result of these trends and our execution, our financial results are improving, we are generating free cash flow, and we are returning more of that cash to our shareholders.

With that, let me turn it back over to Mark.

Okay, thank you, Brian and Stacy.

Moving on to the Q&A, as is our normal practice, we would ask each participant to ask one question, and just one follow-up, if you have one.

Sayed, please go ahead and introduce our first questioner.

(Operator Instructions)

Our first question comes from Vivek Arya from Bank of America.

I have the first question on the PC side, and the second one on smartphones.

So Brian, on the PC side, obviously good growth in enterprise, and the obvious question is how long does that last?

And then I think you had mentioned in your comments that consumer has not yet recovered, and the industry has tried lots of things, different form factors, price points et cetera, but it has not seemed to revive the consumer, so what will it take to revive the consumer side, because that will be an important factor for next year on the PC market.

Sure.

So let me try and answer your questions.

The first one was good growth on the enterprise side, small and medium business, how long will it last?

We think it's driven by multi-factors, driven by the good form factors, the 600 million systems four years or older, new price points, and Windows XP end of life, so all those things are coming together to drive this.

We see it at least lasting through this year, we believe, and that's built into our forecast.

So that's as far as we're looking out today.

The second part of your question was what does it take to reinvigorate the consumer?

We've got a lot of things lined up for the second half of this year to work on that, everything from marketing, to really, we talked about in the call, the Core M Broadwells.

Those are going to allow really a whole new class of system as we go out through the holidays and into next year, where they are 2-in-1 devices but they now become fanless, ultra thin, very portable, long battery life, strong Core performance or Core-like performance.

We believe that will bring another class of system into the market as well, along with just an overall general refresh of many, many of the form factors.

We think that all of those things will start to move it, but that is part of why we have put this caution on, we're still going to watch as the consumer trend goes through the second half of this year.

Understand, and as my follow-up, you have said previously that you plan to bring baseband production in house, it's at TSMC today, but I think you'd said in the past you plan to bring it in house some time late next year, or 2016.

Is that still an important milestone, are you on track to do that, and importantly, will it require any incremental CapEx or OpEx?

Thank you.

So yes, we're still, it is still important to bring the baseband, and it's always important, one of the real advantages of Intel is, it is an integrated device manufacturer, an IDM, and we believe that the integration of the process technology and the design and our leadership in Moore's Law just gives us a real advantage, when you look at that whole ecosystem.

So it's always critical for all of our products to move them inside as fast as we can.

And yes, we're still targeting towards the end of 2015 or beginning of 2016 to move those products inside.

I'd just say to the last part of your second question, from an OpEx standpoint, it's in our run rate.

We're investing in the modem technology today, and from a CapEx standpoint, it won't meaningfully move the needle in terms of CapEx.

Okay, thank you.

Our next question comes from Joe Moore from Morgan Stanley.

It was really nice gross margin guidance, and if I look back historically a couple years ago, I think four years ago, you had some gross margin headwinds in mid-year when you ramped all of the fabs on the new process at once.

And obviously you don't seem to be seeing those headwinds in Q3.

Am I thinking about that the right way, and is there still some cost of ramping 14-nanometer that's still ahead of us?

Yes, so yes, you're thinking about that the right way, and I think if you do the algebra and you look at our actual gross margin in Q1 and Q2, and the projection for Q3, you're going to come up with a number in Q4 that comes down a few points from what we're forecasting for Q3.

We haven't locked in on the forecast yet, but it's down a bit, and that is exactly the phenomenon of what you said.

When we get to Q4, we're ramping multiple 14-nanometer factors simultaneously.

We think we'll see a little bit of an increase in cost in Q4, and in addition in the fourth quarter, because our 14-nanometer products, Broadwell is a family of products, we'll still see some pre-PRQ quals that will cause reserves to go up a little bit in Q4, is our best prediction at this time.

Okay, great, thank you.

Separately looking at the buyback, what's the time frame of the $20 billion repurchase, and can you talk about what's the optimal net cash level that you'd like to maintain on the balance sheet?

Yes, great question.

Let me answer the second one first, because I'm not actually giving you a ton of clarity on the timeline of the $20 billion.

But if you think about this as a multi-year focus that we've had, I think you can see this playing out, and if you go back to 2010, as I said in my prepared remarks, and you look at net cash plus some of the other investments that the Treasury group makes, we had a net cash balance that was running in the mid to high $20 billions back then.

We've brought it down to sub $10 billion as of Q2.

I think it's really a sign, and along the way, we've stress tested our business in terms of cash generation through things like the economic downturn, and it's increased our confidence that we generate free cash flow even in macroeconomic situations that are less favorable.

So we're taking the next step there to bring cash balances down further.

From my perspective as CFO, if we're targeting with the definition of cash I just gave, something around zero net cash, it still gives us a positive gross cash balance, we have plenty of cash for strategic reasons and operational reasons, that feels like a pretty comfortable number.

And then to do that, we'll do $4 billion of buyback in Q3 on top of the $2 billion that we executed to in Q2.

We'll do another sizeable buyback in Q4, TBD exactly the size of that, that will get us pretty close to that goal.

And then you can do the math of cash generation next year, and figure out how, in your model, we'll go through the $20 billion, but I think we'll go through a chunk of it just over the next six months.

Great, thank you very much.

Thank you.

Our next question comes from John Pitzer from Credit Suisse.

Brian and Stacy, congratulations on the strong results.

Brian, my first question is just, whether or not you can go into more detail into DCG and with ASPs being up 11%.

I know you gave us some color in your commentary, but I'm curious, to what extent was that a better mix of enterprise, was it hyperscale mixing up even more than they did in the calendar first quarter?

And to the extent you said that Grantley doesn't come until this calendar quarter, I'm curious how you see that ramp playing out, and how accretive that might be to the data center business.

Sure, I'll start and Stacy can add in since we've got a mix of the product, and then how the financials roll into that as well.

I think if you just take a look, what we said, if you look back at the remarks, we said almost all of the segments of the enterprise were up 15%, that was a mix of volume and ASPs across-the-board there.

You were correct that Grantley doesn't go until this quarter, but we did continue to launch the E7 during this quarter, and see that ramp, which definitely helps our ASP and overall product mix.

Every one of these launches is a little bit different.

They always have a mix of what are our customers doing.

If you just take a look at the data center volume in general, it tends to be a bit lumpy, the big orders, as people fill out their data centers, whether it's an HPC order, or a cloud order, or an enterprise order, they tend to come in big pieces.

And so as we move into the Grantley launch, we'll have to see how the customers place their orders, and what the volume is.

So we don't look at it as on a quarterly basis when we look at something like a Grantley launch.

We really look at it over a longer period of time.

Over a longer period of time, we think it's going to be a very powerful product, but exactly how that transition will occur, we don't try and look at it that closely on a quarterly basis.

If I may just add a couple of things, John.

So in terms of the Q2 ASP uplift, as Brian said, it's a combination of things.

But one thing you need to keep in mind, we are shipping and selling Grantley today into cloud and HPC customers, and we saw the E7 moving into production.

So you've got a combination of things in the second quarter And I think where Brian was taking you is, we are really happy with that 19% growth rate in the second quarter, but we are expecting a nice robust growth rate when we move into the back half, but not 19%.

We think there was some specific purchasing going on with some of the large cloud providers, that probably don't repeat exactly, as we get into the back half.

That's helpful, and then Stacy, going to solving the algebraic equation for Q4 gross margins, it implies gross margins could be down as much as 400 basis points sequentially, if I'm doing the math right.

And that would be about 2x kind of the hit you saw as you were ramping the 22-nanometer node about a year ago.

And I'm just kind of curious, is that because you're ramping more volume, and there's clearly been a lot of speculation about how 14 is going and how Broadwell is going in the popular press, so I'm wondering if you can comment whether or not the margin trends you're seeing in the calendar fourth quarter are as expected, and generally just characterize how that 14-nanometer Broadwell ramp is going from your perspective?

Sure, and I'll let Brian come in on the 14-nanometer, I'll help you with the algebra.

So first, we have to be careful not to get trapped in the rounding here, because if you're at 0.2 on gross margin and you get to a different answer for the Q4 number, I'd expect it to be down a bit, but there's nothing untoward there, other than the fact that we're ramping multiple factories at once, and that we'll still have some -- the way Broadwell is rolling out as a family of products, we'll have some pre-production builds that will cause reserves to go up.

So I guess it would be cautious, it will be down some, but I wouldn't hit any alarm bells.

There's nothing beyond that, that's happening in the fourth quarter.

In terms of 14-nanometer, I'll let Brian take that more from the operational standpoint.

Yes.

14-nanometer, it's going along exactly as we said in April.

We said we would, during this quarter, qualify, and we did qualify our 14-nanometer product and we actually are shipping product today to our customers and partners.

We said we would have products on shelves for the holiday season, and we continue to work with our partners, and we're on schedule to have product on shelves in the holiday.

We talked to you about this.

We focused on Core M which is the Broadwell part that we think really highlights the power of 14-nanometers, and the Broadwell architecture.

As I said, it will be the first class of PC, core-level PC products that are fanless.

We talked to you about the Llama Mountain product, 7.2-millimeters thick, 24 ounces in weight, fanless, those are going to be devices that we think will start to transform how people think about a 2-in-1 device, and the PC versus the tablet.

That's what we focused on.

The rest of the products as we said will launch and ramp as we go through 2015.

Thanks, and congratulations again.

Our next question comes from Jim Covello from Goldman Sachs.

Congratulations.

You, Stacy, have been real helpful in giving us an idea for the algebra for the gross margins in the fourth quarter.

If I'd do the same on the revenues, it looks like flattish revenues, which is would be a little bit below seasonal.

You have done a great job executing versus your plan the last couple quarters.

Are you leaving some room for conservatism in there, or is that more a function of the XP end of life, which Brian referred to, playing itself out?

Thank you.

I wouldn't say conservatism.

It's exactly what Brian said, which is, we've seen nice indications of strength in enterprise and mature, and we can see those selling through.

What we're seeing from our customers is more optimism on the back half than we've seen the last couple of years for the consumer segment, but we won't see the sell-through data on that for a while yet.

And so what we have in for Q3 is a roughly seasonal third quarter, and if you look at the last few years, you'd see a flattish Q4 as also being roughly seasonal, so nothing unusual there.

And we're really watching carefully what happens in the consumer segment.

We've got some great devices coming to the market, and to add-on to Brian's answer earlier, one of the things that's really exciting is the price points that we're enabling with Baytrail in terms of touch-enabled clamshells, we think that those will shift share and drive excitement in the market, but we just have to watch it.

Jim, the only thing I would add is, what I said was, we believe the XP end of life replacement will at least play through the end of the year, that's as far as we've looked at it.

It could go beyond that.

What I'm not doing is predicting 2015 yet, and that was really -- don't want you to walk away with, I think that's the end of it, versus we just haven't really started to put our predictions and our estimates for 2015 together yet.

That's very, very helpful, and I'll leave it there on the questions.

That's great, thank you.

Our next question comes from Ross Seymore from Deutsche Bank.

One clarification I think might be helpful to people.

Can you just give us a rough idea in your PC Client group how much of that is the commercial side, and how much is consumer?

Of the overall, you're saying how much of the business?

In terms of the TAM?

So I'll give you some high level numbers.

I actually haven't looked at it this way in awhile, Ross, so I'll put an asterisk by this data, that could be off a little bit.

But what we've seen generally in the PC market is a shift.

If you go back four or five years it was 60%-plus business and 40% consumer, and those numbers have shifted.

It's 60%-plus consumer now, and 40% business.

Just in rough numbers, I think that's true for the market.

And that is our estimate, and it's very difficult to track this down to the percentage, especially small and medium business, they go into the same place consumers do a lot, to buy a system, so tracking where does that system go, end up, is a bit difficult but 60/40 is probably not far off.

I guess really what I was getting at is, is that representative for Intel as well, or are you a little more skewed?

I realize you have the dominant market share, but it's within good enough for government's work to have that sort of approximation?

That would be indicative of our mix.

Our mix is going to look like the market's mix for the most part.

Got you.

And then getting off that topic to one that's a little more specific to you, Stacy, you talked to an earlier question, I think John asked about the gross margin in the fourth quarter and how much it was implied being down.

When you have those multiple fabs ramping at 14-nanometer, can you walk us through what a typical duration is of that higher-cost inventory working its way through before the lower-cost benefits actually start to kick in?

It's probably a couple of quarters, is the way to think about it.

The first wafers that from qualification for sale, you have the phenomenon of a big factory that's fully equipped with pretty small amounts of volume going through it, but we ramp the factories pretty fast.

So within a couple quarters we're getting to the point that the factories are ramped, and then the costs would continue to come down for another 12 months or so, after that.

Great, thank you.

Our next question comes from David Wong from Wells Fargo.

With the current schedule for the Broadwell ramp on 14-nanometers, what are your expectations for 10-nanometer timing, and will there be a follow-on 14-nanometer family after Broadwell or as you go straight to 10-nanometers?

Let me try to answer your question.

There's a series of products that are 14-nanometers.

We always, remember, do a Tick-Tock product, plus we do a refresh of the Atom line typically.

So we have Cherry Trail coming in at the end of this year, and ramping in the first half.

We have Broxton, which is a follow on Atom product, as well.

And then the Tock or the real architectural shift on 14-nanometers, is Skylake, which is also scheduled for 2015.

We've done no changes or shifts to our 10-nanometer schedule, but we won't talk about 10-nanometer schedules until next year.

Okay, great, and could you give us any numbers on your 4G baseband unit shipments or revenue for June, and the growth momentum going into September for 4G basebands?

Yes, low.

LTE, and this is pretty consistent with what we had showed at the investor meeting, we're just moving into qualification of LTE, as Brian said in his remarks, it's a little bit later than we thought, so we thought it was going to be the end of Q2.

It's now going to be the early part of Q3, and then we'll see a ramp that is offset, it's going to be more towards the end of this year or early next year.

And in the meantime, the market is transitioning hard away from the 2G 3G platform to LTE, so that part of the curve is consistent with what we saw, and you can see it in our overall revenue results in the second quarter for this segment.

Great, thanks.

Thank you.

Our next question comes from Michael McConnell from Pacific Crest Securities.

Looking at just the traditional enterprise segment of DCG, it's encouraging to see that recovery here in Q2.

Regarding sustainability, with Grantley coming out this Fall, and then Microsoft planning to end of life Windows Server 2003 in July, can you comment on the sustainability within that bucket, within DCG?

Are you getting more confident we could see multiple quarters of a recovery there, please?

Sure, I'll start, and Stacy can jump in.

When you take a look at the data center in general, and this gets back to that comment we made earlier about the lumpiness of each one of these segments.

We said that we believe we can continue to grow the data center in the low double digits, out into time, of which the enterprise is a portion of that.

As we said, this quarter was extremely strong in the enterprise, and we don't necessarily -- there was a lumpiness or kind of a pattern to the orders, where customers that came in and made some purchases.

What we've built into that low single -- or the double digits for the whole data center is an enterprise that's in the mid-ish single digits growth over time, so that's more what we've projected.

We do believe Grantley will be a good product.

The enterprise, so we think that it's still going to grow at about that mid range.

Okay and then just for my follow-up, I wanted to ask about market share in Q2.

If I look at PCG, volumes were up about 4% year-over-year, IDC just reported about a 2% decline in overall PC sales, and you had some pretty optimistic commentary on volumes for Baytrail on the desktop and the notebook side.

So that growth relative to the market, that outsized growth, was that mostly market share gains or was it something else to deal with maybe inventory build, et cetera?

I think that it's a couple of things.

One is I think it's pretty clear to us that we are gaining some share, and it's not just from the traditional competitors.

I think we're seeing, at these price points, some shift back of tablet, where we're shipping a really nice 2-in-1 type clamshell, touch-enabled clamshell into these price points, so that's a piece of it.

And then I think the other piece is if you're -- as you look at this in terms of year-on-year comparisons, if you'll recall, last year what we saw is our customers were managing inventories very, very lean.

I think they had very little confidence in a back half seasonal selling season, and so part of it is just the year-on-year comparison.

What they're doing now is putting in more of a normal build for a more seasonal back half, and last year that was not the case, so it's a combination of those two things.

Thank you.

Our next question comes from Stacy Rasgon from Sanford Bernstein.

I had a first question on the tablets and the contra revenue.

Presumably you've got tablets ramping into Q3 and into the back half, but you are not calling out contra revenues as a margin driver for Q3.

Is this a function of the tablet volume, or is this a function of contra revenues rolling off?

I think they were supposed to start to decline as we go through the year.

Any color you could give us on that would be helpful.

So let me start with just kind of an overall, Stacy, discussion on the tablets, and then I'll let our Stacy comment on the contra versus margin discussion.

We are on schedule for our 40 million.

We did 10 million in Q2, so we did roughly 5 million in the first quarter, 10 million in the second quarter, so you can kind of break out how the rest of the 40 million come in Q3 and Q4, which, clearly Q4 being probably the bigger of the two quarters remaining.

We did say that we would continue to drive down our costs and hence the contra revenue, and we are continuing to do that.

Baytrail adds to that capability.

As we exit this year, we said that we're on schedule with SoFIA.

SoFIA is a fully integrated part, really designed for this segment.

That allows us to move into 2015 with a much, much better cost structure and really drive down the contra revenue to near zero on those products.

So we are on schedule as far as we had stated through the year, of what we're doing at our cost reductions, and driving down the contra.

I'll let Stacy comment on how contra is reported versus the margin.

Yes, so you're getting into a little bit of, I think, a math issue, here, Stacy.

Let me walk you through it.

First we saw more or less a full point of margin in Q2 associated with that ramp of tablets.

If you think about the volume curve that Brian just laid out, let's take a precise number of 40 million just to anchor, we did 15 million in the first half, that says -- and we did 10 million in Q2, that says you have 25 million to do in Q3 and Q4, say it's 12.5 million per quarter, it's not really that linear, but just take that for the sake of argument.

The change isn't that great, so you're really into a change in gross margin dollars that doesn't add up to something significant, or else it would have been on the gross margin recon.

Got it, so you're close to the run rate anyway?

Exactly.

So you saw the big change in Q1 to Q2, where it was a full point of gross margin impact.

It was a little hidden, it's on the recon, but it's a little hidden in the fact that we were up 5 points quarter on quarter.

Got it, that's helpful.

For my follow-up question I wanted to dig into mobile a little bit.

I don't want to take away from the results from the rest of the business, which arguably look quite strong, but at this point until it picks up, there isn't much of a mobile business to speak of anymore.

I was wondering if you could give us more of a feeling for how mobile presence fits into the long term goals.

Are you in this for the profit pool that's available, or is this a strategic imperative, for the rest of your businesses to succeed here?

I guess what milestone should we be looking for, and how do you see the loss rate in this business trending into the second half and into 2015, as presumably some of the new products around 4G hopefully start to ramp?

Sure, so I'll start this, and again Stacy can jump in on the profit side.

The answer to your question, Stacy, is a bit of yes to both.

Clearly we don't go into businesses to lose money, and we believe that over time, we can make this a profitable business.

We have some ground to make up both in getting our LTE to Cat 6, and in our products being specifically designed for this segment.

We said, we moved some of the early products, Clover Trail and Baytrail that were really targeted towards clamshells and almost the netbook era, down into this space to get there quickly.

And as we turn into SoFIA next year, and you'll see a family of products from SoFIA, including some from Rockchip, you'll see us really targeting this space, and that's how we become profitable in this space.

But aside from that, this is we believe a strategic area for us.

We are seeing, we've talked about all of our products that become more personal, more mobile, more connected, and we're seeing modems work their way into PCs, for example, especially 2-in-1 devices.

It's going to probably start with Chromebooks.

Chromebooks are best when they're connected, and so the always-connected requirement is going to drive modems into there, for example.

But you can go from the PC down through tablets, phones, and into the Internet of Things, in the industrial space where you're looking at a pump that's out in the middle of the desert someplace or wherever, it's going to want a 2G or 3G connection, probably to get that data back into the system.

So we believe modems and connectivity in this space is critical to almost every segment of our business, but we also believe that we can be in this mobile space and make money, we just got to get our products there and get the right price structures.

Got it.

Well said.

Let me -- I'll specifically answer the second part of your question too.

So just looking at it from the reciprocal from the CFO seat, if we don't have the ability to integrate in comms, I think three or four years from now we are locked out of large segments of the market.

So it's a critical capability.

That said, we acknowledge that's a big loss, and our goal and our plans will suggest that we will have a significant improvement in this segment next year.

It won't be profitable, but we should be able to improve it nicely next year and stay on that trend.

That's what we are guiding the business to.

Thank you.

Our next question comes from Romit Shah from Nomura Securities.

Great quarter.

I was hoping for some more color on the PC client business here in Q3.

Specifically, how you're projecting business versus consumer PC?

We don't break out that level of detail.

Did you mean Q3, or did you mean Q2?

Q3.

Yes, we don't break out that level of detail.

We don't even forecast to the segment level much less at a consumer versus enterprise inside the segment.

I guess I'd say from a market trend standpoint, we would expect that the same market trend that we've seen, which is relatively stronger enterprise, relatively stronger.

Mature markets are the more dominant factors in the quarter, and then a consumer market that's maybe a bit more seasonal, and continue to see some weakness in emerging markets.

But none of that is new news, it's just what we're seeing now, and so we're continuing those trends.

Okay thanks, and my follow-up is on the buyback, and trying to figure out the pace of the $20 billion repurchase.

Stacy, you shared with us that roughly $6 billion is in US cash, which is about a third of your total cash balance.

If I just flow that through to cash flow, it would imply roughly $2 billion a quarter in US cash flow, before $1 billion in dividend and the CapEx commitment.

So I'm just struggling to see how you can fund this $20 billion buyback without going into a net debt position?

Appreciate your perspective on that.

I think, it was a little hard to follow that math on the fly, so I apologize.

But the way I would look at it is, we'll do $4 billion in Q3, that as you mentioned, comes out of US cash.

As we get into the back half of the year I expect that I'm generating cash, and that a reasonable amount of cash is available to me in the US.

So just simple math, net of any cash generation, I'll still have a couple billion dollars in the US.

I'll generate some cash that gives me a reasonable amount of potential to do another leg of this buyback in Q4.

Did that answer your question?

Yes, that's helpful, thank you.

Our next question comes from Hans Mosesmann from Raymond James.

Congratulations on the quarter.

Brian, just going back to the 14-nanometer Broadwell, the availability to OEMs in the first half of 2015 seems to be about a year late.

I understand that you made comments about Core M in April and that's on track, but what's driving the delay for the broader portfolio of Broadwell products, and the follow-up is, what does that do, if anything to the cadence of Tick-Tock?

Thanks.

I wouldn't have said we're a year late.

I'd tell you we're six months.

We targeted Broadwell M, the Core M, because we really feel like it's the product that highlights -- the real power of 14-nanometer is in Broadwell, right?

It's the one that's going to really target the fanless, thin and light, highly mobile systems, which is really going to differentiate, I think, in my mind, 14-nanometer from prior technologies.

It will be the technology that brought the fanless PC to your laptop.

Every one of these process nodes that we do, takes, if you take a look at it, as going all the way out through the mobile products, the desktop products, the server products, the Atom products, it's always a year and a half of product launch, to be honest with you.

Every one of these, by the time we get to the E7 version.

Look, we're still launching the Haswell server products this quarter, and that's a technology that's more than two years old, so that part, and the broader availability of more SKUs out into next year, six months, yes, it's not a year.

And you'll see a series of products through next year.

Right now, we are still, it's always a shift between our customers and OEM partners' availability and readiness to do a new SKU and our readiness of the product.

They will move as we move through the year next year.

I think what's key to me is that the process is healthy, we've got the product in a yield capability, right?

To be able to launch we have a set of criteria that we use on every technology, so it will be shipping to customers.

It has met that quality requirement, those yield requirements, and that's -- we are shipping to customers today, and you are going to have product on shelf.

Just as a follow-up, does that delay Skylark by six months?

Skylake?

We're still looking at the actual launch date.

We've said it's in 2015, so it's a pretty broad window there.

We're trying to pin down, and I think as we go through the second half of this year, we'll pin down exactly when Skylake will come to market.

Again, it's going to be a -- as we launch these other Broadwell products when do the OEMs [convince] consumers, everybody, when are they ready for Skylake.

That will drive it as much as anything on the process readiness and the product readiness.

Thank you.

Thanks, Hans, and operator, we'll go ahead and take two more questions.

Our next question comes from Christopher Rolland from FBR Capital Markets.

Great quarter.

Thanks for letting me ask a question.

I missed a brief segment there, so forgive me if this was asked.

But on PC guidance and operating profits for the PC segment, you previously said down, I think it was, mid single digits there, and op profits were flat.

And I guess given the strong results here, and guidance, can you update us for the year?

Sure, well I would say that guidance is no longer valid, based on what we saw in the first half.

So on the PC market, if you look at some of the third parties out there, you get a range of estimates, and actually, they're fairly divergent at this point.

Some of the ones I was looking at earlier today show a PC TAM that is flat, maybe down a little bit, once you adjust for things like Chromebooks and 2-in-1s and detachables.

I don't think we would be far off of that from the standpoint from our view of the TAM, and then we'll see, we believe, some unit growth based on the things we talked about earlier, more normal inventory levels, and more importantly, some share gain, and that will equate to some revenue growth for us.

We haven't got more granular than that, and I probably won't get more granular than that at this point.

We'll just watch the results play out in the back half.

Last time I looked I think Gartner was down maybe 3%, so that discrepancy is growing pretty dramatically there.

One caveat, and it has gotten really confusing because we see these form factors all coming together, and so you have to get really precise about what you call a PC client.

In our PCCG results, we would include Chromebooks, we would include 2-in-1s, things like the Microsoft Surface, we would include detachables, so yes, the definitions become pretty important here in terms of what are they counting, versus what shows up in PCCG.

Okay, great, and then on the 4% sequential growth for next quarter, maybe you can give us a little color on to -- force rank perhaps those segments where you see the most strength.

Chris we'll answer that one as a courtesy, but I just want to remind everyone, we asked people to ask just one question and one follow-up, thanks.

I'm sorry, could you say the question again?

Yes, just some color on the 4% sequential growth for next quarter, how that shakes out between the segments?

We're not going to provide that level of granularity.

I'll just step back and say it's roughly seasonal, based on what we've seen in the last several years, and it feels like the right place to be after a fairly strong first half.

Thanks, great quarter.

Operator, please go ahead and introduce our last question.

Thank you.

Our next question comes from Ian Ing from MKM Partners.

First question in the foundry.

You've been highlighting this 3.5 year manufacturing lead.

Any other improvements in your foundry offerings or collateral?

As you target the next node, it seems the window is closing here to go after some new 14-nanometer customers.

So you saw we signed up Panasonic this quarter.

They're, we're still in discussions with several other potential partners, so I wouldn't necessarily agree that the window is closing, even on 14-nanometers.

We have already started carrying the learning though, we've had, on 14-nanometers from all segments, both from our own efforts into the mobile space, our partnerships with our current foundry partners, the work we've done with third parties in design, like Synopsys and Cadence.

So we are carrying that off into the 10-nanometer space, and we already have people that are talking to us about 10-nanometer at foundry.

But I guess I wouldn't have said that the 14-nanometer window is closing.

I mean, if you still take a look at the 14-nanometer technology relative to what anything else is available out there, we're still the only Company on the planet who's shipping a thin set transistor of any geometry, and we're clearly the only people out shipping 14-nanometer products.

So I think our leadership is, we've got some window where people could still jump in and have a leadership product.

Okay thanks, Brian.

And then housekeeping for Stacy, domestic versus overseas cash, is there a mix there?

And should there be a repatriation holiday, would that free up even more cash for buybacks and dividends, or are those already being invested overseas?

So there is a mix, and we disclose it.

If you look at domestic cash and this is not taking into account some of the longer term investments, it's on the order of $6 billion out of the total.

In terms of our priorities from the standpoint of tax reform, we actually like to see a more comprehensive tax reform for corporations that bring down our tax rate to make it more in line with what we see in other industrialized countries, that's a bigger issue for us.

We're a big manufacturer, so the manufacturing credits become important, we think those help us create jobs here in the US.

The cash piece for us is less important than it is for maybe others, because remember, we generate cash all over the world, but we also make investments all over the world.

We have factories in Ireland and Israel and China and the US, and so we consume cash.

We don't end up with the same trapped cash problem that companies do that have minimal operations outside the US.

Thanks, I'll take it up with the politicians, then.

Sounds good.

Thanks, Ian, and thanks to the rest of you, as well, for joining us today.

Sayed, please go ahead and wrap up the call.

Thank you.

And ladies and gentlemen, thank you for participating in today's conference.

This concludes your program for today.

You may all disconnect, and have a wonderful day.