英特爾 (INTC) 2014 Q3 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and welcome to the third quarter 2014 Intel Corporation earnings conference call.

  • (Operator Instructions)

  • As a reminder, today's conference is being recorded.

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

  • Please go ahead, sir.

  • - IR

  • Thank you, Jamie, and welcome everyone, to Intel's third 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'll hear brief remarks from both of them, followed by Q&A.

  • Before we begin, let me remind everyone 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, if we use any non-GAAP financial measures or references, we'll post the appropriate GAAP financial reconciliation to our investor website, INTC.com.

  • Finally, I'd like to remind everyone that we'll be hosting our annual investor meeting here in our Santa Clara headquarters, on Thursday, November 20.

  • If you have questions about the event or logistics, please contact Investor Relations.

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

  • - CEO

  • Thanks, Mark.

  • Our third-quarter results were consistent with our expectations, and included a number of important milestones.

  • Revenue and earnings per share both set new records, with strong performances from the PC and the Data Center Groups.

  • The trends we observed in the PC market last quarter continued, with stability in mature markets, offset by ongoing declines in emerging markets.

  • The PC Client Group launched Core M, a new family of products, with full Core performance in both compute and graphics in a fanless design, enabling breakthrough designs and form factors.

  • The first of these systems will be available by the end of this month.

  • In the data center, we saw double digit revenue growth across all four major market segments.

  • Enterprise grew 11%, Networking grew 16%, and HPC and Cloud service providers grew 22% and 34%, respectively.

  • We also launched the new Xeon E5 processor, formerly known as Grantley.

  • This product family provides leadership features and performance for compute, storage and network workloads.

  • Formally launched just five weeks ago, E5 is already 10% of our DP or two socket volume.

  • In the Mobile Communications Group, losses declined sequentially, and that's a trend we need to see continue.

  • Tablet volume was nearly 15 million units, and we remain on track to our 40 million unit goal for 2014.

  • Third parties estimate that we are now the second-largest tablet SoC vendor worldwide, and the largest among merchant suppliers.

  • In addition, Samsung chose our Cat 6 LTE modem with carrier aggregation, known as the 7260, for its recently-announced Galaxy Alpha and Galaxy Note 4. The strategic importance of these capabilities continues to grow.

  • Our LTE technology, which we originally developed for phones, is becoming increasingly valuable in tablets and even PCs, as wireless wide area network connectivity becomes increasingly common.

  • We estimate, for example, that by 2018, the rate of baseband attached to tablets will roughly double, and in PCs will rise to more than 15%.

  • Overall, we've made some good progress during this quarter, yet, we have important work left to do.

  • Within our factory network, 14-nanometer yields improved meaningfully, but were behind where we expected to be.

  • These challenges highlight just how difficult it has become to ramp advanced process technology.

  • I'm most pleased that our strategy for growth is beginning to yield results across a remarkably wide range of products.

  • We sold record volumes of PC, server, internet of things, phone, and tablet products.

  • The diversity and scale of our products uniquely position us across the breadth of devices that compute and connect.

  • Importantly, our results demonstrate that we are building on our success in the PC and data center segments, to successfully pursue adjacent opportunities.

  • These businesses are the source of tremendous intellectual property, and that IP creates valuable and important synergies that position us to compete in an increasingly diverse computing market.

  • Let me share a few examples.

  • At IDF, I showed the world's thinnest tablet, a Dell Venue with Intel RealSense technology.

  • It has an industry-first 3D camera that enables features like after the fact focusing, and a host of capabilities that have the potential to change how people engage with their photography.

  • That technology was first developed for PCs, and was adapted for tablets.

  • In this case, we're in a position to differentiate in tablets precisely because we invested in next generation technology for PCs.

  • Another example of IP synergy is the Atom microarchitecture.

  • We first brought Atom to market as an extension of the PC product family.

  • We've purposely evolved that IP to the point that it now spans from smartphones to tablets and mainstream PCs, and from storage, networking, and compute devices in the data center to the internet of things.

  • Lastly, I'm excited about the moves we're making to engage the ecosystem in new and potentially disruptive ways.

  • We're establishing our position and capabilities in emerging sectors like wearables, before they become mainstream.

  • The data center team is customizing our Xeon products for specific customers and workloads.

  • Custom SKUs now number roughly 35, and over the last year, volume from custom SKUs has grown at 3X the rate of our off-the-shelf products.

  • We're also striking groundbreaking strategic agreements.

  • Our recently announced collaborations with Rockchip, and more recently Spreadtrum, will provide new sources of innovation and a new set of partners that will work with us to scale Intel architecture.

  • Our vision is that if it's smart and connected, it's best with Intel.

  • The breadth of our results this quarter, our progress against our strategic goals, and the changes we're making in our approach to end markets leave me convinced that our strategy is working.

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

  • - CFO

  • Thanks, Brian.

  • The third quarter was the highest revenue in the Company's history, with overall results demonstrating solid financial growth as we approach the end of this year.

  • Focusing on our third-quarter results, revenue came in at $14.6 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 9% from a year ago.

  • We saw PC Client Group platform unit volumes grow 15% year-over-year, and inclusive of tablets, we saw almost 30% unit growth.

  • Of note, our notebook platform units grew over 20% year-over-year, as we are enabling innovative two-in-one devices and growing our market segment share with Bay Trail at lower price points.

  • Our Data Center Group revenue grew 16% from a year ago, with platform volumes up 6%, and platform average selling prices up 9%.

  • We are seeing robust growth rates across all the segments of our data center business.

  • Operating income for the third quarter was $4.5 billion, up $1 billion and 30% from a year ago.

  • Operating income in the PC Client Group was $4.1 billion, and in the Data Center Group, operating income was $1.9 billion.

  • The mobile and communications group had $1 billion of loss, which is an $81 million improvement from the second quarter.

  • The Company generated $3.3 billion of net income for the third quarter, up 12% from a year ago, and earnings per share was $0.66, up 14% from a year ago.

  • Our net inventory levels rose modestly quarter-over-quarter, as we are efficiently managing capacity, while ramping Broadwell on 14-nanometer.

  • The worldwide PC supply chain appears to be healthy, with inventory levels appropriate in anticipation of the fourth-quarter retail cycle.

  • Moving to gross margin.

  • Third-quarter gross margin of 65% was up 0.5 point from the second quarter, and down 1 point from our guidance.

  • The increase from the second quarter was primarily due to lower platform unit cost on 22-nanometer, and higher platform volume, mostly offset by higher production costs on 14-nanometer products.

  • Spending came in at $4.8 billion, $100 million lower than our outlook.

  • The overall decrease in spending was driven by efficiencies and one-time events like capital asset sales, partially offset by higher profit-dependent expenses.

  • The business continued to generate significant cash, with over $5.7 billion of cash from operations in Q3.

  • We purchased $2.4 billion in capital assets, paid $1.1 billion in dividends, and repurchased over $4 billion of stock.

  • Total cash balance at the end of the quarter was roughly $16 billion, down approximately $1.7 billion from the prior quarter.

  • Our net cash balance, total cash less debt, is approximately $2 billion, and inclusive of our other longer-term investments, it is more than $6 billion.

  • This is down by almost $2 billion from the second quarter.

  • As we look forward to the fourth quarter of 2014, we are forecasting the midpoint of the revenue range at $14.7 billion, up 1% from the third quarter.

  • This forecast is in line with the historical average seasonal increase for the fourth quarter.

  • We are forecasting the midpoint of the gross margin range for the fourth quarter to be 64%.

  • The 1 point decrease from the third quarter is driven by higher platform unit costs, higher factory start-up costs, primarily offset by lower production costs on 14-nanometer.

  • As we enter the fourth quarter, we are seeing our strategy play out in our financial results.

  • In the third quarter, we grew revenue 8%, and grew operating profit 30% versus last year.

  • We also shipped over 100 million units for the first time in our history, across a widening range of devices.

  • In the client segment, we are seeing robust growth in the PC segment as a result of innovation and enabling lower price points.

  • We've grown to be the largest merchant supplier of tablet silicon, and we are winning large designs with our LTE communications product.

  • And our internet of things business is ramping Atom-based products and growing.

  • In the data center, we continue to innovate our products, bring increased differentiation and value to our customer, and underlying all of this is our manufacturing leadership.

  • We have led the world to 14-nanometer and plan to do the same for 10-nanometer process technology.

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

  • - IR

  • Moving on to 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.

  • Jamie, please go ahead and introduce our first questioner.

  • Operator

  • (Operator Instructions)

  • Our first question comes from Ross Seymore from Deutsche Bank.

  • - Analyst

  • Congrats on the strong results.

  • One bigger-picture question, and then a smaller-picture one for my second follow-up please.

  • On the bigger-picture one, your units in the PC Client Group being up 15% year-over-year, can you talk a little bit about what you think is driving that in the PC market, that I think most of the third-party data provider says is flat, and do you think that delta can actually stay that large for a bit longer?

  • - CFO

  • Ross, this is Stacy.

  • I'll start it, and I think Brian will fill in some of the color commentary about what we're seeing in the end markets.

  • So yes, we've seen some of the third-party data.

  • When you adjust for some of the other form factors like Core-based tablets and things, I'd say our view of the end market, compared to say, an IDC, isn't terribly different in terms of the growth rate.

  • We would both say it's relatively flat, year-on-year in the third quarter.

  • In terms of our billing results, I think there's a couple of things driving that.

  • First, we saw in Q2 that we gained a relatively significant amount of share, once everybody had reported.

  • If I had to branch predict, I'd say we probably continued to gain some share in Q3.

  • As is per usual, we'll wait to see all of the third party results come in to know for sure, but our sense is that we gained some share in the third quarter, so that helped.

  • And then we're also seeing our customers putting in place a normal supply line in anticipation of a consumer-led seasonal fourth quarter, and that's different than what we saw a year ago, where people were managing inventory levels very low in anticipation of a very muted fourth quarter.

  • So the combination of those two things has our billing results ahead of the IDC, but feels like it's pretty appropriate, based on where I sit.

  • - CEO

  • I think Stacy, you covered it well.

  • From what we've seen, probably covers most of the gap between the two numbers.

  • - Analyst

  • And I guess as my follow-up while it's not really meaningful to the revenue side, it surely is to the bottom line, and that's your Mobile Communications Group.

  • Can you talk a little bit about how we should expect that contra revenue impact to trend over time, and I believe in the past, you said that you didn't think you'd get to profitability next year.

  • But any clues that you could provide on how we should expect either the revenue or the profitability to trend, as we get into next year?

  • Thank you.

  • - CEO

  • Sure.

  • I'll start and Stacy can kind of jump in, because how you look at kind of how we are adjusting the products and the engineering is a little bit ahead of where you'd see the financials move, and so we'll give you some of the two sides of that equation.

  • So from a product standpoint, you saw throughout this year, we did a very good job of, as we figure out how to get into this market and work with our customers and partners, how to reduce the cost just on the general, picking the right P mix, the right board layouts, reducing our part counts, all of those fundamental engineering efforts, is what we focused on.

  • As we got to the end of the year, then we brought out the Bay Trail cost reduced part, which is really focused on -- the first part was really focused on this segment of the market.

  • You're starting to see systems come on to the shelves as we go through the holiday season with Bay Trail CR, and that part will start to have really designed-in cost reduced effort.

  • We said that we would have SoFIA, the 3G version out, at the end of this year.

  • We're on schedule, we've got SoFIA in the labs running, and it's starting its validation effort.

  • We said we would have SoFIA LTE in the first half of next year, that's on schedule.

  • And then we announced several partnerships, two main ones, Rockchip, and then more recently Spreadtrum, which are focused around the SoFIA architecture.

  • Bringing parts for this mobile space, really designed by people who are in that ecosystem, are very cost-efficient, and are connected into both the China market and the worldwide market.

  • You'll see those parts come out as we go through next year.

  • So when we look at the end of next year, we'll look at a model.

  • SoFIA is built to have no contra revenue so when you go through the next year, again, it will be somewhat mix-dependent, as our parts shift the mix, and Stacy will talk to you a little bit about that.

  • That's why it's a bit hard to predict exactly when, but you'll see us mix to Bay Trail cost reduce, Cherry Trail, and then a lot of SoFIA coming in, in both the tablet and phone space, and that is really what drives the contra out of the system.

  • - CFO

  • Yes, so Ross, as Brian said, the way the contra accounting works is, the contra dollars that we recognize are associated with the platforms as they actually ship.

  • And so what you're seeing right now is the majority of our shipments are products that are carrying a fairly high contra dollar per unit.

  • As we ramp the Bay Trail CR and then the SoFIA products, you'll start to see the contra dollars per unit come down.

  • I'm not going to provide a specific forecast at this time for 2015.

  • I'll stand behind the prior statements.

  • We plan to make a substantial improvement in the profitability of the segment next year but don't get too far out ahead of your skis.

  • We are not at the point that we will be profitable next year.

  • It's still our goal, but it will take us a little time to get there.

  • - Analyst

  • Great, thank you.

  • Operator

  • The next question comes from Blayne Curtis from Barclays.

  • - Analyst

  • Thanks for taking my question, and nice quarter.

  • Stacy, I want to follow-up.

  • You talked about the more normal supply chain this year, and helped in Q2 and Q3.

  • You're actually not guiding to a down December, so it seems like you're staying at that elevated rate.

  • Just thoughts on seasonality, you also have Broadwell who launches in an atypical point of year.

  • Is there any catch up before you ramp Broadwell into late first half next year?

  • - CFO

  • I want to make sure I'm answering the right question.

  • You had one question on seasonality, and I'm not sure I understood the Broadwell question, so let me get the seasonality, and I'll give it back over to you, or if you want to clarify it now, that's also fine.

  • - Analyst

  • I just was pointing out that you're launching a platform.

  • Usually you launch it for back-to-school and holiday, and it's coming, the majority of the Broadwell squeeze is coming in the first half of the year, so it's just atypical timing?

  • So just thinking about seasonality.

  • And then just wanted to clarify your comments.

  • You said the supply chain was building ahead, but it doesn't seem like it's pulling back particularly much in Q4, just thoughts there.

  • - CFO

  • So just to clarify on the supply chain and seasonality for Q4, I wouldn't term it as building ahead, what I'd say is an appropriate amount of inventory in anticipation of a seasonal Q4.

  • And if you go back to Q3 of 2013, if you'll recall, we were talking about unusually low inventory levels, based on our customers.

  • I think I used the word muted, having muted expectations about the fourth quarter.

  • Today I'd say they have normal expectations about the third quarter, and our guidance for Q4 would be consistent with that.

  • We're guiding 1% up, if you take the point of our guidance.

  • That's the seasonality we've seen over the last several years, so it's pretty much in line with normal seasonality.

  • And in terms of Broadwell and the impact on 2015 seasonality, I'm not providing a forecast yet for 2015.

  • We'll talk more about 2015 when we get to the investor meeting, which is just a few weeks away.

  • - Analyst

  • Okay just a follow-up on the gross margin, given your full-year guidance, you were looking at a step down December, and now it locks like the gross margin sustains quite nicely.

  • Just what changed in that outlook, and do any of those factors carry into the first half next year?

  • - CFO

  • Yes, so as you rightly pointed out, the gross margin forecast for the year is pretty much on.

  • We were a little light in Q3, we look a little better in Q4, based on the algebra that I gave you on the last call.

  • In essence, we're seeing more of the 14-nanometer cost coming through in the third quarter versus the fourth quarter, and that's why you see that shift between quarters, and the year staying on track.

  • And again, sounds a little bit like a broken record, in terms of 2015, we're only a few weeks away from the investor meeting, and that's a great forum for us to talk about longer-term trends, so we're going to hold off on the 2015 questions until we get to the November investor meeting.

  • - Analyst

  • Thanks a lot.

  • Operator

  • The next question comes from Harlan Sur from JPMorgan.

  • - Analyst

  • Great.

  • Thank you for taking my question, and congratulations on the solid quarterly execution.

  • DCG was up strongly in Q2, and again here in Q3, up 16% year to year, strong growth in all end markets.

  • Do you expect the breadth of spend to continue across the different customer base in Q4?

  • I know cloud tends to be a bit lumpy.

  • Ad then, do you expect to see continued double digits growth in DCG in the fourth quarter?

  • - CEO

  • Sure, this is Brian.

  • I think what we said was, we believe we can grow this business around 15% year-over-year, and you framed it correctly, that we do, especially in the cloud space, it tends to be lumpy.

  • If you take a look at what we're projecting for the fourth quarter, we're projecting right in line for that 15% for the year, and it's got the normal mix of what we see across the enterprise and the cloud and the HPC and other data centers.

  • So we are expecting Q4 to just progress from Q3, and then we aren't changing our forward-looking -- what we believe we can grow this business at.

  • - Analyst

  • Great, and then -- thank you for that.

  • And then, I guess part of the reason for the lower gross margin profile in the fourth quarter is the ramp of 14-nanometer across multiple fabs.

  • I think you said on the last call it will take a couple of quarters to ramp up to full manufacturing capability, after which time you would see ramp costs starting to come down.

  • Is that how you still see it?

  • - CFO

  • Yes, I think I said, you see highly elevated costs for a couple quarters, and then it starts coming down, but it takes a period of time for it to come down.

  • That's the normal trend.

  • We're certainly seeing those elevated costs in Q3, you can see it in the gross margin recon.

  • You'll still see high sell-through costs, as those products are selling through in the fourth quarter.

  • In 2015, I'll get a lot more specific on some of the unit cost trends next month at the investor meeting.

  • - Analyst

  • Great, thank you.

  • Operator

  • The next question comes from Jim Covello from Goldman Sachs.

  • - Analyst

  • Thanks so much.

  • I appreciate it.

  • You referenced the opportunity for consumer buying in the fourth quarter.

  • We saw really good demand in the third quarter from consumers, driven by the new products that you and Microsoft combined to introduce.

  • They were great new products, and the consumer uptake of them was very good.

  • Do you think that impacts fourth quarter versus third quarter buying at all.

  • And I'll kind of make my follow-up as part of this question.

  • Do you see the iPhone 6 cannibalizing any the notebook demand, just given the price points are the same?

  • Obviously the functionality isn't the same, but given that most of the top-10 selling notebooks are right around that same price point as the notebooks, do you think there's any cannibalism going on there as you get to the fourth quarter, or is that part of the guidance?

  • Thanks a lot.

  • - CEO

  • Let me start just on a general basis, and then Stacy can jump in.

  • I'd say in general, again, we're predicting or forecasting a fourth quarter that's seasonal, so what we saw the third quarter, plus, as you said, about 1% growth as we go into the second quarter or the fourth quarter, which is pretty typical if you go back over the last three years of what we see Q3 to Q4.

  • So we're seeing that same trend in consumer being flat to a normal year's performance, hold through the fourth quarter.

  • Your question about iPhone 6, no, we don't really see -- typically we see a separation in that space between consumers going out and buying phones versus PCs, and as you said, there's a big difference in the functionality and usage models between those two.

  • And I think people, when they want the usage model and the functionality of the PC, they look at that cost, and as you said, it's very similar cost.

  • So they look at it and say this is a really good value for the functionality I'm getting.

  • As we typically haven't seen a cross between those two from a demand standpoint.

  • - CFO

  • I'd just come back and say the issue is the question.

  • I don't think we saw extraordinary consumer demand in the third quarter.

  • If you go back to the strength of end markets, I think we're pretty aligned with the third parties.

  • It was pretty flat.

  • From an end market standpoint it was pretty flat.

  • We didn't see anything unusual there.

  • What we saw was some share gain, which caused us to have a nice bump in billings, and we saw a normal amount of inventory being put in the system, relative to last year at the same time, where people are managing inventory levels low.

  • So I'd term it more stable PC markets, and people betting on a normal consumer fourth quarter.

  • - Analyst

  • Very helpful.

  • Thank you and congratulations.

  • Operator

  • The next question comes from John Pitzer from Credit Suisse.

  • - Analyst

  • Good afternoon.

  • Congratulations on the first quarter.

  • First question is for Stacy.

  • Stacy, when you look at the revenue in the PC Client Group, I think year-to-date, you're up about $1.1 billion and yet operating profits are up about twice that.

  • I'm just wondering if you can talk a little bit about what you're doing in OpEx in that business around profitability, and then how much more do you have left to drive profitability in the core PC Client Group?

  • - CFO

  • So I'll answer the question in regards to this year, and again I'll probably hold off on a discussion about 2015 until we get to the investor meeting.

  • But I think what you see going on this year is probably three things that are all contributing to the operating profit.

  • First, they've got a great product portfolio, and so, when you look at where we're seeing growth, we're seeing nice growth in the Core i5, i7 segments of the market, and then we've brought in some really good technology that's got a good cost structure at the low end of the market, that gives them a nice cost structure, and allows them to go after unit growth.

  • So I think this really all starts with the product portfolio.

  • Adding to that, I think we have a couple of tail winds on gross margin in 2014.

  • Our 22-nanometer costs are just spectacular, and we're at the low end of the cycle, in terms of how much start up cost flows through, and the PC Client Group picks up the majority of those.

  • And I also think the leadership of that team has done a nice job of prioritizing investments.

  • We've been making investments in some new areas where Brian and I thought it was pretty important, so they've had a bit of a constrained budget, and I think they've done a nice job of bringing out technology that really helps their business, while prioritizing within a pretty constrained budget.

  • So that's what happened in 2014, the 2015 discussion will be part of that investor meeting next month.

  • - Analyst

  • That's helpful, Stacy.

  • And then my follow-up for Brian.

  • You have been talking about a stabilizing PC market for the last couple quarters, but over the last couple quarters, you've been leaning a little more heavily on developed versus developing, and corporate versus consumer.

  • When you look at the Q3 results, and especially on the ASP line and your guidance for Q4, is this just seasonal consumer strength, or do you actually think that both in the developed and developing market, you can now start talking about turning a corner relative to tablet cannibalization, and perhaps PC stabilization in emerging market consumer?

  • - CEO

  • I think what we would phrase this as, or what we did phrase this as, is it's seasonal.

  • And so we're not saying that there's -- in fact we said that the consumer, we believe, is flat.

  • There's seasonal growth as we move into the fourth quarter, and we're still seeing that mature versus emerging market trends that we talked about in the previous quarters, where the mature markets are a bit stronger.

  • The US, especially Western Europe though, as well, and the emerging markets, China, Latin America and some of the others, are still soft.

  • And so those trends are continuing and when you look at the consumer, as we go into the fourth quarter, we've forecasted a seasonal growth for the consumer side.

  • - Analyst

  • Perfect thanks, congratulations again.

  • Operator

  • The next question comes from Joe Moore from Morgan Stanley.

  • - Analyst

  • Great, thank you.

  • I wonder if I could just push a little bit more on the gap between the 15% unit growth versus the market.

  • I think you attributed it to three factors, to share gains, to the Core-based tablet, and to the inventory environment a year ago.

  • Which of those factors do you think is most important, just because it's such a wide gap between the numbers?

  • - CFO

  • I actually think they're all sizeable numbers, and it's not unusual for us to have those kinds of differences from the third parties.

  • But yes, I think coming back to the prior question, we've had sustained share gains, I think, over a period of time, so that's probably a slightly larger number.

  • And then a normal amount of inventory being put in the system, do that math with the third element being the Core-based tablets, which is I think is going to be relatively smaller.

  • - Analyst

  • Okay, great.

  • And then just so I understand the tablet differential.

  • If it's got anything that has a Bay Trail M or a Core is considered a PC unit, the way that you're classifying it, is that right?

  • - CEO

  • It's more the Core, so products that have a Core, I use the Microsoft Surface as a great example.

  • We classify that in the PC side.

  • - Analyst

  • Got it.

  • - CEO

  • That's probably the cleanest example.

  • - CFO

  • And IDC would classify that in a different category.

  • That's an adjustment you always have to make.

  • I'd also say there's a piece -- we tend to have a difference with the third parties on an ongoing basis, and I think it comes down to the breadth of tracking in the white box, deep in the emerging markets, the Tier 3 and Tier 4 cities, very hard to get your arms around that holistically.

  • So we tend to see over long periods, we'll have a slightly higher billing number than they show as a market number, and best we can tell, it's hard to get your arms around the diversity of the market, when you get into the white box channel in emerging markets, so that's always going to be a difference between them.

  • - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • The next question comes from Stacy Rasgon from Sanford Bernstein.

  • - Analyst

  • Thanks for taking my questions.

  • I'm sorry to harp on it, but I want to go back to this, as well.

  • So I understand you're saying for your own business, you think consumer is seasonal and flattish for the year in Q4, but obviously you must, you and I guess your channel partners must be expecting a much bigger ramp of consumer in Q4, given how much inventory you must have built in the channel in Q3.

  • So how do you get comfort that consumer sell-through is going to be there in Q4, and what's the consequence if that consumer sell-through is not there?

  • Is the corporate uptake still there?

  • Is that going to be enough to offset, or like how do we, I guess judge the potential scenarios around consumer demand in Q4, and the sensitivity of your guidance around that?

  • - CFO

  • That's a lot of different questions in one.

  • Let me take a shot here though.

  • I'd say first the inventory, this is Stacy, by the way and Brian will jump in.

  • But the inventory levels, what we see is when you look at it in terms of weeks of inventory, it's appropriate levels of inventory.

  • It's right in the range of what we would expect.

  • So you termed it as excessive inventory and we aren't seeing that.

  • As always, if demand doesn't materialize, then customers adjust their buying patterns and bring inventory levels down.

  • But what we see is normal levels of inventory in anticipation of a seasonal Q4, that's what our customers think will happen, and that's what we think will happen, in terms of our seasonal results.

  • You also had a question on consumer versus enterprise, and the strength of enterprise, I'll let Brian talk about those market trends.

  • - CEO

  • Yes, just to go back to the inventory comment as well.

  • We do, what I believe, is a really good job of watching our whole supply chain from below us looking at things like the motherboard ordering pattern at the ODMs in Asia, and what's happening there, to the pulls from our inventory hubs, where a lot of our -- more than half of our product ships out of the hubs now, and we actually control the inventory on it until the OEM pulls it at the last moment of use.

  • So we see the actual usage rates there, to what's flying off the shelves at the point of sale.

  • So we are watching all of those and I think we've demonstrated in the past, back in a variety of market moves, that we'll react very quickly.

  • So as Stacy said, I feel the current inventory is very typical for this 1% seasonal growth that we're forecasting for the fourth quarter, and I'm comfortable, and I'm also even more comfortable that we'll be watching it, and if something did happen, we could adjust in either direction.

  • The comment about consumer versus enterprise, as we said, we forecasted a standard seasonal consumer, so we're expecting not a great holiday season, not a bad holiday season, a standard holiday season for the consumer in the PC segment.

  • We continue to see enterprise strength that's shifting, it was strong in desktops earlier in the year, it's moved to notebooks as we move to the second half of the year.

  • Some of the markets are shifted a little bit, but overall, the enterprise all the way from large enterprise to small and medium businesses stayed fairly strong through this year.

  • Still seeing a mature market versus emerging market trend, mature being stronger than the emerging, but those trends have stayed.

  • And we just forecasted a seasonal consumer, so I'm pretty comfortable with where we're at, and I think we've got the right tools in place to watch this.

  • - Analyst

  • Got it.

  • For my follow-up, let me ask the question a different way, then.

  • How much did the weeks of inventory in the channel go up in Q3, to keep -- to bring them to levels that you would now classify as healthy and appropriate for the Q4 patterns that you're talking about?

  • - CFO

  • Yes, I'm going to hold off on quantifying that, Stacy, but I'd say we look at a range of inventory, in terms of forward-looking weeks and we're well within the normal bands of that range.

  • So we aren't seeing anything that's elevated there.

  • - Analyst

  • Okay, thank you.

  • Operator

  • The next question comes from CJ Muse from ISI Group.

  • - Analyst

  • Yes, good afternoon, and thank you for letting me ask a question.

  • First question, curious in terms of whether your guide has changed at all in the last two to three weeks, given growing macro concerns, declining commodity prices, weakness in Europe, et cetera.

  • Anything in terms of your guide change with the vision of seasonality, maybe something a little better?

  • Would love to hear your thoughts.

  • - CFO

  • No.

  • I mean the only guide we've provided is the one we provided a couple hours ago, so we watch the markets all the time.

  • I think if your question is, have we been going and doing triple checks after seeing some of the -- like the microchip results and things like that, we did.

  • We're not seeing anything that's unusual out there, so, but again, it's not a surprising forecast for Q4.

  • It's seasonally up on the back of a more or less seasonal Q3.

  • - Analyst

  • Just checking.

  • That's helpful, and I guess as my follow-up question, curious if you can comment on operating leverage.

  • If we go back to your initial guidance for the year at flat revenues, and now up around 6% at the midpoint of your guide, during that same time, you've grown your OpEx by 5%.

  • And in your prepared remarks you talked about IP synergy.

  • Curious how we should think about operating leverage going forward.

  • - CFO

  • Yes, so it's a long term/short-term phenomenon that we've talked about.

  • And we will absolutely go into this more in November, but we are still committed, Brian and I are still committed to bringing our spending as a percent of revenue down.

  • We will be down a little bit this year, just by dint of the increase in revenue.

  • On the flip side, this is very much a transitional time for us, and we have been making some incremental investments over the course of the last year in areas where we felt like we needed to and where we would generate a long term return.

  • So we're glad we were able to bring it down a little bit, particularly the back half of 2014, as better than the first half.

  • We'll continue to bring it down, but we knew we were doing it during a time where we were making some elevated investments we felt we needed to make.

  • - Analyst

  • Very helpful, thank you.

  • Operator

  • The next question comes from Vivek Arya from Bank of America.

  • - Analyst

  • Thanks for taking my question.

  • Can you talk about the carrier certification, and some of the competitive landscape you are seeing in LTE basebands?

  • And the bigger question, Brian, there is that other than this roll up of the tablet contra revenues, are there other actions you can take to reduce losses in the mobile division?

  • - CEO

  • Sure.

  • Let me try and answer your question.

  • There is I believe, two questions built in there.

  • The first was around where are we with certifications on our LTE, so where are we relative to our LTE road map.

  • What I would tell you is our 7260, as you heard, has had several design wins.

  • We've been able to publicly say two of them with Samsung.

  • There are others in the works that we're working on right now.

  • As far as certifications with the carriers, we've begun certifications across the world, and you will see the systems in almost every geography, as they come out.

  • We've been shipping with a variety of products throughout this year in a variety of the other markets, especially in Asia.

  • So we feel fairly strongly, also still see us as only -- there are only two people out shipping Cat 6 LTE modems right now, and we're one of those two, so we feel good about our roadmap.

  • We have a road map moving forward.

  • Going beyond Cat6, we feel it's highly competitive, and keeps us at or near the leading edge.

  • So from a modem standpoint, we feel very strong right now.

  • You asked, is there other things we can do to reduce our MCG spending?

  • I think there is.

  • If you take a look at what we're driving, on our phone strategy.

  • We're really driving on a strategy that, rather than go and push on our own into the phone space, we're really going with strong partners that are in that space already, and have the linkages and the customer relationships.

  • And really, that's -- Spreadtrum is the most, I'd say, perfect example of that, where they are strong in China, they're strong in other parts of the world, they're a great supplier to several of the OEMs.

  • And us bringing our SoFIA platform, our base IA along with our modem technology, and then over time, we'll likely come into our silicon as well.

  • That gives us and them competitive advantage and a cost advantage, we believe, and a way to get into those markets, a very cost effective efficient way.

  • - CFO

  • If I can just add one thing.

  • Brian talked about the first step is great product.

  • Second step is getting the right investment level, and one of the things you're seeing from him and the Company is a lot of innovation in terms of how we go to market.

  • There's a third piece here too, which is, I think increasingly we're going to see that the IP that we're creating for the mobile group is useful, and in fact becomes a competitive advantage across the breadth of our product line, and Brian talked in his prepared remarks.

  • If, as we think happens, over time, more of the computers of the world, the notebook computers of the world are connecting via wireless WAN, and we're one of the companies that has an IP, there's a lot of Company synergy associated with us investing and leading in that technology.

  • - CEO

  • I think that's a great point.

  • You're going to need those modems in IoT.

  • We said that roughly 15% of the PCs in a couple years will need them.

  • And then there's that synergy of, we are going to try and even down in this space, bring some of that innovation in IP like the RealSense cameras all the way through the mobile space as well, which will help us differentiate our products, and working with our partners, allow them to differentiate as well.

  • - IR

  • We're going to take two more questions, if you can introduce the next questioner please?

  • Operator

  • The next question comes from Doug Freedman from RBC Capital Markets.

  • - Analyst

  • Thanks so much for allowing me to ask a question, and congrats on the strong results, as well.

  • If I could dig in a little bit on what's going on in your tablet goal.

  • It does seem, I heard a 15 million number for the quarter that you shipped.

  • That would mean that you need to ship, actually, I believe if I've added it up right, about 10 million next quarter.

  • Does that mean that the subsidies have peaked in the third quarter, or do you think you're going to exceed your tablet shipment goal by an equal amount?

  • - CEO

  • Let me answer the question on volume, and I'll let Stacy talk about the subsidies.

  • Your numbers are very close.

  • You're right, we had about 15 million, and we think, yes, 10 million to 12 million for Q4.

  • We're not going to necessarily try and blow the number out, but we're also not going to miss it by a million or two.

  • So my guess is somewhere between 40 million and 45 million is where we will end up.

  • Exactly where that is, we'll make sure we're past the 40 but not, there's no need to go well above that.

  • As we said, that puts us as the largest merchant supplier to the tablet business.

  • We're really trying to move that space now as both our cost reduction but also differentiating with products like the Dell Venue, which we believe is the thinnest, and has a lot of innovation with the first of the RealSense.

  • We'll have other products with our other OEM partners, like Lenovo, moving forward.

  • I'll let Stacy talk about what that means for our subsidies, our contra.

  • - CFO

  • Yes, so the contra answer is a little bit complex, because keep in mind, it has to do with both volume and the mix of what we're shipping for the earlier answer to the question about the different platforms come with different subsidy dollars per unit.

  • I'd expect, net of all of that, we're going to see revenue results in the segment that aren't terribly dissimilar from what we saw in Q3, and then we'll start to see reductions as we move into next year.

  • - Analyst

  • Okay, great, thanks so much.

  • If I could, for my follow-up, just one on some start-up accounting.

  • Clearly it did impact gross margin this quarter, and your guidance.

  • Is there any color you can offer us on what your outlook is in the way in which you think you're going to ramp 10-nanometer?

  • It appears as though the 14-nanometer, the magnitude of ramp with the Broadwell platform, is a little less than you might have expected as we entered the year.

  • Is that something that you think might repeat on future nodes?

  • - CFO

  • Yes, apologies, this is Stacy broken record Smith.

  • I'll talk more about gross margin trends for 2015 next month, when we get to the investor meeting.

  • But you are seeing, in the fourth quarter you're seeing the front edge of the start up costs associated with 10-nanometer, and that's right in line with the historical timing of what you'd expect.

  • We'll go through more next month where we talk about how that might look over the next couple years, but you're seeing at least the front edge at the timing that you'd expect, and it's about a point of gross margin next quarter.

  • - Analyst

  • Great, thanks so much.

  • I had to try.

  • - IR

  • Operator, if you could introduce our last questioner, please?

  • Operator

  • Our final question comes from Mark Lipacis from Jefferies.

  • - Analyst

  • Thanks for taking my question.

  • The first question I had was on the tablet market.

  • When you look at the units that you have shipped so far this year, and as you look into what you're expecting to ship next year, to what extent are the tablets that you're shipping into, are they Android versus Windows tablets, and has that played out differently than you expected, that mix, as Microsoft seems to have cut the price of the bundle of Windows and Office?

  • - CEO

  • So the mix of Android versus Windows has pretty much played out as we forecasted.

  • Probably 80%-plus Android, so our mix represents pretty much what you'd see in the marketplace, or if you walk into any store, so there hasn't been really any shift that we've been through.

  • - Analyst

  • Okay, thank you.

  • And then the second question, if I may, there's a view out there that the PC growth you've been seeing has been driven by, mostly, a Windows XP upgrade cycle.

  • Could you update us on your thoughts on that topic?

  • Do you feel better about the idea that it's not just Windows XP, but rather innovation driving the demand?

  • Thank you.

  • - CFO

  • Oh, yes, this is Stacy.

  • There's no data that's going to prove the point one way or the other, but based on what we see in our surveys, there's a variety of things that are causing people to go and upgrade their PCs.

  • Certainly the Windows refresh is one of them, but it's also form factors, it's the age of the PCs and the price points.

  • I think all of that is playing in and I think when we look across the breadth of our SKUs and knowing which of those are going into large enterprise, small and medium, consumer, we get a sense of, we're seeing growth that's more broadly than just something where people are upgrading Windows.

  • I'd say to the second part of your question in terms of where are we?

  • We -- in the back half of the year, believe that the impact that we were seeing with XP is probably less than it was in the front half of the year, but there's likely a pretty long tail that has some positive impact on the market for a while to come, when you just look at the age of the installed base and how many of those are now on supported operating systems.

  • - Analyst

  • Thank you.

  • That's very helpful.

  • - IR

  • Sure.

  • Great.

  • Thanks Mark.

  • Thank you all for joining us today.

  • Jamie, please go ahead and wrap up the call.

  • Operator

  • Ladies and gentlemen that does conclude the conference for today.

  • Again, thank you for your participation.

  • You may all disconnect.

  • Have a great day.