英特爾 (INTC) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 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.

Thank you, Jamie, and welcome everyone to Intel's first-quarter 2015 earnings conference call.

By now, you should have received a copy of our earnings release and the CFO commentary that goes along with it.

If you have not received both documents, they're available on our investor website, INTC.com.

I'm joined today by Brian Krzanich, our CEO, and Stacy Smith, our Chief Financial Officer.

In a moment, we'll hear brief remarks from both of them, followed by Q&A.

Before we begin, let remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties.

Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

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

With that, let me hand it over to Brian.

Thanks, Mark.

Following our reset for our outlook in March, the first quarter finished roughly as expected.

Our PC business was impacted by slowing desktop sales, particularly in small and medium business.

At the same time, challenging macroeconomic conditions and the appreciating US dollar weighted our business in important geographic markets.

Despite this, revenue was flat year-over-year, as our data center, Internet of Things, and NAND business all delivered double-digit growth.

The diversity in scale of Intel products today puts us in a position to compete across the breadth of devices that compute and connect.

I'll take just a moment to review each of these businesses, before sharing my expectations for the rest of the year.

Our newly-formed client computing group results reflect the weakness in desktop demand, and the depletion of PC supply chain inventories.

And while desktop volume declined, notebook volume grew year over year for the fifth consecutive quarter.

Our silicon technology leadership remains a valuable competitive advantage in the percentage mix of our latest 14 nanometer processors, the fifth gen Core and Core M processors.

It is just ahead of our expectations.

In addition to launching the high-volume fifth gen Core product at CES, the CCG group also reached some important product milestones.

We launched our newest Broadwell based vPro notebook SKUs, that feature aspects of the Company's no wires vision, to help us all work better.

We also expanded our mobile product portfolio to address a range of price points and form factors.

This includes the Intel Atom x5 and x7 for mainstream and premium tablets, formerly called Cherry Trail, which is powering the new Microsoft Surface 3. We also started shipping Atom x3, formerly SoFIA 3G, the Company's first single-chip integrated baseband and apps processor, designed for entry and value smartphones and tablets.

This product was not even on our road map 1.5 years ago.

It is now launched in the market.

This is a great example of the philosophy of the new Intel.

In the data center, our manufacturing and architecture leadership, combined with opportunities driven by the rise of class computing and HPC usages, continue to yield impressive results.

DCG revenue grew 19% year-over-year, and our Xeon E5 version 3 product line, formerly known as Grantley platform, now represents more than 50% of our two socket volume.

New products like Grantley and our increased support of custom versions of the product helped us achieve record cloud revenue, and in the telco segment, we continued to significantly outpace the market with the adoption of Intel architecture.

We also introduced our first Xeon-based SSE processor, optimized for microservers, storage, network, and IoT devices.

This product is an example of our strategy to reuse IT from our core business in complementary and profitable segments.

Many of the secular trends underpinning our growth in the data center also benefited our NAND business, which grew 14% year-over-year.

Just three weeks ago, Intel and Micron formally announced our jointly-developed 3D NAND technology.

Intel 3D NAND will be available in the second half of this year, and offers roughly three times the stated capacity of competing technologies, which aren't expected until 2016.

3D NAND, for example, can provide greater than 10 terabytes of storage in a 2.5 inch solid-state drive, and is the first 3D NAND solution to be architected to be lower cost than 2D NAND.

And finally, the Internet of Things group grew 11% over the first quarter of last year, based on strength in the retail and digital security market segments.

Our first-quarter results, combined with a variety of third-party insights from across the industry inform our thinking for the balance of 2015.

We expect the PC market to remain challenging, leading to a mid single-digit decline in the overall full-year PC TAM.

That said, we are excited about the launch of our 14 nanometer Skylake microprocessors, and the capabilities this product family will enable on a variety of operating systems.

In particular, we are enthusiastic about the release of Windows 10 this summer, especially when combined with Skylake.

We continue to be confident in our strategy to drive growth.

We are focused on innovating in our client business, improving mobile profitability, and investing in and growing profitable adjacent markets.

We're applying our process technology leadership, silicon integration expertise, and our efficient use of shared intellectual property.

This strategy is delivering results, as evidenced by the growth we saw this quarter in the data center, IoT, and NAND segments.

The performance of those businesses remain strong, and it's expected to roughly offset weakness in CCG.

As we move forward, we will continue to work to ensure that it's smart and connected, it's best with Intel.

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

Thanks, Brian.

Revenue for the first quarter was $12.8 billion, flat year-over-year, and in line with the downward revision to outlook provided on March 12.

As a reminder, the change in revenue outlook was the result of weaker than expected demand for business desktop PCs, lower than expected inventory levels across the PC supply chain.

While the PC market was challenging in the first quarter, we continue to see strength in the data center, Internet of things, and NAND business.

First-quarter gross margin of 60.5% was slightly above the original outlook provided on the January earnings call.

Spending on R&D and MG&A, $4.9 billion, down $100 million from the fourth quarter, and in line with our guidance.

Operating income of $2.6 billion was up 4% from a year ago.

Earnings per share of $0.41 was up over 8% from a year ago.

The newly created client computing group had revenue of $7.4 billion, an 8% decline year-over-year, driven by a 16% decline in desktop unit volumes, partially offset by a 3% increase in notebook volume.

Tablet unit volumes were over 7 million units, up 45% year-over-year.

We are on track to our annual goal of improving mobile profitability by $800 million, with the majority of improvements to be realized in the back half of the year.

Operating profit for the overall client computing group was $1.4 billion, down 24% from a year ago.

The decrease was driven primarily by lower desktop revenue and higher unit costs.

The data center group had revenue of approximately $3.7 billion, 19% growth on a year-over-year basis, driven by 15% unit growth.

The data center group had operating profit of $1.7 billion.

This was up 27% year-over-year, driven by unit growth, a richer mix, and lower unit costs.

Additionally year-over-year, the Internet of Things segment achieved growth of 11% and the NAND business grew at a fast pace.

The business continued to generate significant cash, with $4.4 billion of cash from operations in the first quarter.

We purchased $2 billion in capital assets, paid $1.1 billion in dividends, and repurchased $750 million of stock in the first quarter.

Total cash balances at the end of the quarter was roughly $14 billion, down approximately $5 billion from a year ago.

Our net cash balances, total cash less debt, is below $1 billion, and inclusive of our other longer-term investments, is more than $4 billion.

As we look forward to the second quarter of 2015, we are forecasting the midpoint of the revenue range of $13.2 billion, up 3% from the first quarter.

This forecast is in line with the average seasonal increase for the second quarter.

We believe there was an inventory burn across the worldwide PC supply chain in the first quarter, and we expected a further reduction in inventory supply chain levels in the second quarter, in anticipation of the Windows 10 launch this summer.

We are forecasting the midpoint of the gross margin range to be 62% plus or minus a couple of points, a 1.5 point increase from the first quarter.

Turning to the full-year 2015, we expect revenue to be approximately flat to 2014, down from the prior guidance of mid-single-digit percentage growth.

We are now projecting a mid single-digit decline in the overall PC market.

We continue to forecast robust growth rates in the data center group, Internet of Things group, and NAND businesses, which we expect to offset the decline in the client computing group.

As a result of lower than expected demand and reduced growth rates this year, we are lowering capital spending, spending on R&D and MG&A.

We are moving to reuse capital by rolling it forward to 14 nanometer, and to align overall capacity with demand.

We are now forecasting the midpoint of capital spending at $8.7 billion, down $1.3 billion from the prior outlook.

We are also forecasting the midpoint of our gross margin range at 61%, down a point from our prior guidance, as a result of temporarily lower utilization rates, and lower platform volumes.

And we are forecasting the midpoint of R&D and MG&A spending for the year at $19.7 billion, down $300 million from the prior outlook.

We are prudently managing our cost capacity and inventory, to address the changes in expected PC demand.

We are using our manufacturing leadership to transform the Company by developing leadership products across a broad range of end markets.

That product leadership is driving growth in revenue, and profits at the data center, Internet of Things, and NAND business.

To illustrate this transformation, in the first quarter, almost 40% of our revenue came from the combination of these businesses, and these businesses accounted for more than two-thirds of the Company's overall operating profit in the first quarter.

Our work is far from done, but the transformation of the Company is well underway.

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

All right.

Thank you, Brian and Stacy.

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

Jamie, please go ahead and introduce our first questioner.

(Operator Instructions)

John Pitzer, Credit Suisse.

Stacy, my first question is relative to your full-year gross margin guidance of 61%, it assumes that the back half of the year is coming in around 61%, and I'm curious, given the revenue guidance implies a pretty steep ramp in the back half of the year, IE utilization going up, can you just help me understand why you wouldn't get better leverage and gross margins in the second half?

John, you're doing the algebra correctly there.

We're averaging about 61% in the first half, we've guided 61% for the year.

But my expectation is the average over the back half is in that range of about 61%.

You see some offsetting trends going on.

So first, we do expect we will see some benefit associated with seasonally stronger volume in the back half of the year.

Offsetting that is two things.

One is we'll start to see -- we're seeing 10 nanometer start up costs today, but they'll ramp pretty significantly when we get into Q3 and Q4, so that's one element.

And then the other is we're bringing down the utilization rates on our 22 nanometer factory network, and have now and through the -- Q2 and maybe a little bit into Q3, those products will go into inventory, and they'll ship in the back half of the year, and so we'll see a little bit of an elevated cost relative to what we thought in the back half, associated with bringing down the utilization rates in the factory.

You've watched us for a while, you know that we do that so that we can free up some capacity and roll it forward to 14 nanometer, and offset some of the capital investment there.

So that's why we are doing it, but the impact of that is higher costs.

Thank you, and as my follow-up, Brian, there's been a lot of speculation in the press about potential M&A activity, and I doubt you're going to address specific speculation, but I'm curious, could you step back and give us a sense of broadly what your acquisition strategy will look like, what areas do you feel like you need to augment, and importantly, as you think about use of cash, does any potential acquisition have to be more accretive than actually buying back your own stock?

You're right, John.

I'm not going to comment on any of the rumors and on the press.

Our strategy on investing in this business, and what we do with our cash hasn't changed, and it's really the same strategy that's been before me.

And that is always, first invest in the business.

I firmly believe in that investment, Moore's Law, new architectures, technologies, things like that.

And M&A at times, and then share buyback and dividends.

So those are our priorities.

We are stewards of our shareholders' cash and we always feel like that's always the first thing to do.

And if we can invest in the business and get a better return than that, then we do that, no matter how we invest in that.

But I'm not going to speculate on any of the rumors.

I just come in on the last part of your question, John.

As Brian said, our priority is invest in the business first, dividends second, and then we use the buyback to modulate cash balances.

We really don't try to time the buyback to specific stock prices.

We use it as a second mechanism to return cash to shareholders.

That's how we view it.

Thanks.

Romit Shah, Nomura.

Stacy, the revenue outlook for 2015, now it assumes a similar recovery as your original guidance, just off a lower base.

And back in early March, you talked about things like weaker business PC demand, the macro environment, and currency impact in the quarter.

So is it implicit in the new outlook that you think these issues will go away?

No, and maybe I'm not completely grokking your question.

We were projecting mid single-digit revenue growth for the Company on the back of a relatively flat PC unit demand.

Now we're projecting mid single-digit PC decline, and that's leading to relatively flat revenue growth year on year.

So what has changed my view of the year, so maybe you can define your question a little better, and I'll try to answer a little better.

Well, just to get to flat for 2015, it assumes pretty healthy sequential growth for the next couple of quarters.

And I was wondering if the issues that hurt you in the first quarter, you see those issues becoming less of a headwind, as we move through the year?

Okay, I understand your question.

It's about linearity.

So yes, let me put the PC market in context, and we can go from there.

Again, we are expecting mid single-digit decline overall in the PC market.

We are seeing a little bit of shift in linearity over the course of the year.

We saw a fairly significant inventory burn in Q1.

Normally in Q2, we would expect to see customers start to put inventory in place for the back half.

Our guide for Q2 is assuming that we'll see a continued inventory burn in the quarter, and that's because of the timing of Windows 10.

It's hitting in the summer, and so what we think is going to happen is that our customers will lean out inventory levels in the second quarter, and then they'll rebuild inventory levels in the third quarter.

and if you do the math, it shifts a point or two of growth from the first half to the second half as a result of that inventory.

Okay, helpful, thank you.

As my follow-up, Brian, I was hoping you could just elaborate on the $8.7 billion in CapEx, and this idea of increased reuse of equipment.

Is that just a repurposing of 22 nanometer, that did it all impact the timing of 10 nanometer?

Thank you.

Sure.

I think you've got it mostly right.

Each one of these product ramps, or these technology ramps, have a personality and an image on their own.

And what you're seeing as we move through 2015 is just that.

You did see that we shifted our overall view of the market from single-digit growth to single-digit decline, so that has one impact.

You are seeing us be able to move more capital now as a result of that, plus I'll give you some other things.

Move more capital from 22 nanometers to 14 nanometers.

We also said that 14 nanometers, the ramps of Broadwell products are slightly ahead of our forecast, so we are seeing a very nice migration of our product demand over to 14 nanometers, and we are seeing some things like better yields, better utilization out of our 14 nanometers, as it continues to get healthier.

And so all of those combined have let us adjust our capital, so you're seeing better utilization, better efficiency, but also the ability to move more 22 nanometer capacity over to 14 nanometer.

I don't think any of it shift in timing, Brian.

Joe Moore, Morgan Stanley.

Wondered if you could talk about how your inventory level kind of barely went up, I guess $140 million sequentially, despite being $900 million below where you thought you'd be on revenue.

Can you just talk about how that transpired, and I thought maybe you'd have to work that inventory down in the second quarter.

Just why isn't there a little bit of an inventory overhang after the magnitude of the shortfall in Q1?

We were expecting inventory levels actually to come down in Q2, Joe.

As Broadwell costs came down, so it wasn't so much a unit comment as much as a dollar comment, but we expected dollar values to come down, because 14 nanometer costs are coming down the cost curve pretty steeply, and we ended up.

So there's -- from our perspective, a pretty significant shift.

And then as we think about the rest of the year, we will as we said, we will bring utilization rates down on 22 nanometer, we will roll forward some of that capacity to 14 nanometer, and we should bring inventory rates, levels down by the time we get to the end of the year.

Okay, great.

And then for my follow-up, with regards to the buyback, how do you think about what the net cash level should be?

Is there still a target of -- I think you said historically, you're comfortable at around zero net cash, and then how do you factor in any potential M&A into that equation?

Does that mean that M&A would require lower buyback, or how should we think about those trade-offs?

Again, not asking about any specific stories, but how should we think about the balance sheet in that context?

As Brian said, we're not going to answer any questions on M&A, and I know there's a lot of speculation out there.

In terms of net cash balances, we have said that we are targeting approximately zero net cash.

I also said it's impossible for me to manage it so tightly that we mathematically ever get to exactly zero.

You can see, we brought on cash balances a lot over the year, and in Q1, we were several billion dollars net cash, and when you include some of the longer-term portions of the portfolio, we were pretty flat at about $4 billion.

We're comfortably where we want to be, and comfortably where we communicated.

Thank you very much.

David Wong, Wells Fargo.

Thanks very much.

Stacy, given your comments about start up charges for 10 nanometers towards the end of this year, are you pacing ahead of your original plans on 10 nanometers, or are things tracking roughly according to what you expected?

I can answer that one just from a technology standpoint.

First, we have said nothing about our timing for 10 nanometer.

We'll give all of our timing for 10 nanometers at a later date, and the adjustments that Stacy talked about, does not everything to do really with the 10 nanometer capital or spending or timing.

So they are completely disconnected.

Okay.

And given what are you are saying on SoFIA, do you expect to be incurring any contra revenues on tablet processor sales by the fourth quarter of this year, and can you give us some idea as to how contra revenue payments might trend through this year?

Sure.

If I may, let me take it all the way out to the comment that Brian and I made around moving, making the $800 million improvement to the mobility portion.

We are on track to that.

There's two big buckets, if you will.

One is the improvements in product margin, and it's a combination of the cost structure we get with SoFIA, and having a great product that is targeted at the entry and value segments of the phone and tablet market.

And a chunk of it is the reduction and contra revenue dollars, again, the bill of materials around SoFIA, we didn't a competitive bill of materials cost, and so we aren't planning to pay contra revenue dollars associated with the SoFIA shipments.

SoFIA is now shipping in the market, so on track from a timing standpoint.

Brian highlighted how fast we were able to execute to this product line, and I think it really is an example of the changes going on inside the Company.

As I think about this playing out over the course of the year -- and then the other big bucket is just reductions in investment level that we talked about at the investor meeting.

That second bucket plays out linearly across the year.

It will grow, but it's giving us a benefit in each quarter.

The product mix, SoFIA reduction in contra revenue dollars really kicks in, in the back half of the year, so it's more back-end loaded for us, based on the SoFIA ramp.

Great, thanks.

Harlan Sur, JPMorgan.

DCG was up 18% in 2014, it grew 19% here in Q1.

I assume much of this growth was your cloud and cloud 2.0 customers.

As you think about the pipeline of cloud and HBC programs, are you anticipating continued strong spend here in Q2, or should we expect some lumpiness?

And how confident is the team about driving double digits growth in DCG this year?

Harlan I'll start the answer, and then Stacy can jump in.

We've always said in times when the growth is higher, I'm going to assume the growth is a little less, that this tends to be lumpy.

There are large cloud providers, they tend to come in with -- big shifts in their purchasing.

And so don't be surprised if there's a very high quarter, and not as high.

What we said though is that over time we believe we can continue to grow this business at a mid double-digit -- midteens growth rate.

So 14, 15 and 16, somewhere in there, growth rate, over the rest several year period.

Moving forward.

We continue to have that view.

We look at the products we are bringing, the growth that we're seeing in cloud, cloud 2.0 as you say.

Big data is driving some of this growth, as the cloud generates this data, and the cloud providers realize that they can utilize it to improve their cloud performance and their cloud offerings.

All of these things are working together, and what gives us confidence that we can continue to grow this business segment.

Great, thank you for that.

And then, the team started ramping its Core M product just before the holiday season.

In discussions with your customers and partners, what's been the sell through trend and uptake of two in one platforms through the holiday season and into the first half of the year?

Just wondering what's the view on adoption and adoption rates of this new form factor on a go-forward basis.

Thank you.

Sure.

As you said, Core M was introduced right before the holidays.

I'd say that we had a limited number of SKUs available at holiday, and the amount of time we could get in front of it with marketing and all was limited, as well.

That said, we are very happy with the sales we saw in the holidays.

Our Core M is really designed to provide the first truly fanless core product capability, very thin and light form factors.

As we moved through the first quarter, you're starting to see a lot more.

There are several designs that have come during this quarter.

The uptake has been good, and we are continuing to market and make a product awareness.

As we move through the first half, you are going to see a the remainder of the products come out on Core M, that continue this thin light fanless design.

Two in ones.

And so far the uptake has been very good.

We think those, combined with our tablet offerings, provide a very -- a lot of choices for the consumer in this mobile space.

And then as we move into the second half of the year, as we introduce a Skylake, Skylake will have an additional Core M version, which drives even the performance, the battery life for the second-generation for Core M. And again we expect to see form factors, thin, light, long battery life, fanless designs, that are quite compelling.

Great, thank you.

Stacy Rasgon, Bernstein.

I wanted to try to verify something, just so I understand it.

You've got gross margins down in the second half, where your 14 nanometers startups are coming down, your revenue is up a bunch.

Your tablet profit losses get a lot worse.

Obviously, you have 10 nanometer ramping.

You talked about reducing your 22 nanometer utilization and building inventory.

So that to me suggests that utilization has to be coming down a lot in the second half.

You've got to be building inventory a lot in Q2, but it's mostly 22 nanometers that you'll be then be selling in the second half, when Windows 10 and Skylake are launching.

Do I have those dynamics correct?

And then, what is the risk that you're going to be building inventory, I guess, in the first half or in Q2, that will be tougher to sell in the second half, given the new products that ought to be launching at that point?

I think the thing in that, that isn't accurate and is confusing is the inventory piece.

So what we are doing is in Q2, we are cutting the utilization rates of the 22 nanometer factories to avoid putting the product in.

Our goal is to bring it down.

We've seen this premise in the past.

When we have a downturn or an opportunity to roll forward capacity, we want to do it.

We certainly don't want to put older generation inventory into inventory, if we can help it.

So we're going to be cutting utilizations, we are actually cutting them as we speak.

The impact of that is, we'll have some higher costs that are sitting in inventory, because those products that we're producing in Q2 will sell through in Q3 and Q4.

A little bit of a cost headwind in the back half of the year.

The utilization rates will bottom in Q2, and then we think they start to build back up, because we'll take capacity off-line on 22 nanometer, but build back up.

Got it.

So then why are you not calling out utilization as a negative margin driver for Q2 versus Q1?

And gross margins are going up for Q2?

Right, good question.

Because we're not cutting to the point that we have excess capacity charges, so what's happening is, you'll see production costs, as that sits inventory and it sells out in the back half.

So that's why, the way you'll see it as a cost increase in the back half, as opposed to a period charge in Q2.

Got it, so you are basically reducing it early, and you're taking the cost that's actually hitting your P&L in the back half.

So you're almost like smoothing your loadings and your margin outlook for the year, taking Q2 up and taking the back half down, versus prior guidance?

Well no, I'd say what we're doing is we're trying to act fast on bringing -- taking capacity off-line, and then rolling that forward.

And that was the same playbook we have had whenever we have a demand issue.

Got it, thanks.

Can I ask my follow-up?

I think we just covered it, Stacy.

We'd like to --

Okay, thank you.

Chris Danely, Citigroup.

Just a hypothetical question on M&A then.

Can you think of any scenario, I guess your previous biggest acquisition was McAfee, which was $8 billion or something.

Can you think of any scenario that would make you feel like you needed or wanted or desired to do a $10 billion or $15 billion acquisition, short of like saving the Company or a big product line or something like that?

Would that never come into play?

Chris, I'll give you that question back, and then I'll give you the same answer, which is we are not only not going to speculate on actual M&A questions, we're not going to speculate on hypothetical M&A questions.

That's fine

You can try a different one if you want.

That's okay.

I'll stop while I'm somewhat behind.

You're not behind.

Next one a little more mainstream.

So if we do the math on your revenue guidance, we get basically high single digit revenue growth for Q3 and Q4.

You have talked about taking the PC growth rate down, so if we just look at straight desktop notebook, that's 58% of the biz or something like that.

So I guess, how can we get to high single digit sequential revenue growth for Q3 and Q4 with the PC business a little slow?

And I look at the last 10 quarters, Q3 and Q4 and high single digit revenue growth has only happened once, and I was wondering how we can get to the math?

I guess I'd say it like this.

You're seeing, I'd say -- you're not seeing anything unusual in the growth rates of CCG, IoTG, the memory business.

They're growing a robust rate.

We're not expecting that to accelerate or reduce in the back half.

So with the exception of DCG, rather higher than what our average is in Q1, so maybe that comes down a little.

The real issue here is on the PC segment.

We think we grew -- we reduced inventories in Q1.

What's unusual is, we're predicting that we will reduce the worldwide PC supply chain, we'll reduce inventories more in Q2.

So think of that as, you shift a few million units from Q2 and they get replenished in Q3, and that shifts when the billing is in.

It's not so much common on the end market, as just a comment on when inventories get builds up for the back end selling season.

Okay, thanks a lot.

We think the driver there is Windows 10.

It's hitting this summer, and given that plus economic volatility and currency volatility, we think customers will reduce inventory levels into the summer, and then replenish back to more normal rates after Windows 10 is available.

Great.

Thanks.

Christopher Rolland, FBR Capital Markets.

So I'm thinking my question is a little bit more big picture here.

So PC industry volumes are now going to fall probably mid single digits along with you, and some, including myself, believe that tablet volumes might also fall this year.

So overall total compute units might in fact be flatter, or perhaps falling this year.

I'm trying to figure out what the missing piece here is.

Are they really going to fall?

Is this a timing issue?

Or is there something else here?

Is it PC lifespan, for example, that might be expanding?

I know you track that.

How do you look at it, in terms of total compute, and what's going on here?

I'll start, and Stacy can jump in as well.

I think you're probably not too far off.

We said that the PC will be down mid single digits.

I would agree most people are thinking that tablets will likely be down.

We've all heard a variety of forecasts.

It's a little bit more difficult to forecast, I think, tablet space.

Just as a reference point, our tablet number for Q1 came in right online with what we had projected, and it's up from our Q1 of 2014 significantly.

So when we look at this for the full year, and we look at compute, there's a variety of things that we look at, when we look at this.

There's share growth, there's what's happening in compute, and then there's also sell off, as we continue to have new and better performance as our products get better and better at the higher ends especially.

And then, with the introduction of Core M and the number of people coming with entry-level systems with Core M. You put all those together, and that's how we formed our view of this year.

As you said, it is formed around a view that when you probably look at the total compute from those products, it declines.

We still think phones and phablets continue to grow, and then there's the growth in data center, the growth in the Internet of Things, and our memory business, which will all grow in that teens range, and they'll vary quarter to quarter.

Okay, great.

Also, well, if you could address PC life span, for example if you do have statistics there.

And then the other question I had was, a major bear thesis, at looking at least cash flow for Intel was around increasing cap intensity as we move down Moore's Law, but that your CapEx guidance implies the lowest spend that we've had since 2010, and we're pretty much on record revenue here.

So in your opinion, does that speak against that capital intensity argument, or is this really just a timing issue?

Thanks.

Those are two questions.

Let me answer the first, and I'll let Stacy answer the capital intensity one.

The first one was around what is happening to system longevity or system lifespan.

It is continuing to grow.

Our estimates are that there is something approximating 600 million PCs out there, and that's growing somewhat by the day, that are greater than four years old.

You could look at that as, this has continued to grow and push.

You can also look at this as this as a great opportunity.

We still believe that at some point, those systems will flip over.

Windows 10, Skylake, all of those things are opportunities that we think we can start to move some of those units, but the approximation is 600 million-ish greater than four years.

I'll let Stacy handle the capital intensity.

On the capital intensity, I'll give you long-term answer and then come back to what we're seeing in 2015.

The longer term answer, and I'll refer you to some of the stuff we showed at the investor meeting.

We do agree, capital intensity is going to go up as measured by capital cost per square inch of silicon.

We believe that through 14, 10 and with some insight, all the way down to 7 nanometer we can offset that increase in capital cost per square inch of silicon by improving our density, and so we can keep the cost per transistor coming down at the historical curve.

So for us, we don't think that we're going to be impacted by, at least over the next two to three generations, by the increase in capital intensity, and that's where I showed at the investor meeting, there is $7 billion to $8 billion normalized run rate were we can respond to some unit growth with manufacturing CapEx, and on top of that we put some other capital things like office buildings and labs.

Specific then to what's happening this year, is we were planning for -- if you go all over way back to the investor meeting last year, we've seen two big buckets of improvement.

One is, as Brian said, our confidence around 14 nanometer has improved, and second, our desktop units have come down, and so versus flat units, we now think we're down in the mid single digits.

And the combination of those two things has allowed us to have more re-use of 22 nanometer or 14 nanometer, and we've driven some efficiency in the factory network.

And so either -- I'd characterize this as being an unusually low level of CapEx, relative to the size of the business, because we are driving efficiency at a faster rate, and we are getting more re-use than we expected.

I see.

Thanks for the clarity.

Jim Covello, Goldman Sachs.

You've talked about how the mobile loss has declined in the back half of the year.

That was very helpful color.

Could you talk a little bit about the strategy or the thought process behind combining the categorizations of the groups and the reporting structure?

What was the thought there?

I'll start, Jim.

And Stacy can voice in on some of this as well, because there's a financial side to this.

But in general, we first made this move based on our customers, and how we look at the architecture in the business.

And so our customers, you walk into whoever that customer is like Lenovo or Acer or some of the ODMs and try to -- they look at the platform from the phablet, especially, up through at least the tablet, and into the low-end entry-level PC, whether it be a Windows base system or Chromebook or Android.

They look at all those platforms as the same type of hardware, and they want to have a single group that they interface with, and so our customers wanted this.

Secondly, from an engineering perspective, from our side, the silicon, the cost improvements, the software work, the drivers.

All of those things, again.

A lot of overlap, so by driving those two organizations together, we are getting efficiencies that are helping contribute to that $800 million cost reduction that Stacy and I committed to.

It was first and foremost our customers and our efficiency were driven by this.

This was not anything else.

But that points then to Stacy's -- what he does, it says the financials need to represent how you're running the business and making decisions by it, and so we also made the reporting structure that same way.

But I'll let Stacy jump on that.

Brian said it well.

The only two pieces of commentary I'd add to that is, I'll take it back to Chris's question earlier.

We're seeing this blurring of lines between different devices, and we were doing some unnatural things to try to categorize them.

I think the Microsoft Surface is a perfect example of that.

When you look at Gartner's and IDC's, the way they characterize the market, they count that as a tablet.

We were including that of the PC revenue line, and we realized that the customers were viewing these as one category of devices, we were starting to manage it as one category of devices, and we would be more efficient and more accurate to think of client broadly.

The other comment I would make is we showed in the investor meeting, and Brian had some specific materials on this, we also finding that the IP that we were developing was shared across these different groups, and so again, we were having to categorize things that ultimately came down to judgment.

So we realized it was one set of customers and one set of products and one set of IP that was flying across the different products.

That's really helpful, thank you.

My follow-up would be on the NAND market.

I know you said NAND is going to follow the same secular trends as DCG.

Is there ever going to be a time period where it makes sense to expand that opportunity for you?

It's a good growth market, you're making good margins on it, fills up the factories.

What would be the pros and cons of expanding your business in that segment?

First, you're right.

As we said at our conference, Jim, especially for us, because the majority of the NAND that we sell goes into enterprise level products, namely the data center.

Greater than 50% of what we sell off the NAND is enterprise class device.

We also announced our 3D NAND, which we think really is a game changer.

We talked about the density, the cost, putting 10 terabytes or more into an SSD we think is pretty compelling.

We are constantly looking at these businesses, NAND especially and asking ourselves, what are the level of investments?

Right now we have a great partnership with Micron where we jointly develop these, the majority the manufacturing is done, and all of the manufacturing on these technologies is done by them, and that relationship works very well.

We are able to invest.

We invest through them, and they have the efficiency of having factories that they can offset loadings with other products that they have, and this is a very efficient model in the memory market, to have basically two companies with two very different business models, to be efficiently using the same factory network.

What would drive us outside that would be if we saw some unique growth or some unique situation where it made sense for us to manufacture it, but right now, this model works very well and the efficiency that we get out of working together with them, I think is really what has been a game changer in the market for us.

Thank you so much, and congrats on the CapEx cut.

Love seeing that.

Thanks, Jim.

And operator, we have time for two more questions.

Ambrish Srivastava, Bank of Montreal.

I just had two questions.

One on the DCG.

You referenced a 50% of Xeon E5, if I remember correctly, on Grantley.

Just help us understand what has that done in terms of driving growth so far for the business?

And my second question, my follow-up is on the on the PC side.

Brian, you had mentioned Windows 10 a couple of times.

Are you expecting a big bump up in demand from that, and if so, why?

Thank you.

Sure so we'll answer these one at a time, and let me start with the Grantley one, and Stacy can voice in, and I'll answer the Windows 10 one.

In all of these cases, our new products, as you said, the Grantley platform, which is our E5 series of products, provides a new level of performance.

And when you look at this business, there are some segments of this business that's replacement.

With each one of these new generations, we look at the fact that the total cost of ownership for a cloud provider, an enterprise provider to come in and do a replacement from a older generation Intel product to a new generation Intel product tends to have a positive total cost of ownership return.

Then there's a replacement function that each one of these new generations has, along with increased density and performance that a cloud provider can get with a new product like the Grantley, allows them to grow their business, without having to grow their footprint as much.

And so that allows cloud growth at a much more efficient and effective capacity.

So we look at new platforms like Grantley, the fact that we do get a very fast transition, as we said, greater than 50% now is on Grantley, is just an example of how fast people see the economics that these products deliver.

So that would be my answer to this, it's really performance, which then drives economics, which then drives both replacement and overall data center growth.

But Stacy had a comment on that.

I'd say that in the place you see it is in our mix, in server.

This is a place where if we can drive technology faster than everybody else, we get paid for it, because as we bring more powerful products in, people buy higher in the stack, because they get an increasing return on that.

And when you look at that the DCG results, year on year, you see that units were up 15%, ASP was up 5%, so you see it in both of those.

It drives this replacement cycle, and it drives an increasing way.

I guess what I was trying to get to, sorry, Stacy, I was trying to get to is how much is the growth is -- are you able to handicap on the number.

How much of the growth came from the Grantley?

How much of the 19% growth was due to Grantley?

We don't go through and report those kinds of separations.

Partly, as we said, the growth in data center is general is supposed to be lumpy, and it's based on orders by some of the big cloud providers.

And as we said, more than 50% of the volume is now on Grantley, so just by the math, you say, sure there's more than 50% of the 19% growth was probably on Grantley, but I'm not sure necessarily that factor driving this, it's one of the factors.

And keep in mind, we bring out a new product in the data center every 12 months, and then that product rolls out over the course of a year.

So Grantley has been shipping for us since -- been shipping since Q3 of last year, and it started in the cloud, and so it's not like an event.

It's -- you bring out a product, it starts in the segment, and then we bring out products that are appropriate to different segments, then we bring out a new microarchitecture, and then we bring out the second generation of the microarchitecture so there's always a product evolution happening.

With regards to you Windows 10 question, as we said in the script and in some of these questions, we are not really currently forecasting a big recovery or boom in the second half.

What we said is, there is some push out of the inventory that would normally be present in the second quarter, as people lean their inventories so that they're in preparation for Windows 10.

Windows 10 launches in the summer, as it has been announced.

As that occurs, and we move into Q3, we anticipate that inventories will simply recover back to a normal level from the lean out, so we'll see growth in an inventory recovery at that point.

But if you took a look at the sell through in an overall year, we're actually projecting, as we said, a relatively seasonal mid-single digit decline in the PC business, and it's just got this inventory shift o moving in the center of the year around that.

Okay, great.

Thank you very much.

CJ Muse, Evercore.

I guess first question on the PC side, in terms of the single-digit decline.

Curious if you could walk through what assumptions you are making around mix shift from an enterprise to consumer ASPs, as well as the impact of US dollar strength.

Oh boy.

It's a tough one.

I'll start with the second part.

It's really impossible to detangle what we're seeing in the PC market and separate out what's happening from a macroeconomic standpoint, currency volatility, an XP hangover, and then Windows 10 shift, it's just kind of all wrapped up together.

So I don't think I can give you a lot of color on that.

Our view of the year when we started the year is that we would see -- I articulated a little less strength in the enterprise segment of the market, and a little less weakness in the consumer segment of the market.

I think we would revise that statement now to say we are going from strength in the enterprise segment to probably a little bit of weakness in the enterprise segment, and consumer was weak last year.

It's probably a little less weak this year, but expect it to be down.

And you take the combination of those two things, and that's how you get to minus 5% mid-single-digit decline.

That's helpful, and as a follow-up, in terms of the cut to CapEx, curious if this is a new steady state for you?

And then as the question that follows that, how do we think about impact to construction in progress, if at all?

And then as well, when we go down to 10 nanometer, the rise in cap intensity there.

Do we see a stair step higher in terms of that number and depreciation, or how should we think about those moving parts?

So let me start, and then I'll let Stacy jump in.

What we said was that this year's capital is a little less than what we would have normally projected for the year.

We were able to get, as we said, better yields, better utilization and we were able to -- and this happens from time to time.

You can look back at our past, it happened in 2008, 2009, where we did -- there's a slight decrease in our projection for total volume.

At the same time, we're going through a transition where we are able to move capital very, very quickly.

One of the things we have made as an improvement at Intel is our ability to shift capital from one node to another very quickly, and that has all to do the copy exactly, and how we design our architectures and technologies to be able to do that.

That said, again separate out capital intensity of the technology with the absolute unit cost of the technology, and the real fundamental of Moore's Law is one of economics, and on the 50th anniversary of Moore's Law, which this year is, we should remember Moore's Law is an economics law, and that we're going to reduce the cost as well as we're improving the performance of these parts.

We believe 10 nanometers, yes the capital per wafer start does go up, but it goes up less than the density does, and so we believe our unit cost and everybody measures that in transistor costs, which is probably the best way to measure a one to one, or our overall product cost on the same die equivalent, if you built a Skylake part on one technology or the other, we get an improvement in that cost greater than the capital intensity.

So the bottom line is, I don't expect us always to have this lower level of CapEx.

That said, we are continuously trying to reduce and be as efficient in CapEx as we can.

Yes, the capital intensity will go in 10 nanometers, but we feel like it goes up less, the data center goes up less than the density and cost improvements of the product.

Very helpful, thank you

Thanks, CJ.

All right, thank you all for joining us today.

Jamie, please go ahead and wrap up the call.

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

Again, thank you for your participation.

You may all disconnect.

Have a great day.