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earnings_call

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Corporate Participants
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* Trey Campbell
Intel Corporation - Head of IR
* Robert H. Swan
Intel Corporation - CEO & Director
* George S. Davis
Intel Corporation - Executive VP & CFO

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Conference Call Participiants
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* Vivek Arya
BofA Merrill Lynch, Research Division - Director
* Joseph Lawrence Moore
Morgan Stanley, Research Division - Executive Director
* Stacy Aaron Rasgon
Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst
* Christopher Adam Jackson Rolland
Susquehanna Financial Group, LLLP, Research Division - Senior Analyst
* Blayne Peter Curtis
Barclays Bank PLC, Research Division - Director & Senior Research Analyst
* Ross Clark Seymore
Deutsche Bank AG, Research Division - MD
* Timothy Michael Arcuri
UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment
* Harlan Sur
JP Morgan Chase & Co, Research Division - Senior Analyst
* John William Pitzer
Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head

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Presentation
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Operator [1]
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Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Intel Corporation Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.
And now I'd like to introduce your host for today's program, Trey Campbell, Head of Investor Relations. Please go ahead.

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Trey Campbell, Intel Corporation - Head of IR [2]
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Thank you, operator, and welcome, everyone, to Intel's fourth quarter earnings conference call. By now you should have received a copy of our earnings release and the earnings presentation. If you've not received both documents, they're available on our investor website, intc.com. The earnings presentation is also available on the webcast window for those joining us online.
I'm joined today by our CEO, Bob Swan; and our CFO, George Davis. In a moment, we'll hear brief remarks from both of them, followed by Q&A.
Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
A brief reminder that this quarter we have provided both GAAP and non-GAAP financial measures. Today, we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentation and earnings release available on intc.com include the full GAAP and non-GAAP reconciliations.
With that, let me hand it over to Bob.

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Robert H. Swan, Intel Corporation - CEO & Director [3]
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Thanks, Trey.
We exceeded our expectations for Q4 '19, capping off a fourth consecutive record year. In Q4, we generated $20.2 billion in revenue and $1.52 in earnings per share, exceeding our guidance by $1 billion and $0.28, respectively.
For the full year, we delivered $72 billion in revenue and $4.87 in EPS. The PC, Data Center, IoT, Memory and Mobileye businesses each set all-time annual revenue records.
Several years ago, we began a transformation to reposition the company to take advantage of the data revolution that is reshaping computing. Exiting this quarter, we now have greater than 50% of our revenue coming from our data-centric collection of businesses, but our journey is just beginning. To reach our multiyear goals, we will continuously focus on 3 key priorities: accelerating growth, improving execution and deploying our capital for attractive returns.
I'd like to share our progress against these priorities over the last 90 days. We are accelerating growth by expanding the capabilities of our workload-optimized platforms, playing a larger role in our customers' success. Demand for our Intel Xeon Scalable processors is very strong as customers continue to make Xeon the foundation for their AI-infused data center workloads. One of the reasons Cascade Lake is our fastest-ramping Xeon CPU is its unrivaled AI performance. Xeon's AI performance will take another step in the first half of 2020 when our third generation Xeon Scalable processor, Cooper Lake, debuts. Cooper Lake features new Intel DL Boost extensions for built-in AI training acceleration, providing up to a 60% increase in training performance over the previous family. Additionally, we've been expanding beyond the CPU, in the Data Center, with products such as Optane persistent memory, custom ASICs, Ethernet and silicon photonics.
In Q4, Data Center adjacent products grew more than 30% year-over-year. In client computing, we are seeing excellent momentum for our first 10-nanometer mobile CPU, Ice Lake, with 44 system designs already shipping. In addition to our CPU capabilities, we continue to deliver leadership PC platform connectivity. With WiFi 6, we're delivering gig plus speeds. And for wired connectivity, we just announced Thunderbolt 4 for platforms in 2020.
At CES, we also showed customer momentum for our Project Athena innovation program, including the first Project Athena-verified Chromebooks. Project Athena-verified laptops have been tuned, tested and verified to deliver fantastic system-level innovation and benefit spanning battery life, consistent responsiveness, instant wake, application compatibility and more. We verified 26 Project Athena designs to date and expect 50 more devices across Windows and Chrome to be verified this year.
In addition to strengthening our largest businesses, we're investing to win key data-driven technology inflections. These inflections include the rise of artificial intelligence, the transformation of networks and emergence of the intelligent and autonomous edge.
The market for AI-based silicon is growing and evolving quickly. New workloads are emerging, and existing workloads like high-performance computing are converging with AI. In 2019, we generated $3.8 billion in AI-based revenue. The AI market opportunity is expected to be $25 billion by 2024, and we're investing to lead with a strong portfolio of products. In addition to integrating AI into all our leading products, we've introduced and acquired new capabilities that deepen an already unparalleled portfolio of AI assets. We announced the acquisition of Habana Labs, a leading developer of programmable, deep learning accelerators for the data center. Habana, combined with Intel's existing AI ASICs and software expertise, will advance our AI offerings for the data center with high-performance training and inference processors and a standards-based programming environment to address evolving AI workloads.
Delivering the optimal AI silicon architecture is critical but not sufficient to solve customers' problems. That's why we launched the oneAPI industry initiative to deliver a unified and simplified programming model for application development across heterogeneous processing architectures. oneAPI marks a game-changing evolution from today's limiting proprietary program approaches to an open standard space model for cross-architecture developer engagement and innovation.
As expected, our networking business reached $5 billion in revenue in 2019. We've grown our business by helping our customers transform their networks by consolidating and virtualizing workloads on Intel Architecture-based servers. Now as we advance into the 5G era, we see our momentum and design win pipeline accelerating as we're positioned to win significant share in base stations.
This quarter, we announced a strategic agreement with Alibaba to support both the Tokyo and Beijing Olympics, building out 5G infrastructure utilizing Xeon Scalable, Optane persistent memory and Intel software. These data-optimized 5G networks will support amazing experiences such as immersive 8K VR, cloud 3D stadium simulations and cloud broadcasting.
We also delivered almost $5 billion in annual revenue from our IoT/Edge portfolio of products. In November, we disclosed our next-gen Movidius vision processing unit, Keem Bay. Keem Bay is highly optimized for edge inference with groundbreaking leaps forward in power-efficient performance, delivering up to 4x the performance or 6x the performance per watt over comparable competitive solutions.
It's been over 2 years since the acquisition of Mobileye, and we couldn't be more excited about the team's progress. This quarter, we announced several exciting new engagements. We established an agreement for RAM data harvesting with SAIC Motor and embarked on a strategic partnership with NIO to deploy Mobileye's self-driving systems as the full stack solution for NIO's consumer AV.
We also continued to accelerate the commercialization of driverless mobility as a service with 2 new partnerships, RATP in Paris and Daegu City in South Korea. In Q4, we were also excited to host analyst and investors at Mobileye's headquarters to discuss our strategy to win the more than $70 billion opportunity for ADAS, AV and data, and to expand our aspirations to an even larger role in the $160 billion opportunity for Mobility as a Service. Our guests had the chance to test drive our technology on the demanding roads of Jerusalem as we demonstrated industry's leading AV solution stack navigating a wide variety of driving complexities and delivering unmatched agility and safety.
We have significant opportunities, but realizing them requires improved execution, starting with delivering more supply for our customers. In response to continued strong demand, we invested record levels of CapEx in 2018 and 2019. That added capacity allowed us to increase our second half 2019 PC CPU supply by double digits relative to the first half. However, demand has continued to outpace PC supply, and supply remains tight in our PC business. We're continuing to add capacity, so we're not constraining our customers' growth.
Across our 14- and 10-nanometer nodes, we're adding 25% wafer capacity this year to deliver a high single-digit increase in PC unit volume. This will enable us to meet market demand, deliver our 2020 financial plan and increase inventory to more normalized levels. Our near-term challenge is working with our customers to support their desired product mix.
Our process technology execution continues to improve. In Q4, we ramped our 10-nanometer production and continue to see yields improve. We are planning 9 new product releases on 10-nanometer this year, including our next-gen mobile CPU, a 5G base station SoC, an AI inference accelerator, our first discrete GPU and Xeon for server, storage and networking. We're also on track to deliver 10-nanometer plus this year, our first performance upgrade on 10-nanometer. Our 7-nanometer process remains on track to deliver our lead 7-nanometer product, Ponte Vecchio, at the end of 2021, with CPU products following shortly after in 2022. We are also driving innovation in the next generation of computing. At CES, we provided a first look at our next-gen Intel core mobile processor, code named Tiger Lake, which is designed to offer groundbreaking advancements when it ships later this year.
Tiger Lake, built on Intel's 10-nanometer plus process, will deliver significant gains in compute, AI, graphics and interconnect over the prior generation. We will also deliver initial production shipments on our first 10-nanometer-based Xeon Scalable product, Ice Lake, in the latter part of 2020. We're also investing to lead the next wave of technology breakthroughs such as quantum computing. Our investment in quantum computing covers the full hardware and software stack in pursuit of a practical commercially viable quantum system.
For example, last month, we unveiled a first of its kind cryogenic control chip, Horse Ridge, that will speed up development of full stack quantum computing systems. We made good progress this quarter but will continue to be laser-focused on improving our execution. That means delivering the supply, leadership process technology and product innovations that allow us to play a larger role in our customers' success.
Our third priority is to thoughtfully deploy your capital to deliver attractive returns. That means, first, investing in the R&D and CapEx necessary to drive our long-term business plan. Since 2015, we have grown revenue by more than $16 billion while reducing spending by $500 million. Spending as a percentage of revenue is down 9 points, while over the same period we've increased R&D spending by $1.2 billion. We acquired Habana Labs, a fantastic company that will accelerate our AI plans, while also making thoughtful disinvestments. We closed both the 5G smartphone modem exit and the sale of IMFT in the quarter. We are confident in our future. And consistent with that, our Board has approved a 5% increase in our dividend to $1.32 per share.
Last quarter, we announced a commitment to execute $20 billion in share repurchases over the next 15 to 18 months. And 3 months into that window, we've already repurchased $3.5 billion in shares.
Finally, our role goes beyond delivering strong results to being a great corporate citizen that has real impact on the world around us and in the communities where we work. I'm proud of the many outside recognitions we've received for our responsible business practices. This reflects our culture and the efforts of our 100,000-plus employees around the world. Also, we continue to believe that a diverse workforce and inclusive culture are essential for executing our growth strategy, which is why we released detailed workforce representation data that raises the bar on ourselves and others for continued improvement.
And it's important to us to be a leader in environmental sustainability, and we're investing to continue to increase the energy efficiency of our operations and our products. And we're also making significant progress on our goal of restoring 100% of our global water use by 2025.
Back at our May Analyst Day, we told you that the industry was at an inflection point where the exponential growth of data is fueling massive expansion in multi-cloud environments, transforming networks and catalyzing the intelligent edge. We believe we're well positioned to lead this data revolution, and we expect to generate $85 billion in revenue and $6 in earnings per share in the next 3 to 4 years. 1 year into that plan, we are tracking well ahead of our commitment. We have $3 billion more revenue, and we've earned an additional $0.52 in earnings versus our May expectations. Our expectation is to continue to make deposits towards our multiyear goal every 90 days.
In summary, our priorities are to accelerate growth, improve execution and thoughtfully deploy our capital on behalf of our owners like you. I'm excited about the opportunities in front of us and appreciate your continued support.
I'll now hand the call over to George for details on our Q4 results and business outlook. George?

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George S. Davis, Intel Corporation - Executive VP & CFO [4]
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Thanks, Bob, and good afternoon, everyone.
Q4 marked an outstanding finish to another record year, with $20.2 billion in revenue, up 8% year-on-year and $1 billion higher than guide. We saw record data-centric revenue of $10.2 billion, representing over 50% of our total revenue, an all-time high. DCG and Mobileye both achieved record revenue in the quarter.
Q4 PC-centric revenue was $10 billion, up 2% year-on-year, capping CCG's fourth consecutive year of revenue growth. Q4 operating margin was approximately 36%, 2 points ahead of our guide on higher gross margin and spending leverage. Gross margin for the quarter was 60.1%, beating expectations due to strong flow-through of higher DCG revenue. Q4 EPS was $1.52, $0.28 above our guide, primarily due to strong operational performance and further boosted by gains from our ICAP Portfolio. These results demonstrate the strong demand for our leadership products and solid execution to achieve a record-breaking year.
As a result, full year EPS of $4.87 was up 6% year-on-year. We generated $16.9 billion of free cash flow, up 19%, and returned $19.2 billion to shareholders. We anticipate another record year in 2020 and are raising the dividend by 5%.
Moving to more details on Q4 performance. Operating margin of 36% in the quarter was up over 0.5 point versus last year as higher volume and ASP strength in our data-centric portfolio and lower spending were partly offset by the ramp of our 10-nanometer process and NAND pricing degradation. EPS was up 19% or $0.24 year-over-year on higher operating margin, equity gains driven by our ICAP Portfolio and a lower share count, partially offset by a higher tax rate. Our non-GAAP tax rate in Q4 was 13.6%, in line with expectations, and up 5 points year-over-year due to tax benefits from tax reform and discrete items in Q4 '18.
Through to segment performance. Our Data Center Group had record revenue at $7.2 billion, up 19% from the prior year. These results beat our expectations, with platform volumes up 12% and platform ASPs up 5% year-over-year on strong cloud demand and continued adoption of our highest performance second-gen Xeon Scalable products.
In Q4, cloud revenue was up 48% year-over-year as cloud service providers continue building capacity to serve customer demand. Enterprise and government revenue was down 7%, while communications service providers revenue grew 14% as customers continue to adopt IA-based solutions to transform their networks and transition to the 5G era. All 3 segments exceeded our expectations for the quarter.
Our other data-centric businesses were up 6% year-over-year in Q4. IOTG achieved another double-digit growth quarter, with revenue up 13% and operating income up 29% year-over-year as customers increasingly adopt Intel AI-infused products to power the growing intelligent edge. And Mobileye revenue and operating income were up 31% and 54%, respectively, driven by the industry-leading EyeQ products, which offer unmatched computer vision and mapping capabilities and continue to win in a fast-growing ADAS market. EyeQ revenue was up 41% year-over-year.
NSG revenue grew 10% on continued bit growth, partially offset by year-over-year pricing declines. NSG reported an operating loss of $96 million as NAND cost improvements were more than offset by pricing declines. PSG revenue declined 17% year-over-year on softness in the embedded segment primarily driven by lower last-time buys versus Q4 '18, partially offset by strength in wireless. Operating income was down 48% on lower revenue and segment product mix.
CCG revenue was $10 billion in the fourth quarter, up 2% year-over-year, driven by higher PC and modem volumes. PC unit volumes were up 1% on continued market strength and increased capacity. Adjacencies, which include modems and wireless and wired connectivity solutions, grew 13% year-over-year driven by strong demand for modems and a better mix of connectivity solutions. Operating margin was 41%, up 4 points year-on-year on higher revenue and lower spending driven by the 5G smartphone modem exit. As a result, CCG achieved record operating income in 2019.
In 2019, we've generated $33.1 billion in operating cash flow and invested $16.2 billion in CapEx. We also returned 113% of free cash flow to shareholders through dividends and buybacks. During the quarter, we purchased 63 million shares at an average price of $55.32 per share. Total 2019 share repurchases were 272 million. And in 2020, we expect to turn in excess of 100% of free cash flow to shareholders under the $20 billion buyback program announced last quarter and the increased dividend announced today.
Let's move to outlook. 2020 is expected to be another record year for the company. We are forecasting revenue of $73.5 billion and EPS of approximately $5. We expect our PC-centric business to be down low single digits year-over-year on a slightly down PC TAM. Within 2020, we expect to see a strong first half and a moderating second half dynamic due to lower modem revenue and expected lower PC TAM in the second half of 2020 as the Windows 10 commercial refresh matures.
We expect revenue from our data-centric businesses to be up high single digits for the full year as we capitalize on the secular trends that Bob outlined. We are expecting an exceptionally strong Q1 as cloud customers continue to build capacity and adopt our highest-performing products. This would mark 3 quarters of strong cloud buildout, and we expect more modest capacity expansion for the remainder of the year as CSPs move to a digestion phase.
We are also planning for an increasingly competitive environment as we move through the year. As a result of these dynamics, we expect total revenue to be more front-end loaded in the first half than we've seen historically. Gross margin is expected to be 59% for the year, down a point versus 2019 on both mix of products and the impact of 10-nanometer costs. Spending for the year is expected to be approximately $19 billion or 26% of revenue, down 1 point, resulting in a flat operating margin of approximately 33%. We expect 2020 CapEx of approximately $17 billion. More than half of which is comprised of investments in fab space and 7- and 5-nanometer equipment.
Free cash flow is expected to be approximately $16.5 billion as the flow-through from revenue growth and higher depreciation is offset by higher CapEx and rebuilding of critical product inventory back to more normal operating levels.
Let's turn to Q1. We anticipate a particularly strong start to another record year, with Q1 revenue of $19 billion, up 18% year-over-year and well above normal seasonal patterns. This is being driven in particular by data-centric revenue growth expected to be above 25% year-over-year on continued cloud buildout and NAND bit growth. Our PC-centric business is also contributing and is expected to be up more than 10% year-over-year on continued PC market strength, additional supply and higher modem revenue. With strong top line growth and mix, we expect Q1 gross margin of approximately 61%, up 3 points year-over-year.
Q1 operating margin is expected to be approximately 35%, up 7 points versus last year on higher gross margin and spending leverage on higher revenue. Tax rate is expected to be 13%, and EPS is expected to be $1.30, up 46% year-over-year.
In summary, 2019 was Intel's best year ever, and we expect a strong start to 2020 on the way to another record year.
With that, let me turn it back over to Trey.

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Trey Campbell, Intel Corporation - Head of IR [5]
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All right. Thank you, George. Moving on now to the Q&A. (Operator Instructions)

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Questions and Answers
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Operator [1]
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Our first question comes from the line of Ross Seymore from Deutsche Bank.

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Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [2]
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Congrats on the strong end of last year and start to this year. George or Bob, whichever of you want to answer this, I want to go a little bit into the trajectory of revenues. George, you gave some great color there on the 2 different segments, PC-centric and data-centric. But it appears by the end of this year, you could even be going negative in both of those segments year-over-year. So it seems like it's a pretty significant drop. I appreciate conservatism in the end-of-life on the Windows side of things, but how do you factor in the increased competition that you mentioned and the fact that shortages should go away so you could actually have some market share gains?

Yes. Let me -- thanks, Ross. Let me start, George, and you can chime in. First, at the -- thank you for the compliment on our fourth quarter results. When we look at 2020 demand cycles, we kind of have 3 things going on that are -- that impact the first half to second half outlook. And George touched on a few of these. But first, at the macro level, the insatiable appetite for data and the processing resources that need to go to make that data relevant, those trends continue, and we feel very good about how we're positioned to capitalize on this increased demand. Second, the -- as you know, from a cloud perspective, which now is bigger and bigger part of our overall DCG revenue, we expect them to continue to benefit from the trajectories that I mentioned initially. At the same time, you'll remember from last year, our ability to predict the cloud -- the CSPs' purchasing and then kind of digestion patterns is relatively hard. So we look at first half to second half, Q1 will be the, in essence, the third quarter in a row of real strong consumption patterns from the cloud folks. So we know from history that at some point, they go into digestion mode and the buying patterns begin to slow down. And it doesn't impact medium- or long-term trends, but it does impact cyclical trends during the course of the year. And we've tried to, based on our past learnings, take that into account as much as we can. So hopefully, we're wrong. Hopefully, we're conservative. But at this stage of the game, that's kind of how we've looked at cloud purchases first half to the second half.
The second thing, PC TAM, we think, is going to be flat to down a little bit this year. And the expectation is the first half will continue to be a Windows 10 refresh that George flagged, and we expect that to slow down in the second half.
And then the third item is modem. It's -- as we go into the second half of the year, we expect modem volume to be lower as we phase out of that business, as smartphone modem moves to the 5G world. So those 3 things have us looking at the full year of kind of 2% growth. And inherent in that is we know we got a much more competitive environment. And our intention during the course of the year is to compete vigorously to protect our position while continuing to expand as compute moves further and further away from the cloud out to the network and to the edge.

Yes. And I guess I would just add that we feel really good about the year overall. It's just going to be a little flatter in terms of the pattern and certainly than we saw last year and certainly different than our normal seasonal pattern, but good strength growth in all of the businesses really outside of the PC, which is going to -- is coming across some headwinds from TAM, but we still expect it to work on gaining back share in some areas where it's had difficulties in the past as we can start to provide more units.

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Robert H. Swan, Intel Corporation - CEO & Director [5]
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And one last comment, I apologize. But I think just on a year-over-year basis, the comps in the first half of '20 are going to be easier. And then after a very strong second half of '19, comps a bit tougher in the second half of the year. But net-net, we're -- as George shaped it up, we're looking for another record year in 2020. Thanks, Rob.

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Operator [6]
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Our next question comes from the line of Vivek Arya from Bank of America.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [7]
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Congratulations on the strong results and especially the buybacks. Nearly 10% of shares retired in the last 2 years. Question, Bob, on 10-nanometer. I saw in the slides, you mentioned 10-nanometer yields ahead, right, of expectations. And you mentioned 9 product releases on 10. Can you help put that in context, what does it imply in terms of the range of desktop and server SKUs? I think there is some speculation that maybe 10-nanometer might be a small node rather than a regular node. Or I guess, asked in a different way, what percentage of your sales do you expect to be on 10-nanometer this year and maybe even next year?

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Robert H. Swan, Intel Corporation - CEO & Director [8]
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Yes. Well, first, we continue to make real progress on yields on 10-nanometer, and that's been -- after all the challenges we've had, that's been kind of a consistent theme over the last 4 to 6 quarters just on yield for 10. So we feel very good exiting the year and coming into this year and where we are in yields.
Second, in terms of the product road map, we have -- we launched Ice Lake for client in the fourth quarter. We launched FPGA's Agilex products on 10-nanometer in the fourth quarter. And then through the course of this year, we're going to have successive products as AI inference accelerator, 5G SoC that we're really excited about for the 5G network GPU launched. And then last and certainly not least, bringing out Ice Lake server product at the back end of the year. So we've launched it. Yields are good. Designs across our portfolio of products are good, and we'll ramp them up during the course of the year.
But primarily, in terms of volume, we'll still be -- the client business is the one we're going to ramp the fastest. It'll ramp during the course of the year. It'll be our second gen of 10-nanometer or what we'll call 10-plus in the second half of the year, which introduces a whole new level of performance for that product. But in the aggregate, we won't have a huge percentage of our overall company volume in the second half of the year. It'll grow as we exit the year and become a much bigger part of our overall volume in 2021.
And then last, I'd just say that our intention back in May, and we reiterated again today, is that we want to get back to a 2- to 2.5-year cadence. And shortly after launching 10, our expectations is we'll have our first 7-nanometer product launched in the latter part of 2021 with CPUs to closely follow. So -- and ramping will go to 10-plus for clients, and we'll ramp 7 on a 2-year cadence in 2021.

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Operator [9]
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Our next question comes from the line of Blayne Curtis from Barclays.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [10]
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Congrats on the great results. Bob, maybe just following on that because I remember 2 quarters ago, you talked about Ice Lake taping out, for servers in the first half. And there's a lot of different milestones, it gets confusing. When you say second half, do you actually -- is that a volume ramp? Or is that when you actually expect the 10-nanometer servers to be out?

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Robert H. Swan, Intel Corporation - CEO & Director [11]
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Yes. It's a good question. Just a few things. I think, first, in terms of how we deploy the technology. Today, our ecosystem partners have already received Ice Lake server samples. So that's kind of the first step for us. And then what we indicated is we'll start production wafers in the first half of this year, and that'll translate into production of shipments in the latter part of 2020. So that's the sequence of events. So production -- we load wafers. We deliver samples, check. We load wafers, first half. We deliver production output, latter part of the year. So that's been pretty consistent with how we've been trying to ramp this over the last several quarters.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [12]
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And then just clarity on the client side, I'm surprised by the seasonality, but I guess I understand with Win 10. With that growth or the strong year-over-year you're seeing in Q1, are you still shorting the market, I guess?

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Robert H. Swan, Intel Corporation - CEO & Director [13]
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Yes. Yes. First, very -- we came into 2019 looking at kind of a flat PC TAM. And when all was said and done, we ended the year with about 3% growth overall and even stronger in the fourth quarter. So we've had a real strong -- the market has had a real strong year in 2019. At the end of the year, as we indicated, we were still constraining our PC customers. And there's -- I'd say there's -- we left some backlog on the table that we are quickly trying to fill as we come into the first quarter. So that's obviously a disappointment in terms of our serving customers at the end of the year but adds to volume in the first quarter, first half.
As we go through the course of the year, just from a macro level, we spent record capital in '18; again, record capital in '19. As George laid out in his prepared remarks, we'll spend -- we'll have record capital in 2020. And it's really geared to ensure that we never constrain our customers' growth. And our expectations in 2020 is that we'll have high single-digit PC unit volume and against the market that we expect to be flat to down slightly. So we are going to be in a good position to meet customer -- the market demand in 2020 to deliver on our full year outlook and to begin to build the inventory levels to more natural position so that the mix dynamics of what product we're selling when we can manage the volatility in that much better than we have been able to in the fourth quarter.
So supply constraints, we are maniacal about eliminating those so that we can meet customer demand and don't have to worry about it.

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George S. Davis, Intel Corporation - Executive VP & CFO [14]
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And we'll expect to see more small core in the second half, which may be part of the dynamic, but we haven't really been able to serve that end of the market in the way that we would like to. So that may be part of what you're looking at.

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Operator [15]
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(Operator Instructions) Our next question comes from the line of John Pitzer from Crédit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [16]
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Let me add my congratulations to the solid results. I guess I've got a similar question to Ross' first question on revenue, but mine is going to be on gross margin. If you just sort of look at the Q1 guide of 61% versus the full year of 59%, I'm just trying to understand kind of the puts and takes that brings gross margin down throughout the year. And explicitly, how much of this is kind of you guys baking in some increased competition? Or how much of this is a pull forward of 7-nanometer? Because 59% is pretty close to what you talked about at the Analyst Day, kind of flattish year-on-year, but it is slightly lower, and you were pretty explicit about gross margins going down in calendar year '21. I'm just kind of curious as to whether or not we're getting a pull forward of the 7 here? Or what are the puts and takes as you think about gross margin throughout the year?

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George S. Davis, Intel Corporation - Executive VP & CFO [17]
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Yes. So as we -- let me just start with the full year because I think that'll be helpful. At the highest level, what you're really seeing is the -- an impact of -- largely related to 10-nanometer costs that are coming into the system during this year and increasing as we go into the second half for all the reasons that Bob laid out. We're actually getting some help that is moderating the impact of that from improving NAND pricing year-over-year. That's actually going to help us on gross margin and lower modem mix in -- particularly in the second half of the year but in the year overall. So those are the big drivers of modems, and that nets out to about a 1% reduction.
And in Q1, what you're really seeing is lower modem and lower variable comp being the reason that we're moving up a point, say, from Q4. And so nothing unusual other than, normally, you would have expected to see a much bigger drop in Q1 gross margin because of the mix of products as it's the, obviously, the seasonally down quarter for many of our businesses.

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Robert H. Swan, Intel Corporation - CEO & Director [18]
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George, the only thing that I would add is we do -- inherent in our guide is our expectations for lower ASPs. And it's a function of 2 things: one that George mentioned, which is we will eliminate the supply constraints and begin to get more volume on small core, which, as you know, has lower ASPs; and secondly, we're anticipating a more competitive environment in the -- as we go through the course of the year.
So to kind of bring it back, we're ramping 10. It's great. And we're ramping 10 in the second half of the year. And in parallel with that, we are investing in 7 in 2020 and in 2021. And those are the things that we flagged back in May at the Analyst Day.
And I'd say the one thing that's really changed since then is that our yields on 10 are just a little bit better, and they're a contributor to slightly better gross margin in the second half of '19, and we expect that to be -- continue to be a contributor next -- this year, I should say.

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Operator [19]
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Our next question comes from the line of Harlan Sur from JPMorgan.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [20]
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On the full year guide for data-centric, up high single digits. I appreciate the first half, second half profile on DCG. But how are you guys thinking about growth of DCG within that framework for the full year? Is it in line with the sort of high single-digits growth for data-centric? And then within that framework, how do you see the growth trends in other DCG segments, i.e., enterprise and comms service provider?

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George S. Davis, Intel Corporation - Executive VP & CFO [21]
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Yes. So the way we would look at DCG, I would say the growth rate will be modestly lower than the overall growth rate. You've got some very high growers contributing to pulling that up a little bit. So a little below the average but still attractive growth in the year.

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Operator [22]
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Our next question comes from the line of Stacy Rasgon from Bernstein Research.

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Stacy Aaron Rasgon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [23]
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I wanted to ask a bit about the capacity additions. So I kind of get this, adding 25% wafer capacity to support your own volumes, going up high single digits in a market that you think is down. Does that imply that you're actually going to be over shipping the market this year as you sort of rebuild those channel inventories?

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Robert H. Swan, Intel Corporation - CEO & Director [24]
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No, Stacy.

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Stacy Aaron Rasgon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [25]
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And what does that imply if I'm going forward into 2021 where the PC market itself may still be in decline, and you'll be -- you'll have higher capacity and ideally like die shrink at that point? Like how do we think about that?

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George S. Davis, Intel Corporation - Executive VP & CFO [26]
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Yes. No, I hear your point. One of the things that we mentioned is we are going to be producing in order to build inventory levels back up in the year. And so in the second half of the year, we would expect to be able to bring both our server products and most importantly, our PC products back to a more normalized inventory level. So we are -- being up in the high single digits is meant to allow us to not only satisfy our customers but also rebuild the inventory. So your math is correct.

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Stacy Aaron Rasgon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [27]
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Right. So that's your own inventory? Or inventory in the channel? Are you going to be selling that to the customers or keeping it on your books?

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George S. Davis, Intel Corporation - Executive VP & CFO [28]
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It'll be our own inventories. And then we'll have to see -- if you look at the -- some of the channel information, you might see customers trying to build some inventory as well. But when we're talking about building inventories, it's our inventory levels.

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Robert H. Swan, Intel Corporation - CEO & Director [29]
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I'd also say the channel inventories exiting the year for PC, I'd say, are relatively low. And that's on us. So I do expect, during the course of the year, we will build our inventory levels to more deal with spikes in demand. But at the same time, we expect the channel to be at more healthy levels as we exit 2020 and enter 2021.
And then just the one other thing I'd mention is as we think about the business overall and kind of the demand signals, we continue to make really good progress on the comms sector, particularly with the growth in the network and the role that we play in the transition to 5G, and we characterize as the intelligent edge. We've delivered double-digit growth with IoT for the last several years. And network and IoT are bigger and bigger parts of our business that we think we're very well positioned. So when you think about PC volume up or down over time, we got this bigger growing aspect of our business that places demand on our manufacturing footprint. So that's the only other thing that I would add, Stacy.

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Operator [30]
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Our next question comes from the line of Joe Moore from Morgan Stanley.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [31]
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I guess going back to the PC constraints that you're seeing. So you'd like to build your inventory back up in, I think, you said earlier in the year, but it seems like we're just a few weeks from you going out to customers and telling them that you would be short. So at what point can they start to add inventory? Are you forecasting that would happen in the second half, in the first half? And then do you feel like when those constraints are eased that you'll be able to take back unit share on the client side?

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Robert H. Swan, Intel Corporation - CEO & Director [32]
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Yes. I think, first, it was middle of November, I should say, that we went out, and we want to be able to provide as much advance notice to our customer base as possible if supply is going to constrain their ability to grow to give them time to deal with it. And in November, with strong data center growth, PC demand continuing to grow and a factory excursion, combination of those things, we felt it was very important to get out to our customers as soon as possible.
I think as we close the year, one of the favorable things was we got more output from our factories. And because of the capacity we put in place in '18, '19 and going into '20, we're really beginning to build back the capacity to meet the demand. So our expectations are we'll have sufficient supply in the first quarter, or I should say, sufficient supply throughout the year.
I think our challenge is really going to be on 2 things, particularly in Q2 with PCs, and that is linearity, not just the supply in the quarter, but week on week supply as our customers are hoping for. And then second, particular SKUs or product mix, making sure that we have the right product mix. So we'll have enough capacity.
I think Q2 will be a little challenging as we try to deal with product mix and linearity. But overall, we really plan to be out of the supply-constrained environment in 2020.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [33]
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Okay. And then are the shortages anywhere other than client? Is it entirely client? Are there any -- anything in server or any other products?

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Robert H. Swan, Intel Corporation - CEO & Director [34]
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No. We're in pretty good shape on server. And I think that going with 19% growth in fourth quarter depleted our inventory level. So we're not -- you have that kind of spike in demand. We're not perfect across all products or all SKUs. But server CPUs, we really prioritize that and try to put ourselves in a position where we're not constrained, and we're in pretty good shape. Pretty great shape, macro, micro, a few challenges here and there, but server CPU supply is pretty good.

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Operator [35]
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Our next question comes from the line of Christopher Rolland from Susquehanna.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [36]
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On CapEx, specifically, $17 billion, you mentioned some of the parts there, but how do we divide that between kind of 7 and 5 versus what you're doing with 10? And I don't know if you're still adding some 14 even. And as we think about CapEx moving forward and capacity here, how do you guys feel about outsourcing non-CPU products like, for example, PSG, could you outsource that to foundries, how are you thinking about CapEx going forward?

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George S. Davis, Intel Corporation - Executive VP & CFO [37]
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Sure. Why don't -- maybe I'll take CapEx, and Bob, you can cover the outsourcing piece. The -- so on CapEx, we're -- part of the reason we're at -- expecting $17 billion this year is we're building more space, some of the longer lead time items. One of the things that's really impacted us in terms of closing the gap on customer demand and our ability to support it has been not enough space available to fill with equipment, which you can do in a much shorter time frame if you already have a space in place. So we said over half is going to be for space. And then for 7- and 5-nanometer equipment, as you know, we've got all 3 nodes right on top of each other. And so we're going to be perhaps a little less capital efficient when you combine that with the fact that we are trying to close the gap on meeting our customers' requirements. And I think all of those things add to the $17 billion. But we also -- we're building for the future to make sure we have the kind of capacity, shelf space in place where we can quickly add capacity to meet demand, if necessary.

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Robert H. Swan, Intel Corporation - CEO & Director [38]
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Yes. And just on the -- the one other thing is maybe with the exception of litho, the reuse from 1 node to the next is still relatively high. So what we put in place for a 10 or a 7, for the most part, we can continue to reuse those tools for next generation.
On the second part of your question, we've historically leveraged third-party foundries for a long time. And it's always been in the probably 20% to 25% of our overall supply we get from third-party foundries. And we continue to look at -- particularly in the non-IA, non-CPU products, we continue to evaluate where is -- in a capital-intense business, where is the best place to have these things manufactured. That's an ongoing process. And I would say, all else equal, the broader -- the breadth of our portfolio as we play a larger and larger role in our customers' success, we build more products. And with that, the evaluation of what we do inside and what we do outside is a full-time effort at our end. So we'll continue to do it. We'll continue to prioritize where we can get the best, most efficient output and make those decisions over time.

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Trey Campbell, Intel Corporation - Head of IR [39]
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Jonathan, I think we have time for one more question, and then we'll turn the call back over to Bob to wrap things up.

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Operator [40]
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Our final question then for the day comes from the line of Timothy Arcuri from UBS.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [41]
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George, I wanted to go back to gross margin. I think last quarter, we were talking about 60% for this year, and we're now 59% for the year on a little bit better revenue. And yes, it's only 100 basis points less. But obviously, people are concerned about the competitive environment. So can you just talk specifically to what changed? And maybe as you exit the year, it looks like that number has to be in the 57%, 57.5% range, which is about where you said next year would be, 2021. So is that still the right number for next year, too?

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George S. Davis, Intel Corporation - Executive VP & CFO [42]
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Yes. Tim, let me just kind of correct the history just a little bit. What we said over the last couple of quarters was, when the question was, hey, when we look at 58%, which is what we quoted for Q4, does that mean -- is that the number that we should be expecting for 2020 and also with the 57% on the table for '21, is that where we are? And I said we will be closer to 60% than we will be to either of those numbers. And so 59% is very much in line with what we believe we were guiding. So I don't really feel like we're down a point. But clearly, there -- the factors that we talked about, everything from product mix to 10-nanometer mix, those are all things that are having an effect, particularly as the year plays out, and also the shape of the year. Bob talked about some of the things where we're -- we'll be in -- the mix in the first half is going to be much richer than we would normally have seen, and we may see a little less rich mix in the second half.
So I think really nothing more than those type of movements, which are very much in line with what we were thinking we would see this year.

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Robert H. Swan, Intel Corporation - CEO & Director [43]
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Maybe -- Trey, maybe just to wrap. First, thanks for joining us. We feel great about how we wrapped up the year, our best quarter in the company's history, 2019, the best year in our company's history, and our outlook for 2020 is it'll -- is we'll do it again. We expect it to be another record year. And our ambitions have just never been greater. As you know, we're going after a larger TAM. We're expanding the role that we play in our customers' success. We're leveraging our CPU architecture but also evolving beyond the CPU to GPUs and visual processing units as workloads continue to evolve. And given the overall dynamics of the industry, we feel very good about where we stand and we realize it's an increasingly competitive world, and we feel like we're well positioned to deal with it. So thanks again for joining us. Our focus is on obsessing about how we serve our customers best. And if we -- and we expect to do that better and better, and that'll be what really drives the growth of the company.
So thanks, and we look forward to another deposit 90 days from now.

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Trey Campbell, Intel Corporation - Head of IR [44]
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Thanks, Bob and George, and thank you all for joining us today. Operator, can you please go ahead and wrap up the call?

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Operator [45]
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Certainly. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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