Good day ladies and gentlemen, and welcome to Intel Corporation's third quarter 2018 earnings conference call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mark Henninger, Head of Investor Relations. Please go ahead.

Thank you, operator, and welcome, everyone, to Intel's third quarter 2018 earnings conference call. By now you should have received a copy of our earnings release and the CFO earnings presentation that goes along with it. If you've not received both documents, they're available on our investor website, intc.com. The CFO earnings presentation is also available in the webcast window for those joining us online. I'm joined by Bob Swan, our Interim CEO and Chief Financial Officer, and Murthy Renduchintala, Group President of the Technology, Systems Architecture, and Client Group and Chief Engineering Officer. Navin Shenoy and his wife are welcoming a new baby, and as a result he won't be joining us today. In a moment, we'll hear brief remarks from Bob, 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 CFO commentary and earnings releases, available on intc.com, include the full GAAP and non-GAAP reconciliations. With that, let me hand it over to Bob.

Thanks, Mark. This summer we celebrated our 50th anniversary, and this quarter was the best quarter in our 50-year history. Record quarterly revenue of $19.2 billion was up 19%. Our operating margins expanded 5 points, and earnings per share of $1.40 was up 39%. Our results were driven by incredibly strong demand and customer preference for the performance of our leadership products across the business. Our Data Center, Client Computing, Internet of Things, Memory, and Mobileye businesses all achieved record revenue. We expect 2018 to be the best year ever and our third record year in a row. Before we get deeper into the financials, I'll take a few minutes to talk about our strategy, our products, and our people, first our strategy. We are growing share in a larger TAM, driving operating leverage while increasing our R&D investments, and delivering attractive capital returns. Our thesis is that the massive growth of data worldwide will increase demand for the analysis, storage, and sharing of data. We are one of the few companies that touches every part of the data revolution, and we've invested both organically and acquisitively to capitalize on these trends to accelerate the growth of the company, while at the same time delivering significant operating leverage and exiting non-core businesses. Our disciplined focus is delivering outstanding results. Demand and growth this year continued to exceed our expectations. Collectively, our data-centric businesses are up 22% year to date, led by growth in the cloud and communication service provider segments. In both our data-centric and PC businesses, our CPU leadership puts us in a great position to capitalize on this massive data opportunity by delivering more value to a broader set of customers. We've expanded beyond CPUs with memory, modems, FPGAs, and silicon for emerging high-growth workloads like ADAS, artificial…

All right, thank you, Bob. Moving on now to the Q&A, continuing with the practice that we began last quarter, we'll ask each participant to ask just one question if you have one. Operator, please go ahead and introduce our first questioner.

Certainly. Our first question comes from the line of Harlan Sur from JPMorgan, your question please.

Good afternoon and congratulations on the solid quarterly execution. On the competitive front, with your nearest competitor rolling out its second-generation 7-nanometer server next product year, I guess the first question is, is the Intel team still on track to roll out its next-generation Xeon family, the Cascade Lake, at the end of this year? And if you could, just help us understand. What are some of the performance and portfolio differentiators that are going to help the team maintain relatively strong share in the service segment 2019 and beyond?

Yeah, Harlan, this is Murthy. Let me take that one. Yes, you're correct. We still intend to be making first shipments of Cascade Lakes by Q4, and we're really excited with the stockpile of new features we have lined up for that platform, primarily the support of our Optane Persistent Memory that we will launch in conjunction with Cascade Lakes as we enter early 2019. We believe that will be a significant uplift in performance. We will also have dedicated instruction set extensions to support artificial intelligence workloads. And we'll have continued generation-over-generation CPU improvements. So all in all, we think that Cascade Lake represents a power-packed addition to the data center roadmap. And of course, we have further excitement towards the end of next year as we launch our Cooper Lake platform as well. So we're really excited about the lineup we have in our DCG roadmap for next year and indeed, as you said, for the end of this quarter.

Great, thank you.

Thank you. Our next question comes from the line of Toshiya Hari from Goldman Sachs, your question please. Toshiya Hari - Goldman Sachs & Co. LLC: Great, thank you so much for taking the question. Bob, you've done a great job in managing OpEx since coming on board. You talked about further leverage into 2019. Can you remind us which areas of the business you're deemphasizing from a spending perspective? And how should we think about the balance between R&D and SG&A in 2019 and beyond? Thank you.

Yeah first, I think that the progress we made has been a team sport. And as I indicated in the prepared remarks, we're down 700 basis points from 2015. And during that timeframe, it's not been at the expense of R&D. It's on the contrary, R&D has grown $1.4 billion during that timeframe. So really the underlying dynamics is we've made trade-offs to invest in higher growth segments of the business. That growth is in fact accelerating. And from that accelerating growth, we've been extremely disciplined on getting leverage on our SG&A, and we've exited some what I'd characterize non-core businesses. During the course of this year, we exited Wind River. We reduced our investments in wearables products, and we exited the Saffron business as well. So as we go forward, we're going to continue to increase R&D, and we're going to increase it in the areas that we think can generate differentiated growth for us. And from that growth, we expect to continue to get leverage as we go into 2019. Toshiya Hari - Goldman Sachs & Co. LLC: Thank you.

Thank you.

Thank you. Our next question comes from the line of John Pitzer from Credit Suisse, your question please. John William Pitzer - Credit Suisse Securities (USA) LLC: Yeah, good afternoon, Bob. Congratulations on the strong results. Bob, I wonder if you could just comment a little bit on when do you think the supply constraints will be over relative to your capacity addition plans. And if I caught it right, it sounds like in the calendar fourth quarter, you're choosing to shortchange the IoT Group. Does that mean that you're already caught up in the PC market, or how should we think about that dynamic?

First, John, as we mentioned earlier, we were caught off guard a little bit this year by explosive growth well ahead of what our expectations were back in the beginning of the year, and that growth came from all different segments of the business. It put us in the unfortunate situation of constraining some of the demand signals that we were seeing from the market and our customer base. In conjunction with our customers, our teams have done an outstanding job in the third quarter and we project into the fourth quarter, and that has enabled us to increase our revenue outlook for the year by $1.7 billion. But I think as we go into the fourth quarter, given the demand signals we continue to see across the business, we in fact will be constraining growth. Our focus has been prioritizing, in conjunction with our customers, Xeon and Core processors. And therefore by definition, the lower end of PC and the IoT business is being constrained. So we are in a constraint scenario into the fourth quarter, both at low-end PC and IoT. As we go into next year and the timing, we've put a lot of capital to work this year. It's a record year for CapEx for us at $15.5 billion. It's $1.5 billion higher than what we expected entering the year, and we have taken some of our 10-nanometer equipment and tools and began to blow that back to meet the increased demand for 14. So we're working extremely hard to get back on track in 2019. But at this stage of the game, given the demand signals we've seen in fourth quarter, we're going to be constrained a little bit. And we're trying to prioritize best as we can with our customers. John William Pitzer - Credit Suisse Securities (USA) LLC: Thank you very much.

Thanks, John.

Thank you. Our next question comes from the line of Ambrish Srivastava from Bank of Montreal, your question please.

Hi, thank you very much, Bob. Thanks actually for providing some color on 2019, but one area you did not touch on was CapEx. And I'm asking if you could provide us some directional input on that and what we should expect for CapEx, specifically in light of the Micron call option and implications that has for your spend on the memory side. Thank you.

I think on CapEx at the macro level, as we think into 2019, we expect logic CapEx to likely be a little higher, and memory CapEx, despite building self-sufficiency on Optane, to be a little bit lower. So at the macro level, those are the dynamics. In terms of how it plays out on overall levels, it's still a work in process, and I'd characterize it, Ambrish, this way. First, it's going to be a function of growth. As we get clearer around what growth looks like in 2019 for 14-nanometer, that will impact what the overall CapEx level is. Secondly, we've made some good progress on 10-nanometer yields over the course of the last six months. And as we progress through the fourth quarter and into 2019, if we're further ahead on 10-nanometer yields, that will influence the amount of CapEx next year. Third, our progress on 7-nanometer, how well we progress on 7-nanometer also will influence how we think about CapEx. And last but not least, as it relates to memory, it's more the customer quals and adoption of our leading-edge 3D NAND 96-layer product. As we continue to make progress on developing that, we may deploy that capital, and that pays for itself very quickly. So as we sit here today, CapEx, I expect logic to be up, memory to be down. And as we look at those four things, all which I'd characterize as being good things if we make progress on all four of those, that will influence the rate of CapEx spend next year. So we'll try to provide you a little more analytical color versus that qualitative color in January.

This is very helpful. Thank you.

Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley, your question please. Joseph Moore - Morgan Stanley & Co. LLC: Great, thank you. I wanted to get – just give us a little bit more color on the PC numbers in the quarter. How much were you constrained by the shortages that you saw? And I guess it looks like you grew a little bit more than seasonal on a sequential basis. And how much of the ASP lift that you saw you think was a function of those shortages? And then just any color on could those shortages spread higher into this product stack over the course of Q4?

Joe, I think as you saw from the IDC and Gartner folks, growth for PC TAM in the quarter probably around 1%. Our guess is it was probably a little bit stronger than that, 1% to 2% growth. And within that, we delivered 6% unit growth, so real strong unit growth and again good ASP momentum. I would say in Q3, largely a function of customer collaboration in our fabs, I don't think we were too terribly constrained on the PC side, to be honest with you. I think as we're going into Q4 is where I think the constraints are impacting us a little bit more. So I don't think ASPs or supply constraints really benefit. We did not benefit from higher ASPs nor were we constrained in terms of unit growth in the quarter. It's more a fourth quarter thing where demand signals remain relatively strong. And as you saw from our guide, while it's good year-on-year growth, it's relatively flat overall on Q3 to Q4. And PCs, low-end PCs and IoT will be impacted as we see the demand signals at this stage of the game. Joseph Moore - Morgan Stanley & Co. LLC: Great, thank you very much.

Thanks, Joe.

Thank you. Our next question comes from the line of Weston Twigg from KeyBanc Capital Markets, your question please.

Sure, thanks for taking my question. I just wanted to ask a little bit. I guess the demand is really good here in the back half of 2019. But with the trade war discussions, softening demand in China, some cycle risk indicators, are you seeing anything or talking to customers that would indicate that there would be any first half 2019 risk to demand?

It's a great question. I think at the aggregate level, there is what I'd maybe characterize as some decent tailwinds as we exit the year and then go into 2019, but also some headwinds. The tailwinds, as you know, we've been talking about an expanded TAM where we play a bigger and bigger role in the increased needs for data. That larger TAM and the momentum we're building across all of our products is a pretty good tailwind as we look at just demand for data, whether it's with consumers or with businesses going into the new year. That's a tailwind. Secondly, Murthy mentioned a few of the products that we have coming down the pike in the fourth quarter and going into next year. And those products we believe will deliver more and more performance for our clients, which I'd characterize as a tailwind. And then third, in somewhat of a perverse way, as you know, when PC was 70% of the business and when enterprise was 50-plus percent of the Data Center business and those were declining, it was a headwind for the company's growth. But those more recently have been stable. So whether it's our expanded TAM, our new products, or the mix of our business, we have some tailwinds as we think about 2019. At the same time, to your point, there are some headwinds. And the headwinds first, this has been a fantastic year for us and I think for the industry, and that just makes comps a little bit tougher as we go into next year. Second, we have growing competition. Growing competition can be a headwind for us. And our expectations are we'll deal with that pretty effectively. And third, just global trade, in particular, as you know, China is a big market for us. We've got some important customers there, and it's an important part of our global supply chain. So as this most recent round of tariffs play out, and we're doing a lot of work with our customers to ensure that the global supply chain can be adjusted and adapted to deal with any tariffs that come down the way. But I think it's going to be a wait-and-see as we go into 2019. At this stage of the game, we don't see any impact on 2018's results. And in 2019, we have what I consider a world-class supply chain team that can manage and weather the dynamics of changes in movement of goods better than anybody else in the industry. So I think that would be a competitive advantage for us as we go into next year.

That is very helpful. Thank you so much.

Thanks.

Thank you. Our next question comes from the line of Tim Arcuri from UBS, your question please.

Thank you very much. I wanted to ask about DCG. You're not specifically guiding it next year, but it sounds like you're still pretty bullish. And there are a lot of investors I think worried about a hyperscale CapEx slowdown next year. So I guess is it that you're bullish on CapEx next year, or is it more a commentary on product cycle, maybe Xeon Scalable beginning to catalyze the server upgrade cycle? Thank you.

I think firstly in terms of growth for next year in the aggregate, we haven't really provided any quantitative color, more qualitative color in terms of the dynamics that we see. That being said, our DCG growth this year is projected to be north of 20%, real strong through the first three quarters of the year. The fourth quarter we expect really solid demand. But it's on a much tougher comp because fourth quarter last year was a great quarter for the DCG business. As we go into next year, we've got – Murthy highlighted we've got a good product roadmap of expanded features for Cascade Lake as we exit this year, Cooper Lake middle of next year. And we have a much more diverse business now, with obviously cloud has been a big accelerant for us. I don't expect that it will grow at 50% forever. 50% was our cloud growth in the quarter. But at the same time, our comms and networking business growth has been accelerating quite a bit, and the stability we've seen in enterprise and government has really helped. So I think next year, we have a much more diverse business. We've got a good product lineup, and we'll provide a little more color as we get into January, but outstanding year this year for Data Center, both top line and bottom line.

Thank you, Bob.

Thank you.

Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank, your question please.

Hi, guys. Thanks for letting me ask a question. Bob, I wanted to ask on the gross margin side. First, thank you for the color you gave on 2019. But if I back it up a step, what's the headwinds in the fourth quarter sequentially? And then any big picture moving parts, 10-nanometer yields, mix, what have you, that gives you the confidence that you could still stay in the upper half of that 55% to 65% range for 2019?

Yeah, great question. First, a little color on Q3, and then a walk from Q3 to Q4 dynamics. As we highlighted in the materials, almost 66% gross margin in the quarter is as high as it's been for a very long time, and it was a function of a few things: one, continued volume leverage with full factories; two, ASPs both on the client side and on the data center side. And those were partially offset by platform costs going up and changing mix, growth of our modem and memory business. So those are the four dynamics that played out during the course of the quarter. I would say 66% was artificially high, and I'd say that for a couple reasons. One, we had, in the NSG business, we earned a government incentive that was from scaling our fabs outside the U.S. So that incentive was worth about $110 million, so a bit of a one-timer that we don't expect to repeat itself. Secondly, sell-through of product either, on the CPU side, we are working with our customers and shaping demand to where we had inventory. We had good sell-through for some inventory that was previously partially reserved. And then second on our modem growth, our explosive modem growth in the quarter, we PRQ'd that product in the third quarter, so we got the benefit of previously fully reserved inventory. So what all that means when you adjust for one-timers, the 66% is closer to 64% in terms of a normalized basis going into the fourth quarter. Our guide in the fourth quarter, to your question, is 62%. So there's really three dynamics that we see playing out in the fourth quarter. One, we expect ASPs to be better. And that's going to be a little bit of a function…

Thanks for all the details.

Thanks, Ross. And, operator, I think we've got time for two more questions.

Certainly. Our next question comes from the line of Vivek Arya from Bank of America Merrill Lynch, your question please.

Thanks for taking my question. Bob, just one more on 10-nanometer. You mentioned it's on track. Is there a way to quantify progress on 10-nanometer over the last three months? And if you were to go back to a similar time when you were getting ready to make the jump to 14-nanometer, are the 10-nanometer yields and costs behaving in a similar way? Just any color around progress would be helpful. Thank you.

Hey, Vivek, let me take it. This is Murthy. First of all, as Bob said in his opening remarks, the progress we've made in the quarter is very much in line with our expectations. While we can't give any specific numbers, I do believe that the yields as we speak now are tracking roughly in line with what we experienced in 14-nanometer. So we're still very much reinforcing and reaffirming our previous guidance that we believe that we'll have 10-nanometer shipping by holiday of 2019. And if anything, I feel more confident about that at this call than I did on the call a quarter ago. So we're making good progress and I think we're making the quarter-on-quarter progress that's consistent with prior generations having reset the progress curve.

Okay, thank you.

Thank you. Our final question comes from the line of Romit Shah from Nomura Instinet, your question please.

Thank you and congratulations on the solid results. Bob, you said that progress on 7-nanometer will also be a factor driving CapEx next year, and I was hoping you could maybe talk about that a little bit more. When you talk about progress, is that a statement about yields, meaning if 7-nanometer yields are improving you could potentially deploy more CapEx to ramp that process node a little earlier?

We haven't really given a timeline for 7-nanometer, so to say it's ramping earlier would be a little bit of a stretch. But we've been investing in EUV for a while, and we've obviously been investing in 7-nanometer. And when we step back and think about CapEx for next year, again, it's a function of growth on 14-nanometer. It's a function of the rate in which we scale 10-nanometer, and it's a function of investments we make to begin to prove out 7-nanometer in a more meaningful way. So those are just the dynamics that we're looking at and thinking about as we get closer to giving you a more definitive guide for CapEx in 2019.

Okay, thank you.

All right, thank you all for joining us today. Operator, please go ahead and wrap up the call.

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