Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019 Intel Corporation earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Trey Campbell, Head of Investor Relations. Please go ahead sir.

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 have not received both documents, they are available on our investor website, intc.com. The earnings presentation is also available in the webcast window for those joining us online. I am joined today by our CEO, Bob Swan and our CFO, George Davis. In a moment, we will hear brief remarks from both of them, followed by Q&A. Before we begin, let me remind everyone that today's 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.

Thanks, Trey. We exceeded our expectations for Q4 2019, 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 three key priorities, accelerating growth, improving execution and deploying our capital for attractive returns. I would 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 and 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 have expanded 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…

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%, two 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 half a 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 five points year-over-year due to tax benefits from tax…

All right. Thank you George. Moving on now to the Q&A. As is our normal practice, we would ask each participant to ask just one question. Operator, please go ahead and introduce our first caller.

Certainly. Our first question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.

Hi guys. Thanks for letting me ask a question and 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 little bit into the trajectory of revenues. George, you gave some great color there on the two 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. Thanks Ross. Let me start, George. And you can chime in. First, thank you for the compliment on our fourth quarter results. When we look at 2020 demand cycles, we kind have three things going on that impact the first half to second half outlook. And George touched on a few of these. But first, at the macro level, this 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 are positioned to capitalize on this increased demand. Second, 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 that I mentioned initially. At the same time, you will remember from last year, our ability to protect the CSPs purchasing and then kind of digestion patterns is relatively hard. So we look at first half to second half, Q1 will be 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 have tried to, based on our past learnings, take that into account as much as we can. So hopefully we are wrong. Hopefully, we are conservative. But at this stage of the game, that's kind of how we 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 Windows 10 refresh that George flagged. And we expect that to slowdown in the second half. And then the third item is modem. 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 three things have us looking at the full year of kind of 2% growth and inherent in that is we know we have got a much more competitive environment. And our intentions during the course of year is to compete vigorously to protect our position while continue 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 the PC, which 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.

And one last comment, I apologize. But I think just on a year-over-year basis, the comps in the first half of 2020 are going to be easier. And then after a very strong second half of 2019, comps will get tougher in the second half of the year. But, net net, as George shaped it up, we are looking for another record year in 2020. Thanks Ross.

Thank you.

Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your question, please.

Thanks for taking my question and congratulations on strong results and especially the buybacks, the nearly 10% of shares retired in the last two years. Question. Bob, on 10 nanometer. I was in the slide, you mentioned 10 nanometer yields ahead right off expectations and you mentioned nine 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 percent data of your sale do you expect to be on 10 nanometer this year and maybe even next year? Thank you.

Yes. Well, first, we continue to make real good progress on yields on 10 nanometer. And that's been, after all the challenges we have had, that's been kind of a consistent theme over last the four to six quarter just on yields for 10. So we feel very good exiting the year and coming into this year on where we are on yields. Second, in terms of the product roadmap, we launched Ice Lake for client in the fourth quarter. We launched FPGAs, Agilex products on 10 nanometer in the fourth quarter. And then through the course of this year, we are going to have successive of products of AI inference accelerator, 5G SOC that we are really excited about for the 5G network, GPUs launched and then last but certainly not least, bringing out Ice Lake server product in the back end of the year. So we have launched. The yields are good. Designs across our portfolio of products are good. And we will ramp them up during the course of the year. But primarily in terms of volume, we will still be, the client business is the one we are going to ramp the fastest. It will the ramp during the course of the year. It will be on our second Gen of 10 nanometer or what will call 10+ 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 will grow as we exit the year and become a much bigger part of our overall volume in 2021. And then last, I would just say that our intention back in May and we reiterated again today is that we want to get back to a two to tow-and-a-half year cadence. And shortly after launching 10, our expectations is we will have our first 7 nanometer product launch in the latter part about 2021 with CPUs to closely follow. So 10 is ramping. We will go to 10+ for clients and we will 7 on a two year cadence in 2021.

Thank you.

Thanks a lot.

Thank you. Our next question comes in line of Blayne Curtis from Barclays. Your question, please.

Hi guys. Thanks for taking my question and I would like to give congrats on the great results. Bob, maybe just following on that, because I remember two quarters ago you talked about Ice Lake taping out for servers in the first half. And there is 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?

Yes. It's a good question. And 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 the first step for us. And then what we indicated is, we will start production wafers in the first half of this year and that that will translate into production of shipments in the latter part of 2020. So that's a 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 have been trying to ramp this over last the several quarters.

Thanks for that. And then just a clarity on the client side. I am surprised by the seasonality but I guess I understand with Win 10, with that growth or the strong year-over-year you are seeing in Q1, are you still shorting the market, I guess?

Yes. First, we came into 2019 looking at kind of a flat PC TAM and when all is said and done, we end the year with about 3% growth overall and even stronger in the fourth quarter. So it's 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 I would say, we left some backlog on the table that we are quickly trying to fill as we come in to the first quarter. So that 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 the macro level, we spent record capital in 2018, again record capital in 2019, as George laid out in his prepared remarks. We 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 it will have high single digit PC unit volume and against a market that we expect to be flat to down slightly. So we are going to be in good position and meet the market demand in 2020. We look 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 sell and 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 never have to worry about it.

And we will expect to see more small core in the second half which may be part of the dynamic. We haven't really been in the serve that end of the market in the way that we would like to. So that maybe part of what you are looking at.

Thanks.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of John Pitzer from Credit Suisse. Your question, please.

Yes. Good afternoon, Bob and George. Let me add my congratulations to the solid results. I guess I have got a similar question to Ross' first question on revenue but mine is going to be on gross margin. If you could just sort of look at the Q1 guide of 61% versus the full year of 59%, I am just trying to understand the puts and take that brings gross margin down throughout the year and exclusively 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 2021. I am just kind of curious is to whether we are getting a pull-forward of the 7 here or what are the puts and takes as you think about gross margin throughout the year?

So let me just start with the full year because I think that will be helpful. At the highest level, what you are really seeing is an impact largely related to 10 nanometer cost 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 are 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 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 really seeing is lower modem and lower variable comp being the reason that we are 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 obviously the seasonally down quarter for many of our businesses.

George, the only thing that I would add is, inherent in our guide is our expectations for lower ASPs and it's a function of two 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 are anticipating a more competitive environment as we go to the course of the year. So to kind of bring it back, we are ramping 10 is great and we are 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 would say the one thing that's really changed since then, is that our yields on 10 are just a little bit better and they are contributor to slightly better gross margin in the second half of 2019 and we expect that to continue to be a contributor this year as [indiscernible].

Perfect. Thanks guys.

Thank you. Our next question comes from the line of Harlan Sur from JPMorgan. Your question, please.

Good afternoon and good job on the quarterly execution. 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? Thank you.

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 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.

Thank you. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question please.

Hi guys. Thanks for taking my I question. I wanted to ask a bit about the capacity additions. So I kind of get that 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 are actually going to be overshipping the market this year as you sort of rebuilt those channel inventories? What does that imply if you are going forward into 2021, where the PC market itself may still be in decline and you will have higher capacity and ideally like die shrink at that point? Like how do we think about that?

Yes. 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 inventory. So your math is correct.

So that's your own inventory? Or inventory in the channel? You are going to be selling that to the customers or keeping it on your books?

It will be our own inventory. And then will have to see, if you look at some of the channel information, you might the customers trying to build some inventory as well. But when we are talking about building inventory, it's our inventory levels.

I would also say, the channel inventories exiting the year for PC, I would 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 then through 2021. And then just the one other thing I would mention, 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 and the transition to 5G. And we characterize as the intelligent edge, we delivered double digit growth with IoT for the last several years. And network and IoT are bigger and bigger parts of our business. So we think we are 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 I would add, Stacy. Thanks.

Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question please.

Yes. Thank you. I guess going back to the PC constraints that you are seeing. So you would like to build your inventory back up in, I think you said, early in year. But it seems like we are 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 will be able to take back unit share on the client side?

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 2018, 2019 and going into 2020, we are really beginning to build back the capacity to meet the demand. So our expectations are, we will 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 two things, particularly on 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 mix, making sure that we have the right product mix. So we will 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.

Okay. And then are the shortages anywhere other than client? Is it entirely client? Or are there anything in server or any other products?

No, we are in pretty good shape on server. And I think that going with 19% growth in fourth quarter depleted our inventory levels. So when you have that kind of spike in demand, we are 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 are not constrained and we are in pretty good pretty good shape. Pretty great shape macro. Micro, a few challenges here and there. But server CPU supply is pretty good.

Thank you. Our next question comes from the line of Christopher Rolland from Susquehanna. Your question please.

Hi guys. Thanks for the question. On CapEx, specifically $17 billion, you mentioned some of the parts there. But how do we divide that up between 7 and 5 versus you know what you are doing with 10? And I don't know if you are 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? Thanks guys.

Sure, why not. Maybe I will take CapEx and Bob you can cover the outsourcing piece. So on CapEx, part of the reason we are expecting $17 billion this year is we are building more space. Some of the longer lead time items, one of 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 as we said, over half is going to be for space and then for 7 and 5 nanometer equipment. As you know, we have got all three nodes right on top of each other. And so we are 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 417 billion. But also we are 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.

Yes. And the one other thing is maybe with the exception of litho, the reuse from one 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. And the second part of your question, we have 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, 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 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 will continue to do it. We will continue to prioritize where we can get the best, the most efficient output and make those decisions over time.

Great. Thanks guys.

Jonathan, I think we have time for one more question and then we will turn the call back over to Bob to wrap things up.

Certainly. Our final question then for the day, comes from the line of Timothy Arcuri from UBS. Your question please.

Thanks a lot. George, I wanted to go back to gross margin. I think last quarter, we were talking about 60% for this year and we are 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 a number for next year too? Thanks.

Tim, let me just kind of correct the history just a little bit. What we said over the last couple quarters was, when the question was, A, 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 57% on the table for 2021, 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 were down a point. But clearly the fact is 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 things where we will be in, the mix in the first half is going 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.

Awesome George. Thanks very much.

Yes. Thanks Tim.

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, we will do it again. We expect it to be another record year. And you know, our ambitions have just never been greater. As you know, we are going after a larger TAM. We are expanding the role that we play in our customer's success. We are 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. We feel like we are 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 we expect to do that better and better and that will be what really drives the growth of the company. So thanks and we look forward to another deposit 90 days from now.

Thanks Bob and George and thank you all for joining us today. Operator, can you 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.