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| Thomson Reuters StreetEvents Event Transcript | |
| E D I T E D V E R S I O N | |
| Q2 2018 Intel Corp Earnings Call | |
| JULY 26, 2018 / 9:00PM GMT | |
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| Corporate Participants | |
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| * Navin Shenoy | |
| Intel Corporation - Executive VP & GM of Data Center Group | |
| * Robert H. Swan | |
| Intel Corporation - Interim CEO, Executive VP & CFO | |
| * Venkata S. Murthy Renduchintala | |
| Intel Corporation - Chief Engineering Officer and Group President of Technology, Systems Architecture & Client Group | |
| * Mark H. Henninger | |
| Intel Corporation - VP of Finance and Director of IR | |
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| Conference Call Participiants | |
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| * Christopher Brett Danely | |
| Citigroup Inc, Research Division - MD | |
| * Tristan Gerra | |
| Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst | |
| * Kevin Edward Cassidy | |
| Stifel, Nicolaus & Company, Incorporated, 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 | |
| * Ambrish Srivastava | |
| BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst | |
| * Timothy Michael Arcuri | |
| UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment | |
| * Pierre C. Ferragu | |
| New Street Research LLP - Global Team Head of Technology Infrastructure | |
| * Christopher James Muse | |
| Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst | |
| * John William Pitzer | |
| Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head | |
| * Vivek Arya | |
| BofA Merrill Lynch, Research Division - Director | |
| * Blayne Peter Curtis | |
| Barclays Bank PLC, Research Division - Director & Senior Research Analyst | |
| * Ross Clark Seymore | |
| Deutsche Bank AG, Research Division - MD | |
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| Presentation | |
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| Operator [1] | |
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| Good day, ladies and gentlemen, and welcome to the Intel Corporation's Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded. | |
| I would now like to introduce your host for today's program, Mark Henninger, Head of Investor Relations. Please go ahead, sir. | |
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| Mark H. Henninger, Intel Corporation - VP of Finance and Director of IR [2] | |
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| Thank you, operator, and welcome, everyone, to Intel's Second Quarter 2018 Earnings Conference Call. By now you should have received a copy of our earnings release and earnings presentation. If you've not received both documents, they're available on our Investor website, intc.com. The earnings presentation is also available in the webcast window, for those joining us online. | |
| I'm joined today by Bob Swan, our Interim CEO and Chief Financial Officer; Murthy Renduchintala, Group President of the Technology, Systems Architecture & Client Group, and Chief Engineering Officer; as well as Navin Shenoy, Executive Vice President and General Manager of the Data Center Group. 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'll 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 - Interim CEO, Executive VP & CFO [3] | |
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| Thanks, Mark. Our results for the quarter were outstanding, marking a record second quarter on our way to what we expect will be a record 2018. Last week, we celebrated Intel's 50th year as a company, which is a big deal in an industry that never stops evolving. Even more remarkable is that after 5 decades in tech, Intel is poised to deliver its third year in a row of record financial performance. | |
| We set a course 5 years ago to transform the company. To do that, we made investments to enhance and extend our core microprocessor business along with a series of bold bets to compete and win in new markets. Our thesis was that Intel is uniquely positioned to capitalize on the world's insatiable need to process, store and move data. The results have been dramatic. We are now competing for a $260 billion TAM, the largest in the company's history, and we have lots of room to grow. | |
| Just 5 years ago, roughly 1/3 of our revenue was data-centric. Today, nearly 1/2 of our revenue is data-centric and growing at a double-digit rate. Data has never been more pervasive nor more valuable. In fact, 90% of the digital data ever created was generated in just the past 2 years. But of that data, only 1% has been analyzed, indicating massive untapped potential. | |
| I'd like to highlight a few indicators of Intel's accelerating transformation before going into our financial results. | |
| First, in our data center business, our focus on the cloud, network transformation and AI and analytics produced outstanding results in a strong demand environment. Customer preference for our highest performance products continued, with Xeon Scalable at nearly 50% of our mix in the second quarter. | |
| Cloud revenue grew as service provider CapEx continue to accelerate to meet the explosive demand for digital services, artificial intelligence and data analytics. Enterprise revenue is driven by a combination of macro strength and companies' increasing deployment of hybrid cloud solutions and data-intensive workloads. | |
| In the comms service providers segment, we continue to gain share as customers choose to virtualize and transform their networks and prepare for the 5G transition using Intel Architecture. | |
| Our Programmable Solutions Group also delivered strong results this quarter. PSG again set a record for design win volumes, indicating customers' confidence in our road map and growing adoption of FPGAs for workload acceleration from the data center through the network and out to the edge. | |
| Earlier this month, we announced the planned acquisition of eASIC, which will give us a competitive differentiator and another solution to meet customers' diverse time-to-market performance, cost and power needs. | |
| We combined Intel and Altera 2.5 years ago and we expected a key value driver to be the increasing use of FPGAs in the data center. In Q2, PSG's data center business more than doubled for the second consecutive quarter. | |
| IoTG set an all-time revenue record with particular strength in the retail and industrial sectors as customers look to Intel not only for compute performance, but for solutions that drive business value. We also completed the sale of Wind River as we continue to redeploy resources to higher growth and return areas. | |
| Building on this industry leadership in ADAS and driving the industry toward an autonomous future, Mobileye set another all-time revenue record. Customer momentum continued with several design wins, including a multimillion unit deal with ZF for a large global automaker. | |
| We also announced that Baidu has adopted Mobileye's EyeQ base surround computer vision kit as the preferred vision solution for commercial Apollo pilot AV deployment. In both the open source and commercial Apollo programs, Baidu will also integrate Mobileye's responsibility sensitive safety model, an open and transparent model that provides safety assurance for AV decision-making, an industry imperative. | |
| Our memory business also set an all-time revenue record. We are transforming the memory industry with a pair of differentiated platform-connected capabilities, high-density Floating Gate 3D NAND and high-performance persistent Optane technology. | |
| We've recently announced that we are in production on the industry's first 4 bits per cell data center NAND PCIe SSDs. And at the same time, industry support for Intel Optane DC persistent memory continues to grow with technology leaders, including CERN, Google, SAP and Tencent already announcing plans for future use of the technology. Unlike traditional DRAM, Intel Optane DC persistent memory will offer the unprecedented combination of high capacity, up to 3 terabytes per socket, along with affordability and persistence. | |
| Intel and Micron recently announced that we will develop future generations of 3D XPoint technology independently to better align the technology to our individual business needs and strategy. We'll continue to jointly manufacture 3D XPoint at the Intel Micron flash technology fab in Lehi. | |
| Intel intends to extend its leadership with Intel Optane products based on 3D XPoint, which, combined with our high-density 3D NAND technology, offer the best solution for today's computing and storage needs. | |
| And finally, in client computing, our focus on innovation and differentiation in the commercial, enthusiast and fin and light segments is producing results. Overall market conditions also continue to improve, and we now expect modest growth in the PC TAM this year for the first time since 2011. | |
| The commercial segment remains strong as CIOs refreshing aging PC fleets are turning to Intel Core processors with vPro as the gold standard for performance and manageability. | |
| At the same time, consumer interest in gaming and our outright performance leadership are driving strength in the enthusiast segment, producing another outstanding quarter in gaming. These trends reflect the market's demand for our highest performance products, resulting in strong overall product mix in CCG. | |
| We also began shipping the 7560 modem, Intel's first CDMA and first multi-SIM capable modem. | |
| Our industry-leading products continue to deliver outstanding results. We have a leadership 14-nanometer product lineup for 2019 and we continue to make progress on 10-nanometer. Yields are improving consistent with the time line we shared in April and we expect systems on shelves for the 2019 holiday season. | |
| In the second quarter, we announced the CEO change. The board is making good progress determining the best person to be the next CEO of this great company. While there is no timetable, the board is working with a sense of urgency and the identification of candidates, both internal and external, is well underway. | |
| Personally, and on behalf of Intel's 100,000-plus employees, I'd like to thank Brian for his many contributions to the company over his 35-year career. The investments he made set us on a course for transformation. Even more importantly, he developed the right strategy and leadership team to carry that transformation forward while we conduct the CEO search. Our financial results in the second quarter show we're doing just that. Let's turn to the numbers. | |
| Revenue of $17 billion was up 15% year-over-year, marking a second record quarter. We saw strong performance across all of our businesses and record revenue in NSG, IoTG and Mobileye. Our data-centric businesses were collectively up 26%. Excellent operating margin leverage and a lower tax rate resulted in EPS of $1.04, up 44% year-on-year, even as we continue to invest for growth. | |
| From a capital allocation perspective, year-to-date we have generated $6.3 billion of free cash flow, returned $8.6 billion to shareholders, including $2.8 billion in dividends and $5.8 billion in buybacks, repurchasing 117 million shares. | |
| As a result of the continued strength we are seeing in the business, we are raising our full year revenue guide by $2 billion to $69.5 billion. We are also raising our EPS guide by $0.30 versus April to $4.15, and the free cash flow guide by $0.5 billion to $15 billion. | |
| Our leadership products are winning in an expanded TAM and our data-centric businesses are now almost 50% of our total revenue. Our data-centric businesses had strong quarters, with each business individually growing at a double-digit rate. Our PC-centric business was up 6% on strength in the commercial and enthusiast segments. | |
| Q2 was another quarter of significant EPS growth, up 44% year-on-year. And our operating margin expanded $1.4 billion and 5 points year-on-year. Our EPS improvement was driven by growing demand for high-performance products in the data center and client businesses, leading to higher volumes and ASPs, strong growth in our adjacent businesses and lower tax rate and lower share count as a result of buybacks. | |
| In January, we pulled in our 30% spending goal for 2018, a full 2 years ahead of schedule. We are on track to meet that target and our operating efficiency continues to improve. We remain extremely diligent in managing spending while prioritizing investments in areas that will accelerate revenue growth, product leadership, artificial intelligence and autonomous driving. This focused approach is producing results. | |
| Total Q2 spending came in at $5.1 billion, 30% of revenue. Total spending as a percentage of revenue is down 4.6 points year-over-year in the quarter while we continue to increase investment in our key priorities. Versus the second quarter of last year, we delivered $2.2 billion more revenue with no incremental spending. Let's talk now about our Q2 performance by segment. | |
| The Data Center Group delivered another great double-digit growth quarter with revenue of $5.5 billion, up 27% year-over-year and operating income of $2.7 billion, up 65%. Q2 operating margin was 49%, and we continued to see strong growth in both the cloud and comms service providers segments, which now make up 2/3 of DCG revenue. | |
| Platform unit volume was up 14% and ASPs were up 11%. Non-CPU adjacencies grew 30% over last year, yet another indicator that we are growing share in a larger data-centric TAM. | |
| We saw continued broad-based demand strength this quarter with customer preference for leadership products like Xeon Scalable driving strong mix. The cloud business, our largest data center segment, grew 41% year-over-year as hyperscale CapEx expands to handle the explosive need to transmit, store and analyze data. | |
| Our comms service providers segment grew 30% year-over-year as customers continue to choose Intel Architecture to transform their networks. And our enterprise segment was up 10% year-over-year against a strong IT spending environment and prioritized investment in hybrid cloud implementations. | |
| Our other data-centric businesses, IoTG, NSG and PSG, also achieved double-digit growth in Q2. And together, we're up 22% year-on-year. Our Internet of Things business achieved record volume and record revenue of $880 million, up 22% year-over-year, driven by strength in retail and industrial, as I mentioned earlier. | |
| Operating profit was $243 million, up 75% year-over-year on higher revenue and flat spending. We expect the Wind River divestiture, which closed in the second quarter, will have a negative impact to IoTG revenue of approximately $150 million in the second half of 2018. | |
| Mobileye also had another strong double-digit growth in the quarter, up 37% over last year on increasing ADAS adoption. | |
| Our memory business delivered more than $1 billion in revenue for the second quarter in a row, up 23% year-over-year. Optane gained momentum during the quarter, mostly on client strength, shipping over 1 million client Optane memory modules. We expect the memory segment to have full year profitability in 2018 as we scale revenue and transition a higher percentage of our output to a cost-effective 64-layer 3D NAND. | |
| PSG's revenue came in at $517 million, up 18% in Q2, primarily from strength in the data center business. PSG's data center segment was up 140% over last year. In the Advanced products category, our 28-, 20- and 14-nanometer solutions grew 70%. Operating profit was $101 million, up 4% year-over-year. | |
| Finally, the Client Computing Group continued to execute on all fronts with another outstanding quarter, generating $8.7 billion of revenue, up 6%. Operating margin percent was flat year-over-year as the customer preference for high-performance products drove a strong mix and higher ASPs, offset by 10-nanometer ramp costs. | |
| DCG continues to be an extremely important source of IP, scale and cash flow for our company. | |
| We are executing to our capital allocation priorities of investing organically, expanding acquisitively and returning capital to our shareholders. Year-to-date, we generated $13.7 billion in cash from operations, we invested $7.4 billion in capital expenditures and delivered $6.3 billion in free cash flow, up 61% over the first half of last year. | |
| We returned well over 100% of our free cash flow to our shareholders. Buybacks totaled $5.8 billion and dividends totaled $2.8 billion. In addition, settlements of our convertible debt reduced fully diluted shares by 12 million. | |
| Shifting gears to our full year outlook. Our strategy is working. Our products are winning and our investments in data center growth are paying off. We are now forecasting the midpoint of the revenue range at $69.5 billion, up $2 billion versus our expectations in April. This represents a $4.5 billion increase versus the expectations we set in January. Product innovation, a strong global economy and U.S. tax reform are spurring CIO investment in IT infrastructure, leading to higher data center demand and a stronger PC TAM. | |
| We are seeing demand signals in supply feasibility to deliver on our revised expectations. Our biggest challenge in the second half will be meeting additional demand, and we are working intently with our customers and our factories to be prepared so we are not constraining our customers' growth. | |
| Data center growth is now expected to be approximately 20%, up from our April guidance of high teens. We now expect operating margin of approximately 32%, an increase of 1 point from April. We remain on track to our 30% spending goal, a full 2 years ahead of our original target. | |
| Gross margin is expected to be up slightly versus our April guidance on broad-based business strength. And we expect a full year tax rate of roughly 12.5%, down slightly from our prior estimate. | |
| Overall, we expect stronger top line growth, improved operating margins and stronger demand will boost EPS to $4.15, up $0.30 from our estimate in April. | |
| In response to the stronger demand, we are raising gross CapEx $0.5 billion to $15 billion or $13 billion net of memory prepayments. And we are now expecting free cash flow of $15 billion, up $0.5 billion from April. And we expect free cash flow per share as a percentage of EPS to improve by more than 10 points over last year. We remain intensely focused on closing the gap between free cash flow and EPS and expect to make more progress next year. | |
| For Q3, we are forecasting the midpoint of the revenue range at $18.1 billion, up 12% year-over-year. We expect operating margin of approximately 34%, flat versus last year, which reflects about a 1 point decrease in gross margin and a roughly 1 point decline in spending. | |
| We also expect EPS at $1.15, up 31%, excluding equity adjustments from stronger top line growth, spending reductions and a lower tax rate. | |
| Again, last week, we celebrated our 50th anniversary and reflected on the impact Intel and our ecosystem partners have had on the world. It has been nothing short of extraordinary. At the same time, we are even more excited about the role Intel will play in technology's future. We're laser-focused on Intel's opportunity, which is larger than it has ever been. Intel's inventiveness, architectural innovation, manufacturing expertise and intense drive have allowed the company to create and capitalize on opportunity over the long haul. From the early days of DRAM to the era of the first microprocessors, from one architectural battle to the next, and from the PC to the Internet to the cloud, Intel has grown and thrived. I'm very excited about what lies ahead for the company. | |
| With that, let me turn it over to Mark and we'll get to your questions. Thank you. | |
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| Mark H. Henninger, Intel Corporation - VP of Finance and Director of IR [4] | |
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| All right. Thank you, Bob. Moving on to the Q&A. (Operator Instructions) | |
| Operator, please go and introduce our first questioner. | |
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| Questions and Answers | |
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| Operator [1] | |
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| (Operator Instructions) Our first question comes from the line of C.J. Muse from Evercore ISI. | |
| Our next question comes from the line of Vivek Arya from Bank of America Merrill Lynch. | |
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| Vivek Arya, BofA Merrill Lynch, Research Division - Director [2] | |
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| Bob, on 10-nanometer progress, any color on what you are doing. And systems you mentioned on shelves for second half '19, I assume that's mostly PC Client. Any sense to when we can think of timing for your server products on 10-nanometer also. | |
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| Venkata S. Murthy Renduchintala, Intel Corporation - Chief Engineering Officer and Group President of Technology, Systems Architecture & Client Group [3] | |
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| This is Murthy. I'll take that one. We continue to make progress on 10-nanometers. Yields are improving consistent with the time lines we shared in April. And yes, you're quite right. The systems on shelves that we expect in holiday '19 will be Client systems with Data Center products to follow shortly after. | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [4] | |
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| So good progress on 10-nanometer and what we think is a very good lineup on 14-nanometer products for next year on both client and server that we think will deliver best-in-class performance as we continue to ramp 10. | |
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| Operator [5] | |
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| Our next question comes from the line of Pierre Ferragu from New Street Research. | |
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| Pierre C. Ferragu, New Street Research LLP - Global Team Head of Technology Infrastructure [6] | |
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| A quick follow up on 10-nanometer. When you -- when I look at this time line between now and (inaudible) season next year, 18 months is a very long time to improve your yield. And I have 2 questions on this one. The first one is, could you give us some color on what are the most challenging aspects of the process that you need to address to improve yields? What's the most challenging dynamic or process? And then my second question is how do you think about the impact of this delay on your competitiveness? Where do you think it is going to hurt you the most? | |
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| Venkata S. Murthy Renduchintala, Intel Corporation - Chief Engineering Officer and Group President of Technology, Systems Architecture & Client Group [7] | |
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| So let me take that. I think as we look at what we need to do in 10 nanometers, again, let me replay some of the data we shared on our April call. Recall that 10 nanometers strive for a very aggressive density improvement target beyond 14 nanometers, almost a 2.7x scaling. And really, the challenges that we're facing on 10 nanometers is delivering on all the revolutionary modules that ultimately deliver on that program. And while there's risk and a degree of delay in our time line on that where we're very pleased with the resiliency of our 14-nanometer road map where in the last few years we've delivered in excess of 70% product performance improvement as we move through our 14-nanometer generation of products. So as we look at 2019, across both client and data center space, we feel very good about the product competitiveness of our 14-nanometer program. And that, to some degree, is factoring into our timing of 10-nanometer and launching 10-nanometer at a point in time where we believe the yields are at a level that make it prime for volume production. So 14-nanometer, I think through the rest of this year and through 2019, continues we believe to drive product leadership across all our portfolios in clients and server. | |
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| Operator [8] | |
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| Our next question comes from the line of John Pitzer from Credit Suisse. | |
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| John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [9] | |
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| Just relative to your data center expectations now for the full year, I'm just kind of curious what's been the biggest driver. You're kind of decelerating to mid-teens in the back half of the year, which is still very impressive. And I guess, as you talk about the question, maybe Navin can chime in. Once again, enterprise is much better than expected. And the 10% growth, I think, is what you referenced year-over-year in the June quarter. To what extent is that going to be more sustainable as you look into the second half of the year and into 2019? | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [10] | |
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| Yes, thanks, John, I'll start and then have Navin chime in. Q2 data center growth was outstanding. We kind of started -- when we talked to you back in April, we started the quarter out strong. The middle of the quarter was strong and the end of the quarter was strong. So 27% top line growth for data center was -- we feel very good about it and see that momentum continuing into the second half of the year. As you know, Q4 last year was an outstanding year, so we had slightly tougher comps in the fourth quarter. But we're looking at real strong growth for the full year. And as I indicated earlier, the strength was across the board: cloud, up over 40%; comms services, up 30%. And specifically to your question, enterprise strength continues. And not only volume, but the trajectory of Xeon Scalable and the adoption of Xeon Scalable has accelerated a little bit beyond what we expect to driving real good ASPs. So real good first half, strong outlook for the second half and slightly tougher -- strong outlook in the second half across the board and then slightly tougher comps as we go into Q4. | |
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| Navin Shenoy, Intel Corporation - Executive VP & GM of Data Center Group [11] | |
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| The only thing I'd add to that, John, is that the demand is broad-based across all the segments that Bob talked about. And it's also broad-based in terms of our product portfolio. Xeon Scalable, we launched about a year ago and it crossed over, getting close to crossing over at about 50% of our volumes. So a lot of room still to go on Xeon Scalable as we look forward. And as I think about the product portfolio beyond Xeon Scalable, you might have seen this week at the Google Next show, Google talked about adopting the Optane persistent memory DIMM, so we have that product portfolio ahead of us in the second half. And then our next-generation Xeon will begin to ramp in the early part of '19. So general macroeconomic, all segment growth, people applying information technology to handle their data problems, combined with a very strong product portfolio as we look forward. | |
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| Operator [12] | |
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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 [13] | |
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| I guess, one question. I wanted to ask about gross margins. Your full year guide implies a very significant deceleration of gross margins in Q4, like 300 bps sequentially, down about 59%. Can you talk about what's driving that sequential decline from Q3 to Q4? And do those drivers sustain into 2019, for example, is it 10-nanometer or mix or whatever? Can you give us some color on what's going on there, please? | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [14] | |
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| Yes. Thanks, Stacy. First, I think the first half to second half dynamics, we're looking at an operating margin improvement by 1.5 to 2 points. So we see good solid op margin growth first half to second half. The dynamics are the gross margin, we expect to come down a bit and be more than offset by good volume leverage on a relatively stable spending base. So that trend of modest gross margin erosion more than offset by spending leverage driving op income improvement is the trend that you've been seeing for the last 6 to 8 quarters, and we expect that to continue into the second half of the year. When you look at -- implied in our guide for Q4, in particular, couple of things going on. One, accelerating growth of modem as we go through the second half of the year, accelerating growth of NSG or memory as we go through the second half of the year. A, we haven't assumed the continued strong ASP performance that we've seen through the first half. We hope that turns to be conservative, but we'll see how that plays out. And then, lastly, to your point, and Murthy mentioned earlier, we're ramping up 10-nanometer to improve the yield. So that's going to weigh on gross margins for the fourth quarter as well. So all things equal, we feel good about op margin expansion. We're up 500 basis points in the quarter. We'll be up another couple of points first half to second half, but the gross margin dynamics will weigh on us in the fourth quarter and spending will more than offset it. As we go into 2019, I think the way we've been running the business for the last few years, we have dramatically expanded our TAM. And with that TAM, we see more and more opportunities to invest and grow, and that growth is driving improved earnings for the company. At the same time, some of that growth has lower gross margins. But that expanded TAM, the higher revenue growth on a very well-controlled spending base is expanding our op income dollars and our earnings per share. So we feel pretty good about where we are as we exit 2018 and head into 2019 in terms of operating income for the business. | |
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| Operator [15] | |
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| Our next question comes from the line of Ross Seymore from Deutsche Bank. | |
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| Ross Clark Seymore, Deutsche Bank AG, Research Division - MD [16] | |
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| I want to go back to the DCG side of things. Obviously, the 27% year-over-year growth in 2Q is very impressive in both its magnitude and its breadth. But I get a ton and an increasing amount of questions about competition, whether it's direct competition in the x86 CPU side of things or if it's a more indirect competition for a greater TAM from accelerators and FPGAs and the GPU compute, those sorts of things. So I don't know if it'd be Murthy or Navin, but I'd love to hear how you guys are looking at competition. And if you've taken the 10-nanometer aspect of competition and 7-nanometer for those folks off the table, talk about the design side where you think you can take share or there might actually be some pressure, and in general, how Intel reacts to the optimism we're hearing from a number of your aspiring new entrants. | |
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| Navin Shenoy, Intel Corporation - Executive VP & GM of Data Center Group [17] | |
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| Sure, I'll take that. It's Navin here. Look, we feel great about our competitive position. We came in to 2018 expecting a competitive environment. And against that backdrop, you've seen the results we've delivered over the last 2 or 3 quarters, and this is our third consecutive quarter above 20% growth. And really, that reflects our investments that we've made over several years. We have a leadership road map, not just in CPUs, but in, as you pointed out, a broad set of additional silicon, from ASICs to FPGAs to silicon photonics to memory. And our approach, really, has been to, over time, increasingly stitch all of those assets together to deliver a better solution for our customers. And that really sets us apart from everyone that we're competing with where one or another may have one of those solutions, but very few have -- in fact, none have that broad portfolio that we've been pursuing. So we are going to be aggressive in competing. We're going to have to go out and earn the business, just like we always have every day, every week, every month. And as I look at our road map now and as I look at our road map in the second half and as I look at our road map into 2019, I'm very confident that we continue to maintain that leadership on that broad portfolio of products. So we're set up for a great second half and another strong growth year as we head into 2019. | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [18] | |
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| The one thing I'd add, Ross, is on the accelerator side, particularly the FPGAs. 18% growth for FPGAs in the quarter, and as we mentioned earlier, real strong penetration in data center. So that growth has been fueled by 140% increase in PSG in the data center environment. So I think, Navin, if I could, had a choice to make when he took over in the data center business and it was protect our large microprocessor share or dramatically expand the market and both protect our share as well as participate in a much bigger market, and that's how he and the team have been focused. And that's resulted in both protection of CPUs, but expansion of share, and a much broader TAM. So again, I'll just close with we feel great about what the team is doing in expanding the role we play in the data center and at the edge. | |
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| Operator [19] | |
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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 [20] | |
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| I just want to ask you about 7. You mentioned 10 and timing there and I don't expect you to put a date out there for 7. So maybe you can talk about what you've learned on 10, how you're applying it to 7 and any indications of that development, how it's going. | |
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| Venkata S. Murthy Renduchintala, Intel Corporation - Chief Engineering Officer and Group President of Technology, Systems Architecture & Client Group [21] | |
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| Sure, Blayne. So 7 is very much R&D in deep progress and we're making good progress on that development. We're not giving a direct time line right now. But we've also made some fairly judicious choices in defining 7, learning from our 10-nanometer experiences. And we're focusing on an optimum balance point between density, power and performance and schedule predictability. So I think what you'll see is a more balanced approach across those 3 vectors. So we're still going to drive density, but balancing that with a continued focus on driving transistor performance at the same time, which is highly valued as ASP drivers, both in our client and server businesses. And we're really also focusing on being much more precise in our ability to launch. So those are the key learnings that are coming out of 10 as we go into 7. And as we monitor progress on 7 just as closely as we are on 10, I feel those lessons are being well absorbed into our progress. And we're lining up to support our product plans as our road map dictates. | |
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| Operator [22] | |
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| Our next question 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 [23] | |
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| I actually want to go back to the question about gross margins in Q4. And I wanted to see if you can segment out the pieces because it seems like the modem piece could maybe be a 200 basis point hit just by itself. So I wondered if you could maybe segment out some of the pieces between 10-nanometer, between the modem and between ASP. | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [24] | |
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| Yes. I presume by segment out, you mean quantify, and my answer's probably unfulfilling if that's the case. But I think you hit on the 3 things. And as we go into the -- as we enter the second half and the fourth quarter in particular, we see modem accelerating. We have a great product that's getting good traction in the modem space, so that product's accelerating and that obviously has margins a little lower. NSG growth accelerating. Going into the fourth quarter, those margins are a little bit lower. 10-nanometer ramping, and that will weigh on gross margins. And lastly, just our outlook for ASPs. ASP has been a significant contributor to our high gross margin performance over the last couple of quarters. Now we've assumed that it won't kind of stay at those levels. So those are the 4 components of segmentation. And then I just go back to with this high growth, we're getting really good leverage and expect our operating margins to improve as we go to the back half of the year. | |
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| Operator [25] | |
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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 [26] | |
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| I was wondering, so DCG, you guys have had an 11% ASP increase. And I know there's a lot of noisiness to that, but it's about double what you've sort of averaged over the last few years. Is that a Purley effect? And if so, do you sort of anniversary that and have less of an ASP increase going forward? Just how should I think about the price increase as you've seen there on average? | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [27] | |
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| Yes, Joe. The ASP strength that we've seen, actually, really most of it this year is sort of a reflection of what we see our customers doing across the board. All of them are buying our highest performance products. There's sort of this insatiable appetite for performance on all the workloads that they're looking at. Certainly, we did expect the transition to Purley to be accretive to us from an ASP point of view. But if I look at our broad portfolio of products, our ASPs look very good. And year-on-year, our ASPs look good in the other parts of our products as well, Broadwell, for example. So in general, we're just seeing an almost insatiable appetite for the best products, the highest-performing products that we have. I don't see that slowing down as I look forward. | |
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| Operator [28] | |
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| Our next question comes from the line of Ambrish Srivastava from BMO. | |
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| Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [29] | |
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| I just wanted to go back to the comments you were making as you were concluding your prepared remarks about demand challenges in the second half. Is that specific to Clients? Servers? And where is that coming from? And then, more importantly, does that open up another -- or a window for a competitor to wedge in and take some share from you? | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [30] | |
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| Yes, when we started the year, our outlook for the year was $65 billion in revenue. And 6 months through the year, given strong demand across the board, actually, both servers and PCs. Real strong demand has raised our outlook by $4.5 billion for the year. So we feel very good about the demand signals we see at the $69.5 billion level. We feel very good about having the supply in place for that fairly significant demand increase. And now as we go to the back half of the year to the extent demand continues to increase, which I'd say it has almost month-to-month the first 6 months of the year, we need to work with our customers and our fabs to make sure that we continue to have the capacity to fill demand to the extent that it rises beyond the $69.5 billion level. So we're working closely with our customer base, both on the server and the PC side, and very closely with our internal teams to make sure we're not a constraint to the extent that demand in the second half of the year continues to go up like it has through the first 6 months of the year. And our intent is to fill that demand along the way and not give others the opportunity to fill it for us. | |
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| Operator [31] | |
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| Our next question comes from the line of Chris Danely from Citigroup. | |
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| Christopher Brett Danely, Citigroup Inc, Research Division - MD [32] | |
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| Just a quick one on the DCG op margins. So Data Center rev was up sequentially, but the op margins were down. I think you talked about the 10-nanometer yield issues. Was that all that was going on there? And so essentially, our DCG operating margins kind of capped at this 49%-and-change level. What -- when are these 10-nanometer headwinds going to go away and reverse and start to become tailwinds? | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [33] | |
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| Yes. So just maybe repeat, 27% top line growth and 65% operating income growth with an 11-point improvement in operating margins year-on-year. So outstanding performance on product margin, as Navin indicated, particularly with strong ASP performance, our margins have continued to improve and I'd just say not at the expense of curtailing investments for data center business. We see real good growth opportunities and we continue to invest. So really good expansion in margin performance while continuing to invest. In terms of 10-nanometer, that is more -- again, with client being first on 10-nanometer, they are more feeling the effect of the 10-nanometer on their margins. That's relatively de minimis effect for the DCG business. | |
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| Operator [34] | |
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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 [35] | |
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| Murthy, you might have actually answered this with your shortly after comment. But given some competitive threats in server in particular, are you guys thinking that you might ramp 10-nanometer server more quickly than you traditionally would after PC? | |
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| Venkata S. Murthy Renduchintala, Intel Corporation - Chief Engineering Officer and Group President of Technology, Systems Architecture & Client Group [36] | |
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| In general, we're going to see a much shorter ramp period between our products going forward in client and server. So yes, I think it's a good observation. But as we talk about our client systems on shelf by the second half of '18, you shouldn't expect too much of a delay before you see the data center products coming out. So much closer proximity albeit slightly delayed than we expected on 10, and then you should see that pretty much improve to almost parity of launch as we get into later technologies. So the traditional model of server following rather lengthily after client is probably going to become more sequential going forward. | |
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| Operator [37] | |
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| Our next question, we have C.J. Muse from Evercore back in the queue. | |
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| Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [38] | |
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| Sorry about the gap earlier. A question for you on your evolving manufacturing strategy. It sounds like, as opposed to [copying exactly], we're moving to a world where you would consider building both 14 and 10 in the same factory. So curious what the implications of such a move are to gross margins and capital intensity as we look ahead. | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [39] | |
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| Yes. I think, obviously, from node to node over the last several nodes, frankly, the capital intensity of the business with each node hasn't -- has increased over time. At the same time, the amount of reuse of equipment and tools from one node to the next is extremely high. So with the exception of particularly 10 going to 7 litho-changing quite a bit with EUV, with each node even with more capital intensity, we have relatively high reuse, then we can leverage the tools for longer and longer. So in terms of implications on gross margin, I'd just say it's a function of product leadership and maintaining that product leadership. And Navin talked about how customers are looking for high performance and the ASPs associated with that high performance allows us to continue to generate extremely attractive gross margins, despite increased capital intensity as you go to each node. | |
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| Venkata S. Murthy Renduchintala, Intel Corporation - Chief Engineering Officer and Group President of Technology, Systems Architecture & Client Group [40] | |
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| I just wanted to add to Bob's perspective. The way I look at our road map, what we're really focused on is delivering product leadership generation over generation, and that's at the system level. And while processes are very important part of that recipe, so are the other ingredients as well, such as product architecture, silicon design and packaging. And to Bob's point, as we look towards our road map, gross margin maximization is going to come from delivering excellence that drives performance, and therefore, we're taking a very balanced view on all the ingredients that go into that. So you should expect in our road map going forward a much longer overlap between generations of technology as we try and make sure that, along with process, we add the other ingredients of technology leadership that will become more and more apparent. | |
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| Operator [41] | |
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| Our next question comes from the line of Kevin Cassidy from Stifel. | |
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| Kevin Edward Cassidy, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [42] | |
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| Just looking at gross margin for the longer term, you named the 4 components. And as we look beyond fourth quarter, does modem gross margins improve? And is 10-nanometer less of a drag in the future? And can you kind of frame it, how long that would be? | |
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| Robert H. Swan, Intel Corporation - Interim CEO, Executive VP & CFO [43] | |
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| Yes. I mean, first, we've been -- our gross margin performance has been very strong, in the upper end of our kind of long-term gross margin target. So we feel pretty good about where gross margin sits today. In terms of modem in particular, yes, we do expect to improve gross margins for our modem business, both with our 7560 product that will begin to ship in the second half. But also as we migrate to a 5G world, we expect margins in the modem business to continue to improve. So yes, we expect modem profitability to improve. We don't see it at the 60-plus percent gross margin level, but we do expect it to be a contributor to earnings performance as we go forward. | |
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| Operator [44] | |
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| Our final question for today comes from the line of Tristan Gerra from Baird. | |
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| Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [45] | |
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| So looking at the fact that you're ramping for the first time a very high volume non-x86 architecture, what are the longer-term implications of something that you haven't discussed much more recently, which is the custom foundry business for the medium term? | |
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| Venkata S. Murthy Renduchintala, Intel Corporation - Chief Engineering Officer and Group President of Technology, Systems Architecture & Client Group [46] | |
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| Yes. Again, while we haven't talked about it that much, the custom foundry aspects of our business still remain very particularly important to us. We believe that as we continue to explore growth and partnership opportunities in our data-centric businesses, the ability to develop custom silicon products together with our customers is going to become increasingly important. So as we see our customer relations going forward, you'll probably see a lot more codeveloped products using Intel process technology in order for their delivery and their interworking with the product portfolio that Navin talked about. So custom products through a custom foundry relationship remain a strategically important part of our customer engagement portfolio. | |
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| Mark H. Henninger, Intel Corporation - VP of Finance and Director of IR [47] | |
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| All right. Thank you everyone for joining us today. Operator, please go ahead and wrap up the call. | |
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| Operator [48] | |
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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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