Intel Corporation
Q1 2017 Earnings Call Transcript

Published: 28 Nov 2017

[John Pitzer:]

[Call Started Abruptly] segway into the first keynote, and I'm told now that we are webcast. So Robert Swan, the Chief Financial Officer of Intel, comes onstage from a logistics perspective. I'm just going to read the risk factors sheet that Intel asks me to read every year. Statements in this presentation that refer to forecasts, future plans and expectations are forward-looking statements that involve a number of risks and uncertainties. Words such as anticipates, expects, intends, goals, plans, believes, seeks, estimates, continues, may, will, would, should, could and variations of such words and similar expressions are intended to identify such forward-looking statements. Statements that refer to or are based on projections, uncertain events or assumptions also identify forward-looking statements. Such statements are based on management's current expectations and involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied in those forward-looking statements. Important factors that could cause results to differ materially from the Company’s expectations are set in Intel’s earnings release date on October 20th, so that’s from Q3, so I apologize. The earnings date can be sometime in early January but I am not sure the exact date yet even though we said that. Additional information regarding these and other factors that could affect Intel’s results is included Intel’s SEC filing, including the Company’s most recent report on Form 10-Q or 10-K, copies of Intel’s 10-K, 10-Q and 8-K reports may be obtained by visiting their Investor Web site at www.intel.com. And with that now full, Bob, welcome to the stage. Appreciate your time this morning. You’re officially no longer the oldest person in the Company. And I don’t think Mark has to worry about his job. With that Bob, I think that one of the first questions that I kind of like to ask when coming up on a fireside chat to help kind of set sort of the tone for the conversation. You were appointed CFO in September of last year. I think you joined the Company in early October of last year. And so you’ve been in the seat for just over 13 months. I think I would love to sort of understand from the outside looking in what you thought the biggest challenges were coming into the job. And kind of where you start from sort of how you’ve addressed those challenges?

[Robert Swan:]

Thanks, and good morning everybody. Thanks for making the early time slot. It’s interesting. I joined 13 months ago and I actually didn’t come in thinking about what are the biggest challenges. It's almost the flip side. And I feel a bit honored to join Intel. It's a phenomenal company. It's a great team. It's got all sorts of capabilities, and we think real good opportunities to grow, so coming in. And I'd say the series of predecessors and the CFO who’ve all been play a very active and engaging roles strategically and operationally in driving the Company performance. So I can in kind of honored to join the team. I think my role has been relatively straight forward last year how close out of record 2016. So we did that. It was a great year for the Company. But more importantly, coming into '17 in the next several years it's how do I help Brian and the team accelerate the transformation that's been underway for the last several years. And by that, I mean the transformation from what's historically been a PC-centric company to on the capitalizes on some of the trends that you mentioned in your kick-off, the explosion that needs for and data compute capacity. And we're in the transformation. My role is simply to try to help the team. And during the course of this year, what it's meant is really, we've been making some really big bets that we think are going to have very attractive long-term returns; whether it's memory; whether it's modems; whether it's more recently, the acquisition Mobileye, all big investments that we're excited about. Some of the challenges that we've wrestled with, one of the trade-offs that we make in the short and medium term, while we bring those big bets to life. And I think those challenges, during the course for the last 12 months, it come in a variety of different ways. The acquisition of Mobileye, it's a big check; $15 billion acquisition; we're excited about by its long-term potential. But the practical reality is we want to finance it by using -- by monetizing some of the less strategically important assets we had in the portfolio. So with the exit of 51% stake in McAfee, with the monetization of some of the equity positions we have in our ICAP portfolio, we’ve been able to fund 60% of that acquisition with non-strategic assets. So that's one of the near term trade-offs. Secondly, memory; memory is a big, relatively new big investment for us. And what we try to do during the course of the year is not just use your money to finance the capital investment memory but engage with strategic customers who are going to benefit from the technology and engage them with their money and the long-term supply agreements that reallocates the capital situation for memory in a very unique way that we think works for our customers and works for us, a trade-off. We think memories are good long-term return, but we want to do the economics of it a little bit differently. Third, big bets long-term, short-term what are the kind of things we can do in short and medium term to position for those long bets. We raised our buyback. We raised our dividend during the year and we increased our buyback by $10 billion earlier this year. And we've been executing against that buyback. So it's long-term short-term dynamics that have short, medium and long term benefits, we think for investors. The last thing I would just highlight is we have wonderful growth prospects. We've reallocated our capital towards those growth prospects and we've stopped doing some things. And stopped doing things we’ve been able to drive down our spending, not to constrain growth but by focusing our spending on the real opportunities to grow so that we can accelerate growth at the same time, while reducing our spending. So I'm just part of the big team. For me it’s 12 months in my role to help Brian and the team and accelerate the transformation, and we're well positioned to deliver yet another record year in 2017 off of a record 2016. And we're excited about where we are and I'm proud and honored to be a part of the Intel team.

[John Pitzer:]

Bob, one of the things the Company has talked about as far as its transformation is moving from the PC-centric world to the data centric world. And I think at the Analyst Day this year, you've been instrumental in trying to change the culture internally at Intel to stop thinking about yourselves as a 90% share player in a fairly well defined server PC TAM, and think more about you so being a 30-ish percent share player in a much bigger TAM, which you defined at the Analyst Day at 220 billion. Last night at dinner, I learned that’s gone up to 260 billion. And so can you talk a little bit about why now is the right time to believe that Intel can break out of what's been a very strong PC server franchise and actually exploit itself into these larger TAMs where historically that's been difficult.

[Robert Swan:]

Well, I think first, this is a transformation or a journey that started long before I joined the Company. This is the transformation that Brian started back in 2012 and 2013. And the fundamental challenge was we have a PC-centric company that generates, at the time over 70% of the revenues of the Company, over 70% of the profits. It's funded the IP for the Company and filled the tabs. However, it was not going to be a really big growth driver for the company. And I think at the time that Brian and the team had the wherewithal to increase the level of spending to try to capitalize on what they saw as an increasingly data-centric world. And during the course for the last four or five years, they've taken a PC-centric company, it was 70% of the revenues at the time. So today, what we call our data centric business is are 45% approaching 50% of the Company. So over that time period, the transformation from PC-centric to data-centric and making that transition at a time where the PC TAM is declined by 25%. So PC TAM down and here we are five years later, and the Company's revenues are -- went from 50 billion, roughly to over 60 billion this year. And underneath the coverage you had this collection of data-centric businesses that have been growing in the mid-teens. So the journey's been underway for a while and the series of investments, both organically and acquisitively, have dramatically expanded the TAM that we think we can serve. So the cultural -- that's kind of content transformation. The cultural of transformation is, we no longer talk about the Company as having 90% plus market share in a relatively smaller market where, in that world there's nowhere to go, but down. The Company today talks about $260 billion TAM, with the tailwind of needs in the marketplace that play our fundamental strengths, in a series of capabilities that we’ve built over the course of the last four years that we believe positions us well to continue to accelerate the transformation. So there is content aspects of the transformation and Brian and the team started a several years ago. There’s proof points along the way and there is opportunity, culturally going forward, where we look at the world through a much different lens. We look at the world that’s worth 30% share player with increasing competitive dynamics, and the opportunity to grow is huge. The key is to focus on the things that matter the most, and use our expanded base and our capital to really drive the key areas that will be big growth drivers for the company.

[John Pitzer:]

Bob, if you look over the next one to two years, I know that as you look at over the next five to 10, things like Mobileye make a lot of sense to me. But if you look over the next one to two years as you go after that expanded TAM, where is the low hanging fruit? Is it modem and memory? And how should we think about the corporate growth rate as you re-tap this new TAM?

[Robert Swan:]

First, we talk about PC-centric to data-centric. It's not to trivialize or deemphasize, actually the importance that the PC business still plays for the Company. It is 55% of our revenues. It generates a bulk -- the cash flow for the Company. And that cash flow we’ve been able to use to expand in this data-center world and return a lot of capital to shareholders. So the PC business continues to be and always will be a key component of the growth for the Company. When you look at the growth going forward, memory, we’ve made big investments and we’ve lost money. What we said, what's happened during the course of this year, is the core NAND business became profitable, faster than what we have said and will be profitable for the full year while we continue to invest in new technology in the memory space. And the whole business will be profitable next year. So that begins to serve as a big contributor to the earnings growth going forward instead of investments that have been a drag. Secondly, in mobile, we’ve been growing our mobile business dramatically. It's been a money loser for the company, as you know. But a big part of the improvement in the client business, over the last several years, and we expect to continue going forward is the improvement of the underlying performance of the modem business. So that will be a real contributor in the near-term. In addition to that, our IoT business, it's no longer a tiny little business. It's often overlooked. It's over $3 billion business. It's growing, has been, and we expect it to continue to grow in the double digits. It uses our technology that was developed for other reasons and deploys it in the new markets. So that’s becoming a bigger, a more meaningful and a bigger growth driver for the Company. So these are not new things that we’re starting now. These are things that have built some momentum, have real earnings tailwinds for the Company, going forward, while the client PC business will continue to be challenged in terms of volume. But they contributed profits and cash flows for the Company.

[John Pitzer:]

One of the key concerns I hear from many investors, and I'm sure you hear the same, is the memory strategy. The key part of that incremental TAM you're trying to go after, it's been historically an extremely cyclical market where scale has mattered. And you’re coming into the market, trying to threat a needle a little bit on being the right scale to attack the market, but not overinvesting in the space. And it is a lower margin business relative to your core. It’s hard to find any businesses that aren’t lower margin than your core. So can you help us better understand the memory strategy? Why should we believe it's more strategic today than it was may be over the last three to five years? And help us understand what you're trying to do to mitigate what's inherently a more cyclical part of the semi-market.

[Robert Swan:]

I mean, first, it's not just about memory and isolation. It's about strategically where we see the incremental compute needs, whether it's in the cloud or at the Edge, the compute needs and the increasing important role that storage and memory play to get access to data in a more rapid way. So the memory strategy is part of a view about a data centric world where compute analytic storage retrieval data is increasingly important. And with us, the technology of the CPU, the microprocessor coupled with the knowledge of memory and storage together, means that the combination can deliver incremental value for our customers that we know fairly well, customers in the datacenter world who will benefit from enhanced memory technology, customers in the PC world customers in the IoT world. So we just think that the role of memory plays an increasingly data centric way becomes more and more important. And we have some of the core competencies to compete and win. That being said, John, we're not going after the $100 billion slower growth part of memory. Our investment has been in the non-volatile space, in particular, in the 3D NAND and the SSD space where while overall memory growth will probably be in the low single digits for next several years, the SSD world, we believe, will grow in the 20% CAGR over the next five years. And it's going to grow because the needs the market and the performance that we can generate with NAND begins to solve some of the problems that HDD or DRAM has solved in the past with better density and lower cost performance. So it's not the $100 billion memory market, it’s the SSD market that was faster growth characteristics. It's not in search of new customer money, it's in search of the money they spend today but with the technology and a performance envelop that we think is going to address their needs, going forward. So that because its technology enabled, it leverages our core competencies of Morris Law high volume manufacturing, we think we have a real opportunity to participate in a faster growing segment of memory. It is a more capital intensive business. It's hard to find businesses that generate the returns of our core business. It is more capital intensive. And that's why along the way we’re trying to be extremely disciplined in how we think about the deployment of our capital and our customers' capital to stage the growth of the memory business in a very balanced way. Capital win, given known -- increasingly known commitments for customers for long term needs that we can solve, where the economic equation of memory is less of our capital upfront and more committed volume over the long term. So again for memory it's not just the memory strategy, it's the data centric strategy and the data centric strategy, I believe, of the increasing importance that memory will play and then disciplined capital allocation will drive incremental returns.

[John Pitzer:]

Lot of potential changes on the modem competitive landscape with some of the announcements that have been made in the marketplace; one could make the argument that perhaps your market share in modems has benefitted from the fact that there was a licensing model out there that was perceived as being antagonistic to potential customers on the chipset side and maybe that gave you sort of an in. If that licensing chipset if there’s sort of controversy gets resolved, how do you think about the longer term competitive landscape in the modem market and your positioning therein?

[Robert Swan:]

It's about building the best products. And we've, over the last couple of years, had real inroads. Frankly, I think, it's less about the business models are being deployed more about and improved product performance level that we've been able to build. And we’re shipping -- our volume, most recently, were up almost 40% of revenue in our modem business in the most recent quarter. We continue to gain traction. We’re shipping our current 7480 product now. We’re getting positioned for 7560 product next year. That's when we'll move the volume into our fab, which we think adds additional performance characteristics for us. So this is one where having an annual cadence of a great product ultimately is going to be the determinant of who is winning share and who is not. And that’s kind of where we’re focused. And as the industry landscape changes, we always assess what's the most effective way to play in this market. But so far, it's really about building a really good product that meets the needs of the customers. And in this particular case, doing an annual predictable cadence that can deliver them higher performance.

[John Pitzer:]

Bob, you mentioned in one of your comments that both the memory space and the modem space were areas of investment where you had been moving money. And it looks like that's starting to turn. As you think about going after this much larger TAM, if I piece together what you've said about gross margin and OpEx as a percent of revenue, it seems like you are honing into a target operating margin of 30% to maybe 32% that range and it could be that narrow. As you go after that larger TAM, are those markets still consistent with that view that that 30% operating margin longer term is a right way to think about the profitability for the Company?

[Robert Swan:]

We kind of earlier this year, we kind of laid out our three-year view of the world, if you will. And from a margin perspectives it had a couple of characteristics; one, we've had this long term view about gross margin where we'll generate between 55% to 65% gross margin for the Company. And for the last several and we expect for the next several years that we’ll be at the high end of that range; so in the 60% to 65% range, including roughly 63% last year and inherent in our outlook roughly 63% this year. So the gross margin characteristics, even with an increasing changing mix, have been in upper end of our performance level. And we expect that we’ll continue. However, what we said at the time is we do expect a modest decline in gross margins from where the record levels we've been at the last couple of years. At the same time, with that modest deceleration in gross margin, we said we’re going to improve our spending performance. And that spending performance would come down from roughly 36% of revenue in 2015 to 35% of revenue in 2016 to 33% is our updated guidance in terms of where we would be this year with the second half being lower than that. So gross margins, we expect with the change in mix, to come down a bit. And that will be more than offset by decline in spending as a percentage of revenue, such that operating income grows faster than revenue growth. Those are the dynamics over the course of the three year outlook we gave and nine months in that we feel great about where we are.

[John Pitzer:]

When you look at that three year outlook, one of the questions I always get is what's embedded in the core PC business. And clearly, when you think about the CCG business and the PC business inside of that, I kind of think about three markets, the enterprise market, the core consumer market and then that enthusiast market. We've gone through a four to six quarter period of relative stability in the PC market; some of that its easy comparison, some of that’s just owning to absolute stability. As you look at that three year plan, how should we think about how you’re thinking of PC unit growth over that three year plan?

[Robert Swan:]

The PC business, I mentioned earlier over the last several years, despite a 25% decline in unit volume that's improved its profitability by over $1 billion. So this team has been extremely good in managing the dynamics of a declining TAM, and through our investments strategies generating higher profitability in a declining market. So they know how to execute in this market and they've done it in a variety of different ways. First, annual product cadence with increased performance for our customers; that's been happening in the past; that's happening now; that will continue to happen in the future. Second, real goods core performance moving up the stack and segmenting the market in some of the ways you highlighted to get higher ASPs from the volume that we're selling, that's worked extremely well. Continuing to drive down unit cost when we go to next node has been a contributor to overall performance, a spending level that's in line with the declining market, has been a contributor and then the improvements that we talked about as it relates to mobile. So over the course of the last five years, including this year, those are the characteristics that have been driving increased performance in a declining TAM environment. The way we've tried to think philosophically about PC TAM is we don't really see, nor are we counting on our multi-year view in accelerating growth in PC TAM. On the contrary stability has been great, has been nice, but we continue to see PC TAM and our multi-year outlook to continue to decline. And with that, the increased size and relative performance of our data-centric businesses and the profitability from them begin to carry a bigger overall weight in the overall profitability of the Company. So we will continue to execute. We'll try to plan cautiously for PC TAM. Just have a cautious view. With that cautious view we get our costs in line, our investment envelope in line accordingly. And if our cautious view ends up being higher growth, we just generate a lot more profit and cash flows as a result. So that's been our philosophy this year and that was the philosophy as we laid out our multi-year plan, is we're going to perform extremely well in what will likely be a stable but declining PC TAM environment, our team will execute very well, and the other data centric businesses become a bigger part of the profitability of the Company.

[John Pitzer:]

Bob it sounds like the cautiousness already embedded in your outlook is not just a unit cautiousness but one of the things that’s, I think, really helps the Company as PC TAM unit tam decline is the mix up and pricing. It seems like you're even taking conservative view on pricing from here. Just help us understand on the philosophy behind that.

[Robert Swan:]

Well, first the performance on the core mix, whether it’s in the consumer environment, whether it’s in the enterprise environment or whether it’s in the growing enthusiast segment. The market wants higher performance and that higher performance is one where they have been prepared to pay for. And as a result, we have benefited from that quite a bit. In an increasingly competitive world, it's hard to count on, I call it performance, continuing to get bigger and therefore ASPs continuing to get stronger. It's hard to count on that. So I think as it relates, just broadly speaking for the client business, let's be cautious in our outlook let’s get our cost in line and let's continue to execute well and grow our data centric businesses.

[John Pitzer:]

Switching gears to DCG. If you look, I would argue that one of the reasons why you haven't gotten the credit at least until late for that data centric growth is that, when you look at DCG, it’s sort of a tail of two cities, at least; the enterprise market, which is been declining and then the cloud market and networking market, which as you pointed out earlier, been on that 15% to 20% growth vector. Give us an update of where you think we are in the enterprise cycle? And again, as you think about that three year outlook, what's embedded in your mind relative to enterprise, specifically for data center?

[Robert Swan:]

We talked earlier about a transformation that's underway for the Company. And from PC centric to data centric, from culturally 30% share with massive opportunities to grow rather than 90% share with little opportunities. The third fairly large transformation that's been underway for the last several years is within the DCG business. And we’ve migrated quite a bit from a business that’s primarily benefiting from enterprise growth to one that is a cloud and comms business. And over 60% of our DCG business today is from the cloud customers, and from the networking environment and the change in infrastructure with the OEMs in the network space. So underneath the covers, we got a cloud and comms business that have been growing very strong, that have more than offset a fairly significant decline in the enterprise business where the overall business continues to grow in the high single-digits despite the stock that the enterprise space is declining. Similarly, in our multiyear outlook, we expect those trends to continue. We expect more and more workloads to migrate to the clouds and we expect to continue to benefit from that migration where our cloud customers have a tendency to really value high performance. And similar to the client space, they value and are prepared to pay for the higher performance product. In that world, we get attractive ASPs and that's been a function of the revenue growth from cloud and comms more than offsetting the client and enterprise that we expect to continue. We do expect it to stabilize over time. But it's a cloud business. It's a cloud comms business today and that part of the business has got real attractive growth characteristics for us.

[John Pitzer:]

In the core server Xeon business, how important our product cycles, and I probably get 14 or 15 questions a week about Purley and how Purley is unfolding in the kind of what's the outlook there. So could you talk a little bit about product cycle importance, in general, and specifically how you see Purley rolling out over the next four to six quarters?

[Robert Swan:]

I think, I'm going to focus a little bit on the cloud, if you don't mind and if you -- I think it applies for enterprise as well. This is a -- where everyone, all the CIOs, are dealing with this increasing demand to be more efficient but to also deal with more cyber security threats. The demands of their internal customers to get more access to more data, to analyze that more effectively are growing and growing and growing. And they have -- their demands for compute, memory and storage, are growing like crazy. And in that world, you have -- they don’t know want to just pay X%. If they have 30% more demand for data, they don’t want to pay 30% more for that performance. So what they're looking for, CIOs in general, whether they offload to the cloud or perform on-premise, they’re looking for more performance to deal with the increasing challenges that they’re facing in with. So that more performance comes from just a predictable cadence of new products that deliver higher performance. So that we’re trying to continue much like we are on the client side, has just an annual of rollout of products that can deliver higher performance so they can deal with the increasing demands of what data means for their collective spending envelope. It's very important. Purley is our most recent new product launch, as you know, with dramatically improved performance. We launched in the July timeframe. And it's growing now. It will grow over the course of -- you got lot of into the replacement cycles. We don’t launch the product and they sell, let's go replace everything that it's been growing over the course of the third quarter and we expect, as they go through their refresh, the demand for this higher performance product will continue to grow and will be a source of growth for us and the fourth quarter into 2018.

[John Pitzer:]

That’s helpful. Couple of questions around AI. Clearly, there is a lot concern about your positioning to exploit AI as a workload. We've seen a lot of initial success with GPUs, not as much success with core Xeon or some of the acquisitions you’ve made. So a couple of questions around AI. First, there is a perception in the investment community that it's a zero sum game. If GPUs wining Xeon is losing. I'm curious in a world where you’re not that successful in AI, specifically, what’s the impact you think AI is going to have on your core server business?

[Robert Swan:]

I think, first in the data center worlds, AI is a workload is still relatively nascent. It’s increasingly important but relatively nascent. So we think, going forward, the growth characteristics of AI are really attractive and that’s the place where our expectations are we're going to win. And with this growing workload, the approach we’ve been using is, first, if you break this AI world down into inference versus training. We have a very strong position inference. And our strategy there is to continue to use the core Xeon CPU and optimize it for this AI world in the inference space. And that’s, more recently, Xeon Scalable, is our product attempt to take a very strong position inference, optimize the CPU for AI workloads and continue to protect and extend that strong market position. In the world of training, which is also nascent but growing fast, our approach there is really is been through an acquisition. So Xeon and FPGAs are meant to protect and extend our position in a very important fast growing workload in inference. Our acquisition of Nervana is meant to extend our position into the training segment. And that’s acquisition we made over a year ago now. Very strong team, architecture that we think has real opportunities to strengthen our position in that segment where our competitors, with GPU, have done tremendous traction. So Nervana, the acquisition, is our focus and foray into the training segment. We just announced a launch of a product with Facebook, which is really our first foray and we expect in 2018. And then with another annualized product cadence in with Nervana to have a real good product, high performance product in the training segment. The third aspect for us in this nascent but fast growing AI space is at the Edge, lower power performance, not big heavy stuff, but lower power performance at the Edge. And that's also through the acquisition of a company about 18 months ago, called Movidius. So in this nascent but fast growing workload, called AI, we have a very strong presence in inference and we use Xeon to protect and extent. In training, we're using the acquisition of Nervana and some products releases that we've just announced to improve our position. And at the Edge, the acquisition of Movidius, is kind of collection of capabilities that we're embarking on to continue to be a leader in the AI space.

[John Pitzer:]

Bob, I think from the outside looking in one of the things from my perspective that has definitely changed since you've joined is maybe the philosophy around guidance. And if you go back and historically look at the Company, I think that you've hit your guidance about half the time prior to your joining. It seems like you might have a slightly different philosophy than some of your predecessors around guidance or around the conservatism you take as you communicate with investors. Is that a misperception of mind? Or can you help me understand your philosophy around that?

[Robert Swan:]

It's -- do what you say. And I think we know it's important to build our credibility, our accountability for a company that doesn't just set low guidance that isn't -- that it cannot perform great, is to distinguish between how we drive a 100,000 employees to be great and how we take that and convey it in a way to you where you can trust that we're going to do what we say we're going to do. And philosophically, it's not, it's no -- that's in effect, do what we say and distinguish between demanding greatness internally but be balanced and pragmatic about what you can expect from us. So you can count on us.

[John Pitzer:]

One of the things you've done in the NAND business is try to match capital needs with existing free cash flow with some of the prepayments. There's still a pretty big gap in the model between EPS, earnings per share and free cash flow per share. And the biggest driver of that, as you know, is difference between quarter to depreciation and quarter to CapEx. How should we think about that gap closing overtime? Is the philosophy here -- listen we've got all this new TAM and revenue growth should more than offset depreciation growth. Or how do you think about that dynamic in trying to close that gap?

[Robert Swan:]

There is good reasons for the gap, in some ways and sometimes there's not so good reasons. And for the good reasons, it's just fine. It's how I think about it. And for the not-so good reasons it's close that gap. What does that mean? The gap for us between earnings and free cash flow has widened. And it's really driven by three fundamentals; one is increased capital for memory and a business that has been losing money, double whamming. So what do we there to your point to the extent we can long-term supply agreements with customers where we also use some of their money to fund our capital. But two is to make money. We’re in memory to make money. And the combination of those two will -- the prepays we received this last quarter helped to close that EPS free cash flow gap. But we continue to look at how do we use strategic supply agreements to close that gap. But our intention is to make money. That first and foremost is the biggest driver of the gap and one that we’re working to close in two different ways. Customers might make money at most importantly. Second, the gap has been driven by investments in capital for next node. And we’ve been growing our capital base to build the infrastructure for 10-nanometer. That capital expenditures is invested, it's a good capital, it's not depreciating yet. It will begin to depreciate and it will be a contributor to the modest gross margin erosion overtime. So that's good capital but there is an imbalance right now and that imbalance will play out into our -- in our multiyear margins growth faster than revenue profile. The third driver of the gap is also a good driver, and its working capital. And for us our inventory levels now have been a user of cash during the course of this year. We’re at I think the highest inventory level in the company in the third quarter. And that's a function of growth and multiple product transitions or innovation. That's just fine. We’ll continue to improve working capital. But if inventory is grown because we're accelerating the growth in the business, whether it's memory, whether it's in more modem volume or whether it's in multiple product transitions, that's okay and we’re okay with that. So we have a gap between EPS and free cash flow. There’s three primary drivers, there’s goodness that we are okay with and there is opportunities for us to continue and narrow the gap. And we will narrow that. We have been and we will narrow that gap, going forward.

[John Pitzer:]

Great. With that, we've run out of time in this session. But I want to thank everyone for joining this morning's, especially for Bob for spending some time with us. Appreciate it, thank you.

[Robert Swan:]

Appreciate it, thank you.