Q2 2021 Intel Corp Earnings Call
[music].
Thank you for standing by and welcome to the Intel Corporation second quarter 2021 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 to ask a question. During the session you will need to press 1 on your telephone as a reminder, today's program is being recorded.
And now I'd like to introduce your host for today's program, Tony Veilleux head of Investor Relations. Please go ahead Sir.
Thank you operator, welcome to Intel second quarter earnings Conference call.
By now you should have received a copy of our earnings release and the earnings presentation.
If you've not received both documents they're available on our Investor website.
<unk> Dot com.
The earnings presentation is also available in the webcast window for those joining us online.
I'm joined today by our CEO, Pat Gelsinger, and our CFO George Davis.
Moment with brief remarks from both 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 it 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.
He will be speaking to the non-GAAP financial measures when describing our consolidated results.
The earnings presentation and earnings release available on <unk> Dot Com include the full GAAP and non-GAAP reconciliation.
With that let me hand, it over to Pat.
Thank you Tony Good afternoon, everyone. Thanks for joining our second quarter earnings call.
Thrilling time for both the semiconductor industry and for Intel we're seeing unprecedented demand as the Digitization of everything is accelerated by the superpowers of AI pervasive connectivity cloud to edge infrastructure and increasingly ubiquitous compute power.
Our breadth and depth of software silicon and platforms in packaging and process combined with our at scale manufacturing uniquely positions Intel to capitalize on this vast growth opportunity.
Our Q2 results, which exceeded our top and bottom line expectations reflect the strength of the industry the demand for our products as well as the superb execution of our factory network.
As I've said before we are only in the early innings of what is likely to be a decade of sustained growth across the industry. Our momentum is building as we once again beat expectations and raised our full year revenue and EPS guidance.
Just laying out our I D M..2 point no strategy in March we feel increasingly confident that we're moving the company forward toward our goal of delivering leadership products in every category in which we compete while we have work to do we are making strides to renew our execution machine 7 nanometers is progressing very well we've launched.
<unk>, new innovative products establish Intel foundry services made operational and organizational changes to lay the foundation needed to win in the next phase of our company's great history.
Here at Intel we're proud of our past pragmatic about the work ahead, but most importantly confidence.
Our future no.
Now, let me share some more detail on what we're seeing in the market.
That's compute is becoming more ubiquitous we're seeing sustained strength in client demand. The ecosystem is back to shipping over 1 million PC units a day, despite grappling with component shortages I expect PC Tam growth will continue in 2022 and beyond driven by 3 factors.
First P C density or Pcs per household is increasing as COVID-19 is irreversibly changed the way we work learn connect and care for each other for.
For example, even as we emerge from Covid, we're seeing many companies off for hybrid work models versus full return to the office.
Second replacement cycles are shortening on the larger an aging installed base the shift to notebooks the deployment of new operating systems, and new better experiences such as our Evo platform will continue to drive refresh on the 400 million Pcs over 4 years old that are running windows 10.
Finally, new markets and users are adopting the P. C. As the device of choice and penetration rates are increasing as worldwide GDP growth. It makes the P. C more affordable to more people in areas like education, we see huge potential as the number of Pcs per hundred students and teachers remains in the single digits.
These trends underpin my belief that we are still in the early stages of a sustainable cycle of P. C growth in our OEM and channel partners have resoundingly affirmed this perspective.
Beyond client, we are seeing near term recovery across traditional data center market as well as explosive long term demand from the cloud to the intelligent edge our digital.
Speaker will pace and AI is the key to unlocking the value from this data and turning it into information.
What's the appetite for meaningful data grows and the cost of compute falls AI workloads are proliferating into more areas and as a result, we expect the AI market to grow at more than 20% a year. This is why we are infusing AI across everything we do.
Similar resolutions are occurring in the areas of connectivity for the data center will be transformed by Silicon Photonics, and 5 Chi which is hitting its stride with open Rand and a lot of us driving all markets in which we have substantial leadership positions.
On the other side of the equation the strong demand environment continues to stress the supply chain.
Well I expect the shortages to bottom out in the second half it will take another 1 to 2 years before the industry is able to completely catch up with demand.
D M..2 point, though which combines our internal manufacturing capacity with the use of third party foundries best positions us to weather these challenges and work with our ecosystem partners.
Built a more resilient supply chain.
With major fab construction projects underway in Oregon, Arizona, Ireland, and Israel, we are investing for the future, but we are also taking action today to find innovative ways to help mitigate industry constraints.
For example, on our Q1 call I talked about using our internal assembly tests network to help with portions of the substrate manufacturing process a benefit uniquely enabled by our I D. M 2.0 strategy I am pleased to say that this effort is now online and is significantly accelerating the availability of millions of substrate.
For our products we.
We are also working to build that U V ecosystem, which require significant support around the equipment, including photo resist mass generation metrology.
Example is I M S. Nanofabrication, a wholly owned subsidiary of Intel using a novel multi beam technology <unk> provides the large majority of U V bass, writing tools to the industry and we plan to accelerate investments to advance this pivotal ecosystem capability.
In the second quarter, we continued to see Intel foundry services build momentum. We are now engaged with more than 100 potential customers on the basis of our 3 key value propositions first iff's will have the widest offering of IP ranging from X 86 to arm to risk 5.
Which allows our customers the flexibility to design products, using our IP catalog as well as their own.
Second we will offer our customers comprehensive access to arrange a mature and leading edge process and packaging capabilities.
I'm pleased to announce we recently signed our first major cloud customer to use Iff's packaging solutions.
Have you been more news to share on Iff's customer momentum on Monday.
Third Iff's will offer scale manufacturing that gives our customers confidence we can meet their demand.
Part of that we are committed to creating a more robust geographically balanced and secure supply chain along with our 20 billion fab investment in Arizona and $3.5 billion advanced packaging investment in new Mexico, we planned to build additional capacity to support both internal and Iff's growth for you.
The us innovation and competition Act, there's a tremendous step forward to catalyze investments in manufacturing here in the U S and will serve as a tailwind to our iff's efforts.
After my recent visit to Europe, we're seeing similar enthusiasm from EU governments customers and the overall ecosystem and we expect to announce our plans for our next U S and European sites by the end of this year.
Moving to our continued focus on execution as I said at the start of the call. We are pragmatic about the work in front of us, but supremely confident of our future.
Under I D. M 2.0, our factory network continues to deliver and we are now manufacturing more 10 nanometer wafers and 14 nanometer.
10 nanometer volumes ramp economics are improving with 10 nanometer wafer costs, 45% lower year over year with more to come.
We'll talk more about our plans for process and packaging leadership and our Intel accelerated event. This Monday I Hope you will join me for those critical update.
On our path back to unquestioned product leadership customers continue to choose Intel using our broad portfolio of assets. We will continue to compete aggressively for market segment share.
In Q1, we gained PC share with record notebook sales following that with record Q2 revenue, we launched 12, new processors and Tiger Lake is ramping even better than expected with more than 50 million units shipped to date finally, our future client roadmap remains strong and we expect to ship several more.
Units of Alder late to customers in the second half and Meteor Lake remains on track for production in 2023.
Beyond the CPU, we reached a major milestone with our partners at Microsoft with the announcement of Windows 11, we deepened our co engineering efforts to enable new experiences, including running Android application seamlessly on Pcs and optimized for Intel based platforms.
We're gaining similar momentum through the year in the datacenter Q1 was the low point in revenue for the year and we exceeded our plan in Q2, we expect D. C. G to grow sequentially, achieving double digit year on year growth in the second half as it accelerates through the year ice Lake is ramping broadly to customers include.
Microsoft Alibaba, Baidu Oracle and other major service providers and enterprise customers. Additionally, we continued to extend our leadership in networking by delivering a truly cloud agnostic platform using xeon scalable processors and accelerators and partnership with Ericsson.
This will allow operators like Verizon to introduce a virtualized ran solution across all deployment scenarios, including existing footprints.
Finally mobile life further solidified its position as the leading supplier of advanced driver assistance platforms. In Q2, we announced a major win with Toyota and close 10 additional design wins for over 16 million total lifetime units earlier. This week, we hit another exciting milestone.
As mobile I became the first industry player to start testing autonomous vehicles in New York City.
The challenging driving environment for humans, let alone a vs with vehicles in Israel, Germany, Detroit, Tokyo, Shanghai, and coming soon to Paris Mobile Ly has the largest global footprint in the AAV industry enabled by our unique rim distributed mapping technology by year end.
We will have over 1 million vehicles, providing telemetry for dynamic crowdsourced mapping.
A unique and powerful advantage of mobilized.
At Intel we have a saying we'd begin with sand and the rest is our people that no. Other point in our history have our people and culture, but more important to our success.
We recently made strategic organizational changes to further strengthen our technology leadership and accelerate our execution, we have restructured our data platform group into 2 business units. The data center and AI group led by Sandra Rivera and Intel veteran with deep knowledge of data center silicon to software and.
The network and edge group, which will be led by Nick Mccune, a renowned leader in the networking industry.
We've also created the accelerated computing systems and graphics group led by Russia to Dory to increase the company's focus in key growth areas of high performance computing and graphics.
We're also highly encouraged to have slow Mitt wise rejoined to strengthen our design engineering core.
Finally, Greg Lavender, who joins us Intel CTO and GM of our software and advanced Technology Group will drive a unified vision for our software strategy across Intel and assure it remains a competitive differentiator for us.
Have the utmost confidence in our leadership team to drive the future of Intel together, we will continue to sharpen our focus and execution accelerate innovation and unleash the talent inside Intel.
While there is more work ahead, we are moving at a torrid pace and I look forward to providing several updates in the coming months on Monday I invite you to intend Intel accelerated where we will lay out our road map to regain process performance leadership and share what comes next for our World Class <unk>.
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In October we will hold our Intel innovation event, a geek firsts for the industry to come together and explore the technology that will drive the next decade and beyond.
At our Investor Day on November 18th we'll pull it altogether and present, a compelling long term business plan to drive sustained growth and shareholder value creation.
As you can see we have a lot playing for the rest of the year, but for now I'll turn it over to George to discuss our Q2 performance and outlook.
Thanks, Pat and good afternoon, everyone.
As Pat said, we had a very strong Q2 and are raising full year revenue guidance by $1 billion. Despite a highly constrained supply environment.
Q2 revenue was $18.5 billion exceeding our guidance by $700 million.
This upside was led by continued strength in our PC business and earlier than expected recovery in both our Iot business and the enterprise portion of the data Center segment.
The PC and mobile businesses, both achieved record Q2 revenue.
Gross margin for the quarter was 59, 2% exceeding guide by 220 basis points, primarily due to improved mix and strong flow through on higher revenue.
Q2, EPS was $1.28.
Up 23 cents versus guide largely on strong operational performance across the board.
In Q2, we generated $8.7 billion of cash from operations.
Free cash flow of $5.1 billion and paid dividends of $1.4 billion.
Moving to segment performance in the quarter.
CCG revenue was $10.1 billion up 6% year over year.
The growth of our core client business is up 14% when we exclude the impact of the ramping down Apple modem business and the exit of our home gateway business.
This shows the strong underlying growth in our client business, despite a supply constrained environment.
Platform Asps and client were up 4% sequentially on richer mix within notebook and increase desktop volume.
On a year over year basis, the strength in consumer entry in education led to lower overall asps.
Operating income was $3.8 billion.
32% year over year on higher revenue lower inventory reserves and reduce 10 nanometer costs.
D C. G revenue was $6.5 billion exceeding our expectations.
But down 9% year over year versus a challenging compare and a continued competitive environment.
Sequentially D. C. G grew 16% with all segments growing quarter over quarter and enterprise returning to year over year growth.
Operating income was $1.9 billion.
Down 37% year over year, primarily on lower revenue.
The 10 nanometer production ramp and increased R&D investment.
<unk> revenue was $984 million up 47% year over year on a broad based recovery from Covid, driven lows and up 8% quarter over quarter led by strength in the retail segment.
Operating margin was $287 million up 310% year over year.
Returning to pre COVID-19 levels of profitability.
Mobile AD revenue was $327 million up 124% year over year.
But down sequentially due to COVID-19 related slowdowns at automotive Oems.
Operating margin was $190 million.
<unk> continues to execute extremely well and we are seeing continued design win momentum.
PSG revenue was $486 million down 3% year over year due to significant supply constraints.
Demand continues to significantly exceed supply for FPGA.
Operating margin was $82 million up 3% year over year.
Moving to our Q3 and full year outlook.
For Q3, we are guiding revenue of $18.2 billion up 5.4% year over year.
We remain in a highly constrained environment, where we are unable to fully supply customer demand.
And C. C. G. We continued to see very strong demand for our client products and expect Tam growth to continue.
However, persistent industry wide component and substrates shortages are expected to lower CCG revenue sequentially.
Expect supply shortages to continue for several quarters.
But appear to be particularly acute for clients in Q3.
And data center, we expect enterprise and government and cloud to show further recovery in Q3.
As a result, we expect to see strong year over year growth in the quarter.
Sequentially, we are expecting modest growth that is expected to accelerate further in Q4.
Gross margin is expected to be approximately 55%.
Approximately 150 basis points year over year.
7 nanometer gains momentum and the media Lake pilot line ramps.
We're also seeing pre P <unk> reserves on our older Lake product.
We are forecasting EPS of $1.10 per share.
And a tax rate of approximately 4%.
<unk> forecast includes approximately 10 cents of 1 time tax benefit from our onshoring of certain entities as part of our long term tax planning.
Turning to our full year outlook.
We are raising our revenue guidance by $1 billion to $73.5 billion with gross margin of 56, 5% and EPS of $4.80 up 20 cents from our prior guide.
Consistent with the investment mode. We are in under item to point out we expect capex of $19 billion to $20 billion. This year and free cash flow to be $11 billion up $500 million versus our prior expectation.
And our CCG business, we expect full year revenue to be flat to slightly down year over year as growth from an increasing Tam is offset by supply constraints.
And the ramp down of our Apple modem and CPU revenue.
<unk> of our home Gateway business.
Adjusting for all of the Apple and home Gateway business TCG would've been up high single digits year over year.
For D. C. G. We expect full year revenue to be slightly down year over year with second half revenue significantly higher than first half as Angie and cloud recovers.
As a result, we expect data center will return to year over year growth in both Q3 and Q4.
Gross margin percent is expected to be lower in the second half of the year predominantly due to 7 nanometer factory ramp.
Worsening supply constraints and panting client volume and mix.
And a 1 time charge in Q4 related to our Intel federal business.
Your models absent. This 1 time charge the implied Q4 gross margin would be approximately flat to Q3.
It is good to remember that our investment in 7 nanometer represents a normal impact tied to introducing new process technologies.
Since April we've seen supply chain inflation happening faster than we are electing to pass through to our customers further impacting our second half gross margin outlook.
We expect increased R&D through the year as we invest in our roadmap and I D. M 2.0 strategy, resulting in year over year growth in opex of approximately 10%.
With that let me turn it back over to Tony and get to your questions.
Alright, Thank you George moving on now to the Q&A as is our normal practice, we would ask each participant to ask just 1 question. Operator. Please go ahead and introduce the first caller.
Certainly our first question comes from the line of Tim Mccrory from UBS. Your question. Please.
Hi, Thanks.
There was some headlines recently about you potentially looking at maybe building out your.
Foundry business by our M&A and I'm wondering can you just comment.
You know broadly do you think that.
M&A would significantly accelerate your foundry efforts I know you know right now you're basically offering that 22 nanometer process and you probably have to offer more process used to sort of pull those efforts forward. So I'm wondering if you can comment on the on the headlines that were out there, saying hey.
Hey, Thanks for the question, Tim and great to be with you. All today. So first I'd say, obviously, we can't comment specifically on the speculation that you've been hearing but feel what I'll say is we are very happy with the build out of the Iff's business as you say it will include mature nodes.
Nodes R 22 F. L will also include our leading edge nodes as well our packaging offerings, but overall, we're just seeing great momentum over 100 customers in our pipeline and we fully expect that this is going to be a great business for us.
At this point, we would not say that M&A is critical but nor would be rule. It out you know our view is that industry consolidation is very likely the intense R&D the need to move to modern and leading edge nodes. The massive capital investments required. We just simply view that smaller players simply won't be able to keep up and foundry.
He is without leading edge capabilities will be left behind.
And we are continually seeking ways to accelerate our plans with Iff's. If an acquisition can help we will certainly not ruled out thank you.
Thank you. Our next question comes from the line of C. J Muse from Evercore ISI. Your question. Please.
Yeah. Good afternoon. Thank you for taking the question just wanted to clarify George the 1 time charge in Q4, you know roughly $300 million can you give a little more color on that.
And then I guess, Pat or George.
Bigger picture question as you're going through this transformation IDM Ciudadano strategy is there a free cash flow target that you have in your mind.
Coming 1 or 2 years or Neil Thank you.
Yeah, Let me I'll start with the 1 time charge without going into too much detail. It is related to our high performance compute activities through our Intel federal.
It's a it's crystallized in Q4 at the time that we execute a contract.
So that's the reason are the reason for the timing, yeah, and I would just say the HBC business for us consistent with the re org that we just announced C. J, we just see a huge opportunity for us as we start delivering our GPU HBC specialized versions of the Xeon product, we see a great opportunity there.
<unk> brings more focus on this business, so even though theres a 1 time charge in Q4, we see this as a great business for us for the long term and 1 that just will bring many many technological market and a business benefit so George I'll, let you answer the second half.
In terms of free cash flow, obviously very important.
We're focused on that we raised it this year as you saw on the call. We will go through not only free cash flow of capital and all of the normal financial key financial metrics for the company at the November analyst meeting, So, we'll we'll defer until that.
Jim on that question, but thanks.
Yeah.
Thank you. Our next question comes from the lining of Jonathan from Cree.
Suisse question. Please.
Yeah. Good afternoon, guys. Thanks for let me ask the question that I wanted to ask a bigger picture question just on pricing in the quarter and your philosophy around pricing. It sounds like it was in the client business mix explains a lot of the decline in asps year over year, but when I look at the data Center group, especially with enterprise.
And calmed down year over year, I was a little bit surprised to see asp's.
And that group down about 7% year over year can you help us understand what's mix versus.
Like for like and as you think about regaining product dominance.
How do you use pricing to kind of maintain.
Sure as you get sort of your feedback underneath it.
Yeah, and you know broadly speaking I'm Oh, my comments will be a little bit specific to start with on the datacenter business proper.
Data center business good good recovery in Q2, and with that there was some a S. P declined some of Thats competitive driven a little bit of that is mix, driven but a bit more competitive.
Our outlook. There is is that we see fairly stable pricing and market segment share in the data center business for the second half of the year and that's driven by I'll. Just say, we are bringing everything we got to the table to continue to win back.
The market and with that our software resources, our deep investments with our customers the increasing strength of our product line. I'd also highlight there had been a very strong ramp for the isolate product, which is very competitive clear leadership on a number of metrics.
The critical 1 such as AI performance and we're also starting to see be returned to growth in cloud as you know but stronger.
Growth in the enterprise portion of the market. So overall D. C. G. Good growth second half over first half will be very competitive with that business, but it's a supply constrained environment overall.
The similar case for the client business. So overall, we don't see a lot of movement on Asps first half the second half in either of those businesses. It really is about supply limitations and as George commented, we're not passing through all of our supply constraint.
Price increases that we're seeing from our supply chain, we really see as an opportunity to be investing with our customers rebuilding their confidence in partnership.
For the future and we're feeling very good about our overall strength momentum and competitiveness as we go into the second half.
And C. J I would just add the Q2 number which.
You know looks.
Like a double digit ASP decrease for C. C. G. I would just remind you that that's a year over year comparison, where we have a much bigger mix of the small core products.
Which is really driving that you saw units were up 33% and Asps were down 15%, it's really the mix that is.
Reflected there.
Thank you.
Thank you. Our next question comes from the line of Stacy you asking from Bernstein Research. Your question. Please.
Hi, guys. Thanks for taking my question I have a question on depreciation it has been coming down sequentially for the last several quarters. It was actually down again sequentially this quarter.
How is that possible given the capex ramp like what's going on there and how do we think about depreciations impact on gross margin going forward given it sort of run rating under $10 billion annually. In your Capex is now going to $20 billion annually like how do we think about those yeah. Stacy so the absolute numbers are down.
Are trending well sort.
Sort of counter intuitively and really it's a NAND moving.
From non.
Non-GAAP into <unk>.
GAAP, there's no depreciation for the NAND business anymore.
Is it under.
Under the accounting once as held for sale. So it's a it's an anomaly, yes, we expect depreciation to increase as we're ramping our capex over the next several years and again in terms of how all of that translates into a you know everything from gross margins the free cash flow.
He will cover all of that at the analyst day, but you're not missing anything.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question. Please.
Great. Thank you I Wonder if you can address the timing on Sapphire Rapids, there was some stuff on your blog kind of Andy.
Jim that there was a delay it doesn't sound like from customers, there's been that much of a change, but just maybe from your standpoint, how should we think about the timing of that of that product and how it affects you over the next 12 months.
Yeah, Thanks, Joe I'll take that 1 and overall you know as I said the data center business strong momentum and we really felt Q1 is the low point Q2, gaining momentum second half isolate ramp being very strong and obviously your customers are now very anxious and excited about Sapphire rapids huge performance improvements, but also huge.
Feature capabilities as part of that so we did add a bit more time for the validation cycle for we are now deep into the validation its in the hands of customers with volume sampling underway and there are quite excited about not just the performance capabilities core count increases, but a lot of the new technologies, they're all in the air.
Area of new memory capabilities, New Pcie Gen 5 capabilities. Many of the new features that we brought in here for a high performance in particular, so overall, it's going to be a great product and we're expecting to see a very strong ramp up in the first half of next year and then we think we'll just continue to be.
The momentum of the data center business as we've indicated a strong second half as forecast and we're going to build on that as we go into next year with Sapphire Rapids, and the overall roadmap execution is improving as we look for 'twenty 3 'twenty 4 to deliver unquestioned leadership products across everything that we do including the data center.
Great. 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 back 1 more on the foundry business. So if you have heard Intel I think 20 billion to the U S. A foundry over the next several years and another 20 billion to foundry operations in Europe, I'm curious when that spending is going to start and importantly, who are the target customers.
Because when I look at the Fabulous landscape, it's not the cloud vendors a lot of the large fabless customers Apple Qualcomm Nvidia on Marvell M.
M D et cetera, and many of them compete against Intel.
I'm curious you know who is who are the target customers here that can justify this nearly 40 billion of spending that Intel is committing to a.
Perspective, thank you.
Yeah Vivek this George a couple of things number 1.
But we're short of supply. So we were the first big customer growing into that expanded capacity.
And.
And we'll we'll open up those facilities, you know getting the shells and.
The what I would call the lower cost elements in place.
Is this something that quite frankly, we've fallen behind on over the last few years. So this is where we're playing a little catch up just for our own requirement.
With foundry will be talking about.
Some potential customers, we've talked about 100.
Customers that are talking to us about foundry opportunities obviously.
When you bring on a new foundry customer there's a as you look at the lead times that are needed for that and the lead times that are needed to actually.
Do the most expensive part of adding to your capacity those things actually line up pretty well. So we'll manage that we'll manage that quite tightly will go into this in more detail in November but it's not a this is not intended to be a we'll just keep building and hoping that somebody shows up it's going to be.
Tied to the demand signals that we're receiving in the not only for us which are significantly in excess of our capacity today.
But also for the customers, we're working with which I believe will be talking about more next week at our event, yeah and just to add Vivek you know will cover some more of this on Monday, and our Intel accelerated event and you know as part of that you will be laying out more specifics on the roadmap the <unk>.
<unk> the packaging, but I'll say the core of your question was who's going to be the customers for this we expect a broad range of customers, we're going to have a range of offerings on the menu. If you could for modern nodes as well as a leading edge nodes, we expect a range of customers across different segments of the marketplace, including summer.
The largest users users of our wafer capacity in the industry. There's a lot of excitement in the marketplace 100, plus customers in the pipeline already and you can expect to see great things in this area of a new and exciting business the world needs more semiconductors, the world's needs a more balanced geographic supply.
For those semiconductors, and we're finding enormous momentum and enthusiasm for that strong support from the customers the ecosystem as well as the governments around the world.
Thank you.
Thank you. Our next question comes from the line of Matt Ramsay from Cowen Your question. Please.
Good afternoon, and thank you very much.
Pat I was really pleased to see you guys announced that debt.
<unk> was going to come join you as CTO I don't know how many of the semiconductor folks are familiar with his background and maybe you could just talk a little bit about what.
CTO is gonna be under Greg's re made I know you guys have had this 1 API software strategy for a while that looks great and slides and on paper, but we've not seen a ton from it. So if you could expand a little bit about what's exactly going to be under Gregory made and what he is going to be charged with that would be really helpful. Thanks.
Yeah. Thank you, Matt and Greg will be CTO, the company's CTO. So as part of that will be all of our labs advanced research capabilities. We have a pool of hundreds of Phds doing advanced research and some of the most leading edge work is done.
And you know as you probably know about Greg as well you know he was a U T Professor and was my C. T O. What Vmware. He will also be the leader of all of our central software activities and this is a large organization.
By Us driver's compilers are all of those core things and the 1 API initiative, which we're now starting to see major partners come and aligned with us around 1 API the third and maybe most important area under his remit will be standardizing the upper layers of the software stack for us in a.
The AI software offerings scale for us and this is an area that we have you all say not managed well we've had too many pieces in different portions of the organization. So he will become the AI software leader at scale.
For us in an area, that's going to be critical to standardize deliver and just deliver some of the world's leading research that we have in the area of our software remit for our AI product offerings overall Super excited to have him on the team of World class Technologist and software leader combining with another world class leader.
Nick Mccune of World Class leader like Shlomo wise coming back on the team for our engineering talent flow was going out of the company. It is now coming back to the company and we are excited about the leadership team that we are forming.
Thank you. Our next question comes from the line of Harlan sur from Jpmorgan. Your question. Please.
Good afternoon. Thanks for taking my question on your data center business good to see the sequential inflection in Q2 looking into the second half in your guidance for Q3 and Q4, it looks like D. C. G is going to grow double digits percentage year over year in the second half and.
And that would imply that your data center business is growing double digits second half versus first half of this year is the math roughly correct and in addition to cloud and Hyperscale spending acceleration and improving enterprise does it the team continued to see strength in service provider as well as your customers continue to build out their <unk> networks.
Yes, yes, and yes to your question Harlan right and we're really you know the first half second half year over year, you got it right. We're seeing the growth for it and like we said we saw the bottom in Q1, great Q2 momentum continuing into the second half and next year.
And we saw strong growth in enterprise and government.
Coverage in cloud or we're seeing growth in that area, but as you say oh.
I'll just say we are so well positioned on the edge and the 5 Chi. The open ran V ran initiatives in the industry are now hitting stride and I think I've only been on 3 major service provider calls this week on exactly that topic, right, where they're really starting to look at those deployments at.
Scale for a standardized software driven edge environment for their 5 G networks and I'd also say you know this is a victory for innovation go just a year ago. We were just 3 years ago. There was grave geopolitical concerns around you know 5 G and would there ever be flexibility for how that would get the <unk>.
Floyd nationally now everybody is aligning against the O ran V ran initiatives as the way to do their 5 T broad deployments and the Intel platform sits in the center of those almost everywhere in the world. It really is a great success story for us and 1 that we think that will be harvesting for many many years to come.
Thank you.
Thank you. Our next question comes from the line of tissue hiring from Goldman Sachs. Your question. Please.
Good afternoon. Thanks, so much for taking the question I had a multi part question on gross margin.
George you talked about PR Q reserves related to ultra like.
Being a headwind this quarter. If you can quantify that for us ballpark that would be super helpful. And then towards the end of your remarks in terms of the second half outlook in terms of gross margin you talked about supply tightness driving a deterioration in CCG mix.
I was a little surprised to hear that given.
How strong chromebooks were.
In the first half. So if you can elaborate on that that would be super helpful. As well. Thank you.
Yeah. So in terms of if were looking at the.
Particularly let's just look at the.
Q3, because thats, where we we discussed the older older Lake premium pre <unk> reserves, it's 1 of the 2 top movers.
When you look at being down 400 basis points, it's certainly.
Not that it's not the majority, but it's a it's a meaningful impact in the quarter.
7 nanometer startup costs.
Ramping.
Or is the biggest the impact are far and away.
And in terms of supply tightness.
The challenge is you know.
Part of what made Q2, so great was customers.
Really challenged our sales teams in our factories to remix within a quarter or to provide them with the components that they could then match with what their supply chain was providing them. So they can get to market and this was a.
Watching it was a super impressive a little bit a little bit scary at times, but but the team did a fantastic job. So we we we did a really good job of eating up a lot of our substrates are some of which we thought we would have.
<unk> to us in Q3.
So your the supply impact is.
More of a volume impact.
You know customers are already starting to.
Mixed upwards. So that's a that's a usually a positive for gross margin and if there's upside in the second half it will come from both higher substrates are and the ability and and and a higher mix.
And that could well be the case were very we were cautious in Q3, we could see we had a real supply challenge I mean, it's a cute.
But Q4.
You know, where we're doing everything we can to help our substrate suppliers.
The increase of supply, including finishing up some of their manufacturing in our own facilities, which is something we can do as an IDM.
If we if we have more success than we can forecast today, you know maybe Q4 could be seen as conservative.
Thank you.
Thank you. Our next question comes from the line of <unk> jewelry from S. M. D. C. Nico your question. Please.
Thank you just a follow up to the previous question George could you give us some idea as we head into the next year.
What are some of the puts and takes on the gross margin front I'm just curious as to how long the 7 nanometer costs will persist and when did it peak out and as you go into the first half of next year, how should we think about the gross margins.
Yeah. So.
Again, all all Oh, I'm going to defer them.
Any any kind of forecasting of 'twenty 2 and beyond.
As you know the.
The fact that we have the 7 nanometer startup ramping is a that's a good sign that we're getting close to being able to get products ramping and and that's what really drives down costs over time, I think Pat was talking about our Q2 over Q2 of <unk>.
<unk>, 47% reduction in wafer cost in 10 nanometer. That's the kind of benefit you can get as you as you ramp into a process. So.
We'll we'll lay out more of our thinking in that regard.
Later.
Thank you.
Thank you. Our next question comes from the line of Tristan care off from Baird. Your question. Please.
Hi, Good afternoon, just a quick follow up Tom on the substrates commentary during the Q&A is this something that you believe can actually help you competitively.
Substrates manufacturing in house, particularly if supply constraints continuing this next year.
Yeah, we do think it generally moderates market share movements in the industry period, and if anything we're able to use it as an advantage because we're able to pull some of those substrates steps just to be clear, we're still relying on our substrate network, but we're pulling some of the back end processing into our own factories.
Which allows us to essentially get more out of the capacity that's available in the industry and that's what's enabling us to I'll say, you'll continue to over achieve on the overall market share gains that we've been seeing this has been an important factor.
We do have somehow factored into our second half we do hope to continue to overachieve in that area and if I'd say you know why do we overachieve. So much in Q2, the heroes for the quarter for us where our manufacturing and operations team. They just did a superb job for.
For us and really relying on them for the second half and as George said, Hey, if the if there's more opportunity for us to overachieve on the guide that we set for the second half it's going to come at the hands of their ability to essentially create more out of nothing you know find capacity in the industry build it out and we're doing quite well in this respect but overall it is a constraint.
Environment and.
And as a as a result, we and everybody else are trying to drive our factories harder drive yields better and be able to improve the supply chain of the industry and we're quite excited about it.
Susie is when we see this consistent strong demand signal as the world becomes more digital and we're gonna be building internal factories rapidly our supply chain rapidly and working with our supply chain quite aggressively.
Great. Thank you.
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.
Hey, guys. Thanks for letting me ask a question I wanted to turn to the profitability side of things and specifically on D. C. G. In the operating margin there, it's great to see that it improved from first quarter to second quarter and given the revenue trajectory I would assume it would have improved again in the back half of the year, but kind of trough to trough 2018.
Vesting period to this most recent 1.
The operating margin is about 10 points lower.
Mid twenty's roughly versus mid thirties, prior and I really wanted to understand why is it lower this time and perhaps even much more importantly, going forward is there anything structurally that is going to stop that from returning back to that 40% to 50% operating margin range you guys have historically driven.
Pettitte dynamics need to catch up on the manufacturing side. So you have headwinds there.
People customizing more cloud competition internally any of those dynamics that would stop you from getting back to that range. Thanks.
Yeah. Thanks, maybe starting at the at the latter part of your question. There's no long term reason why.
Why you could not see D. C. G. A return to more historical margins, what you're what you're seeing today is.
Reflection of a couple of things first first off year over year.
You know you've got a significant factory startup costs embedded for them.
Which.
If you look at their operating margin I would say another thing that.
People, maybe are overlooking is our opex investments, we have significantly increase the opex in key areas of the company.
Even as we've taken down about $2 billion of Opex.
Since 2018 on on various portfolio actions.
So and.
The D C G in the Z on product line is absolutely critical to the company and so we have substantially increased opex.
Within that as well so that's the second largest impact.
And.
To continue to do that for as long as it's needed and as you know ultimately it is your product competitiveness that gives you more flexibility to drive our asps.
Further from today and and drive higher gross.
Margins, but.
But you know I think the early comparisons this year were just off of such a strong compare them in the first half of last year was.
Jim.
Super strong high.
C C.
<unk>.
Quarters and in the first half of this year, although Q2 quite frankly, it was a lot better than we thought we thought coming into it for D. C. G.
Strength in enterprise, but the comparisons year over year, we're quite tough as you noted, it's coming up and yes, 7 nanometer startups gonna be gotta be absorbed and the higher opex, but.
You know I think as you see our.
Our product portfolio continued to get stronger and stronger.
With ice Lake in Sapphire Rapids, and then and then for the generations. After that there's no reason why over time, we don't get back to 2.
To historic levels and I'd also just add 1 small point that the Iff's gives us the opportunity to co engineer with our largest customers and this in fact creates a unique competitive differentiation, where our IP with their IP is creating products that are very uniquely beneficial to their T. C L.
And very co engineered so very sticky for both of US and the example customer that we set of a very large cloud customers 1 of our Iff's early customers. As an example of that kind of co engineering that we expect that we'll be doing our at scale for that portion of the marketplace pretty uniquely.
Thank you.
Thank you. Our next question comes from the line of Ambry Shoebox demand from BMO capital markets. Your question. Please.
Alright. Thank you Pat I, just wanted to get back to the competitive environment and just trying to connect all the dots.
In your slide deck or second quarter, you said that the.
Fees are down and you referred to an increasingly competitive environment did servers, but in response to 1 of the questions earlier on you said you expect a more stable share.
And pricing environment in D C G and then.
The final thing that caught my attention was on the substrate side, you said you were kind.
Kind of leveraging that backend to.
Our market share so is that true for the.
Did I get that correct that the environment competitive environment will be stable versus what it was in the second quarter and then.
Substrate.
Also enabling your captive footprint in the backend is allowing you to.
Probably stabilize share losses in the data center side as well.
The comment on fairly stable market segment share and Asps for D. C. G for the second half of the year is what our expectations are so I'll. Just say you know I think that the substrate in the overall supply limitations keeps I'll say a bound on market share movements are in that area of the business.
Overall, we do think incrementally our I D N a capabilities give us a bit more capacity and we saw market share gains for instance in the first half of the year and the client business as a result of that and we do think that gives us some ability to hopefully do a bit better than we've even guided.
If it occurs but overall, yeah your questions and the right domain fairly stable asp's fairly stable market segment share.
In the data center in the second half of the year, which as we've already said is substantially improved from last year as well as from the first half of this year products are getting more competitive stronger products give us more E. S. P capabilities as they become more competitive. So overall, we're feeling like the bottom was cute Q1 Q.
To show that to be the case, even a bit above our expectations and we're in a great trajectory for the second half and into next year.
Thank you.
Thank you well I think we'll wrap up at this point you know before we sign off you know 1 last opportunity to say what it is an honor to be back for my dream job to run this iconic company at this pivotal time in the history of the semiconductor industry. You know, we're rebuilding our heritage of execution innovation.
And in growth along.
Along with the 110000 talented passionate Intel employees I am just absolutely confident that the best days for this company are ahead of us.
For the call today, and I do look forward to talking to you all at or Intel accelerated events on Monday talk to you then thank you so much.
Thanks, Pat Thank you all for joining US today, operator can you please close the call.
Certainly thank you and thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Yeah.
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