Q2 2022 Intel Corp Earnings Call
Good day and thank you for standing by welcome to the second quarter 2022, Intel Corporation earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one or you tell him.
Please be advised that today's conference is being recorded I would now hand, the conference over to your speakers today, John Pitzer Corporate Vice President of Investor Relations at Intel. Please go ahead.
You should have received a copy of our earnings release and the earnings presentation, both of which are available on our investor website, I N T C dot com.
Earnings presentation is also available in our webcast window for those joining us online.
I'm joined today by our CEO , <unk> <unk> and our CFO David visitor in a moment, we'll hear brief comments from both followed by Q&A.
Before we begin please note that today's discussion contains forward looking statements based on the environment as we currently see it.
As such it involves risks and uncertainties. Our press release provides more information on the specific risk factors that could cause actual results to differ materially.
We've also provided both GAAP and non-GAAP financial measures this quarter and we'll be speaking to the non-GAAP financial measures when describing our consolidated results.
The earnings presentation, and the release are available on <unk> Dot com include full GAAP and non-GAAP reconciliations.
With that let me hand, it over to Pat.
Thank you John and good afternoon, everyone. While we continue to make solid progress on our strategy Q2 results were disappointing below the standards, we have set for the company and below the commitments we've made to you our shareholders.
Sudden and rapid decline in economic activity was the largest driver of the shortfall, but Q2 also reflected our own execution issues in areas like product design D C AI and the ramp of xg offerings.
We have an obligation to remain vigilant and to respond to changing business conditions, while not losing sight of our long term goals and opportunities. We will look to do both by adjusting and refocusing our spending levels in the near term at the same time as we accelerate the deployment of our smart capital strategy and improved product execution collectively.
These actions will begin to show dividends in the second half of the year, allowing us to return gross margins to our target range by Q4 and maintain our initial free cash flow outlook for 2022.
While still early in our journey, we remain laser focused on executing to our strategy to deliver leadership products anchored on open and secure platforms powered by at scale manufacturing and supercharged by our people. The current economic backdrop only strengthens our resolve and we are embracing this environment to accelerate our transfer.
<unk> for.
For example, regaining our leadership begins with Moore's law and the capacity to deliver it at scale over the last 18 months, we've taken the right steps to establish a strong footing for our TD roadmap, we are well into the ramp of Intel seven now shipping in excess of 35 million units until four is ready for volume production in second half of this.
This year and until 328% and <unk> are all at or ahead of schedule. We've received additional strong third party validation for TD Iff's and our manufacturing group just this week, when we announced Mediatek as our next major foundry customer a great example of our one in cell culture I want to congratulate.
Our teams are what we expect to be many announcements as we execute to become an at scale, leading edge geographically diversified systems foundry.
But we must also be clear eyed as we look into the second half we are planning for volatility as the world adjusts to the end of a two plus year pandemic.
Precedented stimulus governments used to fight it across the economy supply chain issues have both limited the ability to meet demand in some areas and driven inventory well above normal levels and others.
We are prepared to manage through a slowdown typical of the normal cycles of the semiconductor industry has experienced over the last 50 years, while the depth and duration are still difficult to predict we have a proven track record of being able to adjust and succeed in any environment.
Let me address some of the specific actions we are taking.
First we further sharpened our focus in Q2, selling our drone business and making the difficult decision to wind down our efforts on <unk> as we embrace <unk> standard, which Intel Corporation pioneer.
These add to actions last year and NAND in the sale of Mcafee in total we have now exited six businesses since my return, providing roughly $1 5 billion for investments aligned with our IBM two point of this strategy.
We are also lowering core expenses in calendar year 'twenty, two and we will look to take additional actions in the second half of the year, which Dave will address later.
<unk> expense discipline is not impacting the strategy and we remain firmly on track to achieve process performance parity in 2024 and unquestioned leadership in 2025. This goal as our true North Star.
Second our ability to invest aggressively and fulfill our commitment to a strong and growing dividend is anchored by the progress we are making in deploying our smart capital strategy. We're thrilled to see the bipartisan boats in the Congress. This week and expect <unk> to be on the President's desk. Shortly we have been integrally involved in moving this groundbreaking.
Breaking legislation forward. This progress combined with the strong momentum in Europe will reshape our industry and bring us toward a geographically balanced resilient supply chain that we are uniquely positioned to enable and benefit from ACA.
Access to mission to line pools of capital supports the accelerated pursuit of our strategy and will enable our toward pace.
Third I rejoined Intel to re energize and reestablish a culture of execution and innovation with process technology and capacity expansion. Both now trending very well we have the critical foundation, we need for improved product execution, we have rebuilt our leadership team now fully assembled for the first time and together.
<unk>, we have reestablished okay ours throughout the organization to drive common purpose and importantly, a system of accountability.
The coming months, we will begin to share more with the investment community on the next evolution of our tick tock model to drive consistent and predictable cadence of process and design innovation.
As we look beyond the near term the semiconductor industry continues to be at the beginning of a new structural growth phase driven by four superpowers, one ubiquitous compute to pervasive connectivity three cloud to edge infrastructure and for AI combined these drivers support a semiconductor industry eclipsing one true.
By 2030, what remains very clear even during this period of uncertainty is the growing importance of silicon to the global economy and to each of our daily lives.
However, as a result of macro weaknesses, we now expect the PC Tam to decline roughly 10% in calendar year 'twenty, two characterized by broadening consumer weakness and relative strength in enterprise and higher end Skus Importantly, our Q2 PC unit volumes suggests we are shipping below consumption some of our largest.
Customers are reducing inventory levels at a rate not seen in the last decade, and along with some pricing actions should allow for sequential growth into the second half even as some customers manage inventory lower.
While COVID-19 related dynamics like work from home and school from home pull forward. Some demand <unk> also solidified the PC as an essential tool in the post pandemic World for example, PC and Chromebook usage remains historically high even as the pandemic is most acute impacts diminished markedly higher per PC usage.
And a larger installed base, including 600 million Pcs that are four years and older supports a PC Tam sustainably above 300 million units.
Data center trends are still well entrenched data has been growing exponentially at a 50% CAGR for over 20 years, but until recently it has been uneconomical to turn that data into true actionable insights with the advent of AI along with Cpus Gpus are accelerators, we now have the tools to axa.
And use more of the data, we create driving significantly higher compute demand and a multiyear CAGR in the datacenter Tam of at least mid teens.
Despite these drivers demand will not be immune from economic headwinds. In addition to match set issues, which have constrained shipments for multiple quarters, increasing economic concerns are leading to a reduction in the second half demand as a result, we have lowered our server tam assumptions to reflect more modest growth in 2022.
Against this backdrop, let me highlight key developments in our businesses.
In response to supply chain, a matched set issues, we closely collaborated with our customers and suppliers to effectively address their most critical needs we rapidly adjusted to changing market conditions make cost reductions and leverage smart capital to execute towards our <unk> strategy. Despite.
Lower revenue impacting overall gross margins Q2 saw continued strong performance in our factory network and we exceeded our wafer cost goals with 10 nanometer unit costs declining approximately 8% year on year.
And TD, we continued to deliver on the promise of Moore's law and our ambition is to deliver $1 trillion transistors in the device by 2030.
Until four details were released at the recent <unk> conference to positive reviews, and we've now take them. The first stepping of the Grand Rapids, CPU and expect to power all in this quarter and.
In the second half of this year, we plan to tape and numerous internal and foundry customer test chips on various process nodes, including until three and Intel <unk>.
And our client business all their lake momentum continues we have the strongest PC lineup in five plus years, and we remained unapologetic about our growing leadership in share position. We are building on all the Lake leadership with Raptor Lake in the second half of this year and Meteor Lake in 2023, exemplifying how our innovative design does.
<unk> can drive leadership performance, even before reestablishing best in class transistor technology in Q2, we launched the <unk> Gen. Intel core <unk> processors. The final products in our older Lake family All the Lake family is now powering more than 525 designs from Acer are soustelle HP.
Lenovo LG, Microsoft Samsung and others to.
To date, we've shipped well in excess of 35 million units of Alder Lake within the current market. We are also seeing relative strength in the premium segments, we serve across consumer and commercial we expect to build on this momentum with the launch of our Nexgen product family rapidly starting with our desktop skews. This fall followed by our mobile <unk>.
By the end of the year.
The Lake family will offer customers significant advantages, including double digit performance gains channel and Jen and socket compatibility with Alder Lake.
In 2023, we will deliver our first disaggregated CPU built on Intel for Meteor Lake, which is showing good health in both our and our customers' labs.
Turning to DC AI as we stay to that Investor day over the next couple of years as we rebuild our server product portfolio, we expect to grow slower than the overall data center market. It's not a fact that we like but the forecast we see.
We have a singular focus to regain performance and Tcl leadership across all workloads and use cases from enterprise to cloud the advantage of our incumbency position remains underappreciated and provides a significant opportunity to drive outsized advantages to our customers. For example, we expanded our supply agreement.
With meta leveraging our IDM advantage to ensure better can meet its expanding compute needs also in Q2, we agreed to expand our partnership with AWS to include the co development of multi generational datacenter solutions optimized for AWS infrastructure.
And Intel as a strategic customer for.
Our internal workloads, including EBITDA.
We expect these custom xeon solutions will bring greater levels of differentiation and a durable <unk> advantage to AWS and their customers, including Intel.
In addition, Nvidia announced the selection of Sapphire Rapids for use in their new <unk> 100, which will couple Sapphire Rapids with Nvidia is hopper gpus to deliver unprecedented AI performance.
Beyond Xeon based Cpus, we launched our next generation Goudy to AI accelerator in the quarter with a whopping forex improvement generation to generation.
And then the most recent MLP perf training benchmark test Goudy too has a substantial lead and RESNET 50, and Bert benchmarks and.
In the second quarter, we also began delivering our software strategy with the acquisition of granulate, expanding our platform capabilities with real time, AI driven continuous optimizations for cloud computing and the initial release of Amber or security asset station service since we acquired granulate their customer pipeline has double.
And their revenue pipeline has tripled finally programmable solutions achieved record <unk> revenue and was just shy of an all time record revenue quarter, driven by strong demand, including the ramp of the flagship agile ex FPGA family and improving supply.
And any X, we had an outstanding Q2.
We achieved record revenue in <unk>, <unk> and IP will be co developed and are now beginning to ramp with the large hyperscale partner with additional customers. In 2023. In addition, our latest Xeon <unk> processors built specifically for software defined infrastructure across the network and edge launched at this years mobile World Congress and as ramp.
With leading companies, including Cisco Juniper networks, and racket and Symphony.
Across the network edge, we're continuing to see interest to deploy more compute and AI capabilities. For example, ferrovial a multinational Spanish infrastructure company is using our edge computing AI and connectivity technologies to deploy roadside solutions can identify wrong way drivers Warner Banca.
Hazards and more in Singapore, Singtel has deployed a network solution with Xeon smart edge and opened vino to improve user experience for use cases like entertainment industrial smart manufacturing smart transportation and Smart city.
Lastly, ABB is helping utility providers modernize their electric grid and create a more sustainable energy market by adopting standardized rugged servers based on third Gen. Intel Xeon any X continues to clearly benefit from networks that are increasingly moving towards software and AI that is increasingly moving to the edge.
And we expect another revenue record quarter in Q3.
For <unk>, while we will not hit our GPU unit target, we remain on track to deliver over $1 billion in revenue this year.
In Q2, we started to ramp until art graphics for laptops, and Oems, including Samsung Lenovo, Acer HP and the Seuss COVID-19 related supply chain issues and our own software readiness challenges caused there'll be able ability delays that we continue to work to overcome.
Arc <unk>, five and <unk> seven desktop cards will start to ship in Q3, our energy efficient blockchain accelerator blocks scale achieved the major milestone in Q2 with revenue shipments to our lead customers going from tape it to shipping in less than a year, we expect to ship millions of units. This year not originally in our forecast.
Our data center GPU code named Arctic found them has started production and is now shipping to customers supporting a diverse range of workflows, starting with media streaming and cloud gaming followed by support for AI visual in prints and virtual desktops and high performance computing, we highlighted the installation of the Argonne National.
<unk> lab Aurora supercomputer at our Intel vision events in May and we are on track to deliver over 10000 blades in 2022, enabling over two extra flops of peak performance.
Also announced new partnerships, including the Barcelona Supercomputing center to set up a pioneering risk fives that are scale lab and our continued collaboration with the University of Cambridge to evolve their current lab from extra scale does that a scale.
Our iff's momentum continues creating a geographically balanced secure and resilient semiconductor supply chain as well as access to our transistor technology is driving strong customer interest in our foundry business. In addition to the Mediatek agreement that we announced earlier. This week, we now have active engagements with.
Six of the top 10, fabless customers across our offerings, including <unk>.
Overall, we are engaged with 30 customers for test chips and now have more than 10 qualified opportunities in advanced stages across our process and package offerings that collectively represent a deal value of greater than $6 billion.
Augmenting our organic activities our proposed acquisition of tower semiconductor, we now have regulatory approval or clearance in four geographies, including the U S and we still expect the acquisition to close by early next year.
In Q2, we also launched the Iff's cloud alliance of partnership with leading cloud providers, including Microsoft Azure, and AWS and EDA tool providers, including <unk> cadence, Siemens EBITDA and Synopsys.
<unk> cloud alliances the next phase of our accelerator ecosystem program that will enable secure design environments in the cloud improving foundry customer design efficiency and accelerating time to market.
Lastly, and mobilize we achieved another record quarter in revenue in Q2, we continued to be poised to unlock further value with our proposed IPO later this year pending market conditions.
<unk> backlog continues to grow with first half 2022 design wins generating 37 million units of projected future business compared to 60 million units actually shipped in the first half.
As a result to mobilize high definition map product called Rem. We're currently Crowdsourcing 43 million miles per day on average from approximately $1 5 million vehicles. This data is automatically built into a map, which currently covers greater than 90% of all roads in both Europe and U S, which will support.
Systems across the entire driving assist to autonomous vehicles spectrum.
Looking ahead before turning it over to Dave I wanted to close with a few thoughts first after a very successful Intel vision events in Q2, I am looking forward to hosting Intel innovation on September 27, and 28, our core technical conference for global developers architects and engineering leaders I hope to see many of you.
Joining me there.
Second as I said, when we began our journey Intel will be a source of innovation driving new businesses and additional Tam in large and growing markets taken together, we have already announced over 10, new revenue producing product lines. So far this year, which are just beginning to ramp and we expect to announce more in second half in calendar year 'twenty three.
The foundations for our growth story are taking shape I know I speak for all of our employees when I say that while we have work to do our best days are ahead. Thanks.
Thanks, Pat good afternoon, everyone.
Pat referenced Q2 was a challenging quarter negatively impacted by multiple factors.
First a weakening in uncertain macroeconomic environment impacted by inflation higher interest rates and the war in Ukraine.
Second a much larger than expected OEM inventory correction as our customers adjust to this new macroeconomic environment.
Third worst than expected COVID-19, driven demand reductions and supply dislocations in China and other parts of the supply chain.
Due to the difficult macroeconomic environment together with our own execution challenges our results for the quarter were well below expectations and necessitate a significant revision to our full year financial guidance.
That said, we're taking the actions necessary to maintain our prior full year adjusted free cash flow guidance, including a slowdown in hiring capex reductions and the expectation for increased capital offsets consistent with our smart capital strategy.
We remain fully committed to the business strategy and long term financial model presented during this year's Investor meeting in February .
Revenue was $15 $3 billion, 15% below our original Q2 guidance as our CCG and Dci businesses, both underperformed our expectations.
Note that even in this challenging environment or any X and mobilized businesses achieved all time record quarterly revenue.
Gross margin for the quarter was approximately 45%.
600 basis points below guidance on lower revenue and Sapphire Rapids, preproduction charges offset by lower manufacturing cost.
EPS was <unk> 29.
41, <unk> below our guide on lower revenue and gross profit offset by lower operating expenses.
Operational cash flow for the quarter was $800 million.
Capex for the quarter was $7 2 billion, resulting in an adjusted cash flow of negative $6 4 billion.
Our balance sheet remains strong with cash and investments of $27 5 billion.
Modest leverage and a strong investment grade credit profile.
Now I'll turn age and a strong investment grade credit profile.
Now turning to our business unit results.
<unk> revenue was $7 7 billion.
Below expectations and down 25% year over year on global Tam weakness, particularly in the consumer education and small medium business market.
The shortfall was also driven by OEM inventory reductions as we work with our customers to lower their inventory protect market share and continue to manage through matched that constraints.
CPU Asps were up 11% year over year on richer mix and strong demand for our high end mobile and desktop products across both our commercial and consumer segments.
Operating profit was $1 1 billion down 73% year over year on lower revenue increased 10 nanometer and Intel seven mix and increased spending to further strengthen our product and platform Road map.
Dci revenue was $4 6 billion.
Below expectations and down 16% year over year on OEM inventory reductions mixed related ASP decline and competitive pressures.
Operating profit was $214 million down 90% year over year on lower revenue higher advanced node startup cost increased investment in the product roadmap and Sapphire Rapids preproduction charges.
And <unk> achieved all time record quarterly revenue of $2 3 billion.
Up 11% year over year on strength in data center networking products, specifically networking Ethernet and <unk>.
Operating profit was $241 million.
Down 60% year over year on mix shift to networking Ethernet and <unk> increased investment in process technology and lower sell through of reserved inventory.
<unk> revenue was $186 million.
Up 5% year over year on the ramp up supercomputer and alchemists discrete GPU products.
Operating loss was $507 million versus an operating loss of $168 million in Q2, 'twenty, one with the increase driven by inventory reserves on our <unk> and <unk> products and increased investment to deliver the roadmap of visual supercomputer and custom accelerated graphics products.
Mobile line achieved all time record quarterly revenue of $460 million up 41% year over year outperforming the rate of increase of global automotive production, which was relatively flat year over year.
Operating profit was $190 million up 43% year over year on higher revenue, partially offset by increased investment in next generation <unk> products.
<unk> revenue was $122 million down 54% year over year, driven by lower mass tool sales as well as revenue decrease in the automotive segment due to customer shortages in the automotive market.
Operating loss was $155 million versus an operating profit of $52 million in Q2, 'twenty, one driven by lower revenue and increased investment to build out the custom foundry business.
Before we transition to full year and Q3 guidance after six months on the job. Let me provide my perspectives on the opportunities I see and focus areas to improve our financial performance and achieve our long term goals.
At the highest level I see opportunities to improve in two areas.
First ensuring we are allocating our capital to the programs that are clearly aligned to our revised business strategy and generate maximum long term value to our shareholders.
As Pat mentioned two good examples of continuing to optimize our portfolio are exiting the octane and drone businesses.
We continue to deeply evaluate all opportunities to more narrowly focus our resources on the highest value programs, increasing the probability of success for each of these programs.
Second driving structural product costs and operational expense efficiency across the company, taking full advantage of our IBM to point out strategy.
A major focus for me is driving Intel to world class product costs.
Key to this is executing our five nodes in four year strategy, but there are many more aspects to achieving this goal with programs in flight to dramatically reduce product cost.
Likewise, there are opportunities in opex to ensure we are achieving world class efficiency and everything we do.
With my history in the memory business, where every penny counts I know there are large opportunities for Intel to improve and deliver maximum output per dollar.
As part of these focus areas, we expect to see restructuring charges in Q3, and I'll continue to provide regular updates on these efforts.
Moving to our full year and Q3 guidance.
For the remainder of the year, we expect macroeconomic conditions to continue to soften with the potential for a recessionary scenario to materialize.
There is also risk for continued COVID-19 related impacts on demand and the supply chain to continue throughout the year.
As a result of this high level of uncertainty, we're moving to a range based approach to revenue guidance for the rest of the year.
For full year revenue, we are now guiding a range of 65 billion to $68 billion down.
Down from our prior guidance of <unk> $76 billion driven.
Driven by lower expectations for our CCG and Dci businesses.
More specifically in our PC business as Pat discussed, we now see Tam decreasing approximately 10% year over year due to the softening macroeconomic environment and inflationary pressures.
Although these headwinds have reduced our CCT revenue forecast, we expect CTG revenue to increase in the second half of the year due to seasonal strength.
OEM inventory returning to balanced levels inflation related price increases to take effect and the ramp of our leadership Alder Lake and Raptor Lake products to position us to compete for share.
For <unk>, we expect to see second half revenue growth relative to Q2 levels, but growth will remain muted as competitive and macroeconomic headwinds persist OEM inventory reductions continue and component constraints impact certain segments.
For <unk>, we expect another record quarter in Q3 and continued growth throughout the year and.
<unk> revenue tailwind will be fueled by new product introductions data center, and telco networking demand and continued improvement in pricing and component supply.
For ISG, we continue to expect full year revenue greater than $1 billion driven.
Driven by the launch and ramp of the ALCHEMIST, Arctic sound and <unk> and block scale products.
And finally, we expect to see second half growth in each of our two remaining businesses mobilized in iff's as they ramp new products and secure new customers.
For full year gross margin, we're guiding to 49% at the midpoint of revenue guidance with the expectation that gross margin will return to the low end of our target range of 51% to 53% in Q4 as revenue increases we achieved scale on new product ramps and costs continue to improve.
We're forecasting a tax rate of approximately 8%.
And EPS of $2 30.
At the midpoint of the revenue guidance.
For net Capex were revising down our forecast to 23 billion.
$4 billion less than our previous guidance as we moderately adjust our investment in capacity and take advantage of potentially larger than originally forecast capital offsets highlighting significant progress on our smart capital strategy.
We expect these actions to offset lower than originally forecast operating cash flow, allowing us to reaffirm adjusted free cash flow of negative one to negative $2 billion for the year.
Finally, we paid dividends of $1 5 billion.
A 5% increase year over year and remain committed to growing the dividend over time.
Now moving to Q3 guidance given the aforementioned market environment, we're guiding revenue of 15% to $16 billion.
At the midpoint of the revenue guidance.
<unk> gross margin of 46, 5% a tax rate of 13% and earnings per share of 35.
In closing the market turbulence and updated outlook are disappointing. However, we believe our turnaround is clearly taking shape and expect Q2 and Q3 to be the financial bottom for the company.
We remain completely committed to the strategy and financial model communicated at Investor Day.
The long term financial opportunity of compelling revenue growth and free cash flow at 20% of revenue remains and I believe this downturn represents an opportunity to more quickly make the transformation necessary to achieve these goals with that let me turn it back over to John and get to your questions.
Alright, Thank you Dave moving on now to the Q&A as is our normal practice, we would ask each participant to ask just one question. Operator. Please go ahead and introduce our first caller.
Thank you as a reminder to ask a question you need to press star one on your telephone.
Our first question comes from C. J Muse with Evercore ISI. Your line is open.
Yes, good afternoon, and thank you for taking the question.
I guess for my question your implied guidance calls for roughly 12% sequential growth in December .
Would love to hear.
What gives you confidence that inventory correction in the supply chain issues will be behind you and as part of that do you think a PC Tam is down 10% is conservative enough or is that something where.
There might be further risk thanks.
Thanks, so much.
Thanks T J.
When you look at the fourth quarter first of all we are at this point given the inventory burns in both.
CCG and Dci shipping at below the rate of consumption for those markets and so there is a natural recovery that occurs.
And that we would expect as we progress through the rest of the year. Once inventories is in is in a good place. So we do feel we're at the bottom here in terms of revenue into Q2 Q3 timeframe in Q4, we'd recover just based on that alone I'd say the other thing is we've got a good set of products coming out.
Over the course of the second half of the year and I think we're kind of operating with wind at our sales in terms of product offerings and in all of our businesses and then third we are increasing pricing the pricing generally takes effect in the fourth quarter. We've gone a fair amount of time the advantage of the IBM strategy is.
We can absorb a lot of inflationary impacts.
Impact that others can't.
And so we were able to.
Kind of go a bit longer in terms of the price increases, but at this point now that some of those pricing increase inflationary increases have turned out to be more permanent.
There's a certain amount of that that we do need to pass on to the customers and they're comfortable to do that and so that also is.
It is a factor and then lastly, I would just say the fourth quarter is generally just a seasonally strong quarter for us.
And particularly in the PC space. So I think all those factors give us really good confidence that Q2 Q3 represent the bottom for revenue and at the fourth quarter, we'll see some strength in the fourth quarter. We also see that some of the new business unit areas, where it has started to contribute more significantly as well and.
The PC Tam before we were above the market and with our down revision. We're now exactly align with the market. We were over 350 million units before now market ranges are 310 to $3 25, our range is consistent with that C. J. So we don't see yourself.
Ahead of the market like we were before we are more optimistic now are firmly in line with the market clearly the market has shifted heavily on the consumer side, but there remains strength on the enterprise side, which also gives us confidence. So in addition to the strength of the product roadmap, which Dave said, we also see the enterprise market remaining very high.
<unk> and our position in the higher price points in the enterprise. These are good markets for us and as we're on the back of Alder Lake over 35 million units Raptor Lake ramping we're just coming into a great cycle of the overall business. We'd also say that the PC is strong as that work from home school from home device.
Usage numbers are up significantly for the time that people use their Pcs. We also have a strong replacement cycle in front of US. We now have over 600 million Pcs that are over four years old and we're definitely seeing that roll through the enterprise markets again, where we have stronger market share and better asps.
So all of that taken together, we think we've ranged it and thats consistent with the financial guidance that we've given you for the rest of the year.
Thanks, so much.
We have a question from Vivek Arya from Bank of America. Your line is open.
Hello, Thanks for taking my <unk>.
Question back I'm curious why didn't into choose to negatively pre announce given the extent of the shortfall I mean, I can understand the PC market being weak, but for data center to be.
Almost 25% below expectations. It seems very very strange to me.
So I'm just curious why intends to be the actions and then when you look at your data center revenue, especially in the reported quarter.
Most enterprise and cloud customers reported their sales and spending kind of in line with expectations. So is it mostly competitive pressures. If you could just help us understand what the thought process was for Q2. Thank you yeah. Thanks, Vivek I think that officially is actually two questions but anyway.
We will take them both on the market side, we will say, we were well into the quarter and we saw the market characteristics change quite suddenly right and that resulted in both the sell through in the marketplace. But also these significant inventory adjustments, we worked with our customers on those inventory adjustments and as we said these are like once in 10.
Year kind of inventory adjustments because of the customers, we're working through the quarter catching up to demand that was short for years right and all of a sudden they saw that shifting they took quite significant adjustments to their inventory positions and we wanted to be in a position that we had some thoughtful view of what the.
The market was for the future. So that's the reason that brought us to today, we think that we've given.
Giving you a clear view of where the market is coming into the future.
The Dci point as I said in my formal comments, we were disappointed.
Some of that was driven by the macro it was also match set issues that we've been struggling with as well.
Ethernet components power supply components et cetera have been challenge, but as we also said we have some of our own unique execution issues and we kept the quality bar high on Sapphire Rapids, and thus we did another stepping which was a forecast which put some inventory in reserve issues in front.
Of us as opposed to high ASP, new product revenue. So some of those things where unique issues to us that we were addressed.
Addressing that said, we do feel like the progress on the data center right is clear in front of US. We have Emerald is looking very good we'll be powering on sapphire or CR forest and Grand Rapids. Shortly all of that taken together, we feel our competitive position is improving we also see.
So we know where the market share is and wins like we announced with AWS and meta we are going to focus on every socket every workload every customer quite aggressively on both AWS and these were substantial wins for us this quarter and we hope to be announcing several others like that as we go.
Forward, we're also bringing new capabilities as we sort of set in our formal comments.
Size of our footprint here is underappreciated and we're going to be focusing on really benefiting from that and bring in new capabilities against that enormous footprint with capabilities like granulate and our Amber security service things that allow us to bring more value to our customers as well as harvest more revenue from that enormous install base.
So all of that taken together, we feel like we were owning up to the challenges that we had in data center, but we have a clear view of how we write this business for the future and are well underway on doing exactly that and maybe I'll just add in terms of profitability.
It was disappointing where operating margins landed for the Dci business for sure.
That was largely the impact of the decline in revenue.
But keep in mind, we're also investing a lot for all the reasons that Pat said.
Two to bring out great products.
While our customers and so that investment does also.
Way down on the operating operating profitability of the business, we do see that getting better.
As Pat mentioned reserves on Sapphire Rapids.
And those are kind of a one off thing that that dissipate as we go through the second half of the year.
We also expect.
Revenue to improve as we progress through the year those things combined should improve operating margins in near term and the long term. We see this business as a business that gives us greater than corporate average operating margins gross margins and operating margins for that pattern.
It has traditionally actually for us and for the industry.
And so it's a matter of just.
Putting our nose down and executing to get those results and we feel very confident we'll get there.
Thank you.
Our next question comes from Matt Ramsey with Cowen Your line is open.
Yes. Thank you very much for taking the question good afternoon.
I guess, Pat I wanted to follow up a little bit on the prior question in the server business, particularly on the road map you guys just mentioned.
Some some reserves, but you need to take for Sapphire and the timelines have been pushed out. So I guess the questions are one can Pat could you give us more specific timing on where things are with Sapphire rapids, not just early units, but actual volume production.
Secondly, it does this push out.
Does this impact the timelines for Emerald and granted do you see those pushing out sort of <unk> with the push out here or are those timeline is going to be held and maybe the platforms be a little bit different just curious on the roadmap. Thank you.
And giving a bit more detail on sapphire real we're already ramping a number of skus of Sapphire Rapids already they began.
Ramping last quarter. So we have a number of those ramping the particular issue that we highlighted.
We wasn't affecting those skus. So those continue to ramp so we did another tape out which I'll say for the larger volume Skus and those will be volume shipping in the second half of the year. So youll see us ramping those launching those who also we're fully on track for that and we feel like we're overall of the issues.
We've had a.
Bringing that product to marketplace. So we feel very comfortable with that with FERC and working very closely Emerald goes into the SaaS fire. Our platform. So we're working very closely with our customers on the timing there. The product is looking very healthy. So we're nicely on track so that'll be a 23 product and then granted 10 Sierra Forest is the 24.
Product and just to remind everybody. This is a major new platform. We believe this is a.
A major step forward as we go into Grand Rapids, but also was our first E core product with Sierra Forest right and this we believe is really sort of this ability to have our fleets.
Offering where a lot of cloud workload. So just give me a great container and let me run that quite thermally efficient tcl efficiently and that's what <unk> will do and then Grand Rapids clearly the performance leader in the marketplace of both of those will be 24 products and again right. We're powering on that.
This next quarter. So we're looking very healthy or this quarter I should say.
In Q3, so looking very good so far so we'll just say the roadmap is healthy looking on track and our execution here must improve many of these products were well underway.
When we showed up as I said, the culture right of execution needs to be rebuilt and we are working heavily to rebuild the culture of this team and in fact, we just completed our employee engagement survey.
This was the most significant.
<unk> year on year improvements in history, many of our employment employee engagement survey results now are now best in industry, we've totally reversed the brain drain that so we had so teams are excited.
Momentum is building and many of these products Hey, we're launching the new products with the revised and you'll hear us talk more about our tech talk execution discipline going forward, but a lot of these products were underway. So there werent launched with the new execution a methodology of disciplined so we're working through those and as each.
One of these gets better our execution and confidence in those deliveries as improving culture is improving we're making great progress.
Thank you your next question.
Our next question comes from screening upon Jerry with SMB.
Nico.
Thank you Dave if you can clarify why you're taking the sapphire.
Charges is it just a preproduction reserve or is there something else going on and my question is.
Based on your comments about the recovery profile for D. C. G. I guess D C. III in the second half it seems like PC market is at least your expectation is that the PC market will recover quicker than D. C. AI I'm, a little bit surprised by that because you have satisfied ramping and.
I don't know if the inventory situation was worst in D C versus MPC. So im just surprised by the fact that youre, saying that PC will recover faster than Dci. If you can clarify that that would be helpful. Thank you.
So while yes, you are right Sapphire Rapids, we reserve the production inventory.
Whereas before it has gone what we call <unk>.
So it's the quality.
Metric and so we reserve all the product and since the main path of the main skus have not.
At that point reached <unk>, we continue to reserve them.
Once they do which we expect later this year then we stop first of all reserving the production inventory and then the likelihood of some of this will also sell and so.
We will be able to recover some some portion of that reserve likely as.
As we progress through the end of this year and next year.
On CCG CTG in Dci.
I think that the inventory correction in CCG.
It was definitely more pronounced and so you get this the benefits of the shift.
Shifting back to the consumption level is.
Pronounced.
When things recover that's number one we also will see more pricing improvement.
In CCG than Dci. They are both we are adjusting pricing, but the pricing is more significant in CCG and so that also gives CCG a lift in the in the in the later part of the year.
Thank you.
Our next question.
We have a question from Joseph Moore with Morgan Stanley . Your line is open.
Great. Thank you.
If you could talk about the capital spending cuts can you give us a sense for does that affect shelves versus wafer fab equipment and is there sort of any opportunity cost to that and then to the extent it did.
Does that change your comments about the overall trajectory over the next few years do you expect capex to be rising for the question.
So.
Is that.
When you look at growth Capex, it's about 25% of the reduction about 75% of the reduction is actually increased capital offset so it's not a significant adjustment to the gross number it's almost entirely on the equipment side the reduction.
And some of it is just timing of receipts of of equipment.
Equipment so.
And sorry, what was the other part of your question.
Just the trajectory I know.
You had talked about capital spending generally rising from here, but you also talked about guardrails. You can you just talk about the trade offs.
This being slower versus now looking for a forecast, but how youre thinking about the long term spending so we intend to manage to the guardrails for sure. What I think has become really positive for US is the capital offsets maybe I'll talk a little bit about it and he can go into details about chip 51 pad.
We just are in general way more optimistic about what we're going to get in terms of capital assets. In fact, I think our forecast for the year as Forex what it was when we talked about it at Investor day and so.
Clearly for this year, we're going to see strong offsets and I think.
Given what happened today I think we're going to have good offsets.
In the coming years as well so I think that will really help us kind of keep the guardrails intact I mean, obviously on a long term basis.
We're always looking at our Capex and relationship that demand, we're building supply to meet demand and modulating that as as is.
The signals change on the demand side at this point I think given.
Given the long lead times of building out. These factories, we're very confident that the growth rates of our markets are going to be quite healthy and we're going to need the supply to come online.
We modulate our tiny adjustments to it over the course of years, yes, but I wouldn't say, it's going to be a significant magnitude, but but still at the end of the day, we feel very good about the guardrails, we've talked about it's going to be more like mid thirties net capex intensity in our investment phase that goes through 2024.
And then in 'twenty five 'twenty six we will see a step down as we start to get the benefits of that in terms of revenue growth and margin growth and will normalize more into the mid twenties, yes. It does.
David is alluding to the passage today by the house of the chip Sac following the Senate passage on Tuesday. This is historic legislation.
Literally since World War, two there might not have been a more important piece of industrial policy that came forward through Congress. So we are thrilled by that and that also is something that we pointed to and we've been very active and <unk> been very active this is great for the semiconductor industry. This is beneficial to Intel.
This was one of the pieces of the Smart capital program as we described back in Investor Day, and now seeing this come across the line will clearly be part of that ability for us to invest aggressively.
And the strategy that we described to you we see this as an accelerant to our strategy and something that will give us the capacity to both.
Both meet our product needs as well as our foundry customer needs as well. This is powerful and something that we are thrilled to have come across the line. Just today, we look forward to this being on the President's desk in the next couple of days and signed into law. This was a historic moment for the semiconductor industry and I hope everybody on the law.
Lyne just realized how significant the passage of this was for semiconductors for technology for long term research. This was huge we were thrilled to be a part of it.
Next question please operator.
Our next question comes from Harlan sur with Jpmorgan. Your line is open.
Good afternoon, and thanks for letting me ask a question so let us prepared remarks discussing the macro environment, but you also called out Intel specific execution issues in a specific way product design, where you're just referring to Sapphire rapids or was this a general statement across several of your product segments, including client and graphics.
And can you just articulate like what some of these product design issues are there architectural issues performance issues design closure changing customer requirements.
Any help there would be great. Obviously as you mentioned many of these programs are already underway. When you joined the team, but what is it specifically that youre doing now to ensure a better design execution going forward.
Yes, Thank you Harlan and if I would just to step back slightly right I view, the recovery rebuilding and three different chapter one was TD and manufacturing best transistors capacity second design and products, we have to deliver the <unk>.
Alex that we say to our customers and if they ask for it Monday at noon Monday at 11 59. It is there in the volumes you say at.
At the performance levels power levels et cetera, and the third chapter is building growth prior to establishing the new products, the new product lines for growth and obviously, we've laid the foundations for all three as TV manufacturing are now making good progress. The focus really is get the product in design execution superb again right on that.
And I point back to that sort of tick tock discipline that we had in the past that was a key part of what we're doing and that's exactly what we have underway rebuilding that kind of product disciplined.
Execution clearly the Sapphire Rapids, Miss that we had we are raising the quality bar for that we weren't shipping as the quality levels. The security levels that we needed to in the past and clearly we shouldnt have had that bug in the product in the first place so that caused another stepping for the volume release.
Our software.
Release on our discrete graphics right. It was clearly underperforming we thought that we would be able to leverage the integrated graphics, a software stack and it was wholly inadequate for the performance levels gaming compatibility et cetera that we needed. So we're not hitting our 4 million unit goal and the discrete graphics of space.
Even as we're now catching.
Catching up and getting better software releases. We also are I'll say the timelines for our products as we've committed them to customers Hey, We don't think we're competitive with the best in class in the industry.
Our design timelines, we have to get them better and we're focused on doing that and that's for some of the longer roadmap.
Term items, where we have to be best in class on our design cycle design cost power envelopes architectural leadership things that you would expect from Intel in the past and we're rebuilding those muscles for the future. So those those would be the two examples we point to specifically that were visible this quarter, but we just don't have a lot more work to do.
And it was just that it.
It takes you know these are three four year long projects. These were many of them are underway and we're putting in place. These disciplines now and the products that are being launched with us entirely new methodology in alignment well that'll come out for a couple more years. So we're still working through that inventory of designs that were in process a lot of work to do lot of rebid.
<unk> and that's where a lot of my attention is being focused on and maybe now that I spend a little bit less time in Washington right.
This is the focus for us as a team is getting that execution to be superb once again.
Next question.
We have a question from Randy Abrams with credit Suisse. Your line is open.
Hey, yes. Thank you a multipart question if you could talk in ISS somewhat of an immediate pop announcement the products.
And potential and Thats advanced products.
Or reference design cooperation also wanted to ask a bit where thats affect how it changes your approach to the business and for David If the capital offsets I assume some of the U S benefits and how it could impact the tax rate.
Good.
So clearly media tech, they're the largest fabless supplier.
From Taiwan made there theyre seeking to have a broadening of their supply chain and as we've said our strategy is provide a pathway for customers to have a globally balanced resilient supply chain as I also mentioned in the formal comments six of 10 of the largest foundry.
Customers in the World. We now have active engagement. So the pipeline of customers grew we added another $1 billion to the pipeline. This quarter Mediatek was an Intel 16 announcement.
One of the more mature offerings in the portfolio, which makes sense radio Intel three Intel <unk> are yet to be I'll say design, a bowl products and we have test chips underway, but we're not yet to the point that the PDK for the design libraries would be adequate for people to make design commitments.
At this point in time, but overall great progress on Iff's, we're thrilled with the Mediatek announcement and a robust pipeline of customers continues to build because this idea of a geographically balanced resilient supply chain, Intel, giving the best transistors and capacity corridors and.
I would also say that our Iff's strategy pivots on this idea of system foundry. The world is moving where the we're moving from our board to our system in package and a system in package needs advanced two and a half a <unk> package in the area of Intel's leadership interconnect standards, we've announced the standardization.
<unk>, we're leaving that software assets another area of advantage for us and we will engage with and deliver this go across our portfolio of process technologies the hours and others. So this idea of system foundry is gaining a clear interest to our customers.
As well with.
With respect to chips and capital will say.
We were driving this.
For the last year and a half.
We were fully expecting this to be the case in time were thrilled to get it done.
We also initiated such an effort with Europe and that is making great progress as well and as Dave said, we're also looking to other capital partners as well, which we hope to be able to talk about more in the future with you as well.
And then just on your question, we have not assumed any chips Act money.
In 2022.
Our expectation is there'll be a process and that process will take us into 2023 before we start receiving money from from chips. So not assumed in 2022, although we're assuming that we will see some in 2023.
As you pointed out.
Chip stack or the Bill that was passed is a combination of grant money and.
In.
Tax credits.
I think it's a little early to determine exactly how all of that.
Is administered and it makes its way into the P&L.
P&L, so we'll table that until that becomes clear to us exactly how things shake out and we will give you more color once we have a better assessment of that thanks.
Thanks, Randy can we get the next question. Please.
Our next question comes from Stacy <unk> with Bernstein. Your line is open.
Hey, guys. Thanks for taking my question.
I'm a little confused you said that Sapphire Rapids was on time and its ramping in volume in the second half, but you also said data center growth in the second half was going to be pretty muted off of the base. That's really low and then you also said that data center pricing improvements in the second half would be less than what youre seeing in clients. So.
It doesn't really sound like Sapphire Rapids ramp is helping at all.
What is going on with that how should I be thinking about the impact of that Sapphire rapids ramp as that ramps into volume or is it. The question is like most of the volume coming into 2023 or why isn't really having more of an impact in the second half of the ramps. Yes. We said in the prepared remarks that it's later than we expected Sapphire Rapids. It's ramping later, we have some skus out.
Is good but the main skus are not out and they happen in later in the year and of course, they will contribute more significantly to next year, then theyre going to contribute.
To this year.
We do see an opportunity in the client space given our overlay position.
For price increases that are really passing on inflation and.
And we know customers understand that.
Obviously, our competitive position is not as strong in the Dci business and so there are opportunities to adjust pricing, but not across the board. So that is impacting us a bit.
But you're basically saying that Sapphire rapids is effectively a first half 'twenty three volume ramp that seems to be what youre, saying, yes. I think there is some ramp this year and then mostly it ramps next year yeah. Yeah. Like we said we started shipping some of the Skus earlier in the year right. Those were some of the higher volume Skus. The volume ramp Skus were pushed out right as we.
Said, Stacy and they will start ramping late in the year, but the bigger financial impact definitely is next year Sapphire Rapids right is still leadership product, we continue to get great reviews from our customers on the product areas like.
AI performance that were competing with low.
The mid tier of Nvidia dedicated AI processors, the security capabilities as part of an unquestioned the accelerators and the unquestioned leadership, we're also getting more and more momentum from our software optimizations that come with it as well so all of those taken together a lot of enthusiasm.
Every cloud vendor every data center vendor etcetera as enthusiastic for this product and we're now as I say in the.
The final the final days of getting it completed and beginning those customer volume ramps and obviously financially we will start to see some of those inventory reserves reversing as well, but yes. This was not our finest hour in execution, we're rebuilding our execution machine and this product a lot of enthusiasm for it in the market.
Places we deliberate thanks.
Thanks, Stacy operator, we have time for one more question. Please.
We have a question from William Stein with Suntrust. Your line is open.
Great. Thanks for taking my question.
It relates to that last topic of.
The timeliness of delivery of new products.
While Sapphire Rapids has delayed sounds like something on the order of half a year Pat in the.
In the press release it noted that the later nodes are still on track or ahead of track I think was the language.
As outsiders, what can we look to to.
Sort of judge.
And determine whether Intel is continuing to be on a pace as we progress through the quarters. Aside from just the sort of summary statements in the press releases there or some other metric you could disclose to us there's some way we can better understand whether Intel is.
Getting back on track and keeping these commitments to deliver these products as you've as you schedule, but thank you.
Yes.
Maybe if we just run through the five nodes quickly until seven done volume shipments, we said five nodes for years until 735 million units.
<unk> reported part I'm sure our competitors have done go tear downs on it done Intel for what we've said is hey, Meteor Lake looking good at this point is now broadly sample to customers.
<unk> is looking very healthy as well also we had the independent analysis of our detailed.
Updates that we gave at the VLSI Conference recently and if you go look at some of the reports from that people were pleasantly surprised us at all and solve for it looks as good as some of the three nanometer competitor. So this is looking pretty good so and certainly we will be giving more of those technical updates going forward on the real performance.
So we've given updates on Grand Rapids, one of the lead vehicles of Intel three we also have said that we'll give you updates on <unk> and <unk> test chip updates and others will also have independent assessments of those as we announced foundry customers right, which will be another point of validation that youll see so we're going to keep giving.
More and more points of validation.
Go alone for trust movies or analyze the performance of each one of these process nodes. The defect density of each of these process node the maturity of the design collateral.
The residents from the foundry customers for each one is being scrutinized extraordinarily well.
With that I think you'll get more and more confidence that what we're saying is not only verified by us but independently by industry sources as well.
So with that let me just wrap up our time first I'd like to say. Thank you. We're grateful for your joining us today opportunity that you've given us to update you on our business. We summarize the three key messages as we finish we're not satisfied with the quarter and the financial results that we gave you today, we have growing confidence.
And the strategy and we are optimistic finally about the future.
We deserve some tough questions. This quarter, but also appreciate that they're fair and relevant to the business transformations are not easy, but nothing worthwhile ever us and despite the headwinds that we're seeing we demonstrated substantial progress in ISS NSS and EES business Records.
<unk> record in that business with chips passage today huge clear customer wins like AWS.
And meta and Nvidia and per the last question great progress on our TV milestones in our manufacturing milestones with that we look forward to updating you again next quarter. Thank you.
This concludes today's conference call. Thank you for <unk> you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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