Q1 2023 Intel Corporation Earnings Call
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Any buy it welcome to Intel Corporation's first quarter 2023 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 this session you will need to press star one on your <unk>.
The phone if you wish to remove yourself from the queue simply press Star one one again as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Mr. John Pitzer Corporate Vice President of Investor Relations. Please go ahead, Sir. Thank you Jonathon by now you Should've received a copy of the Q1 earnings release.
Earnings presentation, both of which are available on our Investor Relations website, I N T C dot com.
For those joining us online today. The earnings presentation is also available in our webcast window.
I'm joined today by our CEO , Pat Gelsinger, and our CFO David <unk>.
In a moment, we will hear brief comments from both followed by a Q&A session.
Before we begin please note that today's discussion does contain forward looking statements are based on the environment as we currently see it.
And as such are subject to various risks and uncertainties.
It also contains references to non-GAAP financial measures that we believe provide useful information to our investors.
Our earnings release, most recent annual report in Form 10-K, and other filings with the SEC provide more information on the specific risk factors that could cause actual results to differ materially from our expectations.
They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to the corresponding GAAP financial measures.
With that let me turn things over to Pat.
Thank you John and good afternoon, everyone. We delivered solid first quarter results of both the top and bottom line upside was driven by better than expected revenue and very disciplined expense management across our organization. The latter is not easy and I want to thank the entire Intel team as we thoughtfully execute on cost reduction.
And efficiency improvements that support the investments critical to drive our strategy.
Q1 results demonstrate the progress we are making to advance our transformation and the IDM to point of this strategy. We still have more work to do as we reestablish process product and cost leadership, but we continue to provide proof points each quarter and we remain committed to delivering long term value for all our shareholders.
Consistent with prior quarters I'd like to focus my comments on three areas one our view of the macro and our markets to key highlights from Q1 and three an update on our strategic priorities with a focus on our move to an internal foundry model.
As the industry continues to navigate through multiple global challenges and headwinds we remain cautious on the macro outlook, even as we expect some modest recovery in the second half, we're seeing increasing stability in the PC market with inventory corrections largely proceeding as we had expected however, the server and networking markets have yet to.
Reach their bottoms as cloud and enterprise remained weak as a result, our Q2 revenue guide Embeds continued inventory corrections in our core markets and a range of normal seasonal to better than seasonal growth off depressed Q1 revenue levels.
We remain focused on what is within our control and steadfast in our commitment to advancing our strategy.
As we anticipated on our Q4 earnings call the PC market depleted a significant amount of inventory in Q1 and is tracking to be at a healthy level by the end of Q2 importantly, the PC installed base is larger and usage remained well above pre pandemic levels and along with a better than expected Q1 strengthens our view that.
The PC market is on track to a sell through of 270 million units in calendar year 'twenty three as.
As we highlighted during our P. C. Webinar in January strong usage and installed base, which is roughly 10% higher than pre COVID-19 levels and what we see as a conservative refresh rate supports a longer term PC Tam of 300 million units plus or minus.
And servers Q1 consumption Tam declined both sequentially and year over year at an accelerated rate and we still expect to see first half twenty-three Tam decline year on year with a modest recovery in second half of the year, while all segments have weakened we'd reiterate that the correction in enterprise and rest of world, where we have stronger.
Positions is further along and will likely recover more quickly.
Lastly, in our broad based markets like industrial auto and infrastructure demand trends are relatively stronger although was anticipated any acts did see a Q1 inventory correction that we expect will continue for the next couple of quarters and likely will cause any X revenue to decline this year in.
In contrast, PSG Iff's and mobile I continue on a strong growth trajectory and we see the collection of these businesses in total growing year on year in calendar year 'twenty three much better than third party expectations for a mid single digits decline in the semiconductor market ex memory.
While the semiconductor industry is cyclical by nature, we continue to accelerate our transformation and position ourselves to capture the significant market growth in semis expected over the next decade, nearly doubling to more than one trillion by 2030 <unk>.
Combined with the need for globally balanced and resilient supply chains, and our foundry market expected to be roughly 200 billion by 'twenty 30, we are well positioned to capitalize on multiple vectors of growth.
On that front, let me highlight some key milestones from Q1, we are relentlessly focused on driving execution excellence across process and product roadmaps and throughout the company, including a rigorous focus on efficiency and cost savings looking first at the progress we are making with our process roadmap we remain on track to regain.
Transistor performance in power performance leadership by 2025 relative.
Relative to five nodes in four years, notably two out of these five nodes in Tulsa and until four are now essentially done.
<unk> seven is in high volume manufacturing and Meteor Lake on until four is ramping production of wafer starts today for our second half product launch we are quickly mastering <unk> technology within top four as our first UV node.
As we focus on the next three nodes until three is on track and we highlighted in our recent D. C. A webinar sheer force will begin shipping in first half of 'twenty four with granite Rapids. Shortly thereafter, both on Intel three we also have significant milestones planned in Q2 for Intel three until 'twenty.
And until a TNA and look forward to providing more details as we execute.
Overall, we are squarely on track to deliver five nodes in four years.
We understand that our foundry ambitions will not be realized overnight building a vibrant foundry ecosystem will take time, but we also understand our foundry successes vitally important to establishing a geographically diverse and secure supply of semiconductors.
We took a major step forward in building our ecosystem. This month, when we announced the multi generation agreement with arm holdings.
This will enable chip designers to build leading edge mobile S. O C designs on Intel 18, a giving the design community a new foundry alternative for product innovation and the fast time to market. While also opening up new options and approaches for large ecosystem of arm customers.
We look forward to providing access to best in class CPU IP and the power of an open system foundry with leading edge process technology. Finally, as part of my recent trip to China. We continue to work hard to complete the tower acquisition and we'll update you appropriately.
In our webinar last month, we provided the substantial update on our data center and AI business, highlighting the progress and health of our roadmap Sapphire Rapids, our fourth Gen. Xeon is one of the highest quality datacenter Cpus Intel has ever delivered and continues to ramp aggressively with excellent customer feedback.
We are shipping over 400 designs across numerous system in memory configurations for all Oems ODM and cloud providers and we are on track to 1 million units by mid year.
Notably AI inference performance and confidential computing substantially differentiate our fourth Gen Z on from competitors, specifically fourth Gen. Z on offers the most comprehensive confidential computing portfolio in the industry, including virtual machine isolation with Intel trusts domain extensions.
Or Intel T Dx and trust that Testacean services Justice week, leading cloud service providers signaled readiness for Intel Tds instances, including Alibaba cloud with Microsoft announcing their preview on Azure and Google releasing joint research conducted prelaunch to further harden TD.
X and complex environments.
And we will rapids, our fifth Gen. Xeon scalable is already sampling with customers and is on track to launch in Q4 23.
As stated earlier Sierra Forest, our lead vehicle for Intel three will begin shipping in first half 'twenty four with granite Rapids shortly thereafter.
Both of which are receiving very positive responses from sample to customers. Sierra Forest is our first in Ecorse server CPU, which will provide competitive performance per watt across workloads of leadership across many with all of the benefits of the X 86 ecosystem.
Clearwater Force, which is the follow on to Sierra Force is coming to market in 2025 and will be manufactured on Intel 18, a the node, where we intend to achieve process leadership and representing the culmination of our five nodes in four year strategy the.
The combination of our roadmap strengthening as we highlighted in our webinar better than expected Q1 market share results and great execution on the Xeon Gen. Four ramp Q1 was a turning point as the first quarter of an improving datacenter position since I became CEO .
Further in Q1, we taped into Habana, Goudy, three AI accelerator and the Habana Goudy too is in the market and offering substantial performance advantage over a 100 and training and Inferencing vision and language models for example, goudy to deliver 60% higher power efficiency measured in throughput per.
What for Inferencing of large language models, such as Bloom 176 billion parameter model.
Along with fourth Gen Xeon and Xeon, Max Goudy enables us to address the accelerating growth in AI recent endorsements by hugging face and stability AI are strong proof points of the validation and our AI roadmap and strategy.
Our strategy is to truly democratize the incredible power of AI championing an open ecosystem with a full suite of silicon and software IP to drive AI from cloud to enterprise network edge and client across training and inference and both discrete and integrated.
Solutions.
Our one API now includes the open and royalty free C plus plus based programming model sickle, which is critical to driving collaboration and innovation.
As developers want the ability to write once run anywhere our open source toolkit cyclical matic is helping to accelerate the migration to circle as we work to democratize AI.
AI development sparked by enthusiasm around generative AI is today centered on L ones in the cloud.
AI deployment will rapidly migrate to inference as the dominant AI workload and adoption will quickly expand outwards to edge and client all areas that play to our strengths.
We are focused on capitalizing across all segments with optimized silicon and software solutions.
Our programmable solutions business continues to perform well with an all time record revenue in Q1.
And our FPGA portfolio now includes more than 15, new products scheduled to pay our Q. This calendar year, the highest number of new product introductions ever and our FPGA business.
PST is also piloting and initiative to build a more resilient supply chain by which customers would provide intel with enhanced demand and new design visibility while until provides customers with greater predictability of supply leveraging the benefits of transitioning a great percentage of PSG products to an Intel supply.
Chain.
Our client computing business continues to execute on this roadmap and build on recent market share wins.
We gained overall PC market share in Q1, and expect our competitive position to continue to improve as we ramp Meteor Lake production in Q2 for a launch in second half.
In Q1, we introduced our 13th Gen. Intel core mobile processor, followed by our New V. Pro platform powered by the full lineup of 13 Gen Intel core processors.
Until V pro delivers the most comprehensive security and the necessary hardware for companies in the need of the PC refresh and increase productivity.
In 2023, our expansive commercial portfolio will deliver more than 170 notebooks desktops and entry workstations from technology providers, such as Acer are Seuss, Dell HP, Lenovo, Fujitsu, Panasonic and Samsung electronics.
Turning to any extra mobile ly at mobile World Congress, we demonstrated that nearly all be ran a virtualized network core deployments one uninstall.
We also introduced a range of products and solutions that enable the world's networks from the core to the radio access network and out to the intelligent edge to transition from fixed function hardware to open programmable software defined platforms highlights include the launch of our fourth Gen. Intel Xeon scalable processors with Intel V.
Ran boose delivering two times the capacity gains Jan over churn within the same power envelope and up to an additional 20% power savings with integrated acceleration and with extensive industry support from Ericsson, Verizon Telefonica and Vodafone among many others in particular Ericsson.
<unk> has been working closely with us to enable the classification of the network, making possible industry scale open ran.
Lastly, mobile I continues to be an important part of the Intel family and delivered strong growth and profitability in Q1, they continue to gain significant traction with customers for their advanced product portfolio and we remain very confident in the long term growth profile and value of the mobile ad business.
In addition to our process and product roadmap, we continue to make progress on our commitment to reduce cost and drive efficiencies. We are well on our way towards our goal of reducing 3 billion in costs in 2023, and eight to 10 billion in annual savings exiting 2025.
We further rationalize our products as we prioritize our investments in support of IBM to point out. This includes integrating a X G into D. C. A I and CCG respectively. In addition, we exited their server business in Q1 and signed an agreement with Mitek and edge to cloud solutions provider and long stand.
The ODM partner to manufacture and sell products based on the designs of our server systems business to create a path forward for our channel customers.
I'm going to spend a few minutes and cost leadership last month I had the opportunity to meet with some of you on the east coast and while everyone understands that we are establishing an internal foundry model.
I'm not sure we are fully explain the importance and impact of this change given the manufacturing group their own P&L and the use of standard wafer price will drive a more efficient factory network and a better decision on design to cost at the Bu level.
It will also serve to create parity between internal and external foundry customers and drive a more efficient manufacturing cost structure needs to compete and win external foundry customers.
It's a separate P&L for the manufacturing group. We will also provide you with a cleaner comparison them to be used to their external fabulous peers as.
As we stated on our Q3 earnings call. We believe the structure should allow us to access and execute on multiple pools of profit that are unique to an IBM, which none of our peers have.
Establishing an internal foundry model is one of the most consequential steps, we are taking to deliver IBM to punto and fundamentally shifts the way the company operates and the incentive mechanisms that drive day to day behaviors. We look forward to discussing this in more detail during our internal foundry webinar in Q2.
I am proud of our team's progress this quarter.
We remain committed to executing on our strategic roadmap by first delivering on five nodes in four years, achieving process performance parity in 2024, and unquestioned leadership by 2025 with Intel a TNA.
Second executing on our data center, and AI roadmap, including the Sapphire Rapids ran.
The launch of Emerald Rapids in second half of 'twenty, three and granite rapid sincere force in 2024 third ramping media Lake in second half 'twenty, three and launching lunar Lake in Aero Lake in 2024, and fourth expanding our Iff's customer base to include large design wins in advanced packaging Intel <unk>.
<unk> Intel three and Intel 18, eight this year.
As we improve our cost structure and drive operational efficiency. We will first returned to profitability second execute on or internal foundry P&L by 2024, and third expand the use of our smart capital strategy to balance our long term capital aspirations with near term realities, we are.
Fast in our commitment to continue to effectively allocate your capital in the pursuit of creating value for all of our stakeholders.
Before I turn it over to Dave I'd like to take a moment to honor and pay tribute to the life of Gordon Moore, who passed away on March 24th.
Gordon defined and enabled the technology industry through his insight and vision. He was instrumental in revealing the power of transistors and inspire technologists and entrepreneurs across the decades.
I am forever grateful for his guiding hand willingness to mentor for me and his unwavering friendship Gordon famously said what can be done can be outdone.
This is our guiding principle as stewards of Moore's law, which we intend to enable and drive until the periodic table is exhausted as we use the power of technology to improve the lives of every person on Earth.
Intel will hold a memorial service to honour of her life and accomplishments of Gordon and we will share more details on this shortly.
Thank you Pat and good afternoon, everyone. We drove solid business execution in the first quarter, beating guidance on both the top and bottom line.
Against the backdrop of persistent macroeconomic volatility we will continue to prioritize investments critical to our IDM to point out transformation prudently and aggressively manage expenses near term and drive fundamental improvements to our cost structure long term.
First quarter revenue was $11 $7 billion $700 million above the midpoint of our guide.
Results from CCG D C AI, iff's and mobilized exceeded our expectations, partially offset by softer demand in the network and edge markets impacting any X revenue in the quarter.
Gross margin was 38, 4% modestly below our guidance on higher than expected inventory reserves tied to continued macro uncertainty Q.
Q1 margins were impacted 300 basis points by factory under load charges taken in the period.
EPS was negative four cents for the quarter 11 cents better than guide demonstrating our cross company focus on spending discipline.
Operating cash flow in Q1 was negative $1 $8 billion net capex was $7 billion, resulting in an adjusted free cash flow of negative $8 $8 billion, and we paid dividends of $1 $5 billion, our balance sheet remains strong with cash and investment balances of more than $27 billion and.
Our strong investment grade profile.
Before moving to business unit results I will highlight a few changes made within our segment reporting the client and datacenter focused products from the former <unk> business are now reported within our CCG and Dci segments, respectively, and will have a dilutive effect on the operating margins of those businesses.
Our silicon Photonics and foundry automotive businesses have moved out of any acts in iff's, respectively and are now reported as part of all other revenue.
<unk>, our focus on the significant market opportunities available to both any acts and iff's.
Shifting to the first quarter business unit results.
CCG achieved revenue of $5 $8 billion better than our expectations for the quarter.
While we continue to see a challenging demand environment, especially in our consumer and education segments customers continued to prefer Intel driven by our leadership product performance.
As discussed last quarter, we saw significant inventory burn at our customers in the period.
While inventory levels remain elevated we anticipate the market will be closer to equilibrium as we exit Q2.
Asps were down sequentially due to mix.
Q1, operating profit was $520 million flat sequentially. Despite revenue declining 13% from Q4 and down year over year on lower revenue higher unit cost and excess capacity charges, partially offset by reduced opex.
Dci revenue was $3 $7 billion ahead of our expectations in Xeon, PSG and <unk> lines of business.
We saw significant sequential and year over year Tam contraction across all CPU market segments and expect demand to remain soft in the second quarter.
We saw stable CPU market share in Q1 and are excited by the broad market ramp of our fourth generation Xeon scalable processor Sapphire Rapids.
Operating loss was $518 million impacted sequentially by lower revenue higher product costs and investments in leadership products on new process nodes.
D. C. AI margins were also diluted by the merge of the ESG business and inventory reserves tied to the exit of our server system business.
Within our Dci business, the programmable solutions group delivered record revenue for the second consecutive quarter in Q1 up 36% year over year with increased Asps.
An improved external supply, which enables us to satisfy customer backlog, helping to drive continued operating profit growth.
And he X revenue was $1 5 billion below our expectations for the quarter, driven by demand softness and elevated inventory levels, and our network and edge markets consistent with the overall industry.
Operating loss was $300 million impacted sequentially by depressed revenue in the quarter and inventory reserves, partially offset by continued expense management and discipline.
<unk> continues to outperform underlying automotive end markets delivering record first quarter revenue of $458 million up 16% year over year, along with a 6% year over year increase in content per vehicle.
Profitability continues to be strong with Q1 operating income of $123 million.
<unk> revenue was $118 million, including 67% sequential growth in packaging revenue.
Operating loss was $140 million impacted sequentially by increased factory startup costs as we invest in the strategic growth business.
We're well on our way towards our committed $3 billion of spending reductions in 2023 on our path to $8 billion to $10 billion of reductions exiting 2025, which will exclude benefits from the change in equipment useful life as.
As demonstrated by our Q1 results focused investment prioritization and spending discipline have our opex reductions trending ahead of expectation while revenue adjusted cost of sales reductions face headwinds from factory under load charges and inventory reserves due to continued demand uncertainty.
As Pat highlighted our shift to an internal foundry model is already demonstrating a path to the structural cost improvements necessary to achieve our long term profit goals.
We've seen early wins with a reduction in disruptive factory Expedites and increased focus on sort and test times, we look forward to unpacking, the financial and operational benefits of our internal foundry model in much more detail in our investor Webinar later in the quarter.
Now turning to Q2 guidance.
We expect second quarter revenue of $11 5 billion to $12 $5 billion at the midpoint of $12 billion. We expect billings to continue to trail consumption and our data center network and client markets as customers focus on right sizing operating inventories.
While we remain cautious we're seeing green shoots and expect sequential revenue growth throughout the year Pat.
Pat mentioned the continued strong signals of elevated PC usage and active devices, giving us confidence that our short term headwinds are an anomaly to long term revenue opportunity.
Demand for AI capabilities in the cloud across the network and at the edge continue to grow and we're confident that our CPU and accelerator portfolios are well positioned to benefit from the market tailwind.
We're forecasting Q2 gross margin of 37, 5% a tax rate of 13% and EPS of negative four cents at the midpoint of revenue guidance.
Factory under load charges are projected to impact Q2 gross margins by approximately 300 basis points.
While gross margins are well below acceptable levels I'd highlight inventory reserves on pre P. R. Q products impact Q2 margins by approximately 250 basis points cost, which should begin to unwind later this year as new products launch.
Increased sample costs in support of our Xeon product roadmap will impact margins by 40 basis points sequentially.
Our Q2 guidance includes an approximately $500 million benefit to operating margin from the useful life accounting change we announced in January .
Approximately 80% to cost of sales and 20% to opex up from $460 million in Q1.
Important to remember that this is a fixed cost business the impact of under loaded factories goes beyond the period charges were seeing in the first half of the year and will be felt for several quarters as we sell through products with higher average unit costs.
We will continue to deploy factory capacity prudently as we operate within our smart capital framework.
As communicated last quarter, we expect to manage net capex intensity in the low 30% of revenue range in 2023 with capital offsets of approximately 20% to 30% of gross capex consistent with smart capital Iff's capacity represents approximately 10% of 2023 gross capex number which.
We'll scale in line with foundry customer commitments.
With gross Capex weighted to first half and capital offsets weighted second half, we expect adjusted free cash flow to improve sequentially throughout the year and to be positive in second half of 2023.
While we're encouraged by first quarter revenue and expect growth to improve sequentially through 2023, we're not satisfied with our financial results and remain focused on what we can control our execution and the prioritization of our owners' capital toward our long term goals, we're confident that as we deliver on our roadmap commitments we will.
And exceed our customers' expectations for our products and our owners' expectations for strong revenue growth and free cash flow generation.
With that let me turn the call back over to John .
Thank you, Dave we will now move into the Q&A portion of our call. As a reminder, we will ask each of you to ask one question and a brief follow up question where applicable.
With that Jonathan can we please take the first question.
Certainly our first question comes from the line of Timothy Arcuri from UBS. Your question. Please.
Thanks, a lot Dave I Wonder if you can go through the gross margin walk kind of through the rest of the year Theres a lot of moving parts. I know you have the under utilization of 300 basis points and it sounds like you also have another 200 basis points you highlighted from these you know pre <unk>.
Cost, so youre sort of.
Normalized at 43 ex those two things, but theres a couple of offsets to you got puts and takes around you know higher die costs from these new products like Meteor and Sapphire. So can you sort of give us a walk in terms of what the puts and takes are when you move past June shorten leg little color. So.
On the the 250 basis points that you correctly highlight that or the prepay our Q reserves. The benefit of that is as we go into the back half of the year, that's related to meter Lake and Emerald NSO ship.
Lot of that reverses in fact, we in.
In essence, we end up shipping it at 100% gross margins, so that that becomes a tailwind.
And then you know we do expect as things improve from a demand perspective that we will start to load the fab backup.
The only.
I guess cautionary comment is that we.
Still have under loaded costs that kind of are built into the cost of our product that are held in inventory and so you know it.
It does take a few quarters, even beyond the time when we start to see.
Stopped seeing these period cost of Underutilization that will start to still see some some cost headwinds.
That but ultimately we will be loading fabs up.
So the appropriate levels and that that will be a nice tailwind.
Maybe the best way to describe it is I think for the back half of the year, we feel like we'll be comfortably in the forties are from a gross margin perspective.
All of those factors and you know obviously, we're actively working on our $8 billion to $10 billion of spending reductions.
By the time, we get to 'twenty and the end of 2025 and a lot of that is in the cost base, which will be a benefit to gross margins. Tim do you have a follow up.
I do yeah, Pat I guess, you have a lot of products coming out in a pretty short amount of time basis.
Basically you've got five data center platforms in two and a half years I understand that some are <unk> and some are P core, but usually customers want to leverage their investments in these platforms for that.
Yeah.
Longer time than that so could that be sort of impediment to how quickly. These platforms correct can you kind of talk about that thanks, Yeah. It's a great question, Tim and you know what I'd highlight is that <unk>.
Sapphire in Emerald Gen. Four Gen. Five are the same platform. So from the customer's perspective, they get to leverage those platform investments in a substantial way. Similarly, as we go into next year with a share of forest in Grand Rapids. That's once again, the same platform and Clearwater forest. The following year that we disclosed.
The datacenter webinar for twenty-five also goes into that same platform. So essentially even though its five products that we've discussed it's two platforms and that ability to leverage that platform across our broader market space is a very warmly received by our customers and obviously as we're.
We're working through this period to get back to you know solid leadership, you know, we're getting increasing momentum from our customers and as I highlighted earlier.
In my prepared remarks, you know this was a good quarter for our data center business. So very healthy roadmap, we did better than we forecast in Q1 market share on track for the Sapphire Rapids ramp and the overall you know being able to see these new use cases for AI inferencing in the plan.
That for being.
Being able to deploy be an increasing security capabilities that we disclosed all of these are very unique feature capabilities that are both differentiating as well as value add for our customers that helps them to see the value in the underlying platforms that we're delivering so a very good quarter. Thanks for the question Tim.
Thank you Tim Jonathan can we have the next question. Please.
Certainly 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 you've talked about PC CPU inventory normalizing exiting the June quarter can you give us a sense of.
By how much you're under shipping in demand today, how do you think about the snapback and can you talk about the timing of a planned raising of utilization at least for your <unk> business.
Yeah, So I'll start on that and Dave can jump in you know generally we think that we under are sold into the market by about 20% in Q1 and that continues in Q2 and overall you know we set of 270 million unit sell through Tam for the year.
That equates essentially equivalent to the 240 or 250 million unit sell in Tam that you might have seen from some of the industry analysts. So overall, we think first half we end the first half with a very healthy inventory position by our Oems and by the channel.
It positions us very well for natural improvement and a stronger second half as we're now selling I'll say and at the same rate of selling out in the marketplace and the normally stronger back half of the year.
Overall this is just going to be a positive every quarter as we go through the year, we're seeing a strong strong momentum from our customers for our roadmap and as Dave indicated you know we're already starting to build inventory for the Meteor Lake launch later in the year he or she is another strong indication.
Dave if you want to comment on the inventory comments, yes, we we have about 155 days of inventory aggregate and in the aggregate are on the balance sheet.
Obviously as we get through the inventory depletion at.
At customers and we start to normalize back up to the level of end consumption, we will start to burn through that inventory and you can expect us to start ramping ramping that the factories I don't think we'll be fully ramped by the end of the year, but we certainly will be will be improving the ramp through the through the year do you have a follow up question.
Yeah.
Yes, a quick one Pat in your prepared remarks, you talked about positive feedback from chips at your customers for sure and granted curious if you can share any of the feedback that you're hearing.
To give us confidence.
Yeah, and I'd say generally the feedback is Wow right you guys are delivering at the front end of your schedule Windows that you gave us with a very high quality product.
They're now into there are what we call the volume validation phase of their platforms, so where they're receiving enough samples that they can start to do broad a validation of the platform that validation cycle is very critical for us because it informs us of when we're ready to move forward with a production stepping so those are parts.
And both the software and the firmware of the platform. We're seeing very good response on both the first E core part with the share of forest as well as the next generation P core part with a grant at rapid so overall I'd just say, we feel super good that we're getting such a warm response.
From customers and this positions us very well as there are rebuilding their confidence and Intel and this you know you've heard me talk before a C. J you know that we have to rebuild our customers' confidence and the performance that we're seeing not just on Sapphire Rapids Emerald Rapids Gen five, but next year as our products and the very.
Strong position for the core products going into 2025 with Clearwater Forest has been a strong uptick in their belief that Intel's execution machine is back for their datacenter products of the future. Thank you C. J Jonathan can we have the next question. Please.
Certainly and our next question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.
Hi, guys. Thanks for let me ask a question Pat in your preamble you talked a little bit about some data center trends by the end markets, a little bit geographically, a little bit customer type with enterprise I was hoping you could dig a little bit deeper into what you're seeing in the cloud side of things the customers themselves seem to be reporting very strong numbers, but it seemed that you alluded to that still being.
Inventory digesting and market for you and then how Intel specifically in cloud is doing competitively.
Yes. Thank you and you know clearly there was a down quarter for enterprise and for our cloud we do see that affecting the first at least the first half of the year that said you know we're encouraged by some of the comments that you've heard about you referred to.
For the overall market, we do see that so our position is improving as I indicated in Q1, we saw a better than forecast our market segment share. We also saw some green shoots for the first time in China and we're encouraged by that market is starting to show some.
Positive characteristics, we'd also say that some of that strengthen.
Data centers, driven by AI and AR were seeing a very positive response to our goudy too and are seeing our pipeline growing very rapidly for that product line. We also saw that as a driver of the early strong ramp for Gen. Four Sapphire Rapids.
Those taken together we are are we do believe that's an important trend, but we also as you said in my prepared remarks, we see that so we need to make AI and that is a critical use case broadly available and that's what we refer to as democratizing AI, where those super high end machines.
[noise] uneconomical for most environments and we have to enable the broad deployment of influencing being able to use AI and that's an area, where particularly our core xeon product line has a particular strengths are well above prior generations and competitive alternatives and one that we expected.
B a area of strength for us long term Ross do you have a follow up.
I do I just wanted to go back and revisit the gross margin side. So one for Dave the Underutilization charges is there some trigger point at which revenue wise I guess, we should expect that to go away because obviously thats. The 300 basis point headwind two quarters in a row of that.
And then the <unk> side of things given the frequency of new product introductions that was alluded to in a prior question. It doesn't seem like those would necessarily go away that fast or if they do for a quarter or two they would come back. So can you just walk us through some of the puts and takes on those underutilization charges in pre peer accused please yeah. Okay. So on the <unk> you're right.
And it always is lumpy we saw this effect.
Midway through last year with Sapphire.
Rapids, and so you know we will have these on occasion.
But we think for the second half of the year for sure.
We won't see.
This magnitude of pre PRT reserves, there's a pretty significant quarter for us in the second quarter.
On the under loading charges.
I think it's more partially it's about revenue, but partially it's about your inventory levels and where they are so we obviously need to bring the inventory levels down from the 155 days.
That's going to be important I think I would just say that hey in the third and fourth quarter I would see I would expect to see an improving situation in terms of under loads.
And likely that will be behind us by the time, we're through the end of the year just on the period cost under low charges, we might be living with some higher cost per unit for a couple of quarters after that.
You know because of under load that we built into the cost of the products but.
Ultimately, we'll have this factory or the factory network a.
Loaded back up.
Thanks, Ross Jonathan can we have the next question. Please.
Certainly and our next question comes from the line of Matt Ramsay from Cowen Your question. Please.
Yes. Thank you very much good afternoon guys.
The first question I wanted to ask is on sort of the.
<unk> roadmap.
You guys have made some good progress there and we're working through some end market.
Near term product dynamics, but focusing on the five notes in four years.
I know, there's some internal nodes that are being developed as well around backside power via and also gate all around so maybe you could give a little bit of an update as to.
How those roadmaps, we're going on those two pieces of technology individually and I guess the second part of the question if you do.
Succeed in getting to know parity and then node leadership as you described how can you talk about a path to cost parity.
For for internal and external potential customers on an 18 eight thanks, Yeah, Yeah, Great question, Matt and you know as I indicated you have the five nodes in four years Intel seven done Intel for with the Meteor Lake volume ramp we view that as all but done right and we are essentially the process is Pierre <unk>.
And now we're ramping the product, which will peer accumulator in the year. So we feel like we're two five are now completed obviously the next one up is until three and with Intel three the positive updates that we've given on Grand attempts here for us for next year.
The volume sampling that I've already referred to gives us a lot of confidence that that is now coming along very nicely. Both in top four and until three R. E V nodes.
Nodes as you say as we go to 20, a an 18 a the two major innovations are the a ribbon fetch the gate all around the transistor architecture in the backside power given the uniqueness of the backside power as you indicate we had an internal node that we didn't expose the products are externally to derisk that node in that one.
Extremely well we had very good.
Results from the backside power the power delivery the router ability improvements at that gave and as I'm sure you're always one proof point of that Oh over the arm announcement Hill was one that demonstrated significant benefits of backside power that we were able to do so 'twenty.
A an 18 a or the next ones are upbeat 20, a will be a primarily a client node.
We ramp our Aero Lake products, and 24, and 25 18, a will be everything we will have server products client products and networking products and many foundry our products. We also noted that this was a quarter where that we have our first.
Foundry test chips coming out and so some of the test chips for external customers on 18, a are now popping out of fab and being tested by them. So good affirmation.
From them you also mentioned I think it's actually a very insightful question, Matt you know the cost structure and one of the things that we've put a lot of emphasis on with 18, a is getting to structural cost parity with what we believe is the best in the industry at that point. So we view this is not just getting to power.
And performance parity, but also area parity and cost structural parity as we get to HMA and we believe as we've benchmarked ourselves against the industry Best We believe we're on track to do that in the 18, a timeframe and that's part of why we talk about in the internal foundry model you're always being.
We're able to start really measuring the P&L right I'm really viewing it as the industry price for our wafers is understood and we have to benchmark ourselves against that and deliver a margin structure at the wafer level, that's competitive with that Matt do you have a quick follow up.
Yeah, Jonathan Thank you Pat for all the detail there.
My second question is on server roadmap and you guys had a.
Helpful Dci roadmap day.
So ago I guess my question is.
Kind of related to another question that was asked on platform compatibility I think Pat you mentioned, a few products on the roadmap, including up into including Clearwater for us being on the same.
Sort of platform as granite.
There was another product that was on the public roadmap before Diamond Rapids for the next sort of P core products.
Any update there I just wanted to it wasn't really mentioned it a Dci day and I've had a few folks asking me about it and is it on the same platform. Thanks, Yeah, and you know while we're not speaking a lot about about next generation of product that would be the introduction of the next generation platform.
That point would be when we move to the next platform, which will change package architecture power delivery architecture memory channel he'll key steps and.
Memory scale ability with our CX cell technology, so that'll be a big step in terms of the platform architecture at that point.
And I'll just say you know every aspect of our roadmap is getting well received by our customers for both enterprise, but also and critically for our cloud customers as well.
Thanks, Matt Jonathan can we have the next question. Please.
Certainly our next question comes from the line of Pierre Fabre Goofs from New Street Research. Your question. Please.
Hey, sorry that I can give you is yes here how are you, yes, sorry I forgot.
Unlucky right when you said my name.
Exit of Saba for all the detail on the gross margin and taking a step back I'm kind of thinking between now and the other things you can see by your gross margin is going to be very limited.
You read because you have enough on your plate.
Of course, I mean, and I wish you all the values mode and so.
My question would be maybe looking at things from a much higher level.
Let's say around.
About 20 points below you know.
The historic margin embedded in a good competitive position.
Some of that as these carriers.
The business has shrunk.
Ah recently.
And then some of that is really.
It's very difficult to 10 nanometer node, whereas of course that you need.
Excuse me if you didn't see too high.
And so.
My question really is from what you know already from the nodes that you have coming up like that he is now very very tangible.
In the fall.
You know how much of these gap are you going to regain with each node.
On the wafer against with or without making that any sort of guide of what you get in 2023 of them before.
Forgetting about the roadmap looking at wafer against wafer.
You know what the order of magnitude of improvement in pricing power do you think that you get.
All earnings power, just because you now have like a competitor.
Cost base in your manufacturing.
Yeah. So some of it and then Yep Yep Yep.
Maybe like at a high level Terry maybe the way to think about it is look.
The.
One element of getting too.
The appropriate cost structure to deliver the margins is getting our process technology.
To be competitive in.
That's really at 18, a where we intersect that so you know we make improvements along the way, but that's really where we make.
The meaningful improvement to get there from a process perspective.
Now the challenge is all along the way there is this kind of startup costs that we have to deal with which is hundreds of basis points of headwind for us that we have by virtue of the fact that were stacked on stack. You know we were the five nodes in four years that Pat is driving it is the right strategy, but it does create headwinds on the cost side. So so that we've got to work on.
Through that but once we're on the other side of five notes in four years, we have a competitive process technology from a cost perspective, we've gotten ourselves.
You know this.
Let's say.
Significantly higher startup cost that we're incurring are behind us as well.
And then as you point out you know you have the benefits of the scale of revenue that we would expect.
And then lastly, you have.
That was talking about this whole notion of the internal foundry model, which just drives a lot of attention on cost and where we think we're going to get a lot of that $8 billion to $10 billion of savings exiting 2025, So I think the way.
<unk> I look at it at least is that.
We put forth a model for gross margins, we changed the depreciation which incrementally raises that target and there's nothing that's going on at the company that would suggest that we're off pace from that we think we are going to achieve that the timing is obviously a function somewhat of the mark.
But other than that we feel like we're on on.
Great path to have those margins, yeah, and I would just say you know there there will be lumpiness Pierre right.
Ups and downs, along the way one process nodes come online as you work through different product cycles et cetera.
We'd say as Dave said, we're going from the thirties into the Forty's comfortably. This year, we set a long term model into the fifties that if you consider the useful life gets us up around 60 by the end of the five year period as we've talked about so we're on track to I'll say larger should be up into the <unk>.
Right as we work over time with Lumpiness up and down due to these various considerations, but that's the path that we're laying ourselves upon.
Do you have a quick follow up question.
Yes, it's very quick one.
You mentioned Guardian like.
Like a very very good benchmark on the larger language mothers.
When I look around me I don't see like good tangible signs of Gary like really gaining traction and getting me. Despite the fact that like the web today like really solving more and more processing power capacity to.
To run these mothers. So my question was.
I might just not seeing some things that will become apparent very very soon.
Are there still like building blocks and pop in saying that Jody is.
He's missing before really.
<unk>.
E Bay fast growing opportunity, yes, I think it's a fair commentary that you know, we're only starting to see good positive proof points in the industry. So I think that's a fair.
Kartika up here, but I point back to the announcements hugging face, which is the most popular sort of like the get hub of the AI World very positive proof point this quarter stable diffusion alright, another and stability AI important forces also my comments around <unk>.
A rapidly growing pipeline, obviously, you can't measure that but I'll tell you we have many opportunities that we're now.
Engaging in a globally, you'll also see us taking more aggressive steps with our Dev cloud presenting this is a developer environment for the market. So I think we have a lot of work to do here to show up in a meaningful way, but we think the goudy to our strategy is now starting to gain quite.
A lot of interest in the market as I said in my prepared remarks, our goudy three has now taped out which would be the next step up ill also where I describe into customers. Our 2025 platform. The Falcon shore sub product, which is another step up that also brings together the full offering of our H P C and AI into a single App.
Platform offering customers are responding very well to the I'll say, the alignment and simplification of our roadmap and the HBC and AI coming together. So overall, we feel like we're now starting to show up in this space, but we have a lot of work to do to sell land meaningful revenue customers in this area and I'm hopeful that we'll be able to.
Put some clear proof points that you can start to see in the marketplace in the near future. Thanks, Pierre Jonathan can we have the next question. Please.
Certainly our next question comes from the line of Vivek Arya from Bank of America. Your question. Please.
Thanks for taking my questions I had a near term and then a longer term one so in the near term.
How should we think about the second half.
Right now when I look at the consensus.
Consensus expectations, but about 15% to 20% half on half growth I appreciate you're not giving guidance, but is that the kind of growth that is contemplated there are reflected in the return to the low 40% gross margin.
Yeah, I think what Pat said as you know, we thought things would be modestly better in the second half of the year and that combined with the fact that pre <unk> reserves reverse themselves will probably see some.
Better utilization levels.
That's what gives us the confidence of of of comfortably in the Forty's and we're not providing any specific revenue guidance on the on the second half, but I'd say, there's three things to just think about for the second half.
One is that so you normally have a stronger second half in our industry. We expect that to be the case. You'll second is we'll have worked through a lot of the inventory issues. As you go first half to second half and we are seeing some green shoots in the marketplace. We think it's a tough market for all right and we're navigating through it well.
Seen by our top and bottom line beat in Q1, but hey, it's a tough market out there. So we're still being fairly cautious as we look out overtime and then third obviously are strengthening execution, our roadmaps getting stronger we're gaining market share and I think of our Q1 is a solid.
Proof point that we're navigating through the tough environment that we have in a better way than most so we are incrementally more positive on the second half, but we also believe we have to continue careful execution careful fiscal discipline as we go through a very uncertain macro outlook.
Vivek, Dave a follow up.
Thank you John .
Bank My longer term question is how do you see the role of arm in the server CPU market you know what's interesting here starting to partner with them better service that I presume that implies a more credible ecosystem developing for arm servers I believe it's already around mid single digit or so as part of the cloud.
Instances, so how do you see the role of arm servers over the next few years and do you see it as a and just what is the impact on X 86 server CPU Tam if on becomes bigger in the market Yeah, and you know a couple of things here Vivek. You know one is the announcement that we did with arm this quarter or what.
Round Iff's you know it was a strong ecosystem statement for our foundry offerings and one that was focused around the mobile platform, but we do expect that we'll have you know a broader play over time as the announcement indicated that its first focused on mobile where arm has a proven considerable strength.
Across the market I'd also say that we think of the market and the future of four architectures matter.
Our risk five X 86, right you are playing a critical role and the role of accelerators in GPU right and we will be participating across all of those whether that's through foundry or through our product offerings.
I've continued to view that if we are doing a great job with our roadmap that the role of arm in the data center will be limited right and particularly with the core product line that we've laid now laid out with Sierra Forest Clearwater Forest and strong Youll products coming thereafter, we believe that we now deliver power performance.
<unk> T C O benefited X 86, you know migrating software stacks in the datacenter is a lot of work right and if I give customers an easy path with X 86 in Ecorse solutions with superior Tcl alternatives.
That will do very well so with that you know that's our primary play at the same time, our foundry play will be come one come all we will manufacture right are any of the risks five arm X 86, a GPU alternatives for the industry you go through our superior capabilities in.
Foundry offerings over time, we view this as an industry play of great significance of one that we're committed to competing for a leadership wafers across every architecture every segment of the industry. Thanks Vivek, Jonathan we have time for one last question. Please.
Certainly and our final question for today comes from the line of Joseph Moore from Morgan Stanley . Your question. Please.
Great. Thank you.
I Wonder if you could talk about the capex.
Capex.
Mentioned, 10% going to foundry.
Can you talk about.
I still get kind of a gross capex number that's north of $20 million.
Does that seem like it's in the ballpark and in our U S.
Spending that money more on shelves and capacity or how much of that money gets allocated to the five.
For years Yeah.
Gross would be north of 20 billion.
We think as I had mentioned that we can keep net capex intensity.
And kind of the low thirties as a percent of revenue, which is kind of within our model actually a little bit better than what we modeled during the capital intensive phase of our transformation.
As it relates to kind of a split we are probably.
Certainly theres a lot of Capex going equipment, there's a lot of capex going to.
Shells, we're probably a little bit more.
No bias towards shell investment right now we had been in the past behind and that caught us and you know these are obviously the very long lead time type investments and so you want to be make sure you have a shell when you need it and so we have biased ourselves to do that and to make the investments that are appropriate.
In that regard.
And as you point out as I said, you know, where it's largely around our own needs. We are making some modest investments on the foundry side right now.
When you start to get gain traction on the customer front and as we get more customers will we will ramp that investment as appropriate.
<unk> do you have a quick follow up.
I do yes, and in terms of the thank.
Thank you for that in terms of the sort of capital offsets.
Got it and had a 20% 30%.
Is there is there the opportunity for that number to be better for.
For example at <unk> as the grant money starts to get disbursed or you've talked about additional yields what feels like Brookfield.
Are you contemplating within that number potential future improvement or does that number get better if we start to see benefit from those things I mean, it's this is our current outlook is somewhere in the 20% to 30% of it obviously you can get get better at it assumes that we will have another skip.
But by the end of the year and some government incentives, but obviously.
I've got the.
The CEO out there managing the offsets and so I think there's certainly opportunity to see upside if not this year next year and keep in mind next year. We will also have the benefit of the investment tax credit coming in at that point, which will obviously be helpful.
Yeah, and I would just add on top of that this is something we're working you know we're engaging right now with the department of Commerce and are working through our grant applications in that area. Yeah, we have modeled a certain level in the guidelines that Dave said, obviously, we're going to be working to do better than that.
In this regard and you know fundamentally the chips Act is all about making U S manufacturing competitive in the world and that's the focus that we have and the intent of Congress. So this was laid out and we hope to get those done as quickly as possible. We also had a major milestone with the EU Chips Act passing Parliament last.
Weak and we continue to work on that front and obviously skip an investment tax credit you know, we're working to make our capital intensity and efficiency.
To be a great opportunity for us to bring shareholder returns in a meaningful way so with that let me just wrap up our time together first let me say thank you.
Grateful that you to join us.
Grateful that we have the opportunity to give you an update on our business and the progress that we're making and while the macro is challenging.
And plenty of headwinds out there. We also believe that our execution on our financials, a bead on top and Bottomline, great execution on our process and product Roadmaps and here. We are two years into my tenure at.
The journey to date has had some unexpected bumps in the road. We also beginning to see clear points that increased my confidence that we have the right strategy the right team.
Team and we are executing on this transformation and we look forward to updating you throughout the quarter in our next call together. So thank you all so much.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.