Q2 2023 Intel Corp Earnings Call

July 27, 2023

Okay.

Thank you for standing by and welcome to Intel's corporations second 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 telephone to remove yourself from the queue.

Simply press Star 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.

Thank you Jonathan by now you Should've received a copy of the Q2 earnings release and earnings presentation, both of which are available on our investor website I N T C dot com for those joining US online. The earnings presentation is also available in our webcast window.

I'm joined today by our CEO , Pat Gelsinger, and our CFO David.

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 based on the environment as we currently see it and as such are subject to various risks and uncertainties.

Our discussion also contains references to non-GAAP financial measures that we believe provide useful information to our investors.

Our earnings release, most recent annual report on Form 10-K, and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations there.

They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures.

With that let me turn things over to Pat.

Thank you John and good afternoon, everyone.

Our strong second quarter results exceeded expectations on both the top and bottom line demonstrating continued financial improvement and car.

Information of our strategy in the marketplace.

Effective execution across our process and product roadmap says rebuilding customer confidence and Intel strengthen client and data center and our efforts to drive efficiencies and cost savings across the organization all contributed to the upside in the quarter and a return to profitability.

We remain committed to delivering on our strategic roadmap, achieving our long term goals of maximizing shareholder value.

In Q2, we began to see real benefits from our accelerating AI opportunity. We believe we are in a unique position to drive the best possible Tcl for our customers at every node on the AI continuum, our strategy is to democratize AI scaling it and making it ubiquitous across the <unk>.

Full continuum of workloads and usage models we.

We are 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 data prep training and inference that both discrete and integrated solutions.

As we have previously outlined AI is one of our five superpowers, along with pervasive connectivity ubiquitous compute clouds to edge infrastructure and sensing underpinning a one trillion semi industry by 2030.

Intel foundry services or Iff's positions us to further capitalize on the AI market opportunity as well as the growing need for a secured diversified and resilient global supply chain.

<unk> is a significant accelerant tour IBM to point those strategy and everyday of geopolitical tension reinforces the correctness of our strategy.

<unk> expands our scale accelerates our ramps at the leading edge and creates long tails at the trailing edge more importantly for our customers. It provides choice leading edge capacity outside of Asia and at eight a M. Beyond what we believe will deliver leadership performance.

We are executing well on our Intel 18, a as a key foundry offering and continue to make substantial progress against our strategy in.

In addition in July we announced that Boeing Northrop Grumman will join the ramp C program, along with IBM, Microsoft and Nvidia the rapid assurance microelectronics prototypes commercial or ramp C. As a program created by the U S Department of defense in 2021 to assured domestic act.

<unk> to next generation semiconductors, specifically by establishing and demonstrating a U S based foundry ecosystem to develop and fabricate chips on Intel <unk>.

Ramsey continues to build on recent customer and partner announcements by Iff's, including Mediatek arm and a leading cloud edge data center solutions provider.

We also made good progress on two significant <unk> opportunities this quarter.

We are strategically investing in manufacturing capacity to further advance our ITM to point those strategy.

The overarching foundry ambitions, while adhering to our smart capital strategy and.

In Q2, we announced an expanded investment to build two leaving us semiconductor facilities in Germany as well as plans for a new assembly and test facility in Poland.

The building out of Silicon junction in Magdeburg is an important part of our go forward strategy and with our investment in Poland in the Ireland sites, we already operate at scale in the region.

We are encouraged to see the passage of the EU chip spill supporting our building out an unrivalled capacity corridor in Europe and.

In addition, a year after being signed into law, we submitted our first application for U S chips funding for the on track construction of our fab expansion in Arizona working closely with the U S Department of Commerce.

It all starts with our process and product Roadmaps and I am pleased to report that all our programs are on or ahead of schedule. We remain on track to five nodes in four years and to regain transistor performance and power performance leadership by 2025.

Looking specifically at each node until seven has done and with the second half launch of media like Intel for our first UV node is essentially complete with production ramping.

For the remaining three nodes I would highlight until three met defect density and performance milestones in Q2 release PDK 1.1, and is on track for overall yield and performance targets.

We will launch <unk> in first half 'twenty four with Grand Rapids. Following shortly thereafter, our lead vehicles for Intel three.

But until 'twenty, a our first node using both ribbon fat empower via Arrow Lake volume client product is currently running its first stepping in the fab in Q2, we announced that we will be the first to implement backside power delivery and silicon two plus years ahead of the industry, enabling power savings area efficiency.

<unk> and performance gains for increased compute demands ideal for use cases, like AI Cpus and graphics.

In addition, backside power improves ease of design, a major benefit not only for our own products, but even more so for our foundry customers.

Uninstalled <unk>, we continued to run internal and external test chips and remain on track to being manufacturing ready in the second half of 2024. Just this week. We were pleased to have announced an agreement with Ericsson to partner broadly on their next generation optimized <unk> infrastructure.

Reinforcing customer confidence in our roadmap Erickson will be utilizing Intel's <unk> process technology for its future custom five <unk> offerings.

Moving to products, our client business exceeded expectations and gained share yet again in Q2 as the group executed well seeing a modest recovery in the consumer and education segments as well as strikes in premium segments, where we have leadership performance.

We have worked closely with our customers to manage client CPU inventory down to healthy levels as.

As we continue to execute against our strategic initiatives, we see a sustained recovery in the second half of the year as inventory has normalized.

Accordingly, we see be a IPC is a critical inflection point for the PC market over the coming years that will rival the importance of <unk> and Wi Fi and the early two thousands and we believe that Intel is very well positioned to capitalize on the emerging growth opportunity.

In addition, we remain positive on the long term outlook for Pcs as household density is stable to increasing across most regions and usage remains above pre pandemic levels.

Building on strong demand for our 13th Intel processor family Meteor Lake is ramping well in anticipation of the Q3 peer queue and we will maintain and extend our performance leadership in share gains over the last four quarters.

Meteor Lake will be a key inflection point in our client processor roadmap as the first PC platform built on Intel for our first UV node and the first client triplet design enabled by <unk> advanced three D packaging technology, delivering improved power efficiency and graphics performance.

Meteor Lake will also feature a dedicated AI engine, Intel AI boost with AI boost our integrated neural VP U enabling dedicated low power compute for AI workloads, we won't bring AI use cases to life through key experiences people want and need for hybrid work.

Productivity sensing security and creator capabilities, many of which were previewed at Microsoft's build 2023 conference.

Lee, while making the decision to end direct investment in our next unit of computing or Nook business. This well regarded brand will continue to scale effectively with our recently announced <unk> partnership.

And the data center, our fourth Gen. Xeon scalable processor is showing strong customer demand. Despite the mixed overall market environment.

I am pleased to say that we are poised to ship our one millionth fourth Gen Xeon unit in the coming days. This quarter. We also announced the general availability of fourth Gen cloud instances by Google Cloud.

We also saw great progress with fourth gens AI acceleration capabilities, and we now estimate more than 25% of Xeon datacenter shipments are targeted for AI workloads.

Also in Q2, we saw third party validation from Ammo Commons when they publish ml perf training performance benchmark data showing that fourth Gen Xeon and Habana Goudy two are two strong open alternatives and the AI market that compete on both performance and price versus the competition.

End to end AI infused applications like deep mines out fulfilled and algorithm areas such as graph neural networks sure fourth Gen Z on outperforming other alternatives, including the best published GPU results are.

Our strengthening positioning within the AI market was reinforced by our recent announcement of our collaboration with Boston Consulting group to deliver enterprise grade secure and responsible generative AI, leveraging our goudy and fourth Gen xeon offerings to unlock business value, while maintaining high levels.

Of security and data privacy.

Our data center CPU roadmap continues to get stronger and remains on or incrementally ahead of schedule with envelope Rapids, our fifth Gen. Xeon scalable set to launch in Q4 of 23 <unk>.

<unk> our lead vehicle for Intel three will launch in first half of 'twenty four.

Granite Rapids will follow shortly thereafter.

For both Sierra Forest in Grand Rapids volume validation with customers is progressing ahead of schedule multiple Sierra <unk> customers have powered on their boards and silicon is hitting all power and performance targets.

Clearwater Forest the follow on to Sierra Forest will come to market in 2025 and be manufactured on Intel <unk>.

While we performed ahead of expectations. The Q2 consumption Tam for servers remained soft and persistent weakness across all segments, but particularly in the enterprise and rest of world, where the recovery is taking longer than expected across the entire industry. We see the server CPU inventory.

Digestion persisting in the second half Additionally impacted by the near term wallet share focus on AI accelerators, rather than general purpose compute in the cloud we.

We expect Q3 server Cpus to modestly decline sequentially before recovering in Q4.

Longer term, we see AI as Tam expansive to server Cpus and more importantly, we see our accelerated product portfolio is well positioned to gain share in 2024 and beyond.

The surging demand for AI products and services is expanding the pipeline of business engagements for our accelerator products, which includes our goudy flex and Max product lines or.

Our pipeline of opportunities through 2024 is rapidly increasing and is now over $1 billion and continuing to expand with goudy driving the lion's share.

The value of our AI products as demonstrated by the public instances of goudy at AWS and the new commitments to our goudy product line from leading AI companies, such as Huggy face instability AI. In addition to emerging AI leaders, including Indian Institute of Technology mantras proper attack and.

Genesis cloud.

In addition to building near term momentum with our family of accelerators. We continue to make key advancements in next generation technologies, which presents significant opportunities for Intel.

In Q2, we shipped our test chip tunnel false or 12, qubit silicon based quantum chip, which uniquely leverages decades of transistor design and manufacturing investments and expertise.

Total falls fabrication achieved 95% yield rate with voltage uniformity similar to chips manufactured under the more usual Cmos process with a single 300 millimeter wafer providing 24000 quantum dot test chips.

We strongly believe our silicon approach is the only path to true cost effective commercialization of quantum computing, a silicon based qubit approach is 1 billion times smaller than alternative approaches.

Turning to PSG, Mdx and mobile ly demand trends are relatively stronger across our broad based markets like industrial auto and infrastructure, although as anticipated any X did see a Q2 inventory correction, which we expect to continue into Q3 and.

In contrast, PSG iff's in mobile I continue on a solid growth trajectory and we see the collection of these businesses in total growing year on year and calendar year 'twenty three much better than third party expectations for mid single digit decline in the semiconductor market excluding memory.

Looking specifically at our programmable solutions group, we delivered record results for a third consecutive quarter.

In Q2, we announced the Intel agile at seven with the our tile triplet is shipping production qualified these site devices and volume to help customers accelerate workflows with seamless integration and the highest bandwidth processor interfaces.

We have now <unk> 11 of the 15, new products, we expect it to bring to market in calendar year 'twenty three.

For any ex during Q2, Intel Ericsson and HPE successfully demonstrated the industry's first DRAM solution running on the fourth Gen. Intel Xeon scalable processor with Intel DRAM boost and.

In addition, we will enhance the collaboration we announced at mobile World Congress to accelerate industry scale open ran utilizing standard Intel Xeon based platforms as telcos transform to a foundation of programmable software defined infrastructure.

Mobile I continued to generate strong profitability in Q2 and demonstrated impressive traction with their advanced product portfolio by announcing a supervision ice on hands off design win with Porsche and the mobility as a service collaboration with Volkswagen Group that will soon begin testing in Austin, Texas.

We continue to drive technical and commercial engagement with them co developing leading F. M. CW Lidar products based on Intel Silicon Photonics technology and partnering to drive the software defined automobile vision that integrates mobilize the Adas technology with Intel's cockpit offerings.

Additionally, in the second quarter, we executed the secondary offering that generated meaningful proceeds as we continue to optimize our value creation efforts.

In addition to executing on our process and product roadmaps during the quarter, we remain on track to achieve our goal of reducing costs by $3 billion in 2023, and eight to 10 billion exiting 2025.

As mentioned during our internal foundry webinar, our new operating model establishes a separate P&L for our manufacturing group inclusive of Iff's, and TD, which enables us to facilitate and accelerate our efforts to drive best in class cost structure Derisk, our technology for external foundry customers.

And fundamentally changes incentives to drive incremental efficiencies.

We have already identified numerous gains and efficiency, including factory loading.

In short time reduction packaging cost improvements litho field utilization improvements reductions in staff things Expedites and many more.

It is important to underscore the inherent sustained value creation due to the tight connection between our business units and TD manufacturing in Iff's.

Finally, as we continue to optimize our portfolio, we agreed to sell a minority stake in our IMS nano fabrication business to Bain capital brings a long history of partnering with companies to drive growth and value creation.

<unk> has created a significant market position with multi beam mask, writing tools that are critical to the semiconductor ecosystem for enabling <unk> technology and is already providing benefit on our five nodes for years efforts. Further this capability becomes even more critical with the adoption of high end.

<unk> in the second half of the decade.

As we continue to keep Moore's law alive, and very well IMS is a hidden gem within Intel and the business's growth will be exposed and accelerated through this transaction.

While we still have work to do we continue to advance our IDM 2.0 strategy five nodes in four years remains well on track our product execution and roadmap is progressing well, we continue to build out our foundry business and we're seeing early signs of success as we work to truly democratize AI.

From cloud to enterprise network edge and client.

Also saw strong momentum on our financial discipline and cost savings as we returned to profitability our.

Our executing our internal foundry model by 2024 and are leveraging our smart capital strategy to effectively and efficiently position us for the future with that I will turn it over to Dave.

Thank you Pat and good afternoon, everyone, we drove stronger than expected business results in the second quarter comfortably beating guidance on both the top and bottom line.

While we expect continued improvement to global macroeconomic conditions. The pace of recovery remains moderate we will continue to focus on what we can control prioritizing investments critical to our IDM to point out transformation.

Prudently and aggressively managing expenses near term and driving fundamental improvements to our cost structure longer term.

Second quarter revenue was $12 9 billion.

More than $900 million above the midpoint of our guidance.

Revenue exceeded our expectations in CCG D C AI.

And mobile I, partially offset by continued demand softness and elevated inventory levels in the network and edge markets, which impacted <unk> results.

Gross margin was 39, 8% 230 basis points better than our guidance on stronger revenue.

EPS for the quarter was 13.

Beating guidance by 17.

As our revenue strength better gross margin and disciplined Opex management resulted in a return to profitability.

Q2, operating cash flow was $2 8 billion.

Up $4 6 billion sequentially.

Net inventory was reduced by $1 billion or 18 days in the quarter and accounts receivable declined by $850 million or seven days as we continue to focus on disciplined cash management.

Net capex was $5 5 billion, resulting in an adjusted free cash flow of negative $2 $7 billion and we paid dividends of <unk> 5 billion in the quarter our actions in the last few weeks the completed secondary offering of mobilized shares and the upcoming investment in our IMS nano fabrication business by being.

Capital will generate more than $2 4 billion of cash and help to unlock roughly $35 billion of shareholder value.

These actions further bolster our strong balance sheet and investment grade profile with cash and short term investments of more than 24 billion exiting Q2.

We will continue to focus on avenues to generate shareholder value from our broad portfolio of assets in support of our IDM to point out strategy.

Moving to second quarter business unit results.

<unk> delivered revenue of $6 8 billion up 18% sequentially and ahead of our expectations for the quarter as the pace of customer inventory burn slowed.

As anticipated, we see the market moving toward equilibrium and expect shipments to more closely align to consumption in the second half.

Asps declined modestly in the quarter due to higher education shipments and sell through of older inventory.

CCG showed outstanding execution in Q2 generating operating profit of $1 billion.

An improvement of more than $500 million sequentially on higher revenue improved unit costs and reduced operating expenses offsetting the impact of <unk> inventory reserves in preparation for the second half launch of media like.

Dci revenue was $4 billion.

Ahead of expectations and up 8% sequentially with the Xeon business up double digits sequentially.

Data Center CPU Tam contracted meaningfully in the first half of 'twenty, three and while we expect the magnitude of year over year declines to diminish in the second half a slower than anticipated Tam recovery in China and across the enterprise market is delay the return of CPU Tam growth.

CPU market share remained relatively stable in Q2, and the continued ramp of Sapphire Rapids contributed the CPU AFP improvement of 3% sequentially and 17% year over year.

TCA I had an operating loss of $161 million in.

Proving sequentially on higher revenue and Asps and reduced operating expenses.

Within D C AI, our FPGA products delivered a third consecutive quarter of record revenue up 35% year over year, along with another record quarterly operating margin.

We expect this business to return to more natural demand profile in the second half of the year as we worked down customer backlog to normalized levels.

<unk> revenue was $1 4 billion below our expectations in the quarter and down significantly in comparison to a record Q2 'twenty two.

Network and edge markets are slowly working through elevated inventory levels elongated by sluggish, China recovery and telcos have delayed infrastructure investment due to macro uncertainty.

We see demand remaining weak through at least the third quarter.

Q2, <unk> operating loss of $187 million improved sequentially on lower inventory reserves and reduced operating expenses.

Mobile I continued to perform well in Q2 revenue was $454 million roughly flat sequentially and year over year with operating profit improving sequentially to $129 million.

This morning mobilized increased fiscal year 2023 outlook for adjusted operating income by 9% at the midpoint.

Intel Foundry services revenue was $232 million up forex year over year, and nearly doubling sequentially on increased packaging revenue and higher sales of IMF nanofabrication tools.

Operating loss was $143 million with higher factory startup costs offsetting stronger revenue.

Q2 was another strong quarter of cross company spending discipline with operating expenses down 14% year over year.

We're on track to achieve $3 billion of spending reductions in 'twenty three.

But the decision to stop direct investment and our client Nook business earlier. This month, we have now exited nine lines of business and Pat rejoined the company with a combined annual savings of more than $1 7 billion.

Through focused investment prioritization and austerity measures in the first half of the year some of which are temporary in nature Opex is tracking a couple of hundred million dollars better than our $19 6 billion twenty-three committed goal.

Now turning to Q3 guidance.

We expect third quarter revenue of $12 nine to $13 $9 billion.

At the midpoint of $13 4 billion, we expect client CPU shipments to more closely match sell through.

Ada Center network and edge markets continue to face mixed macro signals and elevated inventory levels in the third quarter, while iff's and mobilized are well positioned to generate strong sequential and year over year growth.

Were forecasting gross margin of 43% a tax rate of 13% and EPS of 20 at the midpoint of revenue guidance.

We expect sequential margin improvement on higher sales and lower <unk> inventory reserves.

But we're starting to see some improvement and factory under low charges. Most of the benefit will take some time to run through inventory and positively impact cost of sales.

Investment in manufacturing capacity continues to be guided by our smart capital framework, creating flexibility through proactive investment in shell and aligning equipment purchases to customer demand.

In the last few weeks, we have closed agreements with governments in Poland, and Germany, which includes significant capital incentives and we are well positioned to meet the requirements of funding laid out by the U S Chips Act.

Looking at capital requirements and offsets made possible by our smart capital strategy, We expect net capital intensity in the mid <unk> as a percentage of revenue across 23 and 24 in aggregate.

While our expectations for growth Capex have not changed the timing of some capital assets is uncertain and could land in either 23 or 'twenty four depending on a number of factors.

Having said that we're confident in the level of capital offsets we will receive over the next 18 months and expect offsets to track to the high end of our previous range of 20% to 30%.

Our financial results in Q2 reflects improved execution and improving macro conditions. Despite a.

Slower than expected recovery in key consumption markets like China in the enterprise, we maintain our forecast of sequential revenue growth throughout the year.

Accelerating AI use cases will drive increased demand for compute across the AI continuum, and Intel is well positioned to capitalize on the opportunity in each of our business units.

We remain focused on the execution of our near and long term product process and financial commitments and the prioritization of our owners' capital to generate free cash flow and create value for our stakeholders with that let me turn the call back over to John .

Thank you, Dave we will now transition to the Q&A portion of our earnings presentation. As a reminder, we would ask each of you to ask one question with a brief follow up question where appropriate.

With that Jonathan can we have the first caller please.

Certainly and our first question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.

Hi, guys. Thanks for let me ask the question and congrats on the strong results are wonderful because Pat on the data center Dci side of things strong upside in the quarter, but it sounds like there's still some mixed trends going forward. So I guess a two part question can you talk about what drove the upside and where the concern is going forward and part of that concern that crowding out potential that she does.

Discussed with accelerators versus Cpus, how is that playing out and when do you expect it to end.

Yes, Thanks Ross.

Thanks for the congrats on the quarter as well I'm Super proud of my team for the great execution this quarter top and bottom line beat raise and just great execution across every aspect of the business both financially as well as roadmap execution.

With regard to the data center, obviously, the good execution I will just say, we executed well winning designs fighting hard in the market regaining our momentum good execution as you said, we'll see the Sapphire Rapids hit the 1 million unit.

The next couple of days or Z on Gen. Four so overall, it's feeling good roadmaps in very good shape. So we're feeling very good about the future outlook of the business as well as we look to fifth Gen E core P core with Sapphire and granted rapids. So all of those I would just say we're performing well.

We do think that the next quarter at least we will show some softness there's some inventory burn that we're still working through we do see that big cloud customers in particular have put a lot of energy into building out their high end AI training environments and that is putting more of their budgets focused or priority.

<unk> into the AI portion of their build out that said, we do think this is a near term right to surge.

Do you expect will balance over time, we see AI as a workload not as a market rate, which will affect every aspect of the business, whether it's client whether it's edge, whether it's standard data center on premise enterprise.

Or a cloud we're also seeing that Gen. Four xeon and then we'll be enhancing that in the future roadmap has significant AI capabilities and as you heard in the prepared remarks, we expect about 25% today and growing.

Our Gen four is being driven by AI use cases, and obviously, we're gonna be participating more in the accelerator portion of the market with our goudy flex and Max product lines, particularly goudy is gaining a lot of momentum in my formal remarks, we said, we now have over $1 billion of pipeline six axis.

In the last quarter, so we're going to participate in the accelerate a portion of it we're seeing a real opportunity for the CPU is that workload balances over time between CPU and accelerator and obviously, we have a strong position to democratize AI across our entire portfolio of products.

Ross do you have a quick follow up.

I do I just wanted to pivot to Dave on a question on the gross margin side nice beat in the quarter and a sequential increase for the third quarter as well beyond the revenue increase side, which I know is important can you just walk us through some of the pluses and minuses sequentially into the third quarter and even into the back half some of the pre <unk> reversals underutilization any of those kind of <unk>.

Synchronic blocks that we should be aware of as we think about the gross margin in the second half of the year. Yes. Good question right. So in the second quarter just to.

Repeat what I said in the prepared remarks that was largely a function of revenue. We had obviously beat revenue significantly and we got a good fall through given the fixed cost nature of our business and so that really was what helped us really outperform significantly on the gross margin side in the second quarter in the <unk>.

Third quarter, we do obviously at the mid point see revenue growth sequentially and so that will be helpful. In terms of gross margin premium we expect again pretty good fall through.

As we get that incremental revenue.

We're also gonna see under loadings come down I would say modestly come down.

For two reasons, one we get that period charge for some of our under loading but some of our under loading is actually just a function of the cost of the inventory so that will take some time to flow through.

So it will be more it'll be a modest decline, but nevertheless helpful on the gross margin front.

And then as you point out we will have pre <unk> reserves in the third quarter, but they're.

Down from the second quarter or like will not be.

Our pre <unk> reserve in the third quarter, because we expect to launch that this quarter.

We have Emerald wrap is that will that will certainly have.

Some impact and then some of the other skus.

We will also impact itself coming down, but not not to zero. So we have an opportunity actually to perform better in the fourth quarter, you know obviously dependent on the revenue and so forth.

Given that <unk> reserves are likely to come off again in the fourth quarter, we should improve on the loading front in the fourth quarter as well. So there are some I think some good tailwind on the gross on the gross margin front.

Just take an opportunity to talk longer term, we will continue to be weighed down for some quarters on under load.

Because of the nature of just having it cycle through inventory and then come out through cost of sales. So for multiple quarters, we'll have some under loading charges that will that we'll see and then as we talked about for since really Pat joined in and we.

Kind of launched into the five notes and for US we're going to have a significant amount of startup cost that will hit gross margins that will affect us for a couple of years, but we're really optimistic about where gross margins are going over the over the long term ultimately we will get back to process parity and leadership and that will enable us to not have these <unk>.

Up costs be a headwind and of course as you bring out products.

At a high performance in terms of process and in terms of product with that shows up in terms of our margins and then as Pat mentioned you went through a laundry list in the prepared remarks, the areas of benefit that the internal foundry model will give us we expect a pretty meaningful amount of that.

To come out and by the time, we hit 2026, but we won't be done there I mean, I think there'll be multiple opportunities over the course of multiple years to improve the.

The gross margin so.

Pat has talked.

<unk> talked about a pretty significant improvement in gross margins over time and I think what we're seeing today is the beginnings of seeing that improvement show up in the P&L right Ross. Thanks for the question Jonathan can we have the next one please.

Certainly one moment for our next question and our next question comes from the line of Joe Moore from Morgan Stanley . Your question. Please.

Great. Thank you Dave.

Dave I think you said in your prepared remarks that data center pricing was up 17% year on year and Sapphire.

Sapphire Rapids was the fact that there can you just talk to that and kind of.

Obviously sapphire Rapids is going to get bigger can you talk about what you expect to see what platform cost and PCI.

Platform costs, Okay, well first of all <unk> is obviously, improving as we increase core count.

And as we get more competitive on the product offerings that enables us to have more confidence in the market in terms of our pricing. So that that's certainly helpful. Obviously with the increase in core count that that affects the cost as well. So cost is obviously goes up but the longer the larger drivers of.

Of our cost structure will be around what we do in terms of the entire internal foundry model as we get off in terms of scale and get away from these under loading charges and as we get past the startup costs on 5004 years, which you know data centers, certainly getting hit with and so those things I think longer term will be the biggest drive.

<unk> of gross margin improvement and as we get.

Launch Sierra for Us in the first half of next year and granted later and later.

Thereafter.

And start to produce products on the datacenter side that are really competitive.

<unk> us to even be stronger in terms of our our margin outlook and should help improve the overall P&L with data center.

Joe do you have a follow up question.

Sure just also on servers as you look to Q3, I think you talked about some of the.

The cautious trends there can.

You talked to enterprise versus cloud is it different between the two and also do you see are you seeing anything different in China for data center versus what Youre seeing in North America.

Yeah, and as we said Joe and thanks for the question.

<unk> said in the prepared remarks, we do expect.

To be seeing the Tam down in Q3 somewhat driven by all of it it's a little bit of a data center.

Digestion for the cloud guys a bit of enterprise of weakness and some of that as more inventory and.

The China market I think this has been well reported hasn't come back as strongly as people would've expected overall and then the last factor was the one of the first question from Ross around the pressure from accelerator spend being a stronger. So I think those four somewhat together right are leading to a bit of weakness at least through.

Q3 that said our overall position is strengthening and we're seeing our products improve right. We're seeing the benefits of the AI capabilities in our Gen four and beyond products improving we're also starting to see some of the use cases like <unk>.

Graph neural networks Google's Alpha fold.

Boeing best results on Cpus, as well, which is increasingly gaining momentum in the industry as people look for different aspects of data preparation data processing different innovations in AI. So all of that taken together, we feel optimistic about the long term opportunities that we have in data center.

And of course, the strengthening accelerate a roadmap with goudy two three falcon shores.

Being now well executed also our first wafers are in hand for our goudy three so we see a lot of long term optimism even as a near term we're working through some of the challenging environments of the market not being as strong as we would've hoped.

Thanks for the question 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, and thank you for taking the question I guess first question in your prepared remarks, you talked about AI being a Tam expander for servers and I guess I was hoping you could elaborate that on that given the productivity gains to acceleration would love to hear why you think that will grow units and particularly if you could bifurcate your commentary.

Across both training and inference.

Yeah.

C J and generally.

They're a great analogy here that from from history, we point to cases like virtualization was going to destroy the CPU Tam and that ended up driving new workloads right. If you think about the <unk> platform, the leading edge AI platform. It includes Cpus right.

Hi, right head nodes data processing data prep dominate certain portions of the workload. We also see as we said AI is a workload, where you might spend 10 megawatts in months training a model, but then you're going to use it very broadly for inferencing.

We do see with Meteor Lake ushering in the AI P. C generation, where you have tens of what's being responding in a second or two and then AI is going to be in every hearing aid in the future, including mine, where it's 10 micro watts and instantaneous so we.

Do see as AI drives workloads across the full spectrum of applications and for that we're going to build AI into every product that we built whether it's a client whether it's an edge platform.

For our retail and manufacturing and industrial use cases, whether it's an enterprise data center, where they're not going to stand up a dedicated 10 megawatt far but theyre not going to move.

Their private data off premises right and use our foundational models that are available and open source as well as in the big cloud and training environments as well we firmly believe this idea of democratizing AI opening the software stack.

<unk>, creating and participating with this broad industry ecosystem. That's emerging it was a great opportunity and one that Intel is well positioned to participate in we've seen that the AI Tam right is part of the semiconductor Tam. We've always described this true.

Dollar semiconductor opportunity in AI being one of those superpowers as I call. It a driving it but it's not the only one and one that we're going to participate and broadly across our portfolio.

Do you have a follow up question.

Yes. Please.

You talked a little bit about <unk> and backside power would love to hear.

What youre seeing today in terms of both scaling empowered benefits and how your potential foundry customers.

We are looking at that technology in particular.

Yeah, Thank you and.

We continue to make good progress on our five nodes in four years and with that that culminates in 18, eight and 18, a is proceeding well and we got a particularly good response this quarter to power via the backside power.

That we believe is a couple of years ahead as the industry measured as it against any other alternative in the industry were very affirmed by the Ericsson announcement, which is reinforcing the strong belief they have in <unk>, but over and above that I mentioned in the prepared remarks.

Marks the two major significant opportunities that we made very good progress on is our big 18, a foundry customers this quarter and an overall growing pipeline of potential foundry customers test chips and process as well. So we feel five nodes in four years is on track.

<unk> is the culmination of that and good interest from the industry across the board I would also say that you know as part of the overall strength in the foundry business as well and maybe tying the first part and the second part of your question together was that our packaging technologies are particularly interesting in.

In the marketplace in area that Intel never stumbled right. This is the area of sustained leadership that we've had and today many of the big AI machines or packaging limited and because of that we're finding a lot of interest for our advanced packaging and this is an area of immediate strength for the foundry business, we set up.

A specific packaging business unit within our foundry business and finding a lot of great opportunities for us to pursue there as well.

Hey, Thanks for the questions Jonathan can we have the next caller. Please.

Certainly and our next question comes from the line of Timothy Arcuri from UBS. Your question. Please.

Thanks, a lot first day, if I had one for you if I look at the third party contributions they were down a little bit which was a little bit of a surprise.

So we did.

Manage capex a bit better than I was hoping we thought it would be more front end loaded. It's looking look hey, it's going to be a lot more evenly distributed first half versus the second half and we managed capex in particular.

This quarter really well, which I think obviously helped on the on the free cash flow side.

When you manage the Capex, you get less offsets and so that kind of drove the lower capital offsets for the quarter, but for the year, we're still on track to get the same amount of cash.

Capital offsets through skip that we had anticipated and that's really where most of the capital assets have.

We have come so far now obviously.

As we get into chips.

Chips incentives that should be coming here in the not too distant future that will add to the offsets that we get we go into next year, we start getting the investment tax credit that will help on the capital offsets so there'll be more things that come.

In the future, but right now, it's largely skip and skip one end and that's a function of where the spending lands quarter to quarter, Yes, just maybe to pile on to that a bit obviously getting EU chips Act approved we're excited about that for the Germany and Poland projects, which are we'll go for formal DG comp approval. We're also very.

Happy we submitted our first proposal the on track Arizona facility.

But we'll have three more proposals going in for U S. Chips Act this quarter and so we're now at pace for those so everything there is feeling exactly as we said it would and Super happy with the great engagement, both in Europe as well as with the U S. Department of Commerce is we're working on those application processes, Tim do you have a.

Follow up question.

I do yes, Pat So you talked about an accelerated pipeline of.

More than a billion dollars and I think Sandra has been recently, implying that you could do over $1 billion in Goudy next year. So the question is is that the commitment and then also at the data Center day, you had talked about emerging the.

GPU in the goudy roadmaps into south insurers, but but that's not going to come out until 2025. So the question is really there is wondering where that leaves customers in terms of their commitment to your roadmap given those changes.

Yeah, and let me take that and Dave can add overall, you know as we said the accelerator pipeline is now well over $1 billion and growing rapidly about six X. This past quarter, that's led by but not exclusively goudy that also includes the Max and flex product lines as well, but the lion's share of that.

As goudy.

Goudy too is the shipping volume product today Goudy three will be the volume product for next year, and then Falcon shores and 25, and we're already working on Falcon shorts too for 26. So we have a simplified roadmap as we bring together our GPU and <unk>.

<unk> into a single offering but the progress that we're making with goudy two it becomes more generalized with goudy free the software stack are one API approach that we're taking will give customers confidence that they have forward compatibility.

The goudy three in Falcon shores, and will just be broadening the flexibility of that software stack, we're adding a F. P. Eight we just added pie torch to support so every step along the way it gets better and broader use cases more language models are being supported more programmability is being supported in the soft.

Or stack and we're building that full solution set as we deliver on the best of GPU in the best the matrix acceleration and the Falcon short timeline, but every step along the way. It just gets better every software released gets better every hardware released gets better along the way to cover more of the overall.

<unk> marketplace and as I said, we now have.

<unk> three <unk> wafers first ones are enhanced so that program is looking very good and with this rapidly accelerating our pipeline of opportunity.

We expect that we'll be giving you a very positive updates there in the future with both customers as well as expanded business opportunities Tim. Thanks for the question Jonathan can we have the next caller. Please.

Certainly and our next question comes from the line of Ben Reitzes from Melius Research. Your question. Please.

Yes, Thanks, a lot I appreciate the question.

Pat you caught my attention with your comment about Pcs next year or with AI, having its been Trina moment did.

Do you mind, just talking about that and what.

<unk> took place.

He was very clear, we unplugged from the wires and investors really grasp that what is the aha moment with AI that is going to accelerate the client business.

And benefit Intel.

Yeah and.

The real question is what applications are going to become AI enabled and today youre starting to see that you know people are going to the cloud and goofing around with the chat GPT writing a research paper and you know that's like Super Cool right and kids are of course.

<unk> their homework assignments that way [laughter], but youre not going to do that for every client becoming AI in April it must be done on the client for that to occur right. You can't go to the cloud you can't round trip to the cloud all of the new effects real time language translation in your Zoom calls you know real time transcripts.

Automation inferencing relevance portraying you'll generated content in gaming environments real time creator environments being done through adobe's and others that are doing those as part of the client new productivity tools.

Being able to do local illegal brief generations on our clients' one after the other right across every aspect of consumer of of.

Of our developer and enterprise efficiency use cases, we see that there's going to be a raft of AI enablement and those will be client centered those will also be at the edge you can't round trip to the cloud you don't have the latency the bandwidth of the cost structure to round trip, let's say infancy.

And a local convenience store to the cloud it will all happen at the edge and at the client so with that in mind, we do see this idea of bringing AI directly into the client immediately right, which would bring it to the market in the second half of the year is the first major client product that includes native AI.

<unk> the neural engine that we've talked about and this will be a volume delivery that we will have and we expect that Intel is the volume leader for the client footprint is the one that's gonna truly democratize AI at the client and at the edge and we do believe that this will become a driver of the Tam because people will say Oh I.

Once those new those new use cases, they make me more efficient and more capable just like <unk> made me more efficient because I didn't have to plug into the wire right now I don't have to go to the cloud to get these use cases I'm going to have them locally on my P. C. In real time and cost. The fact that we see this as a true AI PC moment.

That begins with Meteor Lake in the fall of this year.

And do you have a follow up question. Please.

Yes, Thanks, Jon.

I wanted to double click on your sequential guidance in the client business.

There's been there's some concerns out there with investors that there was some demand pull in in the second quarter, given some comments from some others.

Just wanted to talk about your confidence for sequential growth in that business based on what Youre seeing and if there was any more color there. Thanks.

Let me start on that Dave can jump in the biggest change quarter on quarter that we see is now that we're now what healthy inventory levels.

And we've worked through inventory Q4, Q1, and some in Q2, we now see the Oems in the channel at healthy inventory levels. We continue to see solid demand signals for the client business from our Oems and even some of the end of quarter and early quarter sale through are clear indicators of.

Good strength in that business.

When obviously, we combine that with gaining share again in Q2, so we come into the second half of the year with good momentum and a very strong product line. So we feel quite good about the client business outlook.

I'd just add normally over the last few quarters, you've seen us identify in the 10-Q.

Strategic sale.

Sales that we've made where we've <unk>.

Negotiated kind of attractive deals.

Which have accelerated demand, let's call. It when you look at our 10-Q, which will either be filed late Tonight or early tomorrow, you will see that we don't have a number in there.

For this quarter, which is an indication of how little we did in terms of strategic versus purchases. So to your question of did we pull in demand I think that's probably it gives you a pretty good assessment of that Ben Thanks for the questions. Jonathan can we have the next caller. Please.

Certainly and our next question comes from the line of Sydney Gerry from Raymond James Your question. Please.

Thank you Pat I have a question on AI as it relates to custom silicon.

It's great to see that you announced a customer for <unk> on custom silicon, but theres a huge demand. It seems like you know for custom silicon on the AI front I think some of your Hyperscale customers are already successfully using custom silicon for us in AI accelerators. So I'm just curious what your strategy for that market.

Is that a focus area for you. If so do you have any engagements with customers right now.

Yeah. Thank you Shirley and the simple answer is yes, and I have multiple ways to play.

And in this market obviously, one of those is foundry customers. When we have a good pipeline of foundry customers for 18, a foundry opportunities on several of those opportunities that we're investigating are exactly what you described.

Looking to do their own unique versions of their AI accelerator components, and we're engaging with a number of those but some of those are going to be variations of Intel standard products. So this is where the IDM 2.0 strength really comes to play where they could be using some of our silicon combining it with some of their.

Silicon designs and with given our advanced packaging strength that gives us another way to be participating in those areas and of course that reinforces some of the near term opportunities will just be packaging right, where they're already have designed with one of the other foundry, but we're going to be able to augment their capacity opportunities with immediately.

Able to.

Engage with packaging opportunities and we're seeing pipeline of those opportunities. So overall, we agree that this is clearly going to be a market. We also see that some of the ones that you've seen most of the press or about particularly high end training environments, but as we've said, we see AI being infused and everything and there's going to be a.

I trips for the edge AI trip chips for the communications infrastructure AI chips for sensing devices for automotive devices, and we see opportunities for us both as a product provider and as a foundry and technology provider across that spectrum and that's part of the unique positioning that IBM 2.0, it gives us.

The future training do you have a follow up question yes.

Yes, it is for Dave Dave It's good to see the progress on the working capital front I think previously you said your expectation is that you know free cash flow will turn positive sometime in second half just curious if that's still the expectation and also on the gross margin front is there any I guess you know P. R. Q charges that we should be aware of as we go into fourth quarter. Thank you.

Okay. So let me let me just take a moment just to give the team credit on the second quarter in terms of working capital because we brought inventory down by $1 billion, our days of days sales outstanding.

On the AUR front is down to 24 days, which is exceptional so a lot of what you saw in terms of the improving free cash flow from Q1 to Q2 was working capital. So I think the team has done an outstanding job just really focusing on all of the elements that drive free cash flow.

Our expectation is still by the end of the year to get to breakeven free cash flow.

There's no reason why we shouldn't achieve that obviously.

The net capex might be a little different this year than we can't and we thought coming into the year, but as we've talked about is that just the focus on free cash flow the improved outlook in terms of the business.

We think we can we can get to breakeven by by the end of the year.

As it relates to pre <unk> reserves in the fourth quarter, where we're likely to have some but it should be a pretty good quarter over quarter improvement from the third quarter, which was obviously a good quarter over quarter improvement from the second quarter.

Thanks for the questions Jonathan I think we have time for one last caller. Please.

Certainly and our final question for today, then comes from the line of Aaron Rakers from Wells Fargo. Your question. Please.

Yes, thanks for taking the question.

I have a quick follow up as well just kind of going back to the gross margin a little bit.

Dave when you had guided this quarter you talked about just looking backwards. The PR Q impact was maybe about 250 basis points.

There was also an under load impact that I think you guided to around 300 basis points. So I'm just curious of what was what were those numbers in this most recent quarter.

Relative to kind of as we try to frame what the expectation is going forward, yes. They were largely as expected. Although it was off of a lower revenue number so the absolute dollars were as expected.

Had a little bit of a less of an impact.

Given the revenue the revenue was higher and both of those numbers like I said will be lower in the third quarter.

And do you have a quick follow up.

I do just real quickly on just kind of the AI narrative, we talk about goudy a lot in the pipeline build out.

Curious as you look forward as part of that pipeline passed do you expect to see.

Appointment in some of the Hyperscale cloud guys and competing against directly some of the larger competitors on the GPU front with Audi in cloud.

Simple answer yes.

Right and everyone is looking for alternatives clearly the MLP perf numbers that we've posted a recently with goudy to show very competitive numbers significant tcl benefits for customers that are looking for alternatives. They're also looking for more capacity and so we're definitely engaged we already have.

Audi instances on AWS is available today already and some of the names that we described in our earnings call stability AI Genesis cloud. They also some of these are the proven I'll say at scale, a tier one cloud providers, but some of the next generation ones are also engaging so overall, yes, absolutely we expect that.

To be the case, we are also on our own Dev cloud, we're making it easier for customers to test our goudy more quickly.

And with that we now have a thousand customers now who are taking advantage of the Intel development cloud. We're building a thousand node goudy cluster. So that they can be at scale with their testing a very larger training environments. So overall the simple answer is yes, very much so and we're seeing a good pipeline.

Of those opportunities so with that let me just wrap up our time together today.

We are grateful that you would join US today and we are thankful that we have the opportunity to update you on our business and simply put it was a very good quarter.

<unk> expectations on topline and Bottomline, we raised guidance and we look forward to the continue opportunities that we have of accelerating our business and seeing the margin improvement that comes in the second half of the year, but even more important to me was the operational improvements that we saw a good fiscal discipline cost saving discipline and best of all the progress.

But we've made right on our execution our process execution product execution. The transformational journey that we're in and I just saw.

When I say a big thank you to my team for having a very good quarter that we could tell you about today, we look forward to talking to you more particularly at our innovation in September we will be hosting an investor Q&A track and we hope to see many if not all of you there will be a great time. Thank you.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

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Thank you for standing by and welcome to Intel's Corporation's second 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'll need to press star one.

One on your telephone to remove yourself from the queue simply press Star 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.

Thank you Jonathan by now you should have received a copy of the Q2 earnings release and earnings presentation, both of which are available on our investor website <unk> Dot com for those joining US online. The earnings presentation is also available in our webcast window.

I am 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 based on the environment as we currently see it and as such are subject to various risks and uncertainties.

Our discussion also contains references to non-GAAP financial measures that we believe provide useful information to our investors.

They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures.

With that let me turn things over to Pat.

Yeah.

Thank you John and good afternoon, everyone. Our strong second quarter results exceeded expectations on both the top and bottom line demonstrating continued financial improvement and confirmation of our strategy in the marketplace effective execution across our process and product roadmap says rebuilding customer confidence and Intel.

Strength in client and data center, and our efforts to drive efficiencies and cost savings across the organization all contributed to the upside in the quarter and a return to profitability we remain.

<unk> committed to delivering on our strategic roadmap, achieving our long term goals of maximizing shareholder value.

Full continuum of workloads and usage models.

Intel foundry services or Iff's positions us to further capitalize on the AI market opportunity as well as the growing need for secure diversified and resilient global supply chain.

<unk> is a significant accelerant tour IBM, two point strategy and everyday of geopolitical tension reinforces the correctness of our strategy.

Iff's expands our scale accelerates our ramps at the leading edge and creates long tails at the trailing edge more importantly for our customers. It provides choice leading edge capacity outside of Asia and in <unk> and beyond what we believe will deliver leadership performance.

We are executing well on our Intel 18, a as a key foundry offering and continue to make substantial progress against our strategy in.

<unk> to next generation semiconductors, specifically by establishing and demonstrating a U S based foundry ecosystem to develop and fabricate chips on Intel <unk>.

Ramp C continues to build on recent customer and partner announcements by Iff's, including Mediatek arm, and a leading cloud edge and datacenter solutions provider.

We also made good progress on two significant <unk> opportunities this quarter.

We are strategically investing in manufacturing capacity to further advance our ITM to point out strategy.

The overarching foundry ambitions, while adhering to our smart capital strategy in.

In Q2, we announced an expanded investment to build two leaving us semiconductor facilities in Germany as well as plans for a new assembly and test facility in Poland.

The building out of Silicon junction in Magdeburg is an important part of our go forward strategy and with our investment in Poland in the Ireland sites, we already operate at scale in the region.

We are encouraged to see the passage of the EU chip spill supporting our building out an unrivalled capacity corridor in Europe . In addition, a year after being signed into law. We submitted our first application for U S chips funding for the on track construction of our fab expansion in Arizona working closely.

The U S Department of Commerce.

And was the second half launch of media like Intel for our first the UV node is essentially complete with production ramping.

For the remaining three notes I would highlight until three met defect density and performance milestones in Q2 released PDK one one and is on track for overall yield and performance targets.

We will launch <unk> in first half 'twenty four with Grand Rapids. Following shortly thereafter, our lead vehicles for Intel three.

On until 'twenty, a our first node using both ribbon fed empower via Air Lake volume client product is currently running its first stepping in the fab in Q2, we announced that we will be the first to implement backside power delivery and silicon two plus years ahead of the industry, enabling power savings area of efficiency.

And performance gains for increased compute demands ideal for use cases, like AI Cpus and graphics.

In addition, backside power improves ease of design, a major benefit not only for our own products, but even more so for our foundry customers.

On <unk>, we continue to run internal and external test chips and remain on track to being manufacturing ready in the second half of 2024. Just this week. We were pleased to have announced an agreement with Ericsson to partner broadly on their next generation optimized <unk> infrastructure.

Reinforcing customer confidence in our roadmap Erickson will be utilizing Intel's <unk> process technology for its future custom five G. So C offerings.

Moving to products, our client business exceeded expectations and gained share yet again in Q2 as the group executed well seeing a modest recovery in the consumer and education segments as well as strength in premium segments, where we have leadership performance we.

We have worked closely with our customers to manage client CPU inventory down to healthy levels as.

As we continue to execute against our strategic initiatives, we see a sustained recovery in the second half of the year as inventory has normalized.

Accordingly, we see be a IPC is a critical inflection point for the PC market over the coming years that will rival the importance of <unk> Wi Fi and the early two thousands and we believe that Intel is very well positioned to capitalize on the emerging growth opportunity.

In addition, we remain positive on the long term outlook for Pcs as household density is stable to increasing across most regions and usage remains above pre pandemic levels.

Building on strong demand for our 13th <unk> Intel processor family Media Lake is ramping well in anticipation of the Q3 peer queue and we will maintain and extend our performance leadership in share gains over the last four quarters.

Meteor Lake will be a key inflection point in our client processor roadmap as the first PC platform built on Intel for our first UV node and the first client chip design enabled by <unk> advanced three D packaging technology, delivering improved power efficiency and graphics performance.

Productivity sensing security and creator capabilities, many of which were previewed at Microsoft's build 2023 conference <unk>.

Finally, while making the decision to end direct investment in our next unit of computing or Nook business. This well regarded brand will continue to scale effectively with our recently announced <unk> partnership.

And the data center, our fourth Gen. Xeon scalable processor is showing strong customer demand. Despite the mixed overall market environment I am pleased to say that we are poised to ship our one millionth fourth Gen Xeon unit in the coming days. This quarter, we also announced the general availability of fourth Gen.

Cloud instances by Google Cloud.

We also saw great progress with fourth gens AI acceleration capabilities, and we now estimate more than 25% of the xeon datacenter shipments are targeted for AI workloads.

Also in Q2, we saw third party validation from M. O Commons when they publish ml perf training performance benchmark data showing that fourth Gen Xeon and Habana Goudy two are two strong open alternatives and the AI market that compete on both performance and price versus the competition.

Our strengthening positioning within the AI market was reinforced by our recent announcement of our collaboration with Boston Consulting group to deliver enterprise grade secure and responsible generative AI leveraging our goudy and fourth Gen Z on offerings to unlock business value, while maintaining high levels.

Security and data privacy.

Our datacenter CPU roadmap continues to get stronger and remains on or incrementally ahead of schedule with Emerald Rapids, our fifth Gen. Xeon scalable set to launch in Q4 of 'twenty three.

Sierra Forest, our lead vehicle for Intel three will launch in first half of 'twenty four.

Grand Rapids will follow shortly thereafter for both Sierra Forest in Grand Rapids volume validation with customers is progressing ahead of schedule multiple Sierra <unk> customers have powered on their boards and silicon is hitting all power and performance targets.

Clearwater for us the follow on to Sierra Forest will come to market in 2025 and be manufactured on Intel <unk>.

We see the server CPU inventory digestion persisting in the second half. Additionally impacted by the near term wallet share focus on AI accelerators, rather than general purpose compute in the cloud we.

We expect Q3 server Cpus to modestly decline sequentially before recovering in Q4.

Longer term, we see AI as Tam expansive to server Cpus and more importantly, we see our accelerate a product portfolio is well positioned to gain share in 2024 and beyond.

The surging demand for AI products and services is expanding the pipeline of business engagements for our accelerator products, which includes our goudy flex and Max product lines or.

Our pipeline of opportunities through 2024 is rapidly increasing and is now over $1 billion and continuing to expand with goudy driving the lion's share.

The value of our AI products as demonstrated by the public instances of goudy at AWS and the new commitments to our <unk> product line from leading AI companies, such as Huggy face instability AI. In addition to emerging AI leaders, including Indian Institute of Technology mantras proper tuck and.

Genesis cloud.

In addition to building near term momentum with our family of accelerators. We continue to make key advancements in next generation technologies, which presents significant opportunities for Intel.

In Q2, we shipped our test chip tunnel false or 12, qubit silicon based quantum chip, which uniquely leverages decades of transistor design and manufacturing investments and expertise.

Turning to PSG, Mdx and mobile ly demand trends are relatively stronger across our broad base markets like industrial and auto and infrastructure. Although was anticipated any X did see a Q2 inventory correction, which we expect to continue into Q3 in contrast PSG.

And mobile I continue on a solid growth trajectory and we see the collection of these businesses in total growing year on year and calendar year 'twenty three much better than third party expectations for mid single digit decline in the semiconductor market excluding memory.

Looking specifically at our programmable solutions group, we delivered record results for a third consecutive quarter in Q2, we announced the Intel agile at seven with the our tile triplet is shipping production qualified these site devices and volume to help customers accelerate workflows with seamless integration and the highest bandwidth.

The processor interfaces we.

We have now <unk> 11 of the 15, new products, we expect to bring to market in calendar year 'twenty three.

For any ex during Q2, Intel Ericsson and H P. E successfully demonstrated the industry's first b Rand solution running on the fourth Gen. Intel Xeon scalable processor with Intel DRAM boost and.

Mobile I continued to generate strong profitability in Q2 and demonstrated impressive traction with their advanced product portfolio by announcing a supervision ISIL in hands off design win with Porsche and the mobility as a service collaboration with Volkswagen Group that will soon begin testing in Austin, Texas.

Additionally, in the second quarter, we executed the secondary offering that generated meaningful proceeds as we continue to optimize our value creation efforts.

In addition to executing on our process and product roadmaps during the quarter, we remain on track to achieve our goal of reducing costs by $3 billion in 2023, and eight to 10 billion exiting 2025.

As mentioned during our internal foundry webinar, our new operating model establishes a separate P&L for our manufacturing group inclusive of Iff's and T D, which enables us to facilitate and accelerate our efforts to drive best in class cost structure Derisk, our technology for external foundry customers.

And fundamentally changes incentives to drive incremental efficiencies.

We have already identified numerous gains and efficiency, including factory loading.

And sort time reduction packaging cost improvements litho field utilization improvements reductions in staff things Expedites and many more.

It is important to underscore the inherent sustained value creation due to the tight connection between our business units and TD manufacturing in Iff's.

<unk> U V in the second half of the decade.

As we continue to keep Moore's law alive, and very well IMS is a hidden gem within Intel and the business's growth will be exposed and accelerated through this transaction.

While we still have work to do we continue to advance our IDM 2.0 strategy five nodes in four years remains well on track our product execution and roadmap is progressing well we continue to build out our foundry business and we are seeing early signs of success as we work to truly democratize AI.

From cloud to enterprise network edge and client.

Also saw strong momentum on our financial discipline and cost savings as we returned to profitability our.

Our executing our internal foundry model by 2024 and are leveraging our smart capital strategy to effectively and efficiently position us for the future with that I will turn it over to Dave.

Thank you Pat and good afternoon, everyone, we drove stronger than expected business results in the second quarter comfortably beating guidance on both the top and bottom line.

Prudently and aggressively managing expenses near term and driving fundamental improvements to our cost structure longer term.

Second quarter revenue was $12 9 billion.

More than $900 million above the midpoint of our guidance.

Revenue exceeded our expectations in CCG D C AI.

And mobile I, partially offset by continued demand softness and elevated inventory levels in the network and edge markets, which impacted <unk> results.

Gross margin was 39, 8% 230 basis points better than our guidance on stronger revenue.

EPS for the quarter was 13.

Beating guidance by 17.

As our revenue strength better gross margin and disciplined Opex management resulted in a return to profitability.

Q2, operating cash flow was $2 8 billion.

Up $4 6 billion sequentially.

Net inventory was reduced by $1 billion or 18 days in the quarter and accounts receivable declined by $850 million or seven days as we continue to focus on disciplined cash management.

Capital will generate more than $2 4 billion of cash and help to unlock roughly $35 billion of shareholder value.

These actions further bolster our strong balance sheet and investment grade profile with cash and short term investments of more than 24 billion exiting Q2.

We will continue to focus on avenues to generate shareholder value from our broad portfolio of assets in support of our IDM to point out strategy.

Moving to second quarter business unit results.

<unk> delivered revenue of $6 $8 billion up 18% sequentially and ahead of our expectations for the quarter as the pace of customer inventory burn slowed.

As anticipated, we see the market moving toward equilibrium and expect shipments to more closely align to consumption in the second half.

Asps declined modestly in the quarter due to higher education shipments and sell through of older inventory.

CCT showed outstanding execution in Q2 generating operating profit of $1 billion.

An improvement of more than $500 million sequentially on higher revenue improved unit costs and reduced operating expenses offsetting the impact of pre <unk> inventory reserves in preparation for the second half launch of media like.

D C AI revenue was $4 billion.

Ahead of expectations and up 8% sequentially with the Xeon business up double digits sequentially.

CPU market share remained relatively stable in Q2, and the continued ramp of Sapphire Rapids contributed the CPU AFP improvement of 3% sequentially and 17% year over year.

D C AI had an operating loss of $161 million in.

Proving sequentially on higher revenue and Asps and reduced operating expenses.

Within D C AI, our FPGA products delivered a third consecutive quarter of record revenue up 35% year over year, along with another record quarterly operating margin.

We expect this business to return to more natural demand profile in the second half of the year as we worked down customer backlog to normalized levels.

<unk> revenue was $1 4 billion below our expectations in the quarter and down significantly in comparison to a record Q2 'twenty two.

Network and edge markets are slowly working through elevated inventory levels, along gated by sluggish China recovery and telcos have delayed infrastructure investment due to macro uncertainty.

We see demand remaining weak through at least the third quarter.

Q2, <unk> operating loss of $187 million improved sequentially on lower inventory reserves and reduced operating expenses.

Mobile I continued to perform well in Q2 revenue was $454 million roughly flat sequentially and year over year with operating profit improving sequentially to $129 million.

This morning mobile App increased fiscal year 2023 outlook for adjusted operating income by 9% at the midpoint.

Intel Foundry services revenue was $232 million up forex year over year, and nearly doubling sequentially on increased packaging revenue and higher sales of IMF nanofabrication tools.

Operating loss was $143 million with higher factory startup costs offsetting stronger revenue.

Q2 was another strong quarter of cross company spending discipline with operating expenses down 14% year over year.

We're on track to achieve $3 billion of spending reductions in 'twenty three.

With the decision to stop direct investment and our client Nook business earlier. This month, we have now exited nine lines of business and Pat rejoined the company with a combined annual savings of more than $1 7 billion.

Now turning to Q3 guidance.

We expect third quarter revenue of $12 nine to $13 $9 billion.

At the midpoint of $13 4 billion, we expect client CPU shipments to more closely match sell through.

Were forecasting gross margin of 43% a tax rate of 13% and EPS of 20 at the midpoint of revenue guidance.

We expect sequential margin improvement on higher sales and lower pre tru inventory reserves.

But we're starting to see some improvement and factory under low charges. Most of the benefit will take some time to run through inventory and positively impact cost of sales.

Investment in manufacturing capacity continues to be guided by our smart capital framework, creating flexibility through proactive investment in shells and aligning equipment purchases to customer demand.

In the last few weeks, we have closed agreements with governments in Poland, and Germany, which include significant capital incentives and we're well positioned to meet the requirements of funding laid out by the U S Chips Act.

Looking at capital requirements and offsets made possible by our smart capital strategy, We expect net capital intensity in the mid Thirty's as a percentage of revenue across 23 and 24 in aggregate.

While our expectations for growth Capex have not changed the timing of some capital assets is uncertain and could land in either 'twenty three or 'twenty four depending on a number of factors.

Having said that we're confident in the level of capital offsets we will receive over the next 18 months and expect offsets to track to the high end of our previous range of 20% to 30%.

Our financial results in Q2 reflects improved execution and improving macro conditions. Despite a.

Slower than expected recovery in key consumption markets like China in the enterprise, we maintain our forecast of sequential revenue growth throughout the year.

Accelerating AI use cases will drive increased demand for compute across the AI continuum, and Intel is well positioned to capitalize on the opportunity in each of our business units.

Thank you, Dave we will now transition to the Q&A portion of our earnings presentation. As a reminder, we would ask each of you to ask one question with a brief follow up question where appropriate.

With that Jonathan can we have the first caller please.

Certainly and our first question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.

Hi, guys. Thanks for let me ask the question and congrats on the strong results are wonderful pad on the data center, the Dci side of things strong upside in the quarter, but it sounds like there's still some mixed trends going forward. So I guess a two part question can you talk about what drove the upside and where the concern is going forward and part of that concern that crowding out potential that she does.

Discussed with accelerators versus Cpus, how is that playing out and when do you expect it to end.

Yeah, Thanks, Ross and.

So I'll, just say, we executed well winning designs fighting hard in the market regaining our momentum good execution as you said, we'll see the Sapphire Rapids hit the million unit.

In the next couple of days or Z on Gen. Four so overall, it's feeling good roadmaps in very good shape. So we're feeling very good about the future outlook of the business as well as we look to fifth Gen E core P core with Sapphire and granted rapids. So all of those I would just say we're performing well.

Said, we do think that the next quarter at least will show some softness there's some inventory burn that we're still working through we do see that big cloud customers in particular have put a lot of energy into building out their high end AI training environments and that is putting more of their budgets focused or prior.

Critized into the AI portion of their build out that said, we do think this is a near term right to surge that we expect will balance over time, we see AI as a workload not as a market rate, which will affect every aspect of the business, whether it's client whether it's edge, whether it's standard data center.

Our on premise enterprise.

Of our Gen. Four is being driven by AI use cases, and obviously, we're gonna be participating more in the accelerator portion of the market with our goudy flex and Max product lines, particularly goudy is gaining a lot of momentum in my formal remarks, we said, we now have over $1 billion of pipeline six.

And the last quarter, so we're going to participate in the accelerate a portion of it.

We're seeing a real opportunity for the CPU is that workload balances over time between CPU and accelerator and obviously, we have a strong position to democratize AI across our entire portfolio of products.

Ross do you have a quick follow up.

I do I just wanted to pivot to Dave on a question on the gross margin side, a nice beat in the quarter and a sequential increase for the third quarter as well beyond the revenue increase side, which I know is important can you just walk us through some of the pluses and minuses sequentially into the third quarter and even into the back half some of the pre <unk> reversals underutilization any of those kind of Ids.

Synchronic blocks that we should be aware of as we think about the gross margin in the second half of the year. Yes. Good question right. So in the second quarter just to.

I repeat what I said in the prepared remarks that was largely a function of revenue. We had obviously beat revenue significantly and we got a good fall through given the fixed cost nature of our business and so that really was what helped us really outperform significantly on the gross margin side in the second quarter in the.

Third quarter, we do obviously at the midpoint you see revenue growth sequentially and so that will be helpful. In terms of gross margin premium we expect again pretty good fall through.

As we get that incremental revenue.

We're also going to see under loadings come down I would say modestly come down.

For two reasons, one we get that period charge for some of our under loading but some of our under loading is actually just a function of the cost of the inventory and so that will take some time to flow through.

So it will be more it'll be a modest decline, but nevertheless helpful on the gross margin front.

And then as you point out we will have pre <unk> reserves in the third quarter, but they're meaningfully down from the second quarter or like will not be a pre <unk> reserve in the third quarter, because we expect to launch that this quarter.

We have Emerald wrap is that will that will certainly have.

Some impact and then some of the other skus.

We will also impact itself coming down, but not not to zero. So we have an opportunity actually to perform better in the fourth quarter, you know obviously dependent on the revenue and so forth.

Given that <unk> reserves are likely to come off again in the fourth quarter, we should improve on a loading front in the fourth quarter as well. So there are some I think some good tailwind on the gross on the gross margin front.

Just take an opportunity to talk longer term, we will continue to be way down for some quarters on under load.

Up costs be a headwind and of course as you bring out products.

To come out in by the time, we hit 2026, but we won't be done there I mean, I think there'll be multiple opportunities over the course of multiple years to improve.

The gross margin so you know Pat.

Pat has talked.

<unk> talked about a pretty significant improvement in gross margins over time and I think what we're seeing today is the beginnings of seeing that improvement show up in the in the P&L right Ross. Thanks for the question Jonathan can we have the next one please.

Certainly one moment for our next question and our next question comes from the line of Joe Moore from Morgan Stanley . Your question. Please.

Great. Thank you Dave.

Dave I think you said in your prepared remarks that data center pricing was up 17% year on year and Sapphire.

Sapphire Rapids was the fact that there can you just talk to that and kind of.

Obviously sapphire Rapids is going to get bigger can you talk about what you expect to see with platform cost and Dci.

Platform costs, Okay, well first of all you know ASC is obviously, improving as we increase core count.

And as we get more competitive on the product offerings that enables us to you know to have more confidence in the market in terms of our pricing. So that that's certainly helpful. Obviously with the increase in core count that that affects the cost as well. So cost is obviously goes up but the longer the larger drivers of.

Of our cost structure will be around what we do in terms of the entire internal foundry model as we get off in terms of scale and and get away from these under loading charges and you know as we get past the startup costs on 5004 years, which you know data centers, certainly getting hit with and so those things I think longer term will be the biggest drive.

<unk> of gross margin improvement and as we get.

Launch Sierra for Us in the first half of next year and granted later and later.

Thereafter.

And start to produce products on the datacenter side that are really competitive.

<unk> us to even be stronger in terms of our our margin outlook and should help improve the overall P&L a data center.

Joe do you have a follow up question.

Sure just also on servers as you look to Q3, I think you talked about some of the.

The cautious trends there can.

Can you talk to enterprise versus cloud is it different between the two and also do you see are you seeing anything different in China for data center versus what Youre seeing in North America.

And as we said Joe and thanks for the question.

As we said in the prepared remarks, we do expect.

To be seeing the Tam down in Q3 somewhat driven by all of it it's a little bit of a data center.

Digestion for the cloud guys a bit of enterprise of weakness and some of that as more inventory and AR.

Graph neural networks Google's Alpha fold.

And of course, the strengthening accelerate a roadmap with goudy two three falcon shores.

Thanks for the question 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.

Yes, good afternoon, and thank you for taking the question I guess first question in your prepared remarks, you talked about AI being a Tam expander for servers and I guess I was hoping you could elaborate that on that given the productivity gains to acceleration would love to hear why you think that will grow units and particularly if you could bifurcate your commentary.

Across both training and inference.

Yeah.

C J and generally.

They're a great analogy here. That's a you know from from history. We point to you know cases like virtualization was going to destroy the CPU Tam and that ended up driving new workloads right. If you think about a D. G X platform, the leading edge AI.

Platform. It includes Cpus right why right head nodes data processing data prep dominate certain portions of the workload.

We also see as we said AI is a workload, where you might spend 10 megawatts in months training a model, but then you're going to use it very broadly for inferencing you, we do see with Meteor Lake ushering in the AI P. C generation, where you have tens of what's being responding.

In a second or two and then AI is going to be in every hearing aid in the future, including mine, where it's 10 micro watts and instantaneous. So yeah. We do see is AI drives workloads across the full spectrum of applications and for that we're going to build AI into every product that we.

Whether it's a client whether it's an edge platform for our retail and manufacturing and industrial use cases, whether it's an enterprise data center, where they're not going to stand up a dedicated 10 megawatt far but theyre not going to move.

Dollar semiconductor opportunity in AI being one of those superpowers as I call. It a driving it but it's not the only one and one that we're going to participate and broadly across our portfolio.

C. J do you have a follow up question.

Yes. Please.

You talked a little bit about <unk> and backside power would love to hear.

What youre seeing today in terms of both scaling and power benefits and how your potential foundry customers.

We are looking at that technology in particular.

Yeah. Thank you and so we continue to make good progress on our five nodes in four years and with that that culminates in 18, eight and 18, a is proceeding well and we got a particularly good response this quarter.

Two power via the backside power that we believe is a couple of years ahead as the industry measured as it against any other alternative in the industry were very affirmed by the Ericsson announcement, which is reinforcing our strong belief they have in <unk>, but over and above that I mentioned.

The in the prepared remarks, the two major significant opportunities that we made very good progress on is our big 18, a foundry customers this quarter and an overall growing pipeline of potential foundry customers test chips and process as well so we feel five nodes.

For years is on track 18, a is the culmination of that and good interest from the industry across the board I would also say that you know as part of the overall strength in the foundry business as well and maybe tying the first part and the second part of your question together is that our packaging technologies are particularly interesting.

In the marketplace in area that Intel never stumbled right. This is a area of sustained leadership that we've had and today many of the big AI machines or packaging limited and because of that we're finding a lot of interest for our advanced packaging and this is an area of immediate strength for the foundry business.

We set up a specific packaging.

Business unit within our foundry business and finding a lot of great opportunities for us to pursue their as well C. J. Thanks for the questions. Jonathan can we have the next caller. Please.

Certainly and our next question comes from the line of Timothy Arcuri from UBS. Your question. Please.

Thanks, a lot first day, if I had one for you if I look at the third party contributions they were down a little bit which was a little bit of a surprise.

But you did say that the Arizona Fab is on track can you sort of talk about that and I know last quarter. You said gross capex would be first half weighted and the offsets would be back half weighted or is that still the case. Yeah. So we did manage our capex a bit better than I was hoping we thought it would be more front end loaded. It's looking look hey, it's going to be a lot.

More evenly distributed first half versus the second half and we managed capex in particular.

This quarter really well, which I think you know obviously helped on the on the free cash flow side.

Kind of.

When you manage the Capex, you get less offsets and so that kind of drove the lower capital offsets for the quarter, but for the year, we're still on track to get the same amount of.

Capital offsets through skip that we had anticipated and that's really where most of the capital assets have.

We have come so far now obviously.

As we get into chips.

Chips incentives that that should be coming here in the not too distant future that will add to the offsets that we get we go into next year, we start getting the investment tax credit that will help on the capital offsets so there'll be more things that come.

In the future, but right now, it's largely skip and skip one end and that's a function of where the spending lands quarter to quarter, Yes, just maybe to pile on to that a bit obviously getting EU chips Act approved we're excited about that for the Germany and Poland projects, which are we will go for formal DG comp approval. We're also very.

Happy we submitted our first proposal the on track Arizona facility.

Follow up question.

I do yes, Pat So you talked about an accelerated pipeline of them.

No more than a billion dollars and I think Sandra has been recently, implying that you could do over $1 billion in Goudy next year. So the question is is that the commitment and then also at the data Center day. You are you had talked about emerging the.

GPU in the goudy roadmaps into self insurers, but but that's not going to come out until 2025. So the question is really there is wondering where that leaves customers in terms of their commitment to your roadmap given those changes.

<unk> is goudy goudy to is the shipping volume product today Goudy three will be the volume product for next year, and then Falcon shores and 25, and we're already working on Falcon shorts too for 26. So we have a simplified roadmap as we bring together our.

Our GPU and our accelerators into a single offering but the progress that we're making with goudy two it becomes more generalized with goudy free the software stack are one API approach that we're taking will give customers confidence that they have forward compatibility into.

<unk> and Falcon shores, and will just be broadening the flexibility of that software stack, we're adding a F. P. Eight we just added pie torch to support so every step along the way it gets better and broader use cases more language models are being supported more programmability is being supported in the <unk>.

Software stack and we're building that full solution set as we deliver on the best of GPU and the best the matrix acceleration and the Falcon short timeline, but every step along the way. It just gets better every software released gets better every hardware released gets better along the way to cover more of the overall.

All accelerator marketplace and as I said, we now have got Goudy three wafers first ones are enhanced so that program is looking very good and with this rapidly accelerating our pipeline of opportunity. We expect that we'll be giving you a very positive updates there in the future with both customers as well as expanded business opportunity.

Tim Thanks for the question Jonathan can we have the next caller. Please.

Certainly and our next question comes from the line of Ben Reitzes from Melius Research. Your question. Please.

Yes, Thanks, a lot I appreciate the question.

Pat you caught my attention with your comment about Pcs next year or with AI, having a century moment did.

Do you mind, just talking about that and what.

<unk> took place.

He was very clear, we unplugged from the wires and investors really grasp that what is the aha moment with AI.

To accelerate the client business.

And benefit Intel.

Yeah.

The real question is what applications are going to become AI enabled and today youre starting to see that you know people are going to the cloud and goofing around with the chat G. P. T. Writing a research paper and you know that's like Super Cool right and kids are of course.

Simplifying their homework assignments that way [laughter], but youre not going to do that for every client becoming AI enabled it must be done on the client for that to occur right. You can't go to the cloud you can't round trip to the cloud all of the new effects real time language translation in your Zoom calls you know real time transcripts.

Being able to do local illegal brief generations on our clients' one after the other right across every aspect of consumer of of.

Of our developer and enterprise efficiency use cases, we see that there's going to be a raft of AI enablement and those will be client center. Those will also be at the edge you can't round trip to the cloud you don't have the latency the bandwidth of the cost structure to round trip, let's say infancy.

Once those know those new use cases, they make me more efficient and more capable just like <unk> made me more efficient because I didn't have to plug into the wire right now I don't have to go to the cloud to get these use cases I'm going to have them locally on my P. C. In real time and cost. The fact that we see this as a true AI P C moment.

That begins with Meteor Lake in the fall of this year.

And do you have a follow up question. Please.

Yes, Thanks John .

I wanted to double click on your sequential guidance in the client business. There's been there's some concerns out there with investors that there was some demand pull in in the second quarter, given some comments from some others and just wanted to talk about your confidence for sequential growth in that business based on what you are saying and if there was any.

More color there thanks.

Let me start on that Dave can jump in the biggest change quarter on quarter that we see is now that we're now what healthy inventory levels.

Good strength in that business. When obviously, we combine that with gaining share again in Q2, So we come into the second half of the year with good momentum and a very strong product line. So we feel quite good about the client business outlook I'd just add you know normally over the last few quarters you've seen us.

Identify in the 10-Q.

Strategic sale.

Sales that we've made where we've <unk>.

Negotiated kind of attractive deals.

Which have accelerated demand, let's call. It when you look at our 10-Q, which will either be filed late Tonight or early tomorrow, you will see that we don't have a number in there.

Certainly and our next question comes from the line of Sydney Gerry from Raymond James Your question. Please.

Thank you Pat I have a question on AI as it relates to custom silicon.

It's great to see that you announced you know customer for <unk> on custom silicon, but theres a huge demand. It seems like you know for custom silicon on the AI front I think some of your Hyperscale customers are already successfully using custom silicon for us in AI accelerators. So I'm just curious what your strategy for that market.

Is that a focus area for you. If so do you have any engagements with customers right now.

Yeah, Yeah. Thank you Shirley and the simple answer is yes, and I have multiple ways to play.

And in this market obviously, one of those is foundry customers and we have a good pipeline of foundry customers for 18, a foundry opportunities on several of those opportunities that we're investigating are exactly what you described.

Are you able to.

Engage with packaging opportunities and we're seeing pipeline of those opportunities. So overall, we agree that this is clearly going to be a market. We also see that some of the ones that you've seen most in the presser about particularly high end training environments, but as we've said, we see AI being infused and everything and there's going to be a.

Trips for the edge AI trip chips for the communications infrastructure AI chips for sensing devices for automotive devices, and we see opportunities for us both as a product provider and as a foundry and technology provider across that spectrum and that's part of the unique positioning that IBM 2.0, it gives us.

The future training do you have a follow up question yes.

Yes, it's for Dave Dave It's good to see the progress on the working capital front I think previously you said your expectation is that you know free cash flow will turn positive sometime in the second half just curious if that's still the expectation and also on the gross margin front is there any I guess you know P. R. Q charges that we should be aware of as we go into fourth quarter. Thank you.

Okay. So let me let me just take a moment just to give the team credit on the second quarter in terms of working capital because we brought inventory down by $1 billion or days.

<unk> sales outstanding on our front is down to 24 days, which is exceptional so a lot of what you saw in terms of the improving free cash flow from Q1 to Q2 was working capital. So I think the team has done an outstanding job just really focusing on all of the elements that drive our free cash flow.

Our expectation is still by the end of the year to get to breakeven free cash flow. There's no reason why we shouldn't achieve that obviously.

That the net capex might be a little different this year than we can't and we thought coming into the year, but as we've talked about is there's just a focus on free cash flow of the improved outlook in terms of the business.

We think we can we can get to breakeven by by the end of the year.

Certainly and our final question for today, then comes from the line of Aaron Rakers from Wells Fargo. Your question. Please.

Yes, thanks for taking the question.

I do have a quick follow up as well just kind of going back to the gross margin a little bit.

Dave when you had guided this quarter you talked about just looking backwards. The PR Q impact was about 250 basis point I think there was also an under load impact that I think you guided to around 300 basis points. So I'm just curious of what was what were those numbers in this most recent quarter realm.

We had a little bit of a less of an impact give.

Given the revenue the revenue was higher and both of those numbers like I said will be lower in the third quarter.

Karen do you have a quick follow up.

I do just real quickly on just kind of the AI narrative, we talk about goudy a lot in the pipeline build out.

Curious as you look forward as part of that pipeline passed do you expect to see deployment in some of the Hyperscale cloud guys and competing against directly some of the larger competitors on the GPU front with Audi in cloud.

Simple answer yes.

Right and everyone is looking for alternatives you know clearly the MLP perf numbers that we've posted a recently with goudy to show very competitive numbers go significant tcl benefits for customers that are looking for alternatives and Theyre also looking for more capacity and so we're definitely engaged we already have.

Audi instances on AWS is available today already and some of the names that we described in our earnings call stability AI Genesis cloud. So some of these are the proven and I'll say at scale, a tier one cloud providers, but some of the next generation ones are also engaging so overall, yes, absolutely we expect that to.

To be the case, we're also on our own Dev cloud, we're making it easier for customers to test our goudy more quickly.

Are those opportunities so with that let me just wrap up our time together today.

We are grateful that you have joined US today, and we are thankful that we have the opportunity to update you on our business and simply put it was a very good quarter, we exceeded expectations on topline and Bottomline, we raised guidance and we look forward to the continue opportunities that we have of accelerating our business and seeing the margin improvement.

That comes in the second half of the year, but even more important to me was the operational improvements that we saw a good fiscal discipline cost saving discipline and best of all the progress that we've made right on our execution our process execution product execution that transformational journey.

That we're in and I just wanted to say a big Thank you to my team for having a very good quarter that we could tell you about today, we look forward to talking to you more particularly at our innovation in September we will be hosting an investor Q&A track and we hope to see many if not all of you there will be a great time. Thank you.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Q2 2023 Intel Corp Earnings Call

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