Q2 2024 Intel Corp Earnings Call
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Operator: Thank you for standing by, and welcome to Intel Corporation's second quarter 2024 earnings conference call. At this time, all participants are in listen only mode.
Intel Corporation: Thank you for standing by and welcome to Intel Corporation's second quarter 2024 earnings conference call. At this time all participants are in 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 1 1 on your telephone.
Operator: 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 11 on your telephone. If your question has been answered, and you'd like to remove yourself from the queue, simply press star 11 again.
Operator: 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.
John Pitzer: By now, you should have received a copy of the Q2 earnings release and earnings presentation, both of which are available on our investor relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Pat Gelsinger, and our CFO, David Zinzine. 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 contains forward-looking statements based on the environment as we currently see it, and as such, they are subject to various risks and uncertainties.
Speaker Change: Before we begin please note that today's discussion contains forward looking statements based on the environment as we currently see it and as such are subject to various risks and uncertainties.
John Pitzer: It also contains reference 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. They also provide additional information on non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures. With that, I will turn things over to Pat. Thank you, John, and good afternoon, everyone.
Speaker Change: It also contains reference to non-GAAP financial measures that we believe provide useful information to our investors.
Speaker Change: 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.
Speaker Change: They also provide additional information on non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures.
Speaker Change: With that let me turn things over to Pat.
Pat: Thank you John and good afternoon, everyone.
Patrick Gelsinger: Q2 profitability was disappointing despite continued progress on product and process roadmaps. With our new operating model firmly in place, we are accelerating actions to improve profitability and capital efficiency by more than $10 billion in 2025, which I will discuss shortly. For the quarter, we delivered sequential revenue growth in line with our forecast, despite the unexpected timing of new export control restrictions announced in May. Q2 profitability was below our expectations, due in part to our decision to more quickly ramp core Ultra-AI CPUs, as well as other selective actions we took to better position ourselves for future quarters, which Dave will address fully in his comments.
Pat: Q2 profitability was disappointing despite continued progress on product and process Roadmaps with our new operating model firmly in place we are accelerating actions to improve profitability and capital efficiency by more than $10 billion in 2025, which I will discuss shortly.
Speaker Change: For the quarter, we delivered sequential revenue growth in line with our forecast despite the unexpected timing of new export control restrictions announced in May.
Speaker Change: Two profitability was below our expectations due in part by our decision to more quickly ramp core ultra AI Cpus as well as other selective actions, we took to better position ourselves for future quarters, which Dave will address fully in his comments.
Dave: We've previously signaled that our investments to define and drive the AIP C category would pressure margins in the near term we believe the tradeoffs are worth it.
Patrick Gelsinger: We previously signaled that our investments to define and drive the AIPC category would pressure margins in the near term. However, we believe the tradeoffs are working. AI-PC will grow from less than 10% of the market today to greater than 50% in 2026. We know today's investments will accelerate and extend our leadership and drive significant benefits in the years to come. Our efforts will culminate with the introduction of Panther Lake, our first client CPU on Intel 18a, a much more performant and cost competitive process, which will additionally allow us to bring more of our tiles in-house, meaningfully improving our overall profitability.
Dave: IPC will grow from less than 10% of the market today to greater than 50% in 2026.
Dave: We know today's investments will accelerate and extend our leadership and drive significant benefits in the years to come.
Dave: Our efforts will culminate with the introduction of Panther Lake in the second half of 'twenty five.
Speaker Change: <unk> is our first client CPU on Intel <unk>, a much more performance and cost competitive process, which will additionally, allow us to bring more of our titles in house meaningfully improving our overall profitability.
Patrick Gelsinger: Another important driver of improved financial performance is the cost reduction plan we announced today. This plan represents structural improvements enabled by our new operating model, which we are pulling forward to adjust to current business trends. Having separate financial reporting for Intel products and Intel foundry clarifies and focuses roles and responsibilities across the company. It also enables us to eliminate complexity and maximize the impact of our resources. Taking a clean sheet view of the business is allowing us to take swift and broad-based actions this quarter.
Dave: Another important driver of improved financial performance is the cost reduction plan, we announced today.
Dave: This plan represents a structural improvements enabled by our new operating model, which we are pulling forward to adjust to current business trends.
Dave: Having separate financial reporting for installed products and Intel foundry clarifies and focuses roles and responsibilities across the company.
Dave: It also enables us to eliminate complexity and maximize the impact of our resources, taking a clean sheet view of the business is allowing us to take Swift and broad based actions beginning this quarter.
Patrick Gelsinger: As a result, we expect to drive a meaningful reduction in our spending and headcount beginning in the second half of this year. We are targeting a headcount reduction of greater than 15% by the end of 2025, with the majority of this action completed by the end of this year. We do not take this lightly, and we have carefully considered the impact this will have on the Intel family. These are hard, but necessary decisions.
Dave: As a result, we expect to drive a meaningful reduction in our spending and head count beginning in the second half of this year.
Dave: We are targeting a head count reduction of greater than 15% by the end of 2025 with the majority of this auction completed by the end of this year we.
Dave: We do not take this lightly and.
Dave: And we have carefully considered the impact this will have on the <unk> family.
Dave: These are hard but necessary decisions, our actions will reduce opex to approximately $20 billion in 2024, and we see a bigger impact next year with 2025 Opex targeted at $17 5 billion more than 20% below prior estimates.
Patrick Gelsinger: Our actions will reduce OpEx to approximately $20 billion in 2024, and we see a bigger impact next year with 2025 OpEx targeted at $17.5 billion, more than 20% below prior estimates. We expect further benefits in 2026 with OpEx declining in absolute dollars yet again. Even as we lower overall spending, we will continue to fund the investments needed to deliver our strategy.
Dave: We expect further benefits in 2026 with Opex to decline in absolute dollars, yet again EBIT.
Dave: Even as we lower overall spending we will continue to fund the investments needed to deliver our strategy.
Patrick Gelsinger: Our new operating model is also driving benefits to our capital requirements, giving us the transparency to more rigorously scrutinize every project and every dollar of capital. As a result, we now expect gross CapEx in 2024 to be between $25 and $27 billion. That is a reduction of over 20% from our plan entering the year and additionally reflects expectations for softer second half demand. Combined with strong execution of our smart capital strategy, including our second skip with Apollo, we expect net capital spending in 2024 of between $11 and $13 billion.
Dave: Our new operating model is also driving benefits to our capital requirements, giving us the transparency to more rigorously scrutinize every project and every dollar of capital as a result, we now expect gross Capex in 2000 2004 to be between 25 and $27 billion.
Dave: That is a reduction of over 20% from our plan entering the year and additionally reflects expectations for softer second half demand.
Dave: With strong execution of our smart capital strategy, including our second skip with Apollo, We expect net capital spending in 2024 of between 11 and $13 billion.
Patrick Gelsinger: These benefits will carry forward to next year as well. For 2025, gross capital spending is targeted between 20 and 23 billion, and net capital spending between 12 to 14 billion. Increased capital efficiency has a positive impact on gross margins over time, but we will also accelerate improvements by generating roughly one billion dollars of savings at a non-variable cost of sales in 2025. Once again, these reductions do not impact our ability to execute our plan.
Dave: These benefits will carry forward to next year as well for 2025 gross capital spending is targeted between 20, and 23 billion and net capital spending between $12 billion to $14 billion increased capital efficiency as a positive impact to gross margins over time, but we will also accelerate improvements by generating.
Dave: Roughly $1 billion of savings is not variable cost of sales in 2025.
Dave: Once again these reductions do not impact our ability to execute our plan.
Patrick Gelsinger: We designed our smart capital strategy to enable us to conservatively manage the day-to-day business to trendline growth while maintaining the operational flexibility to quickly and cost-effectively capture upside when it comes. We are taking the bold step of suspending the dividend at the beginning of the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute our strategy.
Dave: We designed our smart capital strategy to enable us to conservatively manage the day to day business to trend line growth, while maintaining the operational flexibility to quickly and cost effectively capture upside when it comes.
Dave: We are taking avid step of suspending the dividend at the beginning of the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute our strategy. We reiterate our long term commitment to a competitive dividend as cash flows improved to sustainably higher levels.
Patrick Gelsinger: We reiterate our long-term commitment to a competitive dividend as cash flows improve to sustainably higher levels. Reductions across OpEx, CapEx, and cost of sales totaled well over $10 billion in direct savings in 2025 and provide a clear line of sight to a sustainable model with the ongoing financial resources and liquidity needed to support our long-term strategy. We remain confident that we have and will continue to make the investments needed to drive long-term shareholder value, and we view cost discipline as the compass that drives effective execution, helping teams stay on track to both prioritize and achieve measurable results.
Dave: Reductions across Opex, capex and cost of sales total well over $10 billion of direct savings in 2025 and provides clear line of sight to a sustainable model was the ongoing financial resources and liquidity needed to support our long term strategy.
Dave: We remain confident that we have and will continue to make the investments needed to drive long term shareholder value and we view cost discipline as the compass that drives effective execution pumping teams stay on track to both prioritize and achieve measurable results.
Patrick Gelsinger: The operational and capital improvements we are driving will be especially important as we manage the business through the near term. While we expect to deliver sequential revenue growth through the rest of the year, the pace of the recovery will be slower than expected, which is reflected in our Q3 outlook. Specifically, Q3 will be impacted by a modest inventory digestion in CCG with DCAI and our more cyclical businesses of NEX, Altera, and Mobileye trending below our original forecasts. Our outlook reflects industry-wide conditions without any meaningful change in our market share expectations.
Dave: The operational and capital improvements, we are driving will be especially important as we manage the business through the near term, while we expect to deliver sequential revenue growth through the rest of the year. The pace of the recovery will be slower than expected, which is reflected in our Q3 outlook.
Dave: Specifically Q3 will be impacted by a modest inventory digestion in CCG with Dci and our more cyclical businesses of any ex alterra and mobile ly trending below our original forecast.
Dave: Our outlook reflects industry wide conditions without any meaningful change in our market share expectations.
Patrick Gelsinger: As we looked at Q4, normal seasonal revenue growth has historically been in a range of flat to up 5% quarter and quarter. With improved client inventory levels exiting Q3, we see Q4 revenue at the high end of that range. Let me now provide more details on our key business units, starting with Intel Foundation. A key part of our strategy is returning to process leadership with our aggressive five nodes and four year march, and the finish line is officially within sight.
Dave: As we look into Q4 normal seasonal revenue growth has historically been in the range of flat to up 5% quarter on quarter.
Dave: With improved client inventory levels exiting Q3, we see Q4 revenue at the high end of that range.
Speaker Change: Let me now provide more details by our key business units, starting with Intel foundry.
Speaker Change: A key part of our strategy is returning to process leadership with our aggressive five and.
Speaker Change: Four year March and the finish line is officially within sight, we are well into the ramp of <unk> top four and top three and top 28 is being ready for production next quarter.
Patrick Gelsinger: We are well into the ramp of Intel 4, Intel 3, and Intel 20A is being ready for production next quarter. On Intel 18A, we released the 1.0 PDK last month and are on track to be manufacturing ready by the end of this year with production wait for start volumes in the first half of 25. Panther Lake for client is now running Windows and looking very healthy.
Speaker Change: And until <unk>, we released the one point or PDK last month and are on track to be manufacturing ready by the end of this year with production wafer start volumes in the first half of 'twenty five.
Speaker Change: It relates for client is now running windows and looking very healthy.
Patrick Gelsinger: This is the first microprocessor to use RibbonFET, PowerVia, and advanced packaging, achieving a significant milestone. Clearwater Forest Preserver, which also includes Fogaros Direct and other key advanced packaging capabilities, is booted and is likewise looking very healthy. These are the first of many Intel 18A products on track to bring Intel 18A to the mass market. Importantly, the launch of 18A will be our fifth node in four years, completing an historic pace of design and process innovation and returning Intel to process leadership.
Speaker Change: This is the first microprocessor to use ribbon FET power and advanced packaging, achieving a significant milestone.
Speaker Change: Clearwater Forest for server, which also includes <unk> direct and the other key advanced packaging capabilities is booted and likewise looking very healthy.
Speaker Change: So the first of many Intel <unk> products on track to bring <unk> to the mass market.
Speaker Change: Importantly, the launch of <unk> will be our fifth node in four years, completing and historic pace of design and process innovation and returning insults of process leadership. Our team is resolute and determined to finish what we started and once we do it will unlock further growth and value creation.
Patrick Gelsinger: Our team is resolute and determined to finish what we started, and once we do, it will unlock further growth and value creation across our foundry and product businesses. Our investments in a global footprint of leading-edge capacity continue to weigh on near-term profitability, but long-term, they position us to profitably participate in the largest and fastest-growing parts of the semiconductor market. We continue to expect the investments we're driving through this year to put us on a course for meaningful financial traction, with operating profits for Intel Foundry rising in 2024 and then driving to break even, to help excel. 3, our Foundry services business.
Speaker Change: Across our foundry and product businesses.
Speaker Change: Our investments in our global footprint of leading edge capacity continues to weigh on near term profitability, but long term they positioned us to profitably participate in the largest and fastest growing parts of the semiconductor market we.
Speaker Change: We continue to expect the investments we're driving through this year to put us on a course for meaningful financial traction with operating profits for Intel foundry trusting in 2024, and then driving to breakeven.
Speaker Change: To help accelerate.
Patrick Gelsinger: Kevin has led large Foundry and Fabless businesses outside Intel and is a great addition to our leadership team. He has hit the ground running and has spent inconsiderable time with current and future Foundry customers as we ramp our process packaging and chipset capabilities for the AI era. We are also pleased to welcome Naga Chandrasekaran from Micron later this month to lead our Foundry Manufacturing and Supply Chain organization.
Kevin: Our foundry services business, Kevin has led large foundry and fabless businesses outside themselves and this is a great addition to our leadership team. He has hit the ground running despite considerable time with current and future foundry customers as we ramp our process packaging and chipset.
Speaker Change: Capabilities for the AI era.
Speaker Change: We are also pleased to welcome Naga tender Schaeffer from Micron later this month to lead to our foundry manufacturing and supply chain organization. He brings more than 20 years of leadership and deep technical R&D and manufacturing expertise that will help advance our priorities overall, our foundry team is driving X.
Patrick Gelsinger: He brings more than 20 years of leadership and deep technical R&D and manufacturing expertise that will help advance our priorities. Overall, our Foundry team is driving excellent collaboration with our design ecosystem partners. In Q2, Ansys, Cadence, Siemens, and Synopsys all announced the availability of reference flows for Intel's embedded multi-die interconnect bridge advanced packaging technology. eMIB makes it possible to cost-effectively scale to a larger silicon area by connecting multiple die in a single package, which simplifies the design process and offers design flexibility.
Speaker Change: In collaboration with our design ecosystem partners in Q2, and this cadence Siemens and Synopsys all announced the availability of referenced flows for Intel's embedded multi dye Interconnects bridge advanced packaging technology.
Speaker Change: <unk> makes it possible to cost effectively scale to a larger silicon area by connecting multiple die in a single package, which simplifies the design process and offers design flexibility.
Patrick Gelsinger: These same partners also declared readiness for Intel 18A designs, and we will be collaborating closely with the ecosystem in the second half to prepare for next year's 18A launch. Beyond Intel 18A, we are well on our way to Intel 14a and Intel 10a development. Even as we continue to extend leadership and innovation on our process roadmap, we are transitioning to a more normal cadence of node development. The normalized cadence will have positive implications for both the pace and the magnitude of ongoing R&D and capital spending requirements.
Speaker Change: <unk> partners also declared readiness for Intel <unk> sites, and we will be collaborating closely with the ecosystem and the second half to prepare for next year's <unk> launches.
Speaker Change: Beyond <unk>, we are well on our way uninstalled for Q&A and then top 10, a development even as we continued to extend leadership in innovation of our process Road map, we are transitioning to a more normal cadence of new development for.
Speaker Change: Normalized cadence will have positive implications for both pace and magnitude of ongoing R&D and capital spending requirements.
Patrick Gelsinger: Let's now turn to Intel products. In our largest and most profitable business, CCG, we continue to strengthen our position and execute well against our roadmap. The AI PC category is transforming every aspect of the compute experience, and Intel is at the forefront of this category-creating moment. Intel Core UltraVolume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models.
Speaker Change: Let's now turn to Intel products, and our largest and most profitable business CCG, we continue to strengthen our position and execute well against our roadmap.
Speaker Change: The IPC category is transforming every aspect of the compute experience and Intel is at the forefront of this category creating moment.
Speaker Change: Intel core ultra volume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models.
Patrick Gelsinger: This is an ongoing testament to the strong ecosystem we have nurtured through 40 years of consistent investment. We have now shipped more than 15 million Windows AI PCs since our December launch, multiples more than all of our competitors combined. And we remain on track to ship more than 40 million AI PCs by year end and over 100 million cumulatively by the end of 2025. Lunar Lake, our next generation AI PC, which achieved production release ahead of schedule in July, will be the next industry-wide catalyst for device refresh.
Speaker Change: Is an ongoing testament to the strong ecosystem, we have nurtured through 40 years of consistent investments. We've now shipped more than 15 million windows PC since our December launch multiples more than all of our competitors combined and we remain on track to ship more than 40 million AIP seized by year.
Speaker Change: And in over 100 million cumulative by the end of 2025.
Speaker Change: Lunar Lake our next generation AI on PC, which achieved production released ahead of schedule in July will be the next industry wide catalysts for device refresh lunulate deliver superior performance of half the power with 50% better graphics performance and 40% more power efficiency versus.
Patrick Gelsinger: Lunar Lake delivers superior performance at half the power with 50% better graphics performance and 40% more power efficiency versus the prior generation. It delivers 3X more tops gen on gen with our enhanced NPU and will be the ultimate AI CPU on the shelf for the holiday cycle. Microsoft has qualified Lunar Lake to power more than 80 new Copilot Plus PCs across more than 20 OEMs, which will begin to ship this quarter.
Speaker Change: The prior generation lunar late delivers three X more tops general Gen with our enhanced then it.
Microsoft: It will be the ultimate AI CPU on the shelf for the holiday cycle. Microsoft is qualified lunar leg to power more than 80, new co pilot plus Pcs across more than 20 Oems.
Speaker Change: We will begin to ship this quarter.
Patrick Gelsinger: Lunar Lake will quickly be joined by Arrow Lake, which will scale AI to the desktop category next quarter, and as mentioned earlier, we are already gearing up to launch Panther Lake next year to further extend our leadership position. So, very good progress in CCG and a super strong road map over the next 18 months. Now, I will now turn to DCAI.
Speaker Change: Lunar Lake will quickly be joined by Aero Lake, which will scale AI to the desktop category next quarter and as mentioned earlier, we are already gearing up to launch Panther late next year to further extend our leadership position.
Speaker Change: So very good progress in CCG and a super strong roadmap over the next 18 months let.
Speaker Change: Let me now turn to Dci.
Patrick Gelsinger: This is one of the most important areas of focus as we work to improve our performance and market position. We have a strong foundation on which to build, including the more than 130 million Xeons powering data centers around the world today. And our roadmap is designed to build upon this fast installed base to deliver greater performance and efficiency, enable AI solutions that are open, flexible, and scalable, and reduce total cost of ownership for customers.
Speaker Change: This is one of the most important areas of focus as we work to improve our performance and market position.
Speaker Change: We have a strong foundation on which to build including the more than 130 million <unk> powering data centers around the world today and our roadmap is designed to build upon this vast installed base to deliver greater performance and efficiency enabled AI solutions that are open flexible and scalable and reduce total cost of owner.
Speaker Change: Ship for customers, we took some important steps forward this quarter, starting with the launch of <unk> six with E. Core processors, formerly code named Sierra for US. This is our first Intel III product it is.
Patrick Gelsinger: We took some important steps forward this quarter, starting with the launch of Xeon 6 with E-core processors, formerly codenamed Sierra Forest. This is our first Intel 3 product and is particularly well-suited for high-density scale-out workloads. It drives performance up, power down, and dramatic rack consolidation.
Speaker Change: Particularly well suited for high density scale out workloads.
Speaker Change: <unk> performance power down in dramatic branch consolidation.
Patrick Gelsinger: Early adopters are already seeing 25% better performance per watt versus competitive solutions. This will be followed by Xeon 6 with P-core, codenamed Granite Rapids, which delivers greater performance for the most demanding workloads and will begin shipping this quarter. Looking to the future, we are excited about the launch of Clearwater Forest, our first Intel 18a server product, featuring our industry-leading hybrid bonding. Clearwater Forest has achieved power on and is on track to launch in 2025.
Speaker Change: Early adopters are already seeing 25% better performance per watt versus competitive solutions.
Speaker Change: This will be followed by Xeon six with peak core code named Grand Rapids, which delivers greater performance for the most demanding workflows and will begin shipping this quarter.
Speaker Change: Looking to the future. We are excited about the launch of Clearwater Force, our first Intel <unk> server product feature of our industry, leading hybrid bonding Clearwater Forest, that's achieved power on and is on track to launch in 2025.
Patrick Gelsinger: As we've re-established Xeon's competitive position, we are strongly positioned as the head node of choice in AI servers. We're also focused on improving our accelerator and roadmap. We're delivering a combination of performance, flexibility, and value that is very compelling to customers, particularly cloud and enterprises seeking scalable, cost-effective Gen AI solutions. Our focus on open models, open developer frameworks, and reference designs combining Xeon with accelerators through OPEA, or Open Platform for Enterprise AI, is gaining considerable market traction.
Speaker Change: As we've reestablished <unk> competitive position, we are strongly positioned as the head notice choice in AI servers. We're also focused on improving our accelerate our roadmap for delivering a combination of performance flexibility and value that is very compelling to customers, particularly cloud and enterprises seeking scalable.
Speaker Change: Cost effective <unk> solutions, our focus on open models open developer frameworks and reference designs, combining <unk> with accelerators.
Speaker Change: P. A R open platform for enterprise AI are gaining considerable market traction.
Patrick Gelsinger: Launching in Q3, Gaudi3 will take our accelerator performance to the next level and adjust two-thirds the cost of competitive offerings. To put it into perspective, we expect Gaudi3 to deliver roughly 2x performance per dollar in both inference and training versus H100. Gaudi3 has strong ecosystem support, including Dell Technologies, Hewlett-Packard Enterprise, Lenovo, Supermicro, Foxconn, Gigabyte, InvenTech, Quanta Cloud Technology, and Wishtron. Turning to NEX, we continue to see stability in Q2 while introducing new products that will expand our leadership in edge and networking into the future. As a founding member of the Ultra Ethernet Consortium, we announced an array of AI-optimized scale-out Ethernet solutions, including the Intel AI Network Interface card and Foundry chiplets, which will launch next year.
Speaker Change: Watching it Q3 goggle III, we will take our celebrated performance to the next level.
Speaker Change: <unk> two <unk> the cost of competitive offerings.
Speaker Change: To put it into perspective, we expect <unk> to deliver roughly two ex performance per dollar and both inference and training versus H 100 <unk>.
Speaker Change: <unk> has strong ecosystem support, including Dell technologies, Hewlett Packard Enterprise will Novo supermicro, Foxconn gigabyte in Ventech Quanta cloud technology and what's trial.
Speaker Change: Turning to <unk>, we continue to see stability in Q2, while introducing new products that will expand our leadership in edge and networking into the future. That's.
Speaker Change: As a founding member of the Ultra Ethernet consortium, we announced an array of AI optimized scale out Ethernet solutions, including the Intel AI network interface card and founder triplets, which will launch next year.
Patrick Gelsinger: A recent IPU adapter for the enterprise, supported by Dell Technologies and Red Hat, broadens access to the solution co-developed with Google Cloud. We expect the IPU to be accretive to growth and profitability as it becomes an increasingly important part of acceleration in the AI data center. We also announced the creation of Ultra Accelerator Link, a new industry standard dedicated to advancing high-speed, low-latency communication for scale-up AI systems, communication, and data centers.
Speaker Change: Recent IP adapter for the enterprise supported by Dell technologies and Red hat.
Speaker Change: What its access to the solution co developed with Google Cloud.
Speaker Change: We expect the <unk> to be accretive to growth and profitability as it becomes an increasingly important part of acceleration in the AI data center.
Speaker Change: We also announced the creation of ultra accelerator link a new industry standard dedicated to advancing high speed low latency communication for scale up AI systems communications and data centers.
Patrick Gelsinger: Combined with a growing number of use cases of AI on the edge, NEX is well positioned to be an accretive growth driver in 2025 and beyond. Lastly, as Altera reaches full operational separation by year-end, we are actively working toward capitalizing the business to generate proceeds for Intel on a path to an IPO in the coming years. We are excited to provide Altera with the mandate, focus, and resources to realize their growth opportunities and execute their strategy.
Speaker Change: Combined with the growing number of use cases of AI on the edge and <unk> is well positioned to be an accretive growth driver in 2025 and beyond.
Speaker Change: Lastly, as altera reaches full operational separation by year end.
Speaker Change: Actually working towards capitalizing the business to generate proceeds for Intel on a path to an IPO in the coming years. We are excited to provide us here with the mandate focus and resources to realize their growth opportunities and execute their strategy.
Patrick Gelsinger: We expect their increased autonomy will help to drive value for our shareholders, similar to the decisions we made with Mobileye two years ago and IMS last year. Before I turn the day over, let me sum up by saying it has been a hard-fought first half of the year.
Speaker Change: We expect their increased autonomy will help to drive value for our shareholders similar to the decisions. We made with mobile line two years ago and IMS last year.
Speaker Change: Before I turn to Dave Let me sum up by saying it has been a hard for first half of the year.
Speaker Change: We've achieved several important milestones and we are taking clear and decisive actions to improve our sustainable financial performance. We have entered Q3 with a very clear focus on renewed intensity to up our game and are motivated by the progress we are seeing as we execute our strategy.
Patrick Gelsinger: We have achieved several important milestones, and we are taking clear and decisive actions to improve our sustainable financial performance. We have entered Q3 with a very clear focus and renewed intensity to improve our game, and we are motivated by the progress we are seeing as we execute our strategy and realize our vision. That is the mindset driving us forward as we continue to build a stronger Intel. With that, I'll pass it over to Dave. Thank you, Pat, and good afternoon, everyone.
Speaker Change: And realize our vision.
Speaker Change: That is the mindset driving us forward as we continue to build a stronger until.
Date: With that I'll pass it over to date.
David Zinsner: Second quarter revenue was $12.8 billion, down one point year over year and up 1% sequentially. Revenue was in line with the range we provided in May after receiving notice of an export license restriction, which negatively impacted our client business in China. Intel products and Intel foundry both delivered 4% year-over-year growth offset by headwinds in our more cyclical business. However, profitability was significantly more challenged versus our previous expectations with Q2 gross margin of 38.7% and EPS of $0.02. The weaker than expected gross margin was due to three main drivers.
Date: Thank you Pat and good afternoon, everyone.
Date: Second quarter revenue was $12 8 billion.
Pat: Down one point year over year and up 1% sequentially.
Pat: Revenue was in line with the range. We provided in May after receiving notice of an export license restriction, which negatively impacted our client business in China.
Date: Intel products and Intel foundry, both delivered 4% year over year growth offset by headwinds in our more cyclical businesses.
Date: Profitability was significantly more challenged versus our previous expectations with Q2 gross margin of 38, 7% and EPS of <unk>.
Date: Weaker than expected gross margin was due to three main drivers.
David Zinsner: The largest impact was caused by an accelerated RAMP of our AI-PC product. In addition to exceeding expectations on Q2 core ultra shipments, we made the decision to accelerate the transition of Intel 4 and 3 wafers from our development fab in Oregon to our high volume facility in Ireland, where wafer costs are higher in the near term. However, this change resulted in approximately $1 billion of capital savings and will improve Intel 4 and 3 gross margins long term as we scale up the Ireland fab. Margins were also impacted by higher than typical period charges related to non-core businesses and charges associated with unused capacity. Finally, we saw an unfavorable product mix and more competitive pricing than expected.
Date: The largest impact was caused by an accelerated ramp of our AI PC product.
Speaker Change: In addition to exceeding expectations on Q2 core altra shipments, we made the decision to accelerate transition of Intel for and three wafers from our development fab in Oregon to our high volume facility in Ireland, where wafer costs are higher in the near term.
Speaker Change: However, this change resulted in approximately $1 billion of capital savings and will improve Intel for and three gross margin long term as we scale up the Ireland fab.
Speaker Change: Margins were also impacted by higher than typical period charges related to non core businesses and charges associated with unused capacity.
Speaker Change: Finally, we saw an unfavorable product mix and more competitive pricing than expected.
David Zinsner: Q2 operating cash flow was $2.3 billion, up approximately $3.5 billion sequentially on better working capital. Growth CapEx of $5.7 billion was more than offset by $11.5 billion in grants and partner contributions, highlighted by Apollo's skip investment in our Ireland factory operations resulting in adjusted free cash flow of $8.2 billion. Intel products revenue was $11.8 billion, up 4% year-over-year. The client business grew 9% year-over-year as the AIPC RAMP contributed to higher volume and ASPs, partially offset by export license restrictions communicated during the quarter.
Speaker Change: Q2, operating cash flow was $2 3 billion.
Speaker Change: Up approximately $3 5 billion sequentially on better working capital.
Speaker Change: Growth Capex of $5 $7 billion was more than offset by $11 $5 billion in grants and partner contributions highlighted by Apollo Skip investment in our Ireland factory operations.
Speaker Change: <unk> and adjusted free cash flow of $8 2 billion.
Speaker Change: Intel products revenue was $11 8 billion.
Speaker Change: Up 4% year over year.
Speaker Change: The client business grew 9% year over year as the AIP see ramp contributed to higher volume and Asps, partially offset by export license restrictions communicated during the quarter.
David Zinsner: DCAI revenue is roughly flat sequentially and down three points year over year. We expect sequential growth in the data center through the second half as demand for traditional servers improves modestly. Revenue for the NEX business was approximately flat both sequentially and year-over-year, though excluding the previously discussed inventory digestion impacting the telco market, NEX delivered 10% year-over-year growth in the first half. Q2 operating profit for Intel products was $2.9 billion, 25% of revenue, and up approximately $400 million year-over-year on higher revenue and reduced inventory reserves. Intel Foundry delivered revenue of $4.3 billion, down one point sequential Foundry services revenue more than doubled sequentially off a small base, including the start of advanced packaging revenue. However, Foundry's operating loss of $2.8 billion was worse sequentially.
Speaker Change: Dci revenue was roughly flat sequentially and down three points year over year.
Speaker Change: We expect sequential growth in the data center through the second half as demand for traditional servers improved modestly.
Speaker Change: Revenue for the <unk> business was approximately flat both sequentially and year over year. So excluding the previously discussed inventory digestion impacting the telco market any ex delivered 10% year over year growth in the first half.
Speaker Change: Q2 operating profit for Intel products was $2 9 billion.
Speaker Change: 25% of revenue and up approximately $400 million year over year on higher revenue and reduced inventory reserves.
Speaker Change: Intel foundry delivered revenue of $4 3 billion down.
Speaker Change: Down one point sequentially and up 4% year over year, driven by increased wafer volume on Intel seven and our first <unk> nodes, Intel <unk> and three <unk>.
Speaker Change: Foundry services revenue more than doubled sequentially off a small base, including the start of advanced packaging revenue.
Speaker Change: Foundry operating loss of $2 8 billion was worse sequentially, we expect operating losses to continue at approximately the same rate in Q3 with more than 85% of wafer volume is still coming from pre EV nodes with an uncompetitive cost structure and power performance and area deficit reflected in market based <unk>.
David Zinsner: We expect operating losses to continue at approximately the same rate in Q3, with more than 85% of wafer volume still coming from pre-EUV nodes with an uncompetitive cost structure and power performance and area deficits reflected in market-based prices. The continued ramp of our Intel 4 and 3 Ireland facility and elevated R&D and startup costs to support the rapid progression of our leading-edge technology development will also weigh on profitability. Mobileye's revenue of $440 million improved 84% sequentially due to the non-recurrence of the significant inventory drawdown that occurred in Q1. The rapid revenue and margin recovery indicates digestion occurred in an organized, predictable fashion, and we believe it is now complete. However, difficult conditions in China, which are impacting many Western automotive suppliers, led Mobileye to lower its revenue and income guidance for the second half.
Speaker Change: <unk>.
Speaker Change: The continued ramp of our Intel for and three Ireland facility and elevated R&D and startup costs to support the rapid progression of our leading edge technology development. We will also weigh on profitability.
Speaker Change: Mobile revenue of $440 million improved 84% sequentially due to non recurrence of the significant inventory drawdown that occurred in Q1.
Speaker Change: The rapid revenue and margin recovery indicates digestion occurred in an organized predictable fashion and we believe it is now complete.
Speaker Change: However, difficult conditions in China, which are impacting many western automotive suppliers led mobilized to lower their revenue and income guidance for the second half.
David Zinsner: Altera delivered revenue of $361 million, up 6% sequentially, with operating margins improving 4 points in the quarter. However, revenue remains below consumption as inventory positions tied to previous supply constraints are worked down. We expect double-digit sequential revenue growth through the second half as customers return to more normal buying patterns. Now turning to our Q3 guidance. Weaker spending across consumer and enterprise markets, especially in China, and continued focus on AI server investments in the cloud have reduced our TAM expectations for 2024. As a result, customer inventory levels are elevated. We expect customers to reduce inventory over the second half of the year, along with the continued modest negative impact from export controls.
Speaker Change: Alterra delivered revenue of $361 million up 6% sequentially with operating margins improving four points in the quarter.
Speaker Change: Revenue remains below consumption as inventory positions tied to previous supply constraints are worked down.
Speaker Change: We expect double digit sequential revenue growth through the second half as customers return to more normal buying patterns.
Speaker Change: Now turning to our Q3 guidance.
Speaker Change: Weaker spending across consumer and enterprise markets, especially in China and continued focus on AI server investments in the cloud.
Speaker Change: We've reduced our Tam expectations for 2024.
Speaker Change: As a result customer inventory levels are elevated.
Speaker Change: We expect customers to reduce inventory over the second half of the year along with the continued modest negative impact from export controls.
David Zinsner: These market dynamics should result in below-seasonal revenue growth in Q3, with the client business flat to down and modest growth in data center and edge markets. With an expectation of healthier inventory positions exiting the quarter and the continuation of an enterprise refresh cycle, we should see revenue growth at the high end of seasonal in the fourth quarter. We expect gross margins to be moderately weaker sequentially, with modest revenue growth and efficiencies offset by a continued ramp-up of new manufacturing nodes.
Speaker Change: These market dynamics should result in below seasonal revenue growth in Q3, with the client business flat to down and modest growth in data center and edge market.
Speaker Change: With an expectation of healthier inventory position exiting the quarter and the continuation of an enterprise refresh cycle, we should see revenue growth at the high end of seasonal in the fourth quarter.
Speaker Change: We expect gross margins to be moderately weaker sequentially with modest revenue growth and efficiencies offset by a continued ramp of new manufacturing nodes.
David Zinsner: While we will continue our work to improve near-term profitability, a heavier dependence on external wafers as we ramp AIPC products over the next several quarters will pressure gross margins. As a result of these factors, we expect revenue of $12.5 to $13.5 billion in the third quarter. At the midpoint of $13 billion, we expect gross margin of approximately 38%, with a tax rate of 13%, and EPS of negative 3 cents, all on a non-GAAP basis. As Pat discussed earlier, lower than anticipated revenue in the back half of the year is putting pressure on gross margins and earnings. We are taking aggressive actions to significantly reduce spending in response.
Speaker Change: While we will continue our work to improve near term profitability, a heavier dependence on external wafers as we ramp a ITC products over the next several quarters will pressure gross margins.
Speaker Change: As a result of these factors, we expect revenue of $12 five to $13 5 billion in the third quarter at the midpoint of $13 billion. We expect gross margin of approximately 38% with a tax rate of 13% and EPS of negative <unk> all on a non-GAAP basis.
Speaker Change: As Pat discussed earlier lower than anticipated revenue in the back half of the year is putting pressure on gross margins and earnings.
Speaker Change: We are taking aggressive actions to significantly reduce spending in response.
David Zinsner: These actions, while difficult, will help streamline the organization to improve productivity and make better decisions more quickly. Please note that we are likely to have charges associated with these actions, some of which may be included in our non-GAAP results. However, since we have not yet estimated these charges, they are not included in our guide.
Pat: These actions while difficult will help streamline the organization to improve productivity and make better decisions more quickly.
Speaker Change: Please note that we are likely to have charges associated with these actions some of which may be included in our non-GAAP results.
Speaker Change: Since we have not yet estimated these charges. They are not included in our guidance.
Speaker Change: Smart capital continues to guide the pace and breadth of our global capacity expansion and our new operating model has uncovered opportunities to build and utilize manufacturing capacity more efficiently.
David Zinsner: Smart Capital continues to guide the pace and breadth of our global capacity expansion, and our new operating model has uncovered opportunities to build and utilize manufacturing capacity more efficiently. Additionally, we've responded to lower revenue by reducing 2024 gross capital investments to a range of $25 to $27 billion, with a net capital spending of $11 to $13 billion, including our SCIP program. These adjustments ordinarily would bring us back to approximately breakeven adjusted free cash flow, but we now expect adjusted free cash flow to be modestly negative as we make payments related to the restructuring charges necessary to achieve our spending target.
Speaker Change: Additionally, we've responded to lower revenue by reducing 2024 gross capital investments to a range of 25 to 27 billion.
Speaker Change: With a net capital spending of 11% to $13 billion, including our skip programs.
Speaker Change: These adjustments ordinarily would bring us back to approximately breakeven adjusted free cash flow, but we now expect adjusted free cash flow to be modestly negative as we make payments related to the restructuring charges necessary to achieve our spending target.
David Zinsner: In 2025, with OpEx of approximately $17.5 billion and Net CapEx of $12-14 billion, we expect to achieve positive adjusted free cash flow. The suspension of the dividend, initial Altera capitalization, and positive adjusted free cash flow should significantly improve our liquidity in 2025 and position us to begin the process of meaningfully decreasing our leverage. Before I close, let me take a moment to highlight a couple of items as you model 2025. As previously mentioned, we expect operating expenses to be reduced from street expectations of $21 billion to approximately $17.5 billion.
Speaker Change: In 2025 with Opex of approximately $17 5 billion.
Speaker Change: And net capex of $12 billion to $14 billion, we expect to achieve positive adjusted free cash flow.
Speaker Change: The suspension of the dividend initial alterra capitalization and positive adjusted free cash flow should significantly improve our liquidity in 2025 and position us to begin the process of meaningfully decreasing our leverage.
Speaker Change: Before I close let me take a moment to highlight a couple of items as you model 2025.
Speaker Change: As previously mentioned, we expect operating expenses to be reduced from street expectations of $21 billion to approximately $17 5 billion.
Speaker Change: We will also reduce spending within non variable cost of sales by approximately $1 billion.
Speaker Change: While that will obviously have a positive impact on gross margins, we still only expect a roughly 60% fall through for gross margin next year.
David Zinsner: While that will obviously have a positive impact on gross margins, we still only expect a roughly 60% fall in gross margin next year. AIPC is a big winner for the company, and the early signals on the performance of Lunar Lake are very positive. We therefore intend to ramp that product significantly next year to meet market demand. While the part is great, it was originally a narrowly targeted product using largely external wafers and not optimized for cost.
Speaker Change: The IPC is a big winner for the company and the early signals on the performance of lunar Lake are very positive.
Speaker Change: We therefore intend to ramp that product significantly next year to meet market demand.
Speaker Change: While the part is great. It was originally a narrowly targeted product using largely external wafers and not optimized for cost.
David Zinsner: As a result, our gross margins will likely be up only modestly next year. The good news is that the follow-on product, Panther Lake, is internally sourced on 18A and has a much improved cost structure. As the momentum of AIPCs drives Panther Lake demand, together with the improvements from our new operating model and the cost savings from our lower capital spending, we will be in a great position to see meaningful gross margin expansion in subsequent years. Lastly, the non-controlled income from Mobileye, Altera, and IMS, and the portion of the skips earned by our partners, show up on a line below net income called non-controlling income.
Speaker Change: As a result, our gross margins will likely be up only modestly next year.
Speaker Change: The good news is the follow on product Panther Lake is internally sourced on <unk> and has a much improved cost structure.
Speaker Change: As the momentum of <unk> drives Panther Lake demand together with the improvements from our new operating model and the cost savings from our lower capital spending we will be in a great position to see meaningful gross margin expansion in subsequent years.
Speaker Change: Lastly, the Noncontrolling income from mobile Ly, Alterra and IMS and the portion of the skips earned by our partners show up on our line below net income called Noncontrolling interest.
David Zinsner: The NCI adjustment has been negligible so far, but we expect it to be a more meaningful driver, reducing our controlled share of income by approximately $700 million on a GAAP basis in 2025 and increasing as wafer production at our skip fads in Arizona and Ireland increases in subsequent years. In closing, the market has not recovered as expected, and we're obviously not satisfied with our results. We're responding by aggressively adjusting 25 spending to achieve profitability and positive adjusted free cash flow that is commensurate with the current market conditions while continuing to invest in and execute our strategy.
Speaker Change: The NCI adjustment has been negligible, so far but we expect it to be a more meaningful driver, reducing our controlled share of income by approximately $700 million on a GAAP basis in 2025, and increasing as wafer production at our skip ads in Arizona and Ireland increases in subsequent years.
Speaker Change: In closing the market has not recovered as expected and we're obviously not satisfied with our results.
Speaker Change: Were responding by aggressively adjusting twenty-five spending to achieve profitability and positive adjusted free cash flow that is commensurate with the current market conditions, while continuing to invest in and execute our strategy.
David Zinsner: In addition to these near-term actions, we're also seeing meaningful opportunities to improve financial results, leveraging our new operating model. We remain optimistic that reduced spending, operating efficiencies, and more competitive products will keep us on track to our target model at 60% gross margin and 40% operating margin by the end of the decade. I'll now turn it back over to John to start the Q&A. Thank you, Dave. We will now transition to the Q&A portion of our call. As a reminder, we would ask each of you to ask one question and a brief follow-up question where appropriate. With that said, Jonathan, can we please take the first caller?
Speaker Change: In addition to these near term actions, we're also seeing meaningful opportunities to improve financial results leveraging our new operating model.
Speaker Change: We remain optimistic that reduced spending operating efficiencies and more competitive products will keep us on track to our target model of 60% gross margin and 40% operating margin by the end of the decade.
Speaker Change: Now turn it back over to John to start the Q&A.
John: Thank you, Dave we will now transition to the Q&A portion of our call.
Speaker Change: As a reminder, we would ask each of you to ask one question and a brief follow up question, where appropriate with that Jonathan can we please take the first caller.
Operator: Certainly, our first question comes from the line of Vivek Arya from Bank of America Securities. Your question, please. Thanks for taking my question. In the big picture, there are the challenges, the product issue, the market issue, the strategic issue, and the execution issue. I'm just wondering, have the core issues been accurately diagnosed?
Speaker Change: Certainly our first question comes from the line of Vivek Arya from Bank of America Securities. Your question. Please.
Vivek Arya: Because when we look at your CPU competitor, they appear to be doing much better in this same environment. So I'm curious, what is plan B if just cost cuts don't do the job? Yeah, thank you, Vivek.
Vivek Arya: Thanks for taking my question.
Vivek Arya: That big picture or the challenges of product issue market ensure strategic issue execution issue I'm. Just wondering has the core issue has been accurately diagnose because when we look at your CPU competitor they appear to be doing much better in the same environment. So I'm curious what is plan b, if just cost cuts don't do the job.
Speaker Change: Yes. Thank you Vivek start out we'd say that this first phase of the.
Patrick Gelsinger: You know, to start out, we'd say that, you know, this first phase of the recovery, restoration, and rebuilding plan is now well underway. You know, with 18A, PDK 1.0, with Panther Lake, and Clearwater Forest powered on, our geo footprint is now starting to take shape. We have more competitive products in every segment of the industry. That said, with that foundation in place, it's time for us to focus on phase two.
Speaker Change: Recovery restoration and rebuilding plan is now well underway with 18, a PDK one point with Panther late Clearwater Forest powered on our Geo footprint now starting to take shape.
Speaker Change: More competitive products in every segment of the industry that said without foundation in place it's time for us to focus on phase II building.
Patrick Gelsinger: You know, building a more financially sustainable model for the company for the future. Many of the new products are yet to ramp into the marketplace, and we're just now getting to competitiveness. But we need to build a more sustainable business model for us that allows us to have the financial wherewithal for the long-term journey. I'd say this rebuilding that we're underway is the most significant rebuilding of Intel since the transition from memory to microprocessors, you know, four decades ago.
Vivek Arya: Building, a more financially sustainable model for the company for the future. Many of the new products are yet to ramp into the marketplace and we're just now getting to competitiveness, but we need to build a more sustainable business model for us that allows us to have the financial wherewithal for the long term journey.
Vivek Arya: I would tell you. This rebuilding that were underway. This is the most significant rebuilding of Intel since the transition from memory to microprocessors.
Speaker Change: For decades ago, we firmly believe in the IBM to point out a strategy. We're building two world class companies. The forensics that we've done this year. This clean sheet exercise as we could describe it as building a world class Intel foundry and building a world class Intel products group. These efforts, we believe have identified.
Patrick Gelsinger: You know, we firmly believe in the IDM 2.0 strategy. You know, we're building two world-class companies. The forensics that we've done this year, this clean sheet exercise, as we could describe it, is building a world-class Intel foundry and building a world-class Intel products group.
Patrick Gelsinger: You know, these efforts, we believe, have identified many opportunities for us to have, you know, financial savings. We've launched those aggressive steps today. And we believe that with the new products, a better financial position that we have achieved for a more efficient operation, we see the long-term opportunity for significant value creation for all of our stakeholders. Vivek, do you have a follow-up?
Vivek Arya: <unk> many opportunities for us to have financial savings, we've launched those aggressive steps today.
Vivek Arya: And we believe that with the new products, a better financial position that we've done for a more efficient operation that we see the long term opportunity for significant value creation for all of our stakeholders.
Vivek Arya: Do you have a follow up.
Vivek Arya: Yes, thank you, John. For my follow-up question, I'm curious what impact the restrictions, sorry, the restructuring actions have on either your R&D roadmap, your long-term external foundry opportunity, and any CHIPS Act funding. I think in the past, you had suggested about $15 billion in long-term value from external foundry. Is there any impact on those growth targets because of the restructuring action? Just what changes? With these restructuring actions? Thank you.
Speaker Change: Thank you John for my follow up I'm curious what impact do the restrictions that started the restructuring actions have on either your R&D Road map your long term external foundry.
Speaker Change: <unk> on any chipset funding I think in the past you had.
Speaker Change: The desk at about $15 billion in long term value from extended foundry is there any impact on those.
Speaker Change: Growth targets because of the restructuring actions just what changes.
Speaker Change: These restructuring actions. Thank you, yes. Thank you Vivek and fundamentally we believe our strategy will be maintained even as we get these more efficient steps in place the chips grants taking taking your questions. One by one on the chip side. These are milestone based investments we still believe that we're comfortably.
Patrick Gelsinger: Yeah, thank you, Vivek. And fundamentally, we believe our strategy will be maintained even as we get these more efficient steps in place. The CHIPS grants, taking your questions sort of one by one, on the CHIPS side, these are milestone-based investments. We still believe that we're comfortably able to execute against those milestones across the projects that we've announced. So we believe very comfortably that the CHIPS model that we've put in place, we've worked closely with the CHIPS program office and the U.S. government, and we're very comfortable with those plans.
Vivek Arya: April to execute against those milestones across the projects that we've announced so I.
Vivek Arya: I believe very comfortably that the chips model that we've put in place. We've worked closely with the chips program office in the U S government, we're very comfortable.
Vivek Arya: Those plans and also the foundry.
Patrick Gelsinger: Also, the foundry, we're seeing a lot of momentum in areas like the advanced packaging areas, where we're actually seeing quite a lot of uptake and expansion of those opportunities. So the $15 billion of LDB that we've talked about and the $15 billion revenue by the end of the decade, we're very confident that those are still very solid guidelines for us to be building to. Obviously, with the capital changes that we've made, we're going to be driving, just like a world-class foundry does, to be much more efficient with our capital investments and scrutinizing them more carefully.
Speaker Change: You haven't seen a lot of momentum.
Vivek Arya: Areas like the advanced packaging areas, where we're actually seeing quite a lot of uptake and expansion of those opportunities. So the $15 billion of LTV that we've talked about in the $15 billion revenue by the end of the decade, we're very confident that those are still very solid.
Vivek Arya: Solid guidelines for us to be building to obviously with the capital changes that we've made we're going to be driving just like a world class foundry does to be.
Vivek Arya: A much more efficient with our capital investments and scrutinizing them more carefully and now that we've.
Patrick Gelsinger: And now that we've paid the capital to catch up, and I'll call this catch-up capital, you know, we had no spare capacity, we had no site ahead, shell ahead, we had no capacity to catch up. As those investments are now largely completed, we're able to focus much more on capital efficiency for the future and aligning our capital spend to the market signals as we see to the future of our products as well as the foundry, You know, finally, I'll just say again, we're building this against the market outlook; we're going to flex our investments, you know, up and down appropriately, and we've now established a model with our smart capital to have that effectiveness that we can scale up and down, you know, according to market conditions.
Vivek Arya: Paid the capital to catch up and I view this catch up capital we had no spare capacity. We had no cider heads shall ahead, we had no capacity to catch up as those investments are now largely completed we're able to focus much more on capital efficiency for the future and aligning our capital spend to the <unk>.
Vivek Arya: Market signals as we see to the future of our products as well as the foundry commitments that we have in place finally, I'll just say again.
Vivek Arya: Building this against the market outlook, we're going to flex our investments.
Vivek Arya: And down appropriately and we've now established a model with our smart capital to have that effectiveness that we can scale up and down to market conditions. So we feel like all of the things that we said for our strategy on track and we're now moving into phase two of the execution of that strategy. Thanks, Jonathan can we have the next caller. Please.
Patrick Gelsinger: So we feel like all of the things that we said about our strategy are on track, and we're now moving into phase two of the execution of that strategy. Thanks, Vivek. Jonathan, can we have the next caller, please?
Operator: Certainly. And our next question comes from the line of Ross Seymour from Deutsche Bank. Your question, please? Hi, guys. Thanks for asking the question. I kind of want to follow up on the first two and maybe just ask it a different way.
Speaker Change: Certainly and our next question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.
Ross Seymore: Guys. Thanks, Let me ask the question kind of want to follow up on the first two and Pat maybe just ask it a different way.
Ross Seymour: Part of what you're saying sounds like you're adjusting your spending across the board to reflect the macro reality, slower growth, et cetera, et cetera. But it seems like that would be difficult to do if it didn't impact any of the structural dynamics as well. So I guess the real question is, are there any changes either to your competitiveness, the structure of the company, the long term, you know, $100 billion target that you just saw weren't happening, and therefore, you felt these cuts were necessary?
Ross Seymore: Part of what Youre, saying it sounds like Youre adjusting your spending across the board to reflect the macro realities slower growth et cetera, et cetera, but it seems like that would be.
Speaker Change: Difficult to do if it didn't impact any of the structural dynamics as well. So I guess the real question is are there any changes either to your competitiveness the structure of the company and the long term $100 billion target that you just saw weren't happening and therefore felt these cuts were necessary.
Speaker Change: Any of the structural changes or can you describe any of the structural changes and what the outcome to your financial targets might be.
Ross Seymour: So do any of the structural changes, or can you describe any of the structural changes and what the outcome to your financial targets might be? Yeah, let me, you know, point you back to what I said at the start. We started this forensics, this clean sheet analysis, concurrent with the rolling out of our new operational model. We said, we have to be a world class foundry; we are going to benchmark ourselves against world class foundries.
Speaker Change: Let me.
Speaker Change: Point, you back to what I said at the start we started this forensics this clean sheet analysis.
Ross Seymore: Concurrent with the rolling out of our new operational model. We said we have to be a world class foundry, we are going to benchmark ourselves against World class foundries and Thats, what Intel foundry is going to go.
Ross Seymour: And that's what Intel Foundry is going to become. And we've uncovered a lot of things, a lot of inefficiencies, a lot of ways that we can drive our capital footprint more effectively, you know, and every aspect of that business is being analyzed. And you know, how we do maintenance, how we procure chemicals, you know, how we run and price wafers and shuttle lots and everything like that. So a clean sheet analysis.
Ross Seymore: Become and Thats uncovered a lot of things a lot of inefficiencies a lot of ways that we can drive our capital footprint more effectively in every aspect of that business is being analyzed and how we do maintenance how we.
Vivek Arya: <unk> chemicals, how we run and price our.
Ross Seymore: Wafers and shuttle lots and everything like that so clean sheet analysis. Similarly on the product side. We've done exactly that same analysis, what does a world class Fabless company looked like and we uncover quite a lot of areas, where we don't leverage industry eyepiece were not using our EDA vendors as effectively.
Patrick Gelsinger: Similarly, on the product side, we've done exactly that same analysis: what does a world-class fabless company look like? And we uncover quite a lot of areas where we don't leverage industry IPs, we're not using our EDA vendors as effectively, you know, we've done too many steppings, you know, we validate versus build in design quality. So many of these things are steps that we're taking to be a world class fabricator company, and these are significant structural steps. You know, we also realized that as an IDM 1.0, we were never built for efficiency; we were built for leadership.
Ross Seymore: We've done too many stepping we validate versus building design quality. So many of these things are steps that we're taking to be a world class Fabless company and these are significant structural steps. We also realize that as an IDM. One point, we were never built for efficiency we were.
Vivek Arya: Built for leadership and now as we add this focus on efficiency, we see a lot of opportunities I'm, having each of the four business areas client networking and data center look at their own portfolios, even though those with the right product areas for us for the future and similarly, the portfolio over Intel foundry business and that's the.
Patrick Gelsinger: And now as we add this focus on efficiency, we see a lot of opportunities. I'm having each of the four business areas, you know, client, networking, and data center, look at their own portfolios, even though those are the right product areas for us for the future. And similarly, the portfolio over Intel foundry business, and that's the work that we've now been undertaking. And we're now accelerating, you know, based on the less than expected quarterly results, we're accelerating those impacts, we're going to drive that in the second half of this year. We want to get these restructurings done quickly, so that we can move forward more aggressively with the product lines next year.
Vivek Arya: Work that we've now been undertaking and we're now accelerating based on the less than expected quarterly results. We're accelerating those impacts we're going to drive that in the second half of this year, we want to get these restructurings done quickly. So that we can move forward more aggressively with the product lines next year.
Patrick Gelsinger: In terms of the long-term forecast, we're clearly tempering our view of how fast we can grow in the near term based on the market conditions, but our model is built so that we will scale up or scale down the capital requirements appropriate to the market conditions we see.
Vivek Arya: On the long term forecast, we're clearly tempering our view of how fast we can grow in the near term based on the market conditions, but our model was built that we will scale up or scale down the capital requirements appropriate to the market conditions. We see we believe the long term guidance that we've given you the 60 40 getting too.
Patrick Gelsinger: We believe the long-term guidance that we've given you the 6040, you know, getting to the foundry business model, and we've described the growth areas that we've said, you know, those are larger portions of our business, we believe those are still achievable in the long term. In that regard, and we're on track, you know, for many of those things in the models that we're laying out in today's actions will help Ross, do you have a quick follow-up? Yeah, I do.
Ross Seymore: The foundry business model, we've described the growth areas that we've said.
Vivek Arya: Those are larger portions of our business. We believe those are long term still achievable.
Ross Seymore: In that regard and we're on track for many of those things in the models that we're laying out in today's actions will help accelerate us achieving those roster.
Ross Seymore: Ross do you have a quick follow up.
Ross Seymour: Dave, you went through with good details, the cost structure, and what would change the puts and takes for next year. I wondered, I know you're not going to guide to 2025 revenue, but the puts and takes from maybe a competitive positioning point of view, how you feel in CCG, DCAI, primarily, relative to the competition, any sort of tailwind, headwind analysis or description for 2025 would be, Yeah, sure. On the client side, you know, obviously, we feel very good.
Ross Seymore: Yes, I do Dave you went through with good details the cost structure and what would change the puts and minor puts and takes for next year I Wonder I know youre not going to guide to 2025 revenue, but the puts and takes from maybe a competitive positioning point of view, how you are feeling in CCG DC AI primarily.
Speaker Change: Relative to the competition any sort of tailwind headwind analysis or description for 25, it would be helpful. Sure.
David Zinsner: Given our AI-PC position, we're leading that new product category. And, you know, I think we talked a little bit in the prepared remarks about Lunar Lake, our next product coming in after Meteor Lake and the performance of that. So that looks like a phenomenally good product and position.
Speaker Change: On the client side, obviously, we feel very good.
Speaker Change: Given our AIP C position, where we're leading that.
Speaker Change: That new.
Speaker Change: Product category and.
Speaker Change: I think we talked a little bit in the prepared remarks about lunar Lake our next product coming in after year Lake and the performance of that so that looks like a phenomenally good.
Ross Seymore: Product in position.
Ross Seymore: We're making the early inroads on the AI side of data center, and that's only going to grow.
David Zinsner: You know, we're making early inroads on the AI side of data centers, and that's only going to grow as we go into next year. The big question is, when does the kind of traditional CPU market recover? You know, it has been tempered this year and, of course, affected by other regions of the world, like China spending and so forth. You know, that's obviously been a soft space.
Ross Seymore: As we go into next year. The Big question is when does the kind of traditional CPU market recover it has been tempered this year and of course affected by other regions of the world like China spending and so forth you know thats, obviously been a soft space and so we will have to see how that plays out and then.
Ross Seymore: Any ex obviously also outside of the telco spaces is starting to recover and then we have these other businesses.
Ross Seymore: Alterra is starting to recover now so we're optimistic that next year will be a good year for them.
David Zinsner: And so we'll have to see how that plays out. And then, you know, NEX, obviously, also, outside of the telco space, is starting to recover. And then we have these other businesses, you know? Altera is starting to recover now. So we're, you know, optimistic that next year will be a good year for them. And, you know, we'll have to see how Mobileye plays out ultimately. I think on the margin front, you know, I talked about our kind of tempered view of gross margins next year, given the ramp of Lunar Lake, which, you know, with memory and package and, you know, almost all of the material getting sourced outside, and we're seeing inflation in that space, that is impacting it. But, you know, that part is followed by Panther Lake.
Ross Seymore: See how <unk> plays out ultimately I think on the on the margin front I talked about our kind of tempered view of gross margins next year.
Ross Seymore: Given the ramp of lunar lake, which with memory and package and.
Ross Seymore: Almost all of the materials getting sourced outside and they're seeing we're seeing inflation.
Ross Seymore: Inflation in that space that is impacting it.
Ross Seymore: But that part is followed by Panther Lake that comes back into the Fab and I think one of the bigger stories will have once we get beyond next year is.
David Zinsner: That comes back into the fab. And I think one of the bigger stories we'll have once we get beyond next year is, you know, kind of the resurgence of our internal facilities to start taking on a lot of the capacity that we had to move into. External sources should provide some meaningful improvement in terms of profitability. And then, of course, we've done a lot, as Pat talked about, in terms of restructuring the business, and those will start to show up next year but will be even more impactful the following year, including the new operating model.
Ross Seymore: Kind of the resurgence of our internal facilities to start taking on a lot of that capacity that we had to move into.
Ross Seymore: External sources should provide some meaningful improvement in terms of in terms of profitability and then of course, you know we've done a lot as Pat talked about in terms of restructuring the business and we will start to show up next year, but will be even more impactful the following year.
David Zinsner: So I think the good news for us is we actually don't need a ton of growth to see our model play out, both in the kind of medium term and long term, in terms of growth margins and operating margins. And if we do get the growth, it puts us in an even better position. Thank you, Ross.
Speaker Change: <unk> the new operating model. So I think the good news for US is we actually don't need a ton of growth to see our model play out.
Speaker Change: Both in the kind of medium term and long term in terms of gross margins and operating margins and.
Speaker Change: And if we do get the growth it puts us in even better position.
Operator: Jonathan, can we have the next caller, please? Certainly. And our next question comes from the line of CJ Mews from Cantor Fitzgerald. Your question, please.
Ross Jonathan: Ross Jonathan can we have the next caller. Please certainly and our next question comes from the line of C. J Muse from Cantor Fitzgerald. Your question. Please.
CJ Mews: Yeah, thank you for taking the question. I guess, Dave, as a follow-up to that prior question, I was hoping you could perhaps speak to, you know, how to think about gross margins beyond 25. You know, it's obviously very hard to offer leverage when you're investing in both foundry capacity and, at the same time, outsourcing meaningful tiles to TSM. So, encouraging that you're bringing Panther Lake back in-house, how should we think about incremental margins there and any of the other kinds of moving parts that you've been speaking about on this call, including the unfavorable product mix and the more competitive pricing? Is that just a near-term kind of phenomenon or something else we should be thinking about, you know, in 25 places?
Speaker Change: Yes. Thank you for taking my question I guess, Dave a follow up to that prior question was hoping you could perhaps speak to how to think about gross margins beyond 'twenty five.
Speaker Change: Obviously very hard to offer the leverage when you're investing in books foundry capacity and at the same time outsourcing meaningful titles to TSM, so encouraging that youre, bringing Panther Lake back in house, how should we think about incremental margins there in any of the other kind of moving parts.
Speaker Change: You've been speaking about on this call including.
Speaker Change: The unfavorable product mix and the more competitive pricing is that just a near term kind.
Speaker Change: Kind of phenomenon or something else, we should be thinking about into 'twenty five 'twenty six.
David Zinsner: Yeah, yeah, as I talked about with Ross, CJ, you know, the good news for 26 for us is that it really begins the shift back to the internal manufacturing footprint for a lot of our tiles. And so bringing back more wafers to the internal network will meaningfully improve the cost structure. You know, I think the adjustments in CapEx, which are clearly helpful in terms of cash flow in the near term, will become really beneficial to the cost structure as depreciation becomes kind of a less of a headwind for us. So that will also be helpful.
Speaker Change: Yes, so as I talked about to Ross C J.
Speaker Change: The good news for 2006 for US is that that really begins to shift back to the internal manufacturing footprint for a lot of our titles.
Speaker Change: And so bringing back more wafers to the internal.
Ross Seymore: Network will meaningfully improve the cost structure.
Speaker Change: I think the adjustments in Capex.
Speaker Change: Clearly helpful in terms of cash flow in the near term become really beneficial to the cost structure as depreciation becomes kind of.
Speaker Change: Less of a headwind.
Speaker Change: For us so that will also be helpful. And then like I said, we've got all these structural improvements that are coming our way both from the actions. We've taken today about the new the new operating model and decisions will get made on a go forward basis that will optimize our business model going forward I think 26 should be a good year for us in terms of.
David Zinsner: And then, like I said, we've got all these structural improvements that are coming our way, both from the actions we've taken today, but the new, you know, new operating model, and decisions will get made on a going forward basis that will just optimize our business model going forward. I think, you know, 26 should be a good year for us in terms of gross margins. We'll save the actual number, you know, for a later date when we have more visibility into how things are playing out.
Speaker Change: Gross margins will save the actual number for a later date when we.
Speaker Change: You'll have more visibility into how things are playing out I think from a mix perspective.
David Zinsner: I think from a mixed perspective, you know, it's probably not going to be a big, you know, headwind or tailwind for us, just strict mix, other than, you know, as we move towards more leading-edge wafers, the margins on those wafers are significantly better than, you know, the margins in pre-EUV nodes. So that will be one factor that will certainly help us. In that regard, that also helps us on the pricing side because, obviously, from a wafer perspective, we get better pricing on EUV wafers as opposed to pre-EUV wafers.
Speaker Change: It's probably not going to be a big.
Speaker Change: Headwind or tailwind for us just strict Mitch.
Speaker Change: Mix other than as we move towards more leading edge wafers the margins on those wafers are significantly better.
Speaker Change: Then the margins in <unk>. So so that will that will be one factor that will certainly help us. It also in that regard that also helps us on the pricing side, because obviously from a wafer perspective, we get better pricing on <unk>.
Speaker Change: Wafers as opposed to.
Speaker Change: Pre the wafers and then ultimately I think on pricing it will really come down to when we have a competitive process and we have competitive products running on a competitive process.
David Zinsner: And then ultimately, I think on pricing, you know, it will really come down to when we have a competitive process, and we have competitive products running on a competitive process, and we're delivering what the customers want. That helps us in terms of the pricing dynamic, and we're getting to the place, as Pat talked about, where we're starting to deliver on all those fronts, and so I feel good about our opportunity to realize that in the form of pricing as we progress through the next few years.
Speaker Change: And we are delivering what the customers want and that helps us in terms of the pricing dynamic.
Speaker Change: We're getting to the place that Pat talked about where we are starting to deliver on all those fronts and so I.
Pat: I feel good about our opportunity to realize that in the form of pricing as we progress through the next few years and just one thing to add on top of that just to clarify with Panther Lake already powered on rate and showing good health that is a product that we start ramping in the second half of next year.
David Zinsner: And just one thing to add on top of that, just to clarify, with Panther Lake already powered on and showing good health, that is a product that we will start ramping up in the second half of next year. So we'll start to see some of those benefits, but obviously, the huge volume benefits of that really are in 26 where we'll be very aggressive at bringing both the wafers home on a more competitive process with a more competitive product, with Panther Lake offsetting the volumes of Lunar Lake, which is almost entirely outsourced. So we bring tiles home with a more competitive product and a more competitive process, and that really is, I'll say, the story that will start to unfold as we talk to you more next year. C.J.
Speaker Change: Alright, so we'll start to see some of those benefits, but obviously the huge volume benefits of that really are in 2006, when we will be very aggressive at bringing the both the wafers home on a more competitive process with a more competitive product with Panther like offsetting the volumes of lunar Lake, which was almost entirely outsourced so we bring titles.
Speaker Change: With a more competitive product on a more competitive process and that really is I'll tell you the story.
Speaker Change: We'll start to unfold as we talk to you more next year.
CJ Mews: Do you have a quick follow-up? Yeah, just a quick one on OpEx. You gave us the 17.5 for all of calendar 25, but could you share with us what you think the extra rate would look like? I'm coming to around 4.25 billion. Is that in the ballpark?
Speaker Change: Do you have a quick follow up yes.
Speaker Change: Yes, just a quick one on Opex you gave us the 17 five for all of calendar 'twenty five but could you share with us what you'd say the extra rate would look like I'm coming to around $4 5 billion is that in the ballpark.
David Zinsner: Yeah, I'll say, you know. Given that some of the actions we're taking will kind of go through at least the early part of next year, we're going to enter at a higher number than we're going to exit. I'll give you that.
Speaker Change: Yeah I'll say.
Speaker Change: No.
Speaker Change: Given that some of the actions, we're taking will kind of go through at least the early part of next year, we're going to enter at a higher number than we're going to exit also gave you that and we should be down in 'twenty six relative to 'twenty five.
Speaker Change: Give me some time as we progress through the year.
David Zinsner: And we should be down in 26 relative to 25. Give me some time as we progress through the year to start to fine-tune the budget for 26, and I'll give you more clarity around that. Thank you, TJ.
Speaker Change: Start to fine tune the budget for 2006, and I'll give you more clarity around that.
Operator: Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please. Great, thank you.
Speaker Change: Thank you TJ and Jonathan can we have the next question. Please.
Speaker Change: Certainly and our next question comes from the line of Joe Moore from Morgan Stanley. Your question. Please.
Joe Moore: You talked about the server roadmap with Sierra Forest shipping and Granite Rapids shipping this quarter. Can you talk about where that puts you competitively? Do you think you've kind of closed the gap, or is it a leadership product, and you know obviously Clearwater Forests is the longer-term focus, but where are we in the interim? Yeah, thank you.
Speaker Change: Great. Thank you you talked about the server roadmap with CF for shipping and granite rapid shipping this quarter can you talk about.
Joe Moore: How that where that puts you competitively do you think youre kind of.
Speaker Change: Close the gap and leadership product.
Speaker Change: Obviously clearwater for us as it is the longer term focus, but where are we in the interim.
Patrick Gelsinger: And obviously, you know, Sierra Forest, right, E-core product, very efficient, but a new category for us. So we have to go win sockets with it. Early customer feedback, very positive. As we said, greater than 25% TCO value that they're seeing from it. But it's early, and it's RAMP.
Speaker Change: Thank you and obviously youll see our forest right E core product very efficient, but a new category for us. So we have to go win sockets with this early customer feedback very positive.
Speaker Change: As we said greater than 25% <unk> value that they're seeing from it but it is early in its ramp.
Speaker Change: Janet Rapids is really the P core I'll say the more traditional xeon for us and we will start that ramp.
Speaker Change: This quarter, but it will take us or anything in the server market, winning back share and winning back sockets as a longer term cycle.
Patrick Gelsinger: Granite Rapids is really the P-core, I'll say the more traditional Xeon for us. And we'll start that RAMP this quarter. But it will take, like anything in the server market, you know, winning back share, winning back sockets is a longer-term cycle for that. But there are a lot of encouraging signs for Granite Rapids, even though a lot of the data center energy right now is on the AI build out, as you know.
Speaker Change: For that but a lot of encouraging signs for grain at rapids, even though a lot of the data center energy right now is on the AI build out as you know so in this environment, where largely facing a period where much of the investment energy is going into the AI footprint. So we're having to fight to win those sockets back.
Speaker Change: But grant Rapids looks very positive the early health of Clearwater Forest is really spectacular.
Patrick Gelsinger: So in this environment, you know, we're largely facing a period where much of the investment energy is going into the AI footprint, so we're having to fight to win those sockets back. But Granite Rapids looks very positive, and the early health of Clearwater Forest is really spectacular.
Speaker Change: This is a really stunning.
Speaker Change: Technical achievement with the new design <unk>. This level of health. This early in a major server product is really spectacular the new <unk> direct and should have substantial tcl benefits for next year and then the next P. Core version of that on <unk> is also showing very good not in fab, yet but showing.
Speaker Change: Very good design progress so we feel like the roadmap gets more competitive and with it we believe our market share position is fairly alright, I'll say static right. So year on year, we do see that overall the our market share is more modest in the second half this year. So the <unk> six share.
Patrick Gelsinger: You know, this is a really stunning technical achievement, you know, with the new design, 18A. This level of health, this early in a major server product, is really spectacular. The new Foveros Direct should have substantial TCO benefits for next year. And then the next P-core version of that on 18A is also showing very well, you know, not in fab yet, but showing very good design progress. So we feel like the roadmap is becoming more competitive.
Speaker Change: And we're stabilizing our overall position in the marketplace.
Speaker Change: We believe as we then go to fight to win back one of the good things that we've seen for our server market as the AI had nodes, where we're quite advantage and we're seeing a lot of interest in xeon being the head node of choice for anybody's accelerator, including ours. So a lot of things to unpack there, but we do feel like our position a stabilized.
Patrick Gelsinger: And with it, you know, we believe our market share position is fairly, right, I'll say, you know, static, right, year on year. But we do see that overall, our market share is more modest in the second half this year. So the x86 share, and we're stabilizing our overall position in the marketplace, you know. We believe, as we then go to fight to win back, one of the good things that we've seen for our server market is the AI head nodes, where we're quite advantaged. And we're seeing a lot of interest in Xeon being the head node of choice for anybody's accelerator, you know, including ours. So I have a lot of things to unpack there.
Speaker Change: And strengthening with our products and the roadmap only improves from here Joe do you have a follow up.
Patrick Gelsinger: But we do feel like our position is stabilizing and strengthening with our products, and the roadmap only improves from here. Joe, do you have a follow-up?
Joe Moore: Yeah, just on the notion that AI has kind of stolen some of the focus from servers, it seems like we would be looking at a ceiling in overall power budgets in a couple of years. That would mean we need to invest in traditional server ecosystems and maybe do a significant refresh. You know, do you see any indications of that? And given that, you know, I perceive you guys as sort of stronger in enterprise than in cloud right now, like, how are you positioned to take advantage of that when it does come? Yeah, thanks, Joe.
Joe Moore: Yes, just on the notion that AI is kind of still on some of the focus from server. It seemed like we would be looking at a ceiling in overall power budgets and a couple of years that would mean, we need to invest in traditional server ecosystems, and maybe do a significant refresh do you see any indications of that and given that I presume.
Speaker Change: You guys, just sort of stronger in enterprise and.
Speaker Change: Right now like how are you positioned to take advantage of that when it does come yes. Thanks, Joe and we do think that the enterprise market right as a more favorable market for us and we do have some early indications of positive cycle, there, but I'll say, it's too early to give you any real firm indications, but we are.
Patrick Gelsinger: And we do think that the enterprise market, right, is a more favorable market for us. And we do have some early indications of a positive cycle there. But I'll say it's too early to give you any real firm indications.
Speaker Change: Starting to see I'll say better buying behavior better signals from our Oems in the enterprise market. Similarly for the cloud market. We do believe there will be a refresh cycle right as people get their AI strategies in place the Tcl benefits of a server refresh now as we start talking about three ex Forex Consol.
Patrick Gelsinger: But we are starting to see, I'll say, better buying behavior, and better signals from our OEMs in the enterprise market. Similarly, for the cloud market, we do believe there will be a refresh cycle, right? As people get their AI strategies in place, the TCO benefits of a server refresh, now that we start talking about 3x, 4x consolidation ratios that they can have on their traditional cloud environments, their container delivery environments, these are quite substantial.
Speaker Change: <unk> ratios that they can have on their traditional cloud.
Speaker Change: Cloud environments, they're container delivery environments. These are quite substantial so we do believe that as our products get to be more competitive and there is a natural refresh cycle on that that the markets will be more favorable for the traditional CPU market, but of course, the story is CPU plus GPU right and Thats the.
Patrick Gelsinger: So we do believe that as our products get to be more competitive, right? And there is a natural refresh cycle for that, the markets will be more favorable for the traditional CPU market. But of course, the story is CPU plus GPU, right?
Patrick Gelsinger: And that's the bigger message that we'll be delivering. And obviously, as Gaudi3 starts shipping the CPU plus GPU use cases like we described with OPEA, that will also help us position ourselves on both sides of the cloud and the enterprise market for both CPU and GPU. So that's the strategy that we're building toward. Thank you, Joe.
Speaker Change: Bigger message that we will be delivering and obviously as goudy three starts shipping.
Speaker Change: The CPU plus GPU use cases like we've described with <unk> that will also help us for positioning on both sides of the cloud and the enterprise market for both CPU and GPU. That's the strategy that we're building towards.
Jonathan: Thank you Joe Jonathan can we have the next question. Please certainly and our next question comes from the line of Timothy Arcuri from UBS. Your question. Please.
Operator: Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Timothy O'Curry from UBS. Your question, please. Sure, thanks.
Timothy O'Curry: Dave, can you explain again how June's gross margin was so much worse than you thought just three months ago? I mean, you know, revenue is basically in line. I know you talked about mix, but it seems like it was probably a pretty small part of it, mix was, and it was really more the decisions around Intel 4 and 3. So can you just explain again? I'm not sure why that was such a big factor.
Timothy Arcuri: Sure. Thanks.
Timothy Arcuri: Can you explain how June gross margin was so much worse than you thought just three months ago. I mean revenue is basically in line I know you talked about mix.
Speaker Change: And it seems like it was probably a pretty small part of it mix wasn't it was really more of the decisions around until 43. So can you just explain again I'm not sure I'm not sure I understand why that was such a big yeah. Okay.
David Zinsner: Yeah. Okay, that was the biggest one. Let me, I'll just say that there were a couple other things that, you know, we had to do some write-offs related to legacy businesses that impacted us. Our utilization was a bit lower, that did impact us. But the biggest one was the shift.
Speaker Change: Okay that was the biggest one let me I'll just say that there were a couple of other things that we had to do some write offs related to legacy businesses that impacted us our utilization was a bit lower that did impact us but the biggest one was the shift we were originally planning to ramp.
David Zinsner: We were originally planning to ramp up Meteor Lake, Intel 3, and even, you know, run production on Intel 4, or sorry, Intel 4, and then run production on Intel 3 in Oregon, which is our, or TDFAB, our process technology FAB, kind of our development FAB. But we made the decision to more quickly shift all of that over to Ireland. And it's a good move because it saves capital; we don't have to spend capital twice, essentially.
Speaker Change: Media Lake.
Jonathan: Until three and even run production on until four sorry, it's helpful. And then run production on until three.
Jonathan: In Oregon, which is R.
Jonathan: Our TD fab, our process technology fab kind of our development path.
Jonathan: We made the decision to more quickly shift all of that over to Ireland and it's a good move because it saves capital we don't have to spend capital twice essentially and.
David Zinsner: And it, you know, starts to mature the Intel 4 and 3 processes in Ireland more quickly. The downside of that is wafers are expensive right now. And so we get this kind of early ramp of the product at a much higher wafer cost that we're pushing through the system. And that puts pressure on the margins, and that's going to carry into next quarter.
Jonathan: It starts to mature the Intel foreign three processes in Ireland more quickly.
Jonathan: The downside of that is the wafers are expensive right now and so we get this kind of early ramp of the product at a much higher wafer cost that we're pushing through the system and that puts pressure on the margins that's going to carry into next quarter. I mean, we will do better in next quarter, obviously, but we're going to do more volume and the margins will be.
David Zinsner: I mean, we will do better in the next quarter, obviously, but we're going to do more volume, and the margins will be below the corporate average because while we're improving the wafer cost, it's still not to the point where it's above the corporate average yet. And so it will weigh down on margins for the third quarter as well. After that, it gets more and more mature, the cost structure gets better, and the situation on Meteor Lake will improve immediately. Jim, do you have a quick follow-up?
Jonathan: Below the corporate average because of.
Jonathan: Because while we're improving the wafer cost it's not still not to the point, where it's above corporate average yet.
Tim: And so it will weigh down on margins for the third quarter as well after that we started it gets more and more mature the cost structure gets better and situation I'm here like will improve meaningfully Tim do you have a quick follow up.
Timothy O'Curry: Yeah, Pat, um, can you just talk about the founding strategy given the CapEx cut? I guess my question is, how do you sort of execute on the plan with this lower CapEx? I mean, kind of on the one hand, you keep talking about, you know, bringing all these wafers back in house to help throw some margin in by 2026. But I also hear about a lot more outsourcing to TSMC, even in real time.
Tim: Yes, Pat can you just talk about the standing strategy given the Capex cut.
Tim: Yes. My question is how do you sort of execute on the plan with the slower Capex I mean kind of on one hand.
Tim: We keep talking about.
Tim: Taking all these wafers back in house to help gross margin in 2026, but I also hear about a lot more outsourcing to TSMC even in real time. So is the cut more that some of your foundry customers are maybe structurally deciding that they're not as committed.
Speaker Change: I'm just trying to understand how you can kind of capex and still execute on this strategy.
Timothy O'Curry: So is the cut more that some of your founding customers are maybe structurally deciding that they're not as committed? I'm just trying to understand how you can cut CapEx and still execute on the foundry strategy. Thanks.
Patrick Gelsinger: And, you know, at the highest level, the foundry strategy hasn't changed. And we've built a capacity corridor for foundry customers. However, until we have committed orders, we're going to be modest on how much equipment we put on the shelves and the sites that we have in place.
Speaker Change: And at the highest level the foundry strategy unchanged and we've built capacity corridor.
Speaker Change: For foundry customers. However, until we have committed orders, we're going to be modest on how much equipment, we put against the shelves and the sites that we have.
Jonathan: In place and how much of that corridor, we keep available how much flexibility working with our equipment suppliers that we need for that will be a subject of a careful scrutiny.
Patrick Gelsinger: And how much of that corridor we keep available, how much flexibility working with our equipment suppliers that we need, you know, for that will be a subject of careful scrutiny as we go forward. You know, we've also made some adjustments in the capital investment that we need to support our current view of the market forecast. So all of those are, you say, just adjustments.
Jonathan: As we go forward. We're also made some adjustments in the capital investment that we need to support our current view of market forecast. So all of those RSA or adjustments. The big thing is now that we're finishing this phase of aggressive build out and as you think about what we had to catch up we had.
Patrick Gelsinger: You know, the big thing is now that we're finishing this phase of aggressive build out, right, and as you think about what we had to catch up on, you know, we had no UV capacity, we had no shell ahead, site ahead, you know, capacity, we had no capacity to pull tiles home. As those come into place, we've been making substantial capital investments over the last couple of years. And now we're focused on how we harvest those investments in 24, 25 and 26.
Speaker Change: <unk> capacity, we had no shell ahead site ahead capacity, we had no capacity to pole titles home as those come into place we've been making substantial capital investments over the last couple of years and now we're focused on how do we harvest those investments in 'twenty four 'twenty five and 26, so we are putting much.
Speaker Change: More aggressive view of capital utilization right, how much capital require ahead and working with the suppliers to be more efficient in our capital dollars just like a foundry does and for that we will point you back to again right, we're going to be a world class Fabulous company Intel products, we're going to be a world class foundry within <unk>.
Patrick Gelsinger: So we're taking a much more aggressive view of capital utilization, right, how much capital we require ahead of working with the suppliers to be more efficient in our capital dollars, just like a foundry does. And for that, we'll point you back to again, right, we're going to be a world class fabless company, Intel products; we're going to be a world class foundry with Intel foundry. The last point I'd make on this is, you know, a lot of the early success that we're having with foundry customers is advanced packaging, and there the capital requirements are not as significant as required for wafer capacity.
Speaker Change: Foundry the last point I'd make here on this as you know a lot of the early success that we're having with foundry customers is advanced packaging and they are the capital requirements are not as significant as required for wafer capacity. So we believe very much that we're seeing a surge of interest there.
Patrick Gelsinger: So we believe very much that, you know, we're seeing a surge of interest there, customers and advanced packaging are clearly interested in us for capacity, but increasingly, for our most advanced packaging technology. So that's an area that we believe we have, as we've described before, as the on ramp for Intel foundry, and that's continuing to look very good. You know, the final point is the Intel foundry. Capacity will be aligned with, right to the first order, Intel product requirements.
Speaker Change: Customers in advanced packaging are clearly interested in us for capacity, but increasingly for our most advanced packaging technologies. So that's an area that we believe we have as we've described before is the on ramp for Intel foundry and Thats continuing to look very good.
Patrick Gelsinger: And clearly, as a lot of tiles externally in 25, you know, we bring those home in 26. That's when we'll start to really, as Dave said, you'll see the benefits of the model that we've put in place, tiles coming home, leadership process technology, leadership products start in 25, deliver big time in 26 and beyond. Thanks, Tim. Jonathan, can we have the next caller, please?
Anil: Anil point is the Intel foundry capacity.
Speaker Change: Be aligned with right to the first order the Intel product requirements and clearly there's a lot of titles externally in 2005, when we bring those home and 26, that's when we'll start to really as Dave said, you'll see the benefits of the model that we've put in place titles coming home leadership process technology leadership products starts in 'twenty.
Tim: Five deliver big time in 26 and beyond Thanks, Tim Jonathan can we have the next caller. Please.
Operator: Certainly. Our next question comes from the line of Sridhi Pajari from Raymond James. Your question, please. Thank you.
Speaker Change: Certainly our next question comes from the line of <unk> Treasury from Raymond James Your question. Please.
Srinivas Pajjuri: A couple of follow-ups. Dave, on the move from Oregon to Ireland, Fab, you talked about that being a gross margin headwind. Can you talk about how much, can you clarify how much of a headwind that is right now, and also when it's fully loaded on a like-for-like basis? The second question is, how much of a headwind do you think that's going to be?
<unk> Treasury: Thank you a couple of follow ups, Dave on the.
Speaker Change: Move from Oregon to Ireland Fab, you talked about that being a gross margin headwind can you talk about how much can you clarify how much of a headwind that is right now and also.
Speaker Change: When it's fully loaded on a like for like basis, how much. If it had been do you think that's going to be on an ongoing basis.
Speaker Change: I'm sorry. The second question is how much will the headwind be on an ongoing basis on an ongoing basis, so what youre, saying ongoing basis, yes, okay alright. So.
Srinivas Pajjuri: On an ongoing basis, is that what you're saying? On an ongoing basis, yeah. Okay. All right.
David Zinsner: So I think the best way to think about it is, you know, we were, I don't know, 400 basis points or so off on the gross margin, and take into account revenue was part of it. It was a meaningful chunk of that 400 basis points. So write-offs related to legacy businesses and the, you know mix and underutilization also affected it and it wasn't an insignificant amount but that was a good portion of that 400 basis points let's call it that and that will be the case in the third quarter probably given the you know increase I think we're talking about a 50% increase in Meteor Lake quarter over quarter in the in the third quarter beyond that it's going to start to become less and less to the point where it's you know actually not going to be a headwind yeah it becomes a tailwind yeah exactly right as the as the Ireland factory ramps the production factory will have a lower cost per wafer start than a TD factory like Oregon so it becomes a headwind as we go into next year tailwind as we go now as we now the challenge will for next year will be we'll now be ramping Lunar Lake next year Lunar Lake has the memory in the package so we're going to have to essentially buy that at a price and turn around and go you know include that in our price at zero percent margin so that puts us some negative pressure on the margins and additionally it's got more of the content sourced externally and as you know we're seeing some inflation so that one then becomes more of the head meteor lake starts to be helpful but lunar lake starts to become a drag on the intel products margins which is why we were tempered in terms of our outlook for margins next year because we're going to have a lot of improvements on the intel foundry side it's going to be tempered on the product side and it's really going to be because of lunar lake and i'm just going to add one thing as we move the intel 4.3 capacity into ireland it also gives our td team more focus on their capital on 18a as well as then 14a and 10a you know we're taking for instance the second high in a tool is coming into our oregon facility so you know we're well underway on 14a so part of this was a capacity and cost decision for the long term part of it was an aipc acceleration but it was also a td cadence decision and optimizing the use of our td resources you know for the next generation technologies which are already well underway and showing good early indicators, Srini, do you have a quick follow-on?
Speaker Change: The best way to think about it is we were I don't know 400 basis points or so off on the gross margin.
Jonathan: And take into account revenue.
Speaker Change: It was part of it.
Tim: It was a meaningful chunk of that 400 basis points.
Speaker Change: There was.
Speaker Change: The write off rate related to legacy businesses and the.
Tim: <unk>.
Speaker Change: Mix and Underutilization also affected and it wasn't an insignificant amount, but that was a good portion of that 400 basis points, let's call it that and that will be the case in the third quarter, probably given the.
Speaker Change: Increase I think we're talking about a 50% increase in media like quarter over quarter in the third quarter.
Speaker Change: And that it's going to start to become less and less to the point, where it's actually not going to be a headwind, yes. It becomes a tailwind at exactly.
Speaker Change: The Ireland factory ramp for production factory will have a lower cost per wafer start than a TV factory like Oregon. So it becomes a headwind as we go into next year tailwind I forgot about that now as we know the challenge will be for next year will be what will now be ramping lunar Lake next year Lunar Lake has the memory and the package. So we're going to have to essentially buy.
Speaker Change: That at a price and turnaround in.
Speaker Change: Include that in our price at zero percent margin, so that puts us some negative pressure.
Speaker Change: On the margins and Additionally, it's got more of the content.
Speaker Change: First externally and as you know we're seeing some inflation. So that one then becomes more of a hand meter like starts to be helpful. But lunar like starts to become a drag on the Intel products margins.
Speaker Change: Is why we were tempered in terms of our outlook for margins next year, because we're going to have a lot of improvements.
Speaker Change: On the Intel foundry side, it's going to be tempered on the product side, and it's really going to be because of lunar lake.
Speaker Change: And I was just going to add one thing as we move the Intel for free capacity in the Ireland. It also gives our TD team more focus on their capital on <unk> as well as then 14 antennae. We're taking for instance, the second highest a tool is coming into our Oregon facility. So we're well underway.
Speaker Change: Weigh on <unk>. So part of it was a capacity and cost decision for the long term part of it wasn't a IPC acceleration, but it was also a TD cadence decision and optimizing the use of our TV resources.
Speaker Change: For the next generation technologies, which are already well underway and showing good early indicators.
Speaker Change: Can you give a quick follow on yes.
David Zinsner: Yeah, so Pat, I think in the past, you talked about the foundry business potentially breaking even sometime in 2027. And given all the cuts, and you seem to at least sound confident, confident that, you know, the foundry opportunity is not changing. So I'm just curious, you know, do you see a possibility that the foundry business could actually break even sooner, given all the cuts? Clearly, that's our objective for Dave and me. But I'll say that said, we have a lot of wood to chop until we complete that journey.
Speaker Change: So Pat I think in the past you've talked about the foundry business potentially breaking even some time 2027 and given all the cuts and you seem to at least sound confident confident that foundry opportunity is not changing so I'm. Just curious you know do you see a possibility that in the foundry business could actually breakeven soon.
Speaker Change: Given all the cuts.
Speaker Change: Clearly that's our objective for Dave and I you all say that said, we have a lot of wood to chop until we complete that journey the steps that we've taken today are significant ones.
Patrick Gelsinger: The steps that we've taken today are significant ones for the operational efficiency that we're putting in place. So clearly, that's our operating objective that we have. But as you said, 26 is really this year that many of these wafers come home, many of the new factory investments come online, and the new process technologies. So I'd say that the 27 timeframe is still a good one.
Speaker Change: <unk> for our operational efficiency that we're putting in place. So clearly that's our operating objective.
Speaker Change: Objective that we have but as we said 26 is really this year that many of these wafers come home many of the new factory investments come online the new process technologies. So I'd say that 2007 timeframe is still a good one but you can trust that every aspect of what we're doing is to accelerate the profitability and the significant announcement today.
Patrick Gelsinger: But you can trust that every aspect of what we're doing is to accelerate profitability. And the significant announcement today of the cost and financial focus will give us, I'll say, the scrutiny and the lens by which to focus our Intel foundry. 10 billion next year is a big number.
Speaker Change: Day of the cost and financial focus right will give us I'll say, the scrutiny and the lens by which to focus our Intel foundry 10 billion next year is a big number and we expect that many of these operational improvements will carry forward in 'twenty six Dave said, an acceleration of our adjusted free cash flow turning.
Patrick Gelsinger: And we expect that many of these operational improvements will carry forward in 26. Dave said that an acceleration of our adjusted pre-cash flow turned positive. So everything that we're doing is aligned with that thought, Srini. Jonathan, we've got time for one more question.
Speaker Change: So everything that we're doing is aligned with our fault tree.
Speaker Change: Sure and Jonathan we've got time for one more question.
Operator: Certainly. Then our final question for today comes from the line of Matt Ramsey from TD Cowan. Your question, please. Yeah, good afternoon, thank you guys. I guess my first question, on the client, might've mentioned. Flat to down in September, I think your primary. Quantified Seasonal, um maybe you could give us a little color there; I think there's lots Microsoft Office Word Gaudi3 Title Microsoft Office Word Document MSWordDoc Word. Document.8, Client Market. Institute, Microsoft Office Word Document, MSWordDoc Word.
Speaker Change: Certainly then our final question for today comes from the line of Matt Ramsay from TD Cowen Your question. Please.
Matt Ramsay: Yes. Good afternoon. Thank you guys.
Matt Ramsay: I guess my first question is on the client space.
Matt Ramsay: I think Dave you Might've mentioned client.
Dave: Flat to down in September I think your primary exited six competitors going to be up double digits or I think I mentioned above seasonal.
Speaker Change: Could you quantify seasonal now.
Speaker Change: Maybe you could give us a little color there I know there's lots of.
Speaker Change: Maybe noise in the system about arm coming into to the client market I think that impact would be.
Speaker Change: More modest relative to what you described but if you could kind of give us puts and takes there and how the inventory with Oems might be affecting what you're guiding for it to September.
Speaker Change: Yeah I'll take that.
Matt Ramsey: Document.8, Yeah, I'll take that, Matt. And, you know, we feel very good about our client position, the momentum we have in AIPC. We have a very healthy ecosystem as well, and I'll say that with the large market share position that we have, we're very focused on sell-in and sell-through in the channel. So I believe our overall view of inventory levels, you know, where our market share is, we're actually quite comfortable with the indications that we've given some, you know, inventory sell-through in the third quarter above seasonal in Q4.
Matt Ramsay: Matt and.
Speaker Change: We feel very good with our client position the momentum we have in AIP see here, we have a very healthy ecosystem as well and I will say is the large market share position that we have we're very focused on sell in and sell through.
Speaker Change: In the channel So I believe our overall view of inventory levels, where our market share is we're actually quite comfortable in the indications that we've given you some.
Matt Ramsay: Inventory sell through in the third quarter above seasonal.
Speaker Change: In Q4 overall, the Tam expansion.
Matt Ramsey: Overall, the TAM expansion, you know, is low single digits, even though we're seeing a lot of enthusiasm around the AIPC, and further TAM expansion as we go into 25 is expected now broadly. We would also say that, you know, our position in the commercial portion of this market is very strong with our vPro assets, and we believe we're coming into a refresh cycle on the corporate. You know, we also saw things like vPro have great success for customers as they were dealing with the CrowdStrike blue screen, you know, period.
Matt Ramsay: Low single digit even though we're seeing a lot of enthusiasm around the AI PC and further Tam expansion as we go into 'twenty five as expected now broadly we'd also say that.
Matt Ramsay: Our position in the commercial portion of this market is very strong with our V pro assets and we believe we're coming into a refresh cycle on the corporate we also saw things like V. Pro have great success for our customers as they were dealing with the crowd strike blue screen period and customers who.
Patrick Gelsinger: And customers who, you know, our vPro customers were able to recover in a day or so, where customers not on vPro took weeks, you know, to recover from that. So, you know, a lot of reinforcement of the ecosystem, the leadership that we have on AIPC, and as Dave said, you know, Lunar Lake and Panther Lake only make our market position stronger. So I think we're very comfortable, and every indication so far this quarter is very solid for those outcomes. Matt, do you have a quick follow-on? Yes, I do think so.
Dave: Our V pro customers were able to recover in a day or so where customers not on V. Pro took weeks to recover from that so a lot of reinforcement of the ecosystem. The leadership that we have on a IPC and as Dave said lunar Lake and Panther like only make our market position stronger. So I think we're very comfortable.
Matt Ramsay: And every indication so far this quarter is very solid for those outcomes now do you have a quick follow on yes. Thank you. Thanks John.
Speaker Change: I wanted to ask I think in.
Matt Ramsey: Thanks, John. I wanted to ask, thinking of some of the prepared script, and maybe early in the Q&A, Pat, you kind of reiterated the $15 billion funnel for the foundry business, and I know, The Medium Term, a lot of that is packed. I wanted to ask about the customers that you've engaged with on, How have you seen the Gantt charts of the programs that they're planning to bring into your foundry progress? Are people still committed to ramping those things up? TKs, and maybe doing tapings. Are things moving forward? Acceleration
Speaker Change: Some of the prepared script and maybe early into Q&A, Pat you've kind of reiterated the 15 billion funnel.
Speaker Change: For the foundry business and I know in the medium term a lot of that is packaging, but I wanted to ask about the customers that you've engaged with on <unk> and maybe early on <unk>. How have you seen the gantt charts of the programs that they are planning to bring into your foundry progress in the last few quarters.
Speaker Change: Are people still committed to ramping those things are they taking PDK and maybe doing tape ins are things moving forward have you seen any acceleration of your seeing hesitation or maybe wait and see from those customers I'm just trying to figure out how that stuff is progressing on <unk>. Thanks.
Patrick Gelsinger: Have you seen "Hesitation" or maybe "Wait and See" from those customers? I'm just trying to figure out how that stuff is progressing. Yeah, let me just clarify the $15 billion is the lifetime deal value of committed deals. Right.
Speaker Change: And let me just clarify the 15 billion is lifetime deal value of committed deals.
Patrick Gelsinger: So this is a pipeline. This is committed business that we now have in place. So I just want to clarify that, Matt, because I think your question suggests that there's a lot more in the pipeline. You know, this is 15 billion in committed deals.
Speaker Change: So this isn't pipeline. This is committed business that we now have in place. So I just wanted to clarify that Matt, but I think your question suggests that the pipeline. There's a lot more in the pipeline. This is $15 billion of committed deals as you say a lot of the near term opportunity that's been advanced packaging and we're seeing a significant expansion.
Speaker Change: And of that capability in terms of volume and technology on <unk>, specifically a lot of customers have been waiting for the PDK right and now that we released the PDK last month. The 1.0 PDK, we've seen a flurry of activity with the EIA, the IP vendors and the end customers.
Patrick Gelsinger: As you say, a lot of the near-term opportunity has been advanced packaging, and we're seeing significant expansion of that capability in terms of volume and technology. On 18a specifically, a lot of customers have been waiting for the PDK.
Speaker Change: So I'd be optimistic that we have good indicators coming in that area.
Speaker Change: In the future, but this was really the starting point for many of them to go from test chips to start looking at production chips.
Patrick Gelsinger: And now that we released the PDK last month, the 1.0 PDK, we've seen a flurry of activity with the EDA, the IP vendors, and the end customers. So I'd be optimistic that we have good indicators coming in that area in the future. But this was really the starting point for many of them to go from test chips to start looking at production chips coming based on the PDK that we just released.
Speaker Change: Based on the PDK that we've just released so we remain very comfortable with our earlier comments in that area.
Patrick Gelsinger: So we remain very comfortable with our earlier comments in that area, and I say, you know, we do believe that we'll have further updates there. But, as we've also indicated, customers are reluctant to put their names out there, given the supply base and the traditional operation of the foundry industry.
Matt Ramsay: And I'd say, we do believe that we'll have further updates there but lets we've also indicated customers are reluctant to put their name out there.
Speaker Change: Given the supply base in the traditional operation of the foundry industry overall things are looking on track for what we've said with a meaningful acceleration in packaging over the last quarter more updates to come.
Patrick Gelsinger: Overall, things are looking on track for what we've said, with a meaningful acceleration in packaging over the last quarter. More updates to come. Maybe with that, John, I'll wrap us up.
John Pitzer: You know, thank you for joining our call. We appreciate the time, as always. And I'd say on a couple of these topics. I hope to see many of you at the Deutsches Bank Technology Conference coming up, where we'll have some further updates. You know, I want to reiterate in a quarter like this that we are resolved to finish the audacious turnaround, the building of our process and product key milestones that we've achieved in this phase, but now we have to shift to putting more emphasis on the financial sustainability of our We're making difficult decisions. As we right-size, we rebuild a more efficient, leaner, agile Intel for the future, and one that we're confident will enable our long-term success. Thanks and good afternoon, everybody.
Speaker Change: Maybe with that John I'll wrap us up.
Speaker Change: Thank you for joining our call. We appreciate the time as always and I would tell you on a couple of these topics I hope to see many of you at the Deutsche Bank Technology Conference coming up where we'll have some further updates.
Speaker Change: To reiterate.
Matt Ramsay: Quarter like this that show we are resolved to finish the audacious turnaround the building of our process and product key milestones that we've achieved of this phase, but now we have to shift to putting more emphasis on the financial sustainability of our business, we're making difficult decisions as we are right.
Matt Ramsay: As we rebuild our more efficient leaner agile Intel for the future and one that we're confident will enable our long term success, thanks, and good afternoon to everybody.
Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. Thank you for watching!
Speaker Change: 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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John Pitzer: , Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, Xeon, 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 relations website, intc.com.
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Speaker Change: Thank you for standing by and welcome to Intel Corporation Second quarter 2024 earnings Conference call. At this time all participants are in 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 if your question has.
Speaker Change: Been answered and you'd like 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.
John Pitzer: 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 Relations Web site <unk> Dot com.
John Pitzer: For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Pat Gelsinger, and our CFO, David Zinza. 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 contains forward-looking statements based on the environment as we currently see it, and as such, are subject to various risks and
Speaker Change: Those joining us online today. The earnings presentation is also available in our webcast window.
Speaker Change: I am joined today by our CEO, Pat Gelsinger, and our CFO David <unk>.
Matt Ramsay: In a moment, we will hear a brief comments from both followed by a Q&A session.
John Pitzer: It also contains reference 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. They also provide additional information on non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures. With that, I will turn things over to Pat. Thank you, John, and good afternoon, everyone.
Speaker Change: Before we begin please note that today's discussion contains forward looking statements based on the environment as we currently see it and as such are subject to various risks and uncertainties.
Matt Ramsay: It also contains reference to non-GAAP financial measures that we believe provide useful information to our investors.
Matt Ramsay: 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.
Matt Ramsay: They also provide additional information on non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures.
Matt Ramsay: With that let me turn things over to Pat.
Pat: Thank you John and good afternoon, everyone.
Patrick Gelsinger: Q2 profitability was disappointing despite continued progress on product and process roadmaps. With our new operating model firmly in place, we are accelerating actions to improve profitability and capital efficiency by more than $10 billion in 2025, which I will discuss shortly. For the quarter, we delivered sequential revenue growth in line with our forecast, despite the unexpected timing of new export control restrictions announced in May. Q2 profitability was below our expectations, due in part to our decision to more quickly ramp core Ultra-AI CPUs, as well as other selective actions we took to better position ourselves for future quarters, which Dave will address fully in his comments.
Pat: Q2 profitability was disappointing despite continued progress on product and process Roadmaps with our new operating model firmly in place we are accelerating actions to improve profitability and capital efficiency by more than $10 billion in 2025, which I will discuss shortly.
Speaker Change: For the quarter, we delivered sequential revenue growth in line with our forecast. Despite the unexpected timing of new export control restrictions announced in May Q2 profitability was below our expectations due in part by our decision to more quickly ramp core ultra AI Cpus as well as other selective actions we took to.
Pat: Better position ourselves for future quarters, which Dave will address fully in his comments.
Patrick Gelsinger: We previously signaled that our investments to define and drive the AIPC category would pressure margins in the near term. However, we believe the trade-offs are working. AI-PC will grow from less than 10% of the market today to greater than 50% in 2026. We know today's investments will accelerate and extend our leadership and drive significant benefits in the years to come. Our efforts will culminate with the introduction of Panther Lake, our first client CPU on Intel 18a, a much more performant and cost competitive process, which will additionally allow us to bring more of our tiles in-house, meaningfully improving our overall profitability.
Dave: We've previously signaled that our investments to define and drive the IPC category would pressure margins in the near term we believe the trade offs are worth it.
Dave: IPC will grow from less than 10% of the market today to greater than 50% in 2026.
Dave: We know today's investments will accelerate and extend our leadership and drive significant benefits in the years to come.
Dave: Our efforts will culminate with the introduction of Panther Lake in second half 'twenty five.
Pat: Panther Lake as our first client CPU on Intel <unk>, a much more performance and cost competitive process, which will additionally, allow us to bring more of our titles in house meaningfully improving our overall profitability.
Patrick Gelsinger: Another important driver of improved financial performance is the cost reduction plan we announced today. This plan represents structural improvements enabled by our new operating model, which we are pulling forward to adjust to current business trends. Having separate financial reporting for Intel products and Intel foundry clarifies and focuses roles and responsibilities across the company. It also enables us to eliminate complexity and maximize the impact of our resources. Taking a clean sheet view of the business is allowing us to take swift and broad-based actions this quarter.
Pat: Another important driver of improved financial performance is the cost reduction plan, we announced today.
Pat: This plan represents a structural improvements enabled by our new operating model, which we are pulling forward to adjust to current business trends.
Pat: Having separate financial reporting for installed products and Intel foundry clarifies and focuses roles and responsibilities across the company.
Dave: It also enables us to eliminate complexity and maximize the impact of our resources, taking a clean sheet view of the business is allowing us to take Swift and broad based actions beginning this quarter.
Patrick Gelsinger: As a result, we expect to drive a meaningful reduction in our spending and headcount beginning in the second half of this year. We are targeting a headcount reduction of greater than 15% by the end of 2025, with the majority of this action completed by the end of this year. We do not take this lightly, and we have carefully considered the impact this will have on the Intel family. These are hard but necessary decisions.
Matt Ramsay: As a result, we expect to drive a meaningful reduction in our spending and head count beginning in the second half of this year.
Matt Ramsay: We are targeting a head count reduction of greater than 15% by the end of 2025 with the majority of this action completed by the end of this year we.
Matt Ramsay: We do not take this lightly and.
Matt Ramsay: We have carefully considered the impact this will have on the <unk> family.
Matt Ramsay: These are hard but necessary decisions, our actions will reduce opex to approximately $20 billion in 2024, and we see a bigger impact next year with 2025, Opex targeted at $17 5 billion more than 20% below our prior estimates.
Patrick Gelsinger: Our actions will reduce OpEx to approximately $20 billion in 2024, and we see a bigger impact next year with 2025 OpEx targeted at $17.5 billion, more than 20% below prior estimates. We expect further benefits in 2026 with OpEx declining in absolute dollars yet again. Even as we lower overall spending, we will continue to fund the investments needed to deliver our strategy.
Matt Ramsay: We expect further benefits in 2026 with Opex to decline in absolute dollars, yet again, even as we lower overall spending we will continue to fund the investments needed to deliver our strategy.
Patrick Gelsinger: Our new operating model is also driving benefits to our capital requirements, giving us the transparency to more rigorously scrutinize every project and every dollar of capital. As a result, we now expect gross CapEx in 2024 to be between $25 and $27 billion. That is a reduction of over 20% from our plan entering the year and additionally reflects expectations for softer second half demand. Combined with strong execution of our smart capital strategy, including our second skip with Apollo, we expect net capital spending in 2024 of between $11 and $13 billion. These benefits will carry forward to next year as well. For 2025, gross capital spending is targeted between $20 and $23 billion, and net capital spending between $12 to $14 billion.
Matt Ramsay: Our new operating model is also driving benefits to our capital requirements, giving us the transparency to more rigorously scrutinize every project and every dollar of capital as a result, we now expect gross capex in 2024 to be between 25 and $27 billion.
Matt Ramsay: That is a reduction of over 20% from our plan entering the year and additionally reflects expectations for softer second half demand.
Matt Ramsay: And bind with strong execution of our smart capital strategy, including our second skip with Apollo, We expect net capital spending in 2024 of between 11 and $13 billion.
Patrick Gelsinger: Increased capital efficiency has a positive impact on gross margins over time, but we will also accelerate improvements by generating roughly $1 billion of savings at a non-variable cost of sales in 2025. Once again, these reductions do not impact our ability to execute our plan. We designed our smart capital strategy to enable us to conservatively manage the day-to-day business to achieve trendline growth while maintaining the operational flexibility to quickly and cost-effectively capture upside when it comes. We are taking the bold step of suspending the dividend at the beginning of the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute our strategy.
Matt Ramsay: These benefits will carry forward to next year as well for 2025 gross capital spending is targeted between 20, and 23 billion and net capital spending between $12 billion to $14 billion increased capital efficiency is a positive impact to gross margins over time, but we will also accelerate improvements by generating.
Matt Ramsay: Roughly $1 billion of savings is not variable cost of sales in 2025. Once again these reductions do not impact our ability to execute our plan.
Matt Ramsay: We designed our smart capital strategy to enable us to conservatively manage the day to day business to trend line growth, while maintaining the operational flexibility to quickly and cost effectively capture upside when it comes.
Matt Ramsay: We are taking the added step of suspending the dividend at the beginning of the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute our strategy. We reiterate our long term commitment to a competitive dividend as cash flows improve to sustainably higher levels.
Patrick Gelsinger: We reiterate our long-term commitment to a competitive dividend as cash flows improve to sustainably higher levels. Reductions across OpEx, CapEx, and cost of sales total well over $10 billion in direct savings in 2025 and provide a clear line of sight to a sustainable model with the ongoing financial resources and liquidity needed to support our long-term strategy. We remain confident that we have and will continue to make the investments needed to drive long-term shareholder value, and we view cost discipline as the compass that drives effective execution, helping teams stay on track to both prioritize and achieve measurable results.
Matt Ramsay: Reductions across Opex, capex and cost of sales totaled well over $10 billion in direct savings in 2045. It provides clear line of sight to a sustainable model was the ongoing financial resources and liquidity needed to support our long term strategy.
Matt Ramsay: We remain confident that we have and will continue to make the investments needed to drive long term shareholder value and we view cost discipline as the confidence that drives effective execution.
Speaker Change: <unk> team stay on track to prioritize and achieve measurable results.
Patrick Gelsinger: The operational and capital improvements we are driving will be especially important as we manage the business through the near term. While we expect to deliver sequential revenue growth through the rest of the year, the pace of the recovery will be slower than expected, which is reflected in our Q3 outlook. Specifically, Q3 will be impacted by a modest inventory digestion in CCG with DCAI and our more cyclical businesses of NEX, Altera, and Mobileye trending below our original forecasts. Our outlook reflects industry-wide conditions without any meaningful change in our market share expectations.
Matt Ramsay: The operational and capital improvements, we are driving will be especially important as we manage the business through the near term, while we expect to deliver sequential revenue growth through the rest of the year. The pace of the recovery will be slower than expected, which is reflected in our Q3 outlook spill.
Matt Ramsay: Specifically Q3 will be impacted by a modest inventory digestion in CCG with dji and our more cyclical businesses of any ex alterra and mobile ly trending below our original forecast.
Matt Ramsay: Our outlook reflects industry wide conditions without any meaningful change in our market share expectations.
Patrick Gelsinger: As we looked at Q4, normal seasonal revenue growth has historically been in a range of flat to up 5% quarter and quarter. With improved client inventory levels exiting Q3, we see Q4 revenue at the high end of that range. Let me now provide more details on our key business units, starting with Intel Foundry. A key part of our strategy is returning to process leadership with our aggressive five nodes and four-year march. And the finish line is officially within sight.
Matt Ramsay: As we look into Q4 normal seasonal revenue growth has historically been in the range of flat to up 5% quarter on quarter with improved client inventory levels exiting Q3, we see Q4 revenue at the high end of that range.
Speaker Change: Let me now provide more details by our key business units, starting with Intel foundry.
Speaker Change: A key part of our strategy is returning to process leadership with our aggressive five dose and a four year March and the finish line is officially within sight, we are well into the ramp of <unk> four and <unk> three and top 28 is being ready for production next quarter.
Patrick Gelsinger: We are well into the ramp of Intel 4, Intel 3, and Intel 28, which will be ready for production next quarter. On Intel 18a, we released the 1.0 PDK last month and are on track to be manufacturing ready by the end of this year with production ready to wait for start volumes in the first half of 2025. Panther Lake for Client is now running Windows and looking very healthy.
Matt Ramsay: And then sell HCA, we released the one point or PDK last month and are on track to be manufacturing ready by the end of this year with production wafer start volumes in the first half of 'twenty five.
Speaker Change: It relates to your client is now running windows and looking very healthy this.
Patrick Gelsinger: This is the first microprocessor to use RibbonFET, PowerVia, and advanced packaging, achieving a significant milestone. Clearwater Forest Preserver, which also includes Fogaros Direct and other key advanced packaging capabilities, is booted and is likewise looking very healthy. These are the first of many Intel 18A products on track to bring Intel 18A to the mass market. Importantly, the launch of 18A will be our fifth node in four years, completing an historic pace of design and process innovation and returning Intel to process leadership.
Matt Ramsay: This is the first microprocessor to use ribbon FET power and advanced packaging, achieving a significant milestone.
Matt Ramsay: The reward of forest for server, which also includes <unk> direct and other key advanced packaging capabilities is booted and likewise looking very healthy. These are the first of many Intel <unk> products on track to bring <unk> to the mass market.
Speaker Change: Importantly, the launch of <unk> will be our fifth node in four years, completing and historic pace of design and process innovation and returning installed a process leadership our team is resolute and determine to finish what we started and once we do that will unlock further growth and value creation.
Patrick Gelsinger: Our team is resolute and determined to finish what we started, and once we do, it will unlock further growth and value creation across our foundry and product businesses. Our investments in a global footprint of leading-edge capacity continue to weigh on near-term profitability, but long-term, they position us to profitably participate in the largest and fastest-growing parts of the semiconductor market. We continue to expect the investments we're driving through this year to put us on a course for meaningful financial traction with operating profits for Intel Foundry rising in 2024 and then driving to break even, to help excel the Foundry Services Business.
Matt Ramsay: Cros are foundry and product businesses.
Matt Ramsay: Our investments in our global footprint of leading edge capacity continues to weigh on near term profitability, but long term they positioned us to profitably participate in the largest and fastest growing parts of the semiconductor market we.
Matt Ramsay: We continue to expect the investments we are driving through this year to put us on a course for meaningful financial traction with operating profits for Intel Sandri trusting in 2024, and then driving to breakeven.
Matt Ramsay: To help accelerate.
Patrick Gelsinger: Kevin has led large foundry and established businesses outside Intel and is a great addition to our leadership team. He has hit the ground running, spending considerable time with current and future foundry customers as we ramp our process packaging and chipset capabilities for the AI era. We are also pleased to welcome Naga Chandrasekaran from Micron later this month to lead our Foundry Manufacturing and Supply Chain organization.
Matt Ramsay: Our foundry services business, Kevin has led large foundry and fabless businesses outside and so it is a great addition to our leadership team. He has hit the ground running and then.
Kevin: The considerable time with current and future foundry customers as we ramp our process packaging and chipset capabilities for the AI era.
Speaker Change: We are also pleased to welcome Naga change a shepherd for Micron later this month to lead our foundry manufacturing and supply chain organization.
Patrick Gelsinger: He brings more than 20 years of leadership and deep technical R&D and manufacturing expertise that will help advance our priorities. Overall, our Foundry team is driving excellent collaboration with our design ecosystem partners. In Q2, Ansys, Cadence, Siemens, and Synopsys all announced the availability of reference flows for Intel's embedded multi-die interconnect bridge advanced packaging technology. eMIB makes it possible to cost effectively scale to a larger silicon area by connecting multiple die in a single package, which simplifies the design process and offers design flexibility.
Speaker Change: Brings more than 20 years of leadership and deep technical R&D and manufacturing expertise that will help advance our priorities overall, our foundry team is driving excellent collaboration with our design ecosystem partners in Q2, and CIS cadence, Siemens and Synopsys, all announced the availability of breath.
Matt Ramsay: <unk> flows for Intel's embedded multi die interconnect bridge advanced packaging technology EBIT.
Matt Ramsay: <unk> makes it possible to cost effectively scale to a larger silicon area by connecting multiple die in a single package, which simplifies the design process and offers design flexibility.
Patrick Gelsinger: These same partners also declared readiness for Intel 18A designs, and we will be collaborating closely with the ecosystem in the second half to prepare for next year's 18A launch. Beyond Intel 18A, we are well on our way to Intel 14a and Intel 10a development. Even as we continue to extend leadership and innovation on our process roadmap, we are transitioning to a more normal cadence of node development. The normalized cadence will have positive implications for both the pace and the magnitude of ongoing R&D and capital spending requirements.
Matt Ramsay: St Partners also declared readiness for Intel 88 sites, and we will be collaborating closely with the ecosystem and the second half to prepare for next year's <unk> launches.
Matt Ramsay: Beyond <unk>, we are well on our way uninstalled for Q&A and then top 10, a development even as we continued to extend leadership in innovation on our process Road map, we are transitioning to a more normal cadence of new development.
Matt Ramsay: Normalized cadence will have positive implications for both pace and magnitude of ongoing R&D and capital spending requirements.
Patrick Gelsinger: Let's now turn to Intel products. In our largest and most profitable business, CCG, we continue to strengthen our position and execute well against our roadmaps. The AI-PC category is transforming every aspect of the compute experience, and Intel is at the forefront of this category-creating moment. Intel Core UltraVolume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models.
Matt Ramsay: Let's now turn to Intel products, and our largest and most profitable business CCG, we continue to strengthen our position and execute well against our roadmap. The AIP seat category is transforming every aspect of the compute experience and Intel is at the forefront of this category creating moment into.
Matt Ramsay: <unk> core ultra volume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models.
Patrick Gelsinger: This is an ongoing testament to the strong ecosystem we have nurtured through 40 years of consistent investment. We have now shipped more than 15 million Windows AI PCs since our December launch, multiples more than all of our competitors combined. And we remain on track to ship more than 40 million AI PCs by year end and over 100 million cumulatively by the end of 2025. Lunar Lake, our next generation AI PC, which achieved production release ahead of schedule in July, will be the next industry-wide catalyst for device refresh.
Patrick Gelsinger: Lunar Lake delivers superior performance at half the power with 50% better graphics performance and 40% more power efficiency versus the prior generation. It delivers 3X more tops gen on gen with our enhanced NPU and will be the ultimate AI CPU on the shelf for the holiday cycle. Microsoft has qualified Lunar Lake to power more than 80 new co-pilot plus PCs across more than 20 OEMs, which will begin to ship this quarter.
Patrick Gelsinger: LunarLake will quickly be joined by AeroLake, which will scale AI to the desktop category next quarter, and as mentioned earlier, we are already gearing up to launch PantherLake next year to further extend our leadership position. So, very good progress in CCG and a super strong road map over the next 18 months. Let me now turn to DCAI. This is one of the most important areas of focus as we work to improve our performance and market position.
Patrick Gelsinger: We have a strong foundation on which to build, including more than 130 million Xeons powering data centers around the world today. And our roadmap is designed to build upon this fast installed base to deliver greater performance and efficiency, enable AI solutions that are open, flexible, and scalable, and reduce total cost of ownership for customers. We took some important steps forward this quarter, starting with the launch of Xeon 6 with E-core processors, formerly codenamed Sierra Forest. This is our first Intel 3 product and is particularly well suited for high-density scale-out workloads. It drives performance up, power down, and dramatic rack consolidation.
Patrick Gelsinger: Early adopters are already seeing 25% better performance per watt versus competitive solutions. This will be followed by Xeon 6 with P-core, codenamed Granite Rapids, which delivers greater performance for the most demanding workloads and will begin shipping this quarter. Looking to the future, we are excited about the launch of Clearwater Forest, our first Intel 18a server product featuring our industry-leading hybrid bonding. Clearwater Forest has achieved power on and is on track to launch in 2025.
Patrick Gelsinger: As we've re-established Xeon's competitive position, we are strongly positioned as the head node of choice in AI servers. We're also focused on improving our accelerator roadmap. We're delivering a combination of performance, flexibility, and value that is very compelling to customers, particularly cloud and enterprises seeking scalable, cost-effective Gen AI solutions. Our focus on open models, open developer frameworks, and reference designs combining Xeon with accelerators through OPEA, or Open Platform for Enterprise AI, is gaining considerable market traction.
Patrick Gelsinger: Launching in Q3, Gaudi3 will take our accelerator performance to the next level at just two-thirds the cost of competitive offerings. To put it into perspective, we expect Gaudi3 to deliver roughly 2x performance per dollar in both inference and training versus H100. Gaudi3 has strong ecosystem support, including Dell Technologies, Hewlett-Packard Enterprise, Lenovo, Supermicro, Foxconn, Gigabyte, InvenTech, Quanta Cloud Technology, and Wistrona. Turning to NEX, we continue to see stability in Q2 while introducing new products that will expand our leadership in edge and networking into the future. As a founding member of the Ultra Ethernet Consortium, we announced an array of AI-optimized, scale-out Ethernet solutions, including the Intel AI Network Interface card and Foundry chiplets, which will launch next year.
Patrick Gelsinger: A recent IPU adapter for the enterprise supported by Dell Technologies and Red Hat broadens access to the solution co-developed with Google Cloud. We expect the IPU to be accretive to growth and profitability as it becomes an increasingly important part of acceleration in the AI data center. We also announced the creation of Ultra Accelerator Link, a new industry standard dedicated to advancing high-speed, low-latency communication for scale-up AI systems, communication, and data centers.
Patrick Gelsinger: Combined with a growing number of use cases of AI on the edge, NEX is well positioned to be an accretive growth driver in 2025 and beyond. Lastly, as Altera reaches full operational separation by year-end, we are actively working toward capitalizing the business to generate proceeds for Intel on a path to an IPO in the coming years. We are excited to provide Altera with the mandate, focus, and resources to realize their growth opportunities and execute their strategy.
Patrick Gelsinger: We expect their increased autonomy will help to drive value for our shareholders, similar to the decisions we made with Mobileye two years ago and IMS last year. Before I turn to Dave, let me sum up by saying it has been a hard-fought first half of the year.
Patrick Gelsinger: We have achieved several important milestones, and we are taking clear and decisive actions to improve our sustainable financial performance. We have entered Q3 with a very clear focus and renewed intensity to improve our game, and we are motivated by the progress we are seeing as we execute our strategy and realize our vision. That is the mindset driving us forward as we continue to build a stronger Intel. With that, I'll pass it over to Dave. Thank you, Pat, and good afternoon, everyone.
David Zinsner: Second quarter revenue was $12.8 billion, down one point year over year and up 1% sequentially. Revenue was in line with the range we provided in May after receiving notice of an export license restriction, which negatively impacted our client business in China. Intel products and Intel foundry both delivered 4% year-over-year growth offset by headwinds in our more cyclical business. However, profitability was significantly more challenged versus our previous expectations, with Q2 gross margin of 38.7% and EPS of $0.02. The weaker than expected gross margin was due to three main drivers.
David Zinsner: The largest impact was caused by an accelerated RAMP of our AI-PC product. In addition to exceeding expectations on Q2 core ultra shipments, we made the decision to accelerate the transition of Intel 4 and 3 wafers from our development fab in Oregon to our high volume facility in Ireland, where wafer costs are higher in the near term. However, this change resulted in approximately $1 billion of capital savings and will improve Intel 4 and 3 gross margins long term as we scale up the Ireland fab.
David Zinsner: Margins were also impacted by higher than typical period charges related to non-core businesses and charges associated with unused capacity. Finally, we saw an unfavorable product mix and more competitive pricing than expected. Q2 operating cash flow was $2.3 billion, up approximately $3.5 billion sequentially on better working capital.
David Zinsner: Growth CapEx of $5.7 billion was more than offset by $11.5 billion in grants and partner contributions, highlighted by Apollo's skip investment in our Ireland factory operations, resulting in adjusted free cash flow of $8.2 billion. Intel products revenue was $11.8 billion, up 4% year-over-year. The client business grew 9% year-over-year as the AIPC RAMP contributed to higher volume and ASPs, partially offset by export license restrictions communicated during the quarter. DCAI revenue is roughly flat sequentially and down three points year over year.
David Zinsner: We expect sequential growth in the data center through the second half as demand for traditional servers improves modestly. Revenue for the NEX business was approximately flat both sequentially and year-over-year, though excluding the previously discussed inventory digestion impacting the telco market, NEX delivered 10% year-over-year growth in the first half. Q2 operating profit for Intel products was $2.9 billion, 25% of revenue, and up approximately $400 million year-over-year on higher revenue and reduced inventory reserves.
David Zinsner: Intel Foundry delivered revenue of $4.3 billion, down one point sequentially and up 4% year-over-year driven by increased wafer volume on Intel 7 and our first EUV nodes Intel 4 and 3. Foundry services revenue more than doubled sequentially off a small base, including the start of advanced packaging revenue. Foundry operating loss of $2.8 billion was worse sequentially.
David Zinsner: We expect operating losses to continue at approximately the same rate in Q3, with more than 85% of wafer volume still coming from pre-EUV nodes with an uncompetitive cost structure and power performance and area deficits reflected in market-based prices. The continued ramp of our Intel 4 and 3 Ireland facility and elevated R&D and startup costs to support the rapid progression of our leading-edge technology development will also weigh on profitability. Mobileye's revenue of $440 million improved 84% sequentially due to the non-recurrence of the significant inventory drawdown that occurred in Q1. The rapid revenue and margin recovery indicates digestion occurred in an organized, predictable fashion, and we believe it is now complete. However, difficult conditions in China, which are impacting many Western automotive suppliers, led Mobileye to lower its revenue and income guidance for the second half.
David Zinsner: Altera delivered revenue of $361 million, up 6% sequentially, with operating margins improving 4 points in the quarter. However, revenue remains below consumption as inventory positions tied to previous supply constraints are worked down. We expect double-digit sequential revenue growth through the second half as customers return to more normal buying patterns. Now turning to our Q3 guidance. Weaker spending across consumer and enterprise markets, especially in China, and continued focus on AI server investments in the cloud have reduced our TAM expectations for 2024. As a result, customer inventory levels are elevated. We expect customers to reduce inventory over the second half of the year, along with the continued modest negative impact from export controls.
David Zinsner: These market dynamics should result in below-seasonal revenue growth in Q3, with the client business flat to down and modest growth in data center and edge markets. With an expectation of healthier inventory positions exiting the quarter and the continuation of an enterprise refresh cycle, we should see revenue growth at the high end of seasonal in the fourth quarter. We expect gross margins to be moderately weaker sequentially, with modest revenue growth and efficiencies offset by a continued ramp-up of new manufacturing nodes.
David Zinsner: While we will continue our work to improve near-term profitability, a heavier dependence on external wafers as we ramp AIPC products over the next several quarters will pressure gross margins. As a result of these factors, we expect revenue of $12.5 to $13.5 billion in the third quarter. At the midpoint of $13 billion, we expect gross margin of approximately 38%, with a tax rate of 13%, and EPS of negative 3 cents, all on a non-GAAP basis. As Pat discussed earlier, lower than anticipated revenue in the back half of the year is putting pressure on gross margins and earnings. We are taking aggressive actions to significantly reduce spending in response.
David Zinsner: These actions, while difficult, will help streamline the organization to improve productivity and make better decisions more quickly. Please note that we are likely to have charges associated with these actions, some of which may be included in our non-GAAP results. However, since we have not yet estimated these charges, they are not included in our guide.
David Zinsner: Smart Capital continues to guide the pace and breadth of our global capacity expansion, and our new operating model has uncovered opportunities to build and utilize manufacturing capacity more efficiently. Additionally, we've responded to lower revenue by reducing 2024 gross capital investments to a range of $25 to $27 billion, with a net capital spending of $11 to $13 billion, including our SCIP program. These adjustments ordinarily would bring us back to approximately breakeven adjusted free cash flow, but we now expect adjusted free cash flow to be modestly negative as we make payments related to the restructuring charges necessary to achieve our spending target.
David Zinsner: In 2025, with OpEx of approximately $17.5 billion and Net CapEx of $12-14 billion, we expect to achieve positive adjusted free cash flow. The suspension of the dividend, initial Altera capitalization, and positive adjusted free cash flow should significantly improve our liquidity in 2025 and position us to begin the process of meaningfully decreasing our leverage. Before I close, let me take a moment to highlight a couple of items as you model 2025. As previously mentioned, we expect operating expenses to be reduced from street expectations of $21 billion to approximately $17.5 billion. We will also reduce spending within the non-variable cost of sales by approximately $1 billion.
David Zinsner: While that will obviously have a positive impact on gross margins, we still only expect a roughly 60% fall in gross margin next year. AIPC is a big winner for the company, and the early signals on the performance of Lunar Lake are very positive. We therefore intend to ramp that product significantly next year to meet market demand. While the part is great, it was originally a narrowly targeted product using largely external wafers and not optimized for cost. As a result, our gross margins will likely be up only modestly next year. The good news is that the follow-on product, Panther Lake, is internally sourced on 18A and has a much improved cost structure.
David Zinsner: As the momentum of AIPCs drives Panther Lake demand, together with the improvements from our new operating model and the cost savings from our lower capital spending, we will be in a great position to see meaningful gross margin expansion in subsequent years. Lastly, the non-controlled income from Mobileye, Altera, and IMS, and the portion of the skips earned by our partners, show up on a line below net income called non-controlling, The NCI adjustment has been negligible so far, but we expect it to be a more meaningful driver, reducing our controlled share of income by approximately $700 million on a GAAP basis in 2025 and increasing as wafer production at our skip fabs in Arizona and Ireland increases in subsequent years.
David Zinsner: In closing, the market has not recovered as expected, and we're obviously not satisfied with our results. We're responding by aggressively adjusting 25 spending to achieve profitability and positive adjusted free cash flow that is commensurate with the current market conditions while continuing to invest in and execute our strategy. In addition to these near-term actions, we're also seeing meaningful opportunities to improve financial results, leveraging our new operating model. We remain optimistic that reduced spending, operating efficiencies, and more competitive products will keep us on track to our target model at 60% gross margin and 40% operating margin by the end of the decade. I'll now turn it back over to John to start the Q&A. Thank you, Dave.
John Pitzer: We will now transition to the Q&A portion of our call. As a reminder, we would ask each of you to ask one question and a brief follow-up question where appropriate. With that, Jonathan, can we please take the first caller?
Operator: Certainly. Our first question comes from the line of Vivek Arya from Bank of America Securities. Your question, please. Thanks for taking my question. In the big picture, there are the challenges, the product issue, the market issue, the strategic issue, and the execution issue. I'm just wondering, have the core issues been accurately diagnosed?
Vivek Arya: Because when we look at your CPU competitor, they appear to be doing much better in this same environment. So I'm curious, what is plan B if just cost cuts don't do the job? Yeah, thank you, Vivek.
Patrick Gelsinger: You know, to start out, we'd say that, you know, this first phase of the recovery, restoration, and rebuilding plan is now well underway. You know, with 18A, PDK 1.0, with Panther Lake, and Clearwater Forest powered on, our geo footprint is now starting to take shape. We have more competitive products in every segment of the industry. That said, with that foundation in place, it's time for us to focus on phase two, building a more financially sustainable model for the company and for the future.
Patrick Gelsinger: Many of the new products are yet to ramp into the marketplace, and we're just now getting to competitiveness. But we need to build a more sustainable business model for ourselves that allows us to have the financial wherewithal for the long-term journey. I'd say this rebuilding that we're underway is the most significant rebuilding of Intel since the transition from memory to microprocessors, you know, four decades ago. We firmly believe in the IDM 2.0 strategy. You know, we're building two world-class companies. The forensics that we've done this year, this clean sheet exercise, as we could describe it, is building a world-class Intel foundry and building a world-class Intel products group.
Patrick Gelsinger: You know, these efforts, we believe, have identified many opportunities for us to have, you know, financial savings. We've launched those aggressive steps today, and we believe that with the new products and the better financial position that we have achieved for a more efficient operation, we see the long-term opportunity for significant value creation for all of our stakeholders. Vivek, do you have a follow-up?
Vivek Arya: Yes, thank you, John. For my follow-up question, I'm curious what impact the restrictions, sorry, the restructuring actions have on either your R&D roadmap, your long-term external foundry opportunity, and any CHIPS Act funding. I think in the past, you had suggested about $15 billion in long-term value from external foundry. Is there any impact on those growth targets because of the restructuring action? Just what changes? With these restructuring actions? Thank you.
Patrick Gelsinger: Yeah, thank you, Vivek. And fundamentally, we believe our strategy will be maintained even as we get these more efficient steps in place. The CHIPS grants, taking your questions sort of one by one, on the CHIPS side, these are milestone-based investments. We still believe that we're comfortably able to execute against those milestones across the projects that we've announced. So we believe very comfortably that the CHIPS model that we've put in place, we've worked closely with the CHIPS program office and the U.S. government, and we're very comfortable with those plans.
Patrick Gelsinger: Also, the foundry, we're seeing a lot of momentum in areas like the advanced packaging areas, where we're actually seeing quite a lot of uptake and expansion of those opportunities. So the $15 billion of LDB that we've talked about and the $15 billion revenue by the end of the decade, we're very confident that those are still very solid guidelines for us to be building to. Obviously, with the capital changes that we've made, we're going to be driving, just like a world-class foundry does, to be much more efficient with our capital investments and scrutinizing them more carefully.
Patrick Gelsinger: And now that we've, and so on. So, we paid for the capital to catch up. And I'll give you this catch-up capital. You know, we had no spare capacity. We had no site ahead, or shell ahead. We had no capacity to catch up.
Patrick Gelsinger: As those investments are now largely completed, we're able to focus much more on capital efficiency for the future and aligning our capital spend to the market signals as we see the future of our products as well as the foundry, you know, commitments that we have in place. You know, finally, I'll just say again, we're building this against the market outlook. We're going to flex our investments, you know, up and down appropriately.
Patrick Gelsinger: And we've now established a model with our smart capital to have that effectiveness that we can scale up and down, you know, to market conditions. So, we feel like all of the things that we said for our strategy are on track, and we're now moving into phase two of the execution of that strategy. Thanks, Vivek.
Operator: Jonathan, can we have the next caller, please? Certainly. And our next question comes from the line of Ross Seymour from Deutsche Bank. Your question, please? Hi, guys. Thanks for asking the question. I kind of want to follow up on the first two and, Pat, maybe just ask it a different way.
Ross Seymour: Part of what you're saying sounds like you're adjusting your spending across the board to reflect the macro reality, slower growth, et cetera, et cetera. But it seems like that would be difficult to do if it didn't impact any of the structural dynamics as well. So I guess the real question is, are there any changes either to your competitiveness, the structure of the company, the long term, you know, $100 billion target that you just saw weren't happening, and therefore, you felt these cuts were necessary?
Ross Seymour: So do any of the structural changes, or can you describe any of the structural changes and what the outcome to your financial targets might be? Yeah, let me, you know, point you back to what I said at the start. We started this forensics, this clean sheet analysis, concurrent with the rolling out of our new operational model. We said, we have to be a world class foundry; we are going to benchmark ourselves against world class foundries.
Ross Seymour: And that's what Intel Foundry is going to become. And we've uncovered a lot of things, a lot of inefficiencies, a lot of ways that we can drive our capital footprint more effectively, you know, and every aspect of that business is being analyzed. And, you know, how we do maintenance, how we, you know, procure chemicals, you know, how we run and price wafers and shuttle lots and everything like that. So a clean sheet analysis.
Patrick Gelsinger: Similarly, on the product side, we've done exactly that same analysis: what does a world-class fabless company look like? And we have covered quite a lot of areas where we don't leverage industry IPs, we're not using our EDA vendors as effectively, you know, we've done too many steppings, you know, we validate versus build in design quality. So many of these things are steps that we're taking to be a world class fabricator company, and these are significant structural steps. You know, we also realized that as an IDM 1.0, we were never built for efficiency; we were built for leadership.
Patrick Gelsinger: And now as we add this focus on efficiency, we see a lot of opportunities. I'm having each of the four business areas, you know, client, networking, and data center, look at their own portfolios, even though those are the right product areas for us for the future. And similarly, the portfolio over Intel Foundry, you know, business, and that's the work that we've now been undertaking. And we're now accelerating, you know, based on the less-than-expected quarterly results, we're accelerating those impacts, we're going to drive that in the second half of this year. We want to get these restructurings done quickly, so that we can move forward more aggressively with the product lines next year You know, in terms of the long-term forecast, we're clearly tempering our view of how fast we can grow in the near term based on market conditions.
Patrick Gelsinger: But our model is built so that we will scale up or scale down the capital requirements appropriate to the market conditions we see. We believe the long-term guidelines that we've given you the 6040, you know, getting to the Foundry business model, and we've described the growth areas that we've said, you know, those are larger portions of our business, we believe those are still achievable in that regard. And we're on track, you know, for many of those things. The models that we're laying out in today's actions will help accelerate us in achieving those. Ross, do you have a quick follow-up? Yeah, I do, too.
Ross Seymour: Dave, you went through with good details, the cost structure, and what would change the puts and takes for next year. I wondered, I know you're not going to guide to 2025 revenue, but the puts and takes from maybe a competitive positioning point of view, how you feel in CCG, DCAI, primarily, relative to the competition, any sort of tailwind, headwind analysis or description for 2025 would be, Yeah, sure. On the client side, you know, obviously, we feel very good.
David Zinsner: Given our AI-PC position, we're leading that new product category. And, you know, I think we talked a little bit in the prepared remarks about Lunar Lake, our next product coming in after Meteor Lake and the performance of that. So that looks like a phenomenally good product and position.
David Zinsner: You know, we're making early inroads on the AI side of data centers, and that's only going to grow as we go into next year. The big question is, when does the kind of traditional CPU market recover? You know, it has been tempered this year and, of course, affected by other regions of the world, like China spending and so forth. You know, that's obviously been a soft space.
David Zinsner: And so we'll have to see how that plays out. And then, you know, NEX, obviously, also, outside of the telco space, is starting to recover. And then we have these other businesses, you know? Altera is starting to recover now. So we're, you know, optimistic that next year will be a good year for them. And, you know, we'll have to see how Mobileye plays out ultimately. I think on the margin front, you know, I talked about our kind of tempered view of gross margins next year, given the ramp of Lunar Lake, which, you know, with memory and package and, you know, almost all of the material getting sourced outside, and we're seeing inflation in that space, that is impacting it. But, you know, that part is followed by Panther Lake.
David Zinsner: That comes back into the fab. And I think one of the bigger stories we'll have once we get beyond next year is, you know, kind of the resurgence of our internal facilities to start taking on a lot of the capacity that we had to move into. External sources should provide some meaningful improvement in terms of profitability. And then, of course, we've done a lot, as Pat talked about, in terms of restructuring the business.
David Zinsner: And we'll start to show up next year, but we'll be even more impactful the following year, including the new operating model. So I think the good news for us is we actually don't need a ton of growth to see our model play out, both in the kind of medium term and long term, in terms of gross margins and operating margins. And if we do get the growth, it will put us in an even better position. Thank you, Ross.
Operator: Jonathan, can we have the next caller, please? Certainly. And our next question comes from the line of CJ Mews from Cantor Fitzgerald. Your question, please.
CJ Mews: Yeah, thank you for taking the question. I guess, Dave, a follow-up to that prior question. I was hoping you could perhaps speak to, you know, how to think about gross margins beyond 25. You know, it's obviously very hard to offer leverage when you're investing in both foundry capacity and, at the same time, outsourcing meaningful tiles to TSM. So, it's encouraging that you're bringing Panther Lake back in-house
David Zinsner: How should we think about incremental margins there and any of the other kind of moving parts that you've been speaking about on this call, including the unfavorable product mix and the more competitive pricing? Is that just a near-term kind of phenomenon or something else we should be thinking about, you know, into 25? Yeah, yeah.
David Zinsner: So, as I talked about with Ross, CJ, you know, the good news for 26 for us is that that really begins the shift back to the internal manufacturing footprint for a lot of our tiles. And so bringing back more wafers to the internal network will meaningfully improve the cost structure. You know, I think the adjustments in CapEx, which are clearly helpful in terms of cash flow in the near term, will become really beneficial to the cost structure as depreciation becomes, you know, kind of a less of a headwind for us. So that will also be helpful.
David Zinsner: And then, like I said, we've got all these structural improvements that are coming our way, both from the actions we've taken today, but the new, you know, new operating model, and decisions will get made on a going forward basis that will just optimize our business model going forward. I think, you know, 26 should be a good year for us in terms of gross margins. We'll save the actual number, you know, for a later date when we, you know, have more visibility into how things are playing out.
David Zinsner: I think from a mixed perspective, you know, it's probably not going to be a big, you know, headwind or tailwind for us just because of the strict mix other than, you know, as we move towards more leading-edge wafers, the margins on those wafers are significantly better than, you know, the margins in pre-EV nodes. So, that will be one factor that will certainly help us. In that regard, that also helps us on the pricing side because, obviously, from a wafer perspective, we get better pricing on EUV wafers as opposed to pre-EUV wafers.
David Zinsner: And then ultimately, I think on pricing, you know, it will really come down to when we have a competitive process, and we have competitive products running on a competitive process, and we're delivering what the customers want. That helps us in terms of the pricing dynamic, and we're getting to the place, as Pat talked about, where we're starting to deliver on all those fronts, and so I feel good about our opportunity to realize that in the form of prices as we progress through the next few years.
David Zinsner: And just one thing to add on top of that, just to clarify, with Panther Lake already powered on and showing good health, that is a product that we will start ramping up in the second half of next year. So we'll start to see some of those benefits, but obviously, the huge volume benefits of that really are in 26 where we'll be very aggressive at bringing both the wafers home on a more competitive process with a more competitive product with Panther Lake, offsetting the volumes of Lunar Lake, which is almost entirely outsourced.
David Zinsner: So we bring the tiles home with a more competitive product and a more competitive process, and that really is, I'll say, the story that will start to unfold as we talk to you more next year. C.J., do you have a quick follow-up? Yeah, just a quick one on OpEx.
CJ Mews: You gave us the 17.5 for all of calendar 25, but could you share with us what you think the extra rate would look like? I'm coming to around 4.25 billion. Is that in the ballpark?
David Zinsner: Yeah, I'll say, you know... Given that some of the actions we're taking will kind of go through at least the early part of next year, we're going to enter at a higher number than we're going to exit. I'll give you that. And we should be down in 26 relative to 25. Give me some time as we progress through the year to start to fine-tune the budget for 26, and I'll give you more clarity around that. Thank you, TJ. And Jonathan, can we have the next question, please?
Operator: Certainly. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please. Great, thank you.
Joe Moore: You talked about the server roadmap with Sierra Forest shipping and Granite Rapids shipping this quarter. Can you talk about where that puts you competitively? Do you think you've kind of closed the gap or is a leadership product, and you know, obviously, Clearwater Forests is the longer-term focus, but where are we in the interim? Yeah, thank you.
Patrick Gelsinger: And obviously, Sierra Forest, right, E-core product, very efficient, but a new category for us. So we have to go win sockets with it. Early customer feedback, very positive. As we've said, greater than 25% TCO value that they're seeing from it. But it's early in its ramp.
Patrick Gelsinger: Granite Rapids is really the P-core, I'll say the more traditional Xeon for us, and we'll start that ramp this quarter. But it will take, like anything in the server market, you know, winning back share, winning back sockets is a longer-term cycle for that. But there are a lot of encouraging signs for Granite Rapids, even though a lot of the data center energy right now is on the AI build out, as you know.
Patrick Gelsinger: So in this environment, you know, we're largely facing a period where much of the investment energy is going into the AI footprint, so we're having to fight to win those sockets back. But Granite Rapids looks very positive, and the early health of Clearwater Forest is really spectacular.
Patrick Gelsinger: You know, this is a really stunning technical achievement, you know, with the new design, 18A. This level of health, this early in a major server product, is really spectacular. The new Foveros Direct should have substantial TCO benefits for next year. And then the next P-core version of that on 18A is also showing very good design progress, you know, not in fab yet, but showing very good design progress. So we feel like the roadmap is becoming more competitive.
Patrick Gelsinger: And with it, you know, we believe our market share position is fairly, right, I'll say, you know, static, right, year on year. But we do see that overall, our market share is more modest in the second half this year. So the x86 share, and we're stabilizing our overall position in the marketplace. You know, we believe as we then go to fight to win back, one of the good things that we've seen for our server market is the AI head nodes, where we're quite advantaged.
Patrick Gelsinger: And we're seeing a lot of interest in Xeon being the head node of choice for anybody's accelerator, you know, including ours. So a lot of things to unpack there, but we do feel like our position is stabilizing and strengthening with our products. And the roadmap only improves from here. Joe, do you have a follow-up?
Patrick Gelsinger: Yeah, just on the notion that AI has kind of stolen some of the focus from servers, it seems like we would be looking at a ceiling in overall power budgets in a couple of years. That would mean we need to invest in traditional server ecosystems and maybe do a significant refresh. You know, do you see any indications of that? And given that, you know, I perceive you guys as sort of stronger in enterprise than cloud right now, like, how are you positioned to take advantage of that when it does come? Yeah, thanks, Joe.
Patrick Gelsinger: And we do think that the enterprise market, right, is a more favorable market for us. And we do have some early indications of a positive cycle there. But I'll say it's too early to give you any real firm indications.
Patrick Gelsinger: But we are starting to see, I'll say, better buying behavior, and better signals from our OEMs in the enterprise market. Similarly, for the cloud market, we do believe there will be a refresh cycle, right? As people get their AI strategies in place, the TCO benefits of a server refresh, now that we start talking about 3x, 4x consolidation ratios that they can have on their traditional cloud environments, their container delivery environments, these are quite substantial.
Patrick Gelsinger: So we do believe that as our products get to be more competitive, right? And there is a natural refresh cycle for that, the markets will be more favorable for the traditional CPU market. But of course, the story is CPU plus GPU, right?
Patrick Gelsinger: And that's the bigger message that we'll be delivering. And obviously, as Gaudi3 starts shipping the CPU plus GPU use cases, like we've described with OPEA, that will also help us position ourselves on both sides of the cloud and the enterprise market for both CPU and GPU. So that's the strategy that we're building toward. Thank you, Joe.
Operator: Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Timothy O'Curry from UBS. Your question, please. Sure, thanks.
Timothy O'Curry: Dave, can you explain again how June's gross margin was so much worse than you thought just three months ago? I mean, you know, revenue is basically in line. I know you talked about mix, but it seems like it was probably a pretty small part of it. Mix was, and it was really more the decisions around Intel 4 and 3. So can you just explain again? I'm not sure. I'm not sure I understand why that was such a big factor.
David Zinsner: OK, that was the biggest one. I'll just say that there were a couple other things that we had to do some write-offs related to legacy businesses that impacted us. Our utilization was a bit lower. That did impact us.
David Zinsner: But the biggest one was the shift. We were originally planning to ramp up Meteor Lake, Intel 3, and even run production on Intel 4. Sorry, Intel 4 and then run production on Intel 3 in Oregon, which is our TD fab, our process technology fab, kind of our development fab. We made the decision to more quickly shift all of that over to Ireland, and it's a good move because it saves capital. We don't have to spend capital twice, essentially, and it starts to mature the Intel 4 and 3 processes in Ireland more quickly.
David Zinsner: The downside of that is the wafers are expensive right now and so you know we get this kind of early ramp of the product at a much higher wafer cost that we're pushing through the system and that puts pressure on the margins that's going to carry into next quarter I mean we will do better in next quarter obviously but we're going to do more volume and the margins will be you know below the corporate average because of because while we're improving the wafer cost you know it's not still not to the point where it's above corporate average yet and so it will weigh down on margins for the third quarter as well.
David Zinsner: After that, you know we started it; it gets more and more mature, the cost structure gets better, and you know the situation on Meteor Lake will improve. Jim, do you have a quick follow-up? Yeah, Pat, um, can you just talk about the founding strategy given the CapEx cut? I guess my question is how you sort of execute on the plan with this lower CapEx. I mean, kind of on the one hand, you keep, you know, we keep talking about bringing all these wafers back in house to help gross margin in, you know, 2026.
David Zinsner: But I also hear about a lot more outsourcing to PSMC, even in real time. So is the cut more that some of your founding customers are maybe structurally deciding that they're not as committed? I'm just trying to understand how you can cut CapEx and still execute on the foundry strategy. Thanks.
Timothy O'Curry: And, you know, at the highest level, the foundry strategy hasn't changed. And we've built a capacity corridor for foundry customers. However, until we have committed orders, we're going to be modest on how much equipment we put on the shelves and the sites that we have in place.
Patrick Gelsinger: And how much of that corridor we keep available, how much flexibility working with our equipment suppliers that we need, you know, for that will be a subject of careful scrutiny as we go forward. We have also made some adjustments in the capital investment that we need to support our current view of the market forecast. So all of those are, say, just adjustments. You know, the big thing is now that we're finishing this phase of aggressive build out, right? And as you think about what we had to catch up on, you know, we had no UV capacity. We had no shell ahead, site ahead, you know, capacity. We had no capacity to pull the tiles home.
Patrick Gelsinger: As those come into place, we've been making substantial capital investments over the last couple of years, and now we're focused on how do we harvest those investments in twenty four, twenty five, and twenty six. So we're taking a much more aggressive view of capital utilization, right? How much capital does it require ahead of working with the suppliers to be more efficient in our capital dollars, just like a foundry does.
Patrick Gelsinger: And for that, we'll point you back to again, right? We're going to be a world class fabless company with Intel products. We're going to be a world class foundry with Intel foundry. The last point I'd make here on this is, you know, a lot of the early success that we're having with foundry customers is advanced packaging, and they have the capital requirements are not as significant as required for wafer
Patrick Gelsinger: So we believe very much that we're seeing a surge of interest there. You know, customers and advanced packaging are clearly interested in us for capacity, but increasingly for our most advanced packaging technology. So that's an area that we believe we have and we've described before as the on ramp for Intel foundry, and that's continuing to look very good. You know, the final point is the Intel foundry capacity will be aligned with, right to the first order, the Intel product requirements. And clearly, as a lot of tiles externally in twenty five, we bring those home in twenty six.
Patrick Gelsinger: That's when we'll start to really, as Dave said, see the benefits of the model that we've put in place. Tiles coming home, leadership process, technology, leadership products start to deliver big time in twenty five and beyond. Thanks, Tim. Jonathan, can we have the next caller, please?
Operator: Certainly. Our next question comes from the line of Srinivas from Raymond James. Your question, please. Thank you.
Srinivas Pajjuri: A couple of follow-ups. Dave, on the move from Oregon to Ireland, Fab, you talked about that being a gross margin headwind. Can you talk about how much, can you clarify how much of a headwind that is right now and also, when it's fully loaded on a like for like basis, how much of a headwind do you think that's going to be on an ongoing basis? I'm sorry, the second question is, how much will the headwind be on an ongoing basis, is that what you're saying? Ongoing basis, yeah. Okay. All right.
David Zinsner: So I think the best way to think about it is, you know, we were, I don't know, 400 basis points or so off on the gross margin. Solutions, taking into account revenue, was part of it. It was a meaningful chunk of that 400 basis points. The write-offs related to legacy businesses and the, you know, mix and underutilization also affected it, and it wasn't an insignificant amount, but that was a good portion of that 400 basis points, let's call it that, and that will probably be the case in the third quarter, probably given the, you know, increase. I think we're talking about a 50% increase in Meteor Lake quarter over quarter in the third quarter.
David Zinsner: Beyond that, it's going to start to become less and less to the point where it's, you know, actually not going to be a headwind. Yeah, it becomes a tailwind. As the Ireland factory ramps up, the production factory will have a lower cost per wafer start than a TD factory like Oregon, so it becomes a headwind as we go into next year.
David Zinsner: Now as we know, the challenge for next year will be we'll now be ramping Lunar Lake next year. Lunar Lake has the memory in the package, so we're going to have to essentially buy that at a price and turn around and..., you know, include that in our price at 0% margin. So that puts some negative pressure on the margins. And additionally, it's got more of the content sourced externally.
David Zinsner: And as you know, we're seeing some inflation. So that one then becomes more of the Meteor Lake starts to be helpful, but Lunar Lake starts to become a drag on Intel product margins, which is why we were tempered in terms of our outlook for margins next year because we're gonna have a lot of improvements on the Intel foundry side. It's gonna be tempered on the product side, and it's really gonna be because of Lunar Lake. Sreeni, do you have a- And I'm just gonna add one thing.
Patrick Gelsinger: As we move the Intel 4.3 capacity into Ireland, it also gives our TD team more focus on their capital on 18A as well as then 14A and 10A. We're taking, for instance, the second high-end A tool is coming into our Oregon facility. So we're well underway on 14A, and part of this was a capacity and cost decision for the long term. Part of it was an AIPC acceleration, but it was also a TD cadence decision and optimizing the use of our TD resources for the next generation technologies, which are already well underway and showing good early indicators. Srini, do you have a quick follow-on?
Srinivas Pajjuri: Yeah, so Pat, I think in the past, you talked about the foundry business potentially breaking even sometime in 2027. And given all the cuts, and you seem to at least sound confident, confident that, you know, the foundry opportunity is not changing. So I'm just curious, you know, do you see a possibility that, you know, the foundry business could actually break even sooner, given all the cuts?
Patrick Gelsinger: Clearly, that's our objective for Dave and me. I'll say that said, we have a lot of wood to chop until we complete that journey. The steps that we've taken today are significant, ones for our operational efficiency that we're putting in place. So clearly, that's the operating objective that we have. But as you said, 26 is really this year that many of these wafers come home. Many of the new factory investments will come online, and new process technologies. So I'd say that the 27 timeframe is still a good one.
Patrick Gelsinger: But you can trust that every aspect of what we're doing is to accelerate profitability. And the significant announcement today of the cost and financial focus will give us, I'll say, the scrutiny and the lens by which to focus our Intel foundry. $10 billion next year is a big number.
Patrick Gelsinger: And we expect that many of these operational improvements will carry forward in 26. Dave said an acceleration of our adjusted free cash flow turning positive. So everything that we're doing is aligned with that thought, Srini. Thank you.
Operator: Jonathan, we've got time for one more question. Certainly, then, our final question for today comes from the line of Matt Ramsey from TD Cowan. Your question, please. Yeah, good afternoon, thank you guys. I guess my first question, on the client, might've mentioned. Flat to down in September, I think your primary. Quantified, maybe you could give us a little color there. I think there's a lot, Client-Marketed. Institute, Microsoft Office Word Document, MSWordDoc Word.
Matt Ramsey: Document.8, Yeah, I'll take that, Matt. And, you know, we feel very good about our client position, the momentum we have in AIPC. We have a very healthy ecosystem as well, and I'll say that with the large market share position that we have, we're very focused on sell-in and sell-through in the channel. So I believe our overall view of inventory levels, you know, where our market share is, we're actually quite comfortable with the indications that we've given some, you know, inventory sell-through in the third quarter above seasonal in Q4.
Matt Ramsey: Overall, the TAM expansion, you know, is low single digits, even though we're seeing a lot of enthusiasm around the AIPC and further TAM expansion as we go into 25, as is expected now broadly. We would also say that, you know, our position in the commercial portion of this market is very strong with our vPro assets, and we believe we're coming into a refresh cycle on the corporate. You know, we also saw things like vPro have great success for customers as they were dealing with the CrowdStrike blue screen period, and customers who, you know, our vPro customers were able to recover in a day or so, where customers not on vPro took weeks to recover from that.
Patrick Gelsinger: So, you know, a lot of reinforcement of the ecosystem, the leadership that we have on AIPC, and, as Dave said, you know, Lunar Lake and Panther Lake only make our market position stronger. So, I think we're very comfortable, and every indication so far this quarter is very solid for those outcomes. Matt, do you have a quick follow-on? Yes, I do.
Matt Ramsey: Thanks, John. I wanted to ask you, I think in some of the prepared script that may be early in the Q&A, Pat, you kind of reiterated the $15 billion fund for the foundry business, and I know in the medium term, a lot of that is packed. I wanted to ask about the customers that you've engaged with on, How have you seen the Gantt charts of the programs that they're planning to bring into your foundry progress? Are people still committed? TKs, and maybe doing tape-ins. Are things moving forward? Acceleration
Patrick Gelsinger: Have you seen hesitation or maybe wait and see from those customers? I'm just trying to figure out how that stuff is progressing. Yeah, let me just clarify the $15 billion is the lifetime deal value of committed deals. Right, so this is a pipeline. This is committed business that we now have in place. So I just want to clarify that, Matt, because I think your question suggests it's a pipeline.
Patrick Gelsinger: There's a lot more in the pipeline, you know; this is $15 billion of committed deals. As you say, a lot of the near-term opportunity has been advanced packaging, and we're seeing a significant expansion of that capability in terms of volume and technology. On 18A specifically, a lot of customers have been waiting for the PDK, right?
Patrick Gelsinger: And now that we released the PDK last month, the 1.0 PDK, we've seen a flurry of activity, you know, with the EDA, the IP vendors, and the end customers. So I'd be optimistic that we have good indicators coming in that area in the future, but this was really the starting point, you know, for many of them to go from test chips to start looking at production chips, you know, based on the PDK that we've just released.
Patrick Gelsinger: So we've remained very comfortable with our earlier comments in that area, and I'd say, you know, we do believe that we'll have further updates there. But, as we've also indicated, customers are reluctant to put their names out there, given the supply base and the traditional operation of the foundry industry.
Patrick Gelsinger: Overall, things are looking on track for what we've said with a meaningful acceleration in packaging over the last quarter. More updates to come. Maybe with that, John, I'll wrap us up. You know, thank you for joining our call. We appreciate the time, as always. And I'd say on a couple of these topics. I hope to see many of you at the Deutsches Bank Technology Conference coming up, where we'll have some further updates.
Patrick Gelsinger: You know, I want to reiterate in a quarter like this that we are resolved to finish the audacious turnaround, the building of our process and product key milestones that we've achieved in this phase, but now we have to shift to putting more emphasis on the financial sustainability of our business. We're making difficult decisions.
John Pitzer: As we right-size, we rebuild a more efficient, leaner, agile Intel for the future, and one that we're confident will enable our long-term success. Thanks and good afternoon, everybody. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.