Q3 2024 Intel Corp Earnings Call
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Thank you for standing by and welcome to Intel Corporation's third 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. If your question has been answered and you'd like to remove yourself from the QS simply press star 1-1 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, investor relations. Please go ahead, sir.
Thank you, Jonathan. By now you should have received a copy of the Q3R News release and earnings presentation, both of which are available on our investor relations website, iintc.com. For those joining us online today, the earnings presentation is also available in our webcast window.
John Pitzer: I am joined today by our CEO, Pat Gelsinger and our CFO David Zinsner.
In a moment, we will hear brief comments from both, followed by a Q&A session.
Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it. And as such are subject to various risks and uncertainties.
It also contains reference to non-GAAP and segment 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 our non-GAAP and segment financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures.
Speaker Change: With that, let me turn things over to Pat.
Thank you, John, and good afternoon, everyone. I appreciate you joining us today.
We delivered 2-3 revenue above the midpoint of our guidance and we made significant progress on our cost reduction plan.
That said, Q3 profitability was negatively impacted by the charges we referenced on our Q2 call. This reflects the aggressive actions we are taking to lower our costs, improve our efficiency, and enhance our market competitiveness.
Speaker Change: Dave will go into these charges in detail shortly.
Speaker Change: Operationally, Q3 results exceeded our expectations as we achieved key milestones across Intel Foundry and Intel products. Underlying trends in the business are improving at a measured pace and our outlook for Q4 is modestly above current consensus.
Overall, our stepped-up focus on efficiency and execution across the business is having a positive impact. We have a lot more ahead and we are acting with urgency to deliver on our priorities.
We need to fight for every inch and execute better than ever before and our teams are embracing this mindset as we build a leaner more profitable Intel.
Speaker Change: Now, let me provide more details starting with an update on our cost reduction plan that we announced three months ago. First, we completed the vast majority of our headcount actions during Q3, and we are on track to our greater than 15% workforce reduction before the end of the year.
Second, we have reduced our capital expenditures by over 20% relative to the plan we had entering the year. We are now well-positioned with our shell-ahead strategy to react quickly to market demand.
With our transition to EUV now complete and the launch of Intel 18A on the horizon, we have a more normal cadence of node development at Intel 14A and beyond.
Speaker Change: In addition, our teams are maniacally focused on improving fab productivity, allowing us to produce more with less over time.
Third, we have begun to simplify and streamline parts of our portfolio to unlock efficiencies and create value.
We are re-establishing product portfolio leadership by narrowing our focus on fewer projects with the top priority being to maximize the value of our x86 franchise across the client, edge, and data center markets.
As part of our portfolio simplification, we will move our edge business into CCG and refocus our NEX portfolio on networking and telco.
Speaker Change: We will also integrate our software business into our core business units to foster more integrated solutions that address our customers' most difficult challenges.
Speaker Change: We are evaluating other portfolio actions which we will communicate when appropriate and we plan to provide new segment reporting that reflects these portfolio shifts in Q1 of 2025.
Related to our cost and efficiency actions, the restructuring charges we took in Q3 were significant and necessary to right-size the company as we reduced spending by over $10 billion in 2025.
Speaker Change: There was also a sizable impairment, mostly related to Intel 7 equipment and space, reflecting excess COVID-era spending that we have concluded cannot migrate to more advanced nodes now that we have fully transitioned to EUV processing.
From a broader financial perspective, the actions we took in Q3 go a long way towards delivering the 2025 financial commitments we outlined last quarter.
Specifically, we plan to reduce non-product cost of sales by $1 billion, lower OpEx to $17.5 billion, and drive gross and net CapEx to between $20 to $23 billion and $12 to $14 billion, respectively.
We expect adjusted free cash flow to be positive next year, and we will focus on decreasing leverage and improving liquidity.
Let me go into greater detail on the business starting with Intel products. We continue to focus on our core x86 franchise and the ecosystems we have developed over 40 plus years of investing.
They are a tangible source of value and differentiation for Intel, our partners, and our collective customers.
and help to cement the x86 architecture as uniquely positioned to meet customer demands going forward.
Speaker Change: We are taking steps to supercharge and further unlock the value of our x86 franchise.
I am particularly excited about our recent announcement with AMD to create the X86 Ecosystem Advisory Group.
We are bringing together leaders from across the ecosystem to help shape the future of x86 with a focus on simplifying software development, ensuring interoperability, and interface consistency across vendors and equipping developers with standardized architectural tools and guidelines.
Speaker Change: Broadcom, Dell, Google, HPE, HP Inc., Lenovo, Meta, Microsoft, Oracle, Red Hat have signed on as founding members, as have industry luminaries Linus Torvalds and Tim Sweeney.
Turning to our product segments, in CCG, we continue to lead the AIPC category.
In September at IFA, we launched our Intel Core Ultra 200 V Series processors, formerly named LunarLake.
Speaker Change: This is the most efficient family of x86 processors ever created, setting a new standard for mobile AI performance and significantly outperforming competitor platforms.
Lunar Lake's combination of superior performance at comparable and competitive battery life positions us well to continue to define and lead the AIPC category.
We also continue to nurture the most robust AI PC ecosystem in the industry with more than 100 ISVs, 300 applications, and 500 AI models powered by CoreUltra.
And we remain on track to ship more than 100 million AI PCs accumulative by the end of 2025.
Speaker Change: Next up is Airalake, which launched earlier this month and brings the power of the AI PC to the desktop, delivering a huge leap in performance per watt and bringing an NPU to enthusiast desktop and entry workstation platforms for the first time.
All of this is paving the way toward the launch of Panther Lake in the second half of 2025. Panther Lake will be our first client CPU on Intel 18A, a more performant and cost-competitive process that will allow us to bring more wafers home and improve overall profitability.
Speaker Change: Overall, we are making good progress in CCG. Our share position is strong with a product roadmap and ecosystem that is increasingly setting us apart from our competition, especially in the enterprise market, as customers continue to see increasing value from our vPro solutions.
Turning to DCAI, our focus is squarely on delivering powerful AI systems that provide enterprise customers with greater choice and flexibility.
Optimal Performance Per Watt, and Lower Total Cost of Ownership. And this quarter's launches significantly enhance our market competitiveness, even as we recognize we have more work to do.
We launched our latest Xeon 6 product, codenamed Granite Rapids, which doubles the performance of the prior gen with increased core counts, memory bandwidth, and embedded AI acceleration.
The new Xeon 6 is tailor-made to handle compute-intensive workloads with exceptional efficiency from edge to data center and cloud environments.
This solidifies our position as the head node of choice in AI servers.
Speaker Change: greater than 70% of
CPU rated servers are already using Intel Xeon as the host CPU.
And we have a significant opportunity to build on this as we continue re-establishing Xeon's competitive strength and market leadership.
Speaker Change: This quarter, we also launched our Gaudi3 AI Accelerator, which delivers twice the networking bandwidth and 1.5x the memory bandwidth of its predecessor for large language model efficiency.
Speaker Change: While the Gaudi3 benchmarks have been impressive, and we are pleased by our recent collaboration with IBM to deploy Gaudi3 as a service on IBM Cloud, the overall uptake of Gaudi has been slower than we anticipated as adoption rates were impacted by the product transition from Gaudi2 to Gaudi3.
and Software Ease of Use. As a result, we will not achieve our target of $500 million in revenue for Gaudi in 2024.
That said, taking a longer-term view, we remain encouraged by the market available to us. There is clear need for solutions with superior TCO based on open standards, and we are continuing to enhance the Gaudi value proposition.
In NEX, we announced last month that we will be focusing the business on networking and telco as part of our efforts to simplify our portfolio, drive productivity, and enhance our market position.
We will move our edge business into CCG, which creates a meaningful opportunity to more efficiently leverage our core client business and extend our leadership to a wide range of vertical edge solutions, especially as AI on the edge accelerates.
Speaker Change: As a simpler, more focused NEX, we are better positioned to gain profitable share in the most attractive markets. In networking, we continue to further open-source Ethernet solutions for connectivity through our Ultra Accelerator Link and Ultra Ethernet Consortium.
Let me now turn to Intel Foundry.
A key part of our strategy is returning to process leadership through disciplined execution of our roadmap.
Speaker Change: Intel 18a, our fifth node in four years, is healthy and continues to progress well at this stage in the development process. Our lead vehicles for Intel 18a, Panther Lake and Clearwater Forest, have met early 18a milestones ahead of next year's launches.
In addition, we have seen good traction with the release of our 1.0 PDK last quarter and the material increase in the engagements and the number of RFQs we are actively quoting.
While we will not win them all, we are confident in our head-to-head position based on feedback from potential customers.
Speaker Change: Most recently, as announced, we are finalizing a multi-year, multi-billion dollar commitment by AWS to expand our existing partnership to include a new custom Xeon 6 chip on Intel 3 and a new AI Fabric chip on Intel 18a.
Beyond AWS, we added two additional 18a wafer design wins this quarter from compute-centric companies and our pipeline of potential wafer designs has grown nicely over the quarter. Given our leadership in advanced packaging capabilities, we also added multiple back-end design wins this quarter.
Speaker Change: We were also awarded an additional $3 billion in direct funding under the Secure Enclave program to produce leading-edge semiconductors for the U.S. government. We are proud to be the U.S. government's partner of choice to fortify the domestic semiconductor supply chain and ensure the U.S. maintains its leadership in advanced manufacturing, microelectronic systems, and process technology.
Moving forward, as we shared last month, we are creating clearer separation for Intel Foundry by establishing the business as an independent subsidiary.
Speaker Change: This is important to our external Foundry customers, and will give us future flexibility to evaluate independent sources of funding and optimize the capital structure of Intel Foundry and Intel products.
Speaker Change: We are in the process of forming a fiduciary board for the new Foundry subsidiary, which will include independent directors with deep semiconductor experience.
In our All Other category, our number one priority is to unlock shareholder value. For Altera, revenue increased 14% sequentially and operating profit turned positive in Q3. We also announced the introduction of our new mid-range and small-form factor products Agilex 5 and Agilex 3 to serve broad market customers and segments.
Speaker Change: With an increasingly competitive roadmap, the business is well positioned to show continued top and bottom line improvements.
Consistent with what we have said previously, we remain focused on selling a stake in Altera on a path to its IPO in the coming years. To that end, we have begun discussions with potential investors and expect to conclude in early 2025.
For Mobileye, the company continues to be a leader in the development and deployment of advanced driver assistance systems.
And, by providing Mobileye with separation and autonomy, we have enhanced its ability to capitalize on growth opportunities and accelerate its path to creating even greater value.
The company recently hosted an AI event, laying out a comprehensive strategy for camera-centric compound AI systems providing a full range of autonomous driving solutions.
Wrapping up, our Q3 results reflect heightened focus, discipline, and execution you can expect moving forward.
Speaker Change: We are rigorously managing our costs and improving our profitability to create long-term shareholder value.
We are carefully managing our cash to strengthen our balance sheet and improve our liquidity. And we are staying closely connected with customers and partners as we innovate to meet their most challenging needs.
Q3 also reflected some very difficult decisions we made to right-size the business and I want to recognize the hard work of our employees.
We've put some points on the board over the past few months, but we are far from satisfied. We view every quarter as a new opportunity to up our game and continue to execute well, and that is our mindset entering Q4.
With that, I will now turn it over to Dave.
Thank you, Pat, and good afternoon, everyone. Third quarter revenue was $13.3 billion, up 4% sequentially, and in the upper half of the range we provided in August.
Intel products and Intel Foundry both delivered sequential revenue growth even as we navigated an inventory drawdown in clients.
Speaker Change: Turning to non-GAAP gross margin, as you know, last quarter, we guided gross margins of 38%, but indicated that we expected incremental costs associated with our spending reduction plan, and some of those costs would likely impact non-GAAP gross margin.
We recognized approximately $3 billion of non-cash impairment and accelerated depreciation charges, primarily for Intel 7.
Speaker Change: which are above and beyond our quarter-to-quarter asset adjustments driving our non-GAAP gross margin down to 18% and EPS to a loss of $0.46.
Speaker Change: This $3 billion dollar charge reduced non-GAAP gross margin by approximately 2,300 basis points and EPS by approximately $0.61 per share.
Speaker Change: Beyond those impairment charges, we also were impacted by $15.6 billion of charges that are excluded from our non-GAAP results.
Speaker Change: These charges have three main components.
Speaker Change: First, we impaired our deferred tax asset balance by nearly $10 billion, which was triggered by cumulative GAAP-based losses over the last three years.
Speaker Change: Second, a $2.6 billion goodwill impairment related to Mobileye, which shows up in our consolidated earnings.
And lastly, is $2.2 billion associated with the severance of approximately 15% of our employees aligned with our plan to reduce operating expenses to $17.5 billion and take out $1 billion of other cost of sales next year.
This last charge is the only charge with a cash impact.
Speaker Change: The tax asset impairment charge will not affect cash taxes going forward, and full details are in the 10-Q, which will be available tomorrow.
Q3 operating cash flow was $4.1 billion, up approximately $1.8 billion sequentially on better working capital. We had growth CapEx of $6.5 billion in the quarter, resulting in adjusted free cash flow of negative $2.7 billion.
We expect the principal cash costs associated with the restructuring charges to land in Q4-24.
We have $24.1 billion of cash in short-term investments, paid down $2.8 billion of debt in the quarter, and remain focused on de-levering next year as cash from operations continues to improve.
Speaker Change: Moving to segment results, Intel products revenue was $12.2 billion, up 3% sequentially.
CCG revenue was down 1%, quarter over quarter, as customers work down their inventory as expected.
Speaker Change: DCAI revenue was up 10% sequentially as demand for traditional servers improved.
Speaker Change: Revenue for NEX was up double digits sequentially as elements of this business start to recover off a cyclical bottom.
Q3 operating profit for Intel products was $3.3 billion, 27% of revenue, and up $400 million quarter over quarter on higher revenue and reduced operating expenses.
Operating income was negatively impacted by a $300 million write-down of accelerator inventory due to reduced revenue expectations.
Intel Foundry delivered revenue of $4.4 billion, up slightly sequentially, driven by increased wafer mix of Intel 4.3.
Speaker Change: Foundry operating loss of $5.8 billion was down sequentially materially driven by the $3 billion impairment charges I discussed earlier.
We expect losses to continue at approximately the same rate in Q4, minus this impairment charge.
Next year, as we move to nodes with a better cost structure and realize the savings associated with the restructuring actions, we expect operating losses to improve significantly.
Speaker Change: Additionally, we're intensely focused on driving improved returns on our roughly $80 billion of tangible book value, most of which is associated with Intel Foundry.
Mobileye reported revenue of $485 million and maintained full year guidance for revenue and adjusted operating income.
Q3 revenue was down 8% year-over-year, primarily driven by a more than 50% reduction in shipments to China, where comparisons would become easier as the exposure is now significantly smaller. Cash generation was quite strong as operating cash flow was well above operating income.
Altera delivered revenue of $412 million, up 14% sequentially, consistent with guidance, to support improved lead times by our distribution partners.
For Q4, we expect high single-digit sequential revenue growth as we work with our distribution partners to prepare for the cutover to Altera independent warehouse operations.
Speaker Change: Overall, billings remain below consumption as end customers continue to work down inventory tied to previous supply constraints.
Speaker Change: We anticipate inventory normalization will continue through the first half of next year.
Now, turning to our Q4 guidance. We successfully worked down client-customer inventory levels in Q3 in line with our expectations, and despite continued client-customer inventory reductions in Q4, CCG should grow towards the higher end of seasonal, often abnormal Q3.
Speaker Change: Revenue is expected to be flat sequentially across DCAI and NEX businesses in aggregate.
Based on these factors, we expect revenue of $13.3 to $14.3 billion in the fourth quarter.
At the midpoint of $13.8 billion, we expect gross margin of approximately 39.5%, with a tax rate of 13% and EPS of $0.12, all on a non-GAAP basis.
On a GAAP basis, as we continue to execute on our cost actions and portfolio decisions, we expect additional restructuring charges in Q4.
We continue to size the business to support trendline revenue growth of 3-5% annually with the ability to scale up to 7-9% as demand dictates.
We anticipate that our 2024 growth and net capital investments will be approximately $25 billion and $11 billion, respectively.
Our expectation is for adjusted free cash flow to be negative in 2024 due to the restructuring charges disclosed today and the uncertainty around the timing of capital offsets as we approach year-end.
In 2025, with OpEx of approximately $17.5 billion and gross and net CapEx of $20-23 billion and $12-14 billion respectively, we expect to achieve positive adjusted free cash flow.
Speaker Change: Before I close, let me take a moment to remind you of a couple items as you model 2025 and that today's restructuring and impairment charges are in service to achieve this financial model. First, we are positive on the growing market adoption of the AIPC and our strong product positioning.
As our mix of outsourced products and CCG grows in calendar year 2025, and we ramp Intel 18A to support Panther Lake, gross margin expansion could be muted, particularly in the second half.
We expect gross margin fall-through to significantly improve in 2026, driven by the vastly improved cost structure of Intel 18A, the return of tiles to a meaningfully underutilized Intel foundry, and operational efficiencies.
Second, the estimated $700 million on a GAAP basis of non-controlled income from Mobileye, Altera, IMS, and the portion of the skips earned by our partners.
is expected to be heavily weighted to the second half of 2025 and will continue to grow in future years with the ramping of wafer outs at our skip fabs in Arizona and Ireland.
In closing, our profitability remains well below the standards we've set and recognize there's much more work to be done to improve the efficiency of the business.
We're encouraged by the progress we've made this quarter to right-size the spending, and our process and product execution, combined with the strong external customer traction in the quarter, give us confidence our strategy will deliver compelling shareholder returns.
I'll now turn it back over to John to start the Q&A.
John Pitzer: 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 applicable. With that, Jonathan, can we take the first question, please? Certainly. And our first question for today comes from the line of Ross Seymour from Deutsche Bank. Your question, please.
Ross Seymour: Hi guys, thanks for letting me ask a question and congrats on the solid results. Pat, I want to talk about the 18A transition. Can you just talk about what are the metrics we're going to be able to see externally on this to give people confidence in the ability to ramp it? You've said it's healthy, you've talked about new design wins, but...
John Pitzer: When are some of the true metrics going to come either internally or perhaps even more importantly externally as your Intel foundry revenue from an external customer base grows?
Speaker Change: Yeah, thanks Ross and obviously this was a good quarter on the progress that we had three new customers Amazon which we were public on a few weeks ago, you know Panther Lake and
Clearwater Forest. Internally, two new external customers added to that, so solid progress on it. You know, clearly next year there's not a lot of financial benefit from it, you know, because we're only ramping late in the year. You know, thus we'll be giving more qualitative metrics on progress as we go through the year loss.
We'll continue to update, give LDV updates, lifetime deal value for foundry updates as we go through the year. Clearly, as we get more customers, we'll be updating on that progress.
John Pitzer: It has much larger impacts on 26 financials as we ramp and bring wafers home, as well as move into the better margin structure that we'll have on Panther Lake with 18A and across the product line.
So we'll be giving clarity in that way, but it will be hard to tie it to specific financials next year. But this is super important for us, for our foundry business, for the industry. So we'll be giving plenty of color as we proceed. Ross, do you have a follow-up question, please?
Yeah, I do. One for Dave on the gross margin side of things. Just somewhat chronologically, X the charges, it looked like you were about a 41% gross margin in the second, or excuse me, the third quarter. I know that's not where you want to be overall, but that's much better than you guided. So
John Pitzer: What was the cause of the upside there? Why is it going down in the fourth quarter? And what are the big-picture puts and takes that you are alluding to about the gross margin leverage or lack thereof, especially as we get into the second half of next year?
Speaker Change: Yeah, good question.
Okay, so I would say the third quarter surprise was really associated with better sell-through of previously reserved inventory. I think that was the thing that upsided us the most in the third quarter. As we look into the fourth quarter, we'll have that
RISC-V, PowerVia, Blockscale, Xeon, RibbonFET, RAMP-C, Evercore ISI, O-RAN, Gen Xeon, Gaudi2,
John Pitzer: the impairment charge.
John Pitzer: And additionally, we're going to have more startup costs.
John Pitzer: Yeah.
start to inform how 25 will look in terms of gross margins.
Provide guidance yet on 25 it's it's still early
P-core, Xeon, RibbonFET, RAMP-C, Evercore ISI, O-RAN, Gen Xeon, Gaudi2, GAAP, OpEx,
John Pitzer: RISC-V, PowerVia, Blockscale, Xeon, RibbonFET, RAMP-C, Evercore ISI, O-RAN, Gen Xeon, Gaudi2,
More volume ramping in 26 and Panther Lake that's going to be helpful for gross margins. On the foundry side you know we will see improvement.
Next year you won't see it because we don't report it at that level But we will see gross margin improvement on the foundry side As we step into 25. Partly because of the reductions we talked about
John Pitzer: getting more efficient.
in terms of their spend. Additionally, we're just gonna be mixing more.
to EUV wafers. EUV wafers have a better pricing dynamic. They have a better cost structure on a relative basis. So we see improvement there. And I've been pleased with just the new model of managing the foundry business.
I've seen all kinds of better decision-making going on, both at Foundry and at the product side, just to optimize their cost structure in a better way, and that should help as well. Longer term, I just think, you know...
John Pitzer: That usually commands a better margin profile and will also, longer term, be a tailwind.
I would just add that as we indicated on our last quarter earnings call, as we go through this restructuring phase, we're in the next phase of our transformation.
You know, with that, we're much more focused, you know, on the sustainable business model results, shareholder return, you know, financial disciplines. The first phase was very much about getting back in the game, you know, getting process in place, getting shell ahead in place, getting our products competitive. So I think overall, Ross, we're going to be much more focused on it. Those are the tough actions we've taken this quarter on getting our cost base where we need to be. But overall, the operating margin, the gross margins of the company, overall cost-based CapEx investment, they're just getting a lot more attention from us as we go forward.
Thank you, Ross. Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Timothy R. Curry from UBS. Your question, please.
Thanks a lot. Pat, I think you mentioned at a conference, maybe in September, that defect density on 18A is, you said, sub 0.4, I think.
Speaker Change: Can you just talk about how that translates to yields? Is that sort of a good enough number to translate into, you know, high volume? And what sort of number for, say, defect density does a customer want to see when they're looking at your foundry?
Speaker Change: Yeah, and, you know, defect density, it's a complex conversation, Tim, because, you know, big dye sizes have lower percent yields, right, even at the same defect density. So it's very variable depending on the particular dye size of the product.
You know, when we said the D0 of less than 0.4, that was a healthy yield number at this phase of the process development. That's not yet a high-volume production yield level, but we're not at that phase of the process development yet for 18A. So it's a number that says we're at where we'd want to be at this point in the process development lifecycle. You know, clearly, as you, you know, bring it to high-volume production, which we'll be doing in the second half of next year, we have to be markably lower than that in terms of defect density. But we believe that we see all the signs, the signals, and we're managing this very carefully to accomplish that as we get to next year. You know, similarly, as we look at today's Intel 3, you know, we're accomplishing the defect density.
Tim, do you have a follow-up question?
I do, yeah. I have a question on Panther Lake, Pat. So I know that it's coming back in-house, but we do still hear that most tiles are still being outsourced. Can you speak to that? Is that a change or was that always the plan? And I guess when you look at Nova Lake on the desktop side, is it still being dual-track, meaning that there is still an option that it could be outsourced, or is it guaranteed to be brought back in-house next?
So, overall, we are absolutely executing on the Bringing Wafers Home strategy that we've laid out. You know, that said, PSMC has been a great partner. Clearly, Lunar Lake has demonstrated the strength of that partnership and one that we'll use selectively in our product lines, you know, for the future, but a large percentage of wafers coming home.
that meaningfully fills our factories that also meaningfully improves the margin structure of Intel and Intel products. Thanks, Tim. Jonathan, can we have the next question, please? Certainly. Our next question comes from the line of CJ Mews from Cantor Fitzgerald. Your question, please.
Yeah, good afternoon. Thanks for taking the question. I wanted to follow on that last question.
In terms of...
The optionality in terms of securing leading-edge capacity, obviously you're all in on 18a.
But if that were to get delayed...
CJ Mews: You know, how are you thinking about timeframe of being more aggressive in terms of adding capacity in Arizona?
We really uniquely are able to benefit from every wafer we bring home, adds to the margin structure of Intel in a meaningful way. So we really are setting ourselves up very nicely for the future. And as we make progress on 18A, 18AP, 14A, an aggressive roadmap, advanced packaging, which is uniquely based on Intel technologies and finding more momentum in our product line, but also in our Foundry customers, we really are starting to see the benefits of the long-term strategy that we've put in place with Intel products, with Intel Foundry.
Speaker Change: C.J., do you have a follow-up question? I do. You know, following the Better the Consensus guide for Q4, could you give us an early read on how you're thinking about seasonality into Q1?
Speaker Change: Thank you for watching. I'm sure you'll find it useful. And I'll see you next time.
Yeah, so we're not going to provide CJ guidance for Q1. Let's work on Q4 and we can update you in January. The average seasonality for Q1 is in the 8 to 10 percent range and we'll give you more color as we get into next quarter's earnings, whether we are going to be seasonal or see things differently than that.
Yeah, and I'll tell you, overall, it's hard to say. We have geopolitical factors and other things that the world is looking at, and I don't think we have any wisdom.
Speaker Change: You know, beyond that at this point, you know, we're clearly trying to manage the business to a cost structure that we're very comfortable with. But as we indicated by the last question, CJ, you know, we have a lot of flexibility to scale up if necessary, or we have the opportunity to do that as well. And you know, overall, there's quite a bit of uncertainty, I think, in the marketplace or strategy positions as well to deal with those overall uncertainties that we don't control, but we're very committed to control what we can directly do.
Speaker Change: Thank you, TJ. Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Vivek Arya from Bank of America. Your question, please.
Thanks for taking my question. For the first one, I wanted to go back to 2025 and how we should kind of conceptually look at it. I think...
At one point you mentioned a trend line of 3-5% growth top line. Is that how we should think about it?
And then on the gross margin side, Dave, you said that, you know, muted expansion.
And if I look at your Q4 of 39 and a half, is that sort of what you imply for 2025? And I ask that because I think at some other point, you also mentioned headwinds in the second half of 25. So that got me confused as to whether it could dip below these levels.
I know you're not giving 25 outlook, but you did give a trendline number and you did, you know, kind of give us the 39.5% metric. So any color would be very useful.
Speaker Change: Yeah, so on revenue growth, you know, again, we're not going to...
for 2025. I'd say just that we are managing the business in terms of how we're investing in the business.
to a 3-5% growth rate.
Next year, but, you know, over time in our minds.
Speaker Change: And, you know, if things turn out to be better, then that's, you know, that's good fall through to us.
Speaker Change: from a profitability perspective. I wasn't suggesting that, you know, you take the 39 and a half percent and you move it, you know, every quarter. Clearly, every quarter is gonna have some unique aspects to it. Only that 39 and a half was a quarter in which it was clean and it was a good proxy to start the calculation.
Speaker Change: for the full year of 25. You're right, yes, we do see more headwind in the second half versus the first half.
given, you know, Lunar Lake becoming a more meaningful part.
Speaker Change: of the volume over time for 2025. Again, you know, that starts to improve in the following year as Panther Lake becomes, you know, more and more meaningful part of the volume for the client business in 2026.
Vivek, do you have a follow-up question, please?
Yes, thank you, John. So maybe one for Pat. Pat, what does the future look like for Intel's data center if there is no competitive AI product? You know, it's just being CPU-centric good enough. You know, at what point does the CPU get commoditized by custom chips or replaced with ARM-based products? What is Intel's AI strategy right now?
DataCenter AI Compute. You know and even in cloud-based environments today head nodes are an area of strength.
So we see the enterprise use cases having a very long life associated with them going forward. Second, as I said, Gaudi3, good product, and seeing good early interest from customers. We mentioned the IBM win, but a good pipeline of activities there. So Xeon plus Accelerator in that regard. And as we launch this quarter, we also have the x86 ecosystem advisory. We are breathing life into the x86 architecture, and we're seeing extraordinary interest from the industry, from luminaries, and how we build on that momentum. So we definitely want to be very, very active.
Speaker Change: very front-footed with X86.
for a full range of use cases, but also the AI use cases as well. And the industry is quite interested in joining us, participating, and expanding the world's greatest architecture of all time.
The most industry-influenced, the broadest number of ISVs and applications, and continuing that momentum forward. Thank you, Vivek. Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Aaron Rekers from Wells Fargo. Your question, please.
Aaron Rekers: The pipeline of the design wins that you guys have talked about. I'm curious, how large is your external piece of that call at $4.4 billion revenue in this most recent quarter? I think it's about $77 million last quarter. And how do we think about the pace of that kind of inflecting higher as we look out into 2025-2026? I'm just curious how you would define success in that external business.
So, what RAMP is, we go through the rest of the decade, we set our financial objectives by the end of the decade, our $15 billion plus of external foundry revenue.
Speaker Change: We'll be giving periodic updates on LDV, lifetime deal value of external foundry customers as we go forward, and indicators, like we did this quarter, of new design wins, new customers coming online.
but the reported numbers for Intel foundry will be substantially dominated by the Intel products.
Speaker Change: for the next couple of years. You know, that said, we saw nice growth, right, quarter on quarter in the external foundry business, and we did break profitable for the advanced packaging portion of that business in Q3. So we are seeing nice growth characteristics, nice business characteristics, and we'll be giving more updates as we go forward. Dave, anything to add on that?
Dave Jonathan: No I mean other than it was it was up a bit this quarter but you know still dominated by you know by internal business within the Intel Foundry business.
Speaker Change: Aaron, do you have a follow-up question?
Yeah, I do. Thanks. Real quickly, on the server side of the business, kind of off the prior question, I guess, you know, there's a continual discussion or debate of like Intel's positioning as far as stabilizing or recapturing share position in x86 servers. So I'm curious, you know, as we think about Granite Rapids,
Speaker Change: We think about, you know, Clearwater Forests and Diamond Rapids. How do you characterize your ability to kind of, your views of recapturing share in that server CPU market?
Thank you. Yeah, thank you, Aaron.
Our goal is stabilize our position and grow from that position. And this was a solid quarter for execution. Clearly Xeon 6, Granite Rapids, and Sierra Forest now fully shipping and available are important.
Speaker Change: You know, milestones, obviously the AWS deal was a very nice deal because it reinforces Xeon, but also our expanding role of customization.
Speaker Change: So I'll say, you know, the first order of business is hold share and then regain share.
The strength that we've seen for Xeon is this AI head nodes, these AI use cases, we have very good performance on Granite Rapids for AI use cases. And as we look to the future, getting just more competitive on basic power performance per core and fighting for a share there is clearly the initiatives that we have underway.
Speaker Change: Clearwater Forest powered on, showing health of 18a. Diamond Rapids will shortly go into FAB, so the roadmap is in good solid shape as well. So I'd say overall, we feel that is a good pathway. And if I add to the last question as well for AI,
Speaker Change: I'd also emphasize that all of the energy has been in training.
Speaker Change: and all of that associated with cloud-based training.
Speaker Change: But training is, you know, creating the weather model, not using it.
Speaker Change: and increasingly I think every analyst is putting more and more attention to how do we use those models, how do we inference against them, how do we retrain
Speaker Change: for our localized data. How do we complement that with RAG and database embeddings? And all of those are areas that are much more CPU-centric. So the strength of our CPU and its unique power in some of these AI use cases as well is something we see the market coming more toward us and the strength that we've traditionally had.
Speaker Change: Thank you. Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Srinivas Juri from Raymond James. Your question, please.
Srinivas Juri: if I look at EMEA, Ben Favreau, et cetera. So my question is, given the tightness in the packaging industry right now,
Srinivas Juri: I would have thought, you know, we would see more interest in your packaging services. So I'm just curious as to why we are not seeing that. Is it because it's, I guess, you know, there must be some nuances of using, you know, your packaging with TSM wafers? I'm just curious as to why we are not seeing more interest.
as we go in the 25.
In the external foundry will be advanced packaging and we also see healthy margins for that technology as well.
Srinivas Juri: for the long term. And as I noted in an earlier comment, you know, we did see our advanced packaging now as a profitable business, a standalone by itself as well. Srini, do you have a follow-up question?
Yes, I do. Thank you. I guess a question on the gross margin side, Dave.
Srinivas Juri: I guess, you know, there are two issues impacting your PC gross margins. One, the wafer outsourcing, and the other, you said, you know,
Srinivas Juri: Packaging of the memory. I'm just curious, you know, how much of an impact that memory packaging is having on your gross margin. I suppose that helps your ASPs, but I guess it hurts your gross margin percent.
Srinivas Juri: So just curious to know how much of an impact that's having. And then maybe, you know, for Pat, you know, architecturally, why do we need to, I guess, you know, combine memory in one package? And is this something that's, you know, going to be ongoing or is this just a one-off with, I guess, Lunar and Meteor Lake? Thank you.
Yeah, and just to be clear, it's exclusive to Lunar Lake, but not Meteor Lake. And it's having a pretty meaningful impact, a significant impact on Lunar Lake's gross margins.
Srinivas Juri: And, you know, originally we were like a third the volume in terms of our expectations next year on Lunar Lake when we recognized how important the AIPC market would be and how good this part was competitively.
Srinivas Juri: We pushed the volume significantly up, and so that has put some reasonable pressure on the gross margins for the total company.
Speaker Change: Yeah, maybe architecturally the second half of that question, you know, LunarLake was initially designed to be a niche product
Srinivas Juri: that we wanted to achieve highest performance and great battery life.
Srinivas Juri: capability, and then...
Srinivas Juri: A-I-P-C occurred. And with A-I-P-C, it went from being a niche product, you know, to a pretty high-volume product. Now, relatively speaking, you know, we're not talking about, you know, 50, 100 million units, but a meaningful portion of our total mix from a relatively small piece.
Srinivas Juri: As we
Srinivas Juri: Volume memory will be off package in the roadmap going forward and we won't have this.
Speaker Change: From Wolf Research, your question please.
Speaker Change: Yes, thank you. Good evening. I guess the first question is on both CapEx and OpEx as you go through next year, and I think you were very clear about
Speaker Change: , The question is how much flex . . . . . . .
Speaker Change: We think we right-size the investments to invest in the most important areas that Pat and the team want to pursue. So that, I would say, is relatively firm. Maybe there's a little bit of variability there that we can make adjustments as we progress through the year.
Speaker Change: The CapEx, you know, there are three components to CapEx. There is, you know, what we're going to invest for, you know, the process, advancing the process. There's investment associated with this shell ahead, and there's investments associated with capacity.
Speaker Change: You know, we're always going to make those investments to advance the process. That will always be the case.
Speaker Change: Shell Ahead, we will, but we have largely caught up, I think, you know, and so now we're going to be more measured, I think, as we...
Speaker Change: as we look to, you know, increasing our shell capacity. And then capacity itself then becomes the flesh, you know, the tooling out.
Speaker Change: of of shells. And we're, you know, kind of modulating that based on what we see in terms of demand, and of course, managing it relative to cash flow. So there obviously is flexibility there as we progress.
Speaker Change: through the year.
Speaker Change: and into the following year and you know our goal is to generate free cash flow.
Speaker Change: Xeon, Gaudi2, GAAP, O-RAN, Gen Xeon, Gaudi2, GAAP, O-RAN, Gen Xeon, Gaudi2, GAAP, O-RAN,
Speaker Change: You know, we're aggressively pursuing offsets, some of which we know will already show up next year.
Speaker Change: skip will be a component of our offsets next year. We're also going to start to see some more meaningful impact.
Speaker Change: from the investment tax credit next year, which we have already baked into the forecast.
Speaker Change: Chris, the thing I would, just to add a little bit to that, Chris.
Speaker Change: would be that now that we've gotten an EUV fleet.
Speaker Change: Right into our CAPEX base. We have a lot more flexibility across that fleet. You know largely the CAPEX used for Intel 3, 18a and 14a highly leveraged across it.
Speaker Change: as opposed to this racing through capital. So that will also give us additional flexibility. And I'll say largely with the singular exception of high NA EUV, the equipment bases are almost entirely the same across the 14A node as well. And even at high NA, we've built flexibility into the TD development that we have optionality to include or not include that as a central part of it. So we've built a lot of capacity. Now we're gonna leverage that capacity in much more efficient ways for both a overall high volume manufacturing and a TD leverage going forward. Chris, do you have a quick follow-on?
Speaker Change: I do and I mean it's a good segue in the next question Pat and it's it's you know I guess a question about your comments on Better Together.
Speaker Change: and if you could kind of explain the rationale of why you think that's the case.
Speaker Change: you know obviously there's there's you know various opinions on that and you know if Intel would be willing or has looked at you know any anything strategic beyond you know what the current plan is right now.
Speaker Change: more clearly and definitively to our external customers and then the potential to fund and manage the capital requirements of Foundry. You know, that said, the vast majority of volumes, you know, through the decade come from Intel products.
Speaker Change: The synergies of that co-development and customer zero aspect is very substantial.
Speaker Change: And the benefits that we get from the overall cash flows and managing the balance sheet of the company as we go forward are highly beneficial as well. So for all those reasons, our simple view is distinct, but better together.
Speaker Change: Thanks, Chris. Jonathan, we've got time for one last question, please. Certainly, and our final question for today comes from the line of Joe Moore from Morgan Stanley. Your question, please.
Joe Moore: Great, thank you. In your opening remarks, you talked about narrowing the product focus and prioritizing x86. Can you talk about practically speaking, you know, what happens there? Does that mean, are there areas that you're investing less in to focus more on x86? Is that a mindset shift, organizational shift? Just, you know, what do you mean by that?
Speaker Change: Yeah, and there's a lot of details behind it, Joe, but I'll just maybe give a couple of quick examples. We for instance create a complexity in the server product line, E-cores, P-cores, across different socket types.
Speaker Change: seal race, Mickr AG3 A surfing, Epoch Mini ATF, SucR. We talked about this. We went through a different round of events, where everyone of us went through it. It was great. How do we take steps to guide those
Speaker Change: you know, behind that as we, you know, get ourselves, I'll say, you know, in fighting shape that allows us to leverage our investments, hit our 17.5 billion OpEx that Dave spoke about, and still have a, you know, a very solid growth and a more profitable way for the future. Joe, do you have a quick follow-on?
Joe Moore: Yeah, I do. To the extent that you are kind of prioritizing the x86 leadership that you have,
Joe Moore: You know, does anything shift in the IDM 2.0 model? Is it that they referenced that the arm's length relationship with IFS is still going really well? Like, is that still a focus? You know, is there a benefit to, you know, if the focus is more on internal foundry versus access to marrying those business more tightly? Just how do you think about that relationship?
Speaker Change: Yeah, and, you know, clearly, external foundry, right, requires a different view of how you run and manage that business. But the wafers, the cash flows come from the internal business.
Speaker Change: So this...
Speaker Change: Subsidiary model is a key piece of how we're going to drive that cultural transformation but still bring the success of an at-scale, leading-edge, Western-centered, you know, foundry model. You know, that is an extraordinary asset for us, for the industry, and for the world.
Speaker Change: So we're very focused on making that successful. This has been an extraordinary journey to accomplish five nodes in four years and bring us from years behind to a leadership position in technology. And wow, it's just stunning to see what our TD teams have been able to accomplish there. But we're not done. We have a lot of work in front of us yet. We're well on our way to completing what will be one of the most seminal restructuring in the history, the steps that we took in our financial restructuring this quarter. It was very critical to be able to bring us to a point that we can say we have
Speaker Change: the capacity to and driving to long-term shareholder return.
Speaker Change: So maybe just as we wrap up, you know, thank you as always for joining the call. We appreciate the opportunity to discuss our progress, the actions we've taken.
Speaker Change: Q3 was a good step. Now we need to finish the year strong and prepare for 2025. We're determined to get it right and I look forward to the updates along the way. Thank you and look forward to speaking to you all again soon.
Speaker Change: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
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