Q2 2025 Intel Corp Earnings Call
Thank you for standing by and welcome to Intel Corporation second quarter 2025 earnings conference call. At this time, all participants are listening mode. After this 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 queue simply press start,
Speaker Change: R11 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, vice president investor relations. Please go ahead, sir.
Speaker Change: Thank you, Jonathan, and good afternoon to everyone joining us today. By now, you should have received a copy of the QT, earnings release, and earnings presentation, both of which are available on our investor website. Intc.com
Speaker Change: For those joining us online today, the earnings presentation is also available in our webcast window.
Lip Bhutan: I am joined today by our CEO lip Bhutan and by our CFO, David zinsner.
Lip Bhutan: Table then discuss our overall Financial results, including third quarter guidance before we transition to answer your questions.
Lip Bhutan: 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 our subject to various risks and uncertainties,
Lip Bhutan: It also contains references to non-gaap financial measures that we believe provide useful information to our investors.
Lip Bhutan: Our earnings release most recent annual report on form, 10K and other filings with the SEC. Provide more information on specific risk factors that could cause actual results to differ materially from our expectations.
Lip Bhutan: they also provide additional information on our non-gaap financial measures including reconciliations where appropriate to our corresponding gaap Financial measures
Lip Bhutan: With that, let me turn things over to LIPA.
LIPA: Thank you, John.
Speaker Change: And let me add my welcome.
Speaker Change: We had a solid Q2 with Revenue above the high-end Alpha guidance.
Speaker Change: This reflects.
Speaker Change: Strong demand across our business.
Speaker Change: And good execution, by the team.
Speaker Change: As expected.
Speaker Change: Headline possibility was impacted by several 1-time items.
Speaker Change: And impairments.
Speaker Change: But I am pleased by the underlining operating performance in the quarter.
Speaker Change: Even as we have more Works to do.
They will go through our details Financial shortly.
Speaker Change: Today, I want to provide you with updates on 4 major initiatives.
Where we have started to make progress.
Speaker Change: And will continue to focus in coming quarters.
Speaker Change: Our organization and culture.
Our Foundry strategy.
Speaker Change: Our call x86 franchise.
Speaker Change: And our AI strategy.
Speaker Change: First.
Speaker Change: On organization and culture.
Speaker Change: Over the last 3 months.
Speaker Change: I have completed a systematic review of every organization and function reporting to the CEO.
Speaker Change: This reveals included.
Detail analysis of head cow.
Speaker Change: Skill sets.
Speaker Change: Spending.
Speaker Change: Site distribution.
Speaker Change: Executive population and restructuring plans.
Speaker Change: We have much work to do in building a clean and streamlined organization.
Which we have started in earnest.
Speaker Change: And is remain an area of focus for me.
Speaker Change: During Q3.
Speaker Change: Our goal is to reduce inefficiencies.
Speaker Change: And redundancies and increase accountability at every level of the company.
As mentioned in our q1 earnings call.
We need to right-size and scale back the company while ensuring that we are retaining our best.
Speaker Change: Internal talents and hiring the best external talents from industry and universities.
Speaker Change: During Q2, we completed.
Speaker Change: The majority of the actions needed to achieve our year end Target of 75,000 employees.
Speaker Change: This were hard but necessary decisions.
Speaker Change: And we reduce management layers by approximately 50% in the process.
Speaker Change: We are on track to implement our return to office mandate starting September.
This actions are necessary not just to reduce our operating expenses, but to make the company more agile collaborative.
Speaker Change: And vibrant to simplify our business and improve our product and process execution.
Next.
Speaker Change: On our Foundry strategy.
Speaker Change: I continue to believe that our heritage and expertise in semiconductor technology development and Manufacturing remains a very valuable and vital asset.
Speaker Change: I also fully appreciate the Strategic importance of the US domicile semiconductor. Manufacturing
Speaker Change: Unique asset into a robust Foundry. Business requires us to take a systematic approach and act from the position of strength.
Speaker Change: The Foundry business is a service business that relies on foundational principle of trust.
Speaker Change: We need to demonstrate to our customers.
Speaker Change: That we can deliver Wafers on time with high quality reliability and you that we can manufacture their products at scale.
Speaker Change: We need to have process and packaging technology. That is not only competitive.
Speaker Change: But more importantly, is designed to meet the needs of our customers.
Speaker Change: In addition.
Speaker Change: We also need to develop a rich and diverse ecosystem of Ip and Eda Partners who will enable our customer to seamlessly design chips using our process.
And finally, per helps.
Speaker Change: Most importantly, we need to build capacity, smartly and carefully on a schedule that meets the needs of our customers.
Speaker Change: And support the economics of our business.
Speaker Change: This approach is fundamentally different than the path we have been on for the last 4 years.
Unfortunately, the capacity investment we make
Speaker Change: Over the last.
Speaker Change: Several years were well ahead of demand.
Speaker Change: And were unwise and excessive.
Speaker Change: Our Factory footprint has become needlessly fragmented.
Speaker Change: Going forward, we will grow our capacity based solely on the volume commitments.
And deploy capex lock steps with the tangible, milestones and not before.
Speaker Change: As part of this new Financial discipline, we have decided not to continue with our manufacturing projects in Germany and Poland.
Speaker Change: We also plan to consolidate our assembly and test operation in Costa Rica into larger existing sites, in Vietnam and Malaysia.
Speaker Change: And we were further slow. The pace of construction in Ohio to ensure our spending is aligned with market demand.
Speaker Change: Importantly, based on the progress, we have already made in Ohio, we have flexibility to accelerate work as needed to meet customer needs.
Speaker Change: Funding specifically to process technology development on. Intel 18a, we will continue make steady progress on our yield and performance targets.
Speaker Change: Intel 18a is the foundation of at least next 3, generations of Intel client and server products.
Speaker Change: And we remain committed to ramping this technology to scale.
Speaker Change: Intel 18a and Intel 18, AP are critical notes for Intel products.
And will drive meaningful wafer volumes.
Well, into the next that key.
Our Foundry and product teams remain focused on enabling pentalic to launch this year.
Speaker Change: once we get our own product ramping in high volume,
Speaker Change: we will be in better position to attract external customers to this technology.
Speaker Change: The Intel 18a family is also important as we continue to advance our work for the US government within the secure engrave.
Programs, as well as for other initial committed customers.
Speaker Change: On Intel 14a, The Foundry. Technology team is continuing to focus on the basic.
Speaker Change: Building blocks.
Speaker Change: Technology, definitions and Transit.
Speaker Change: Architecture process Flow Design. Enablement pdk.
Speaker Change: Foundational IPS and test chips to validate and improve performance and defect density.
Speaker Change: Is inception as a Foundry notes from the ground up.
Speaker Change: Better positions us to meet specific customer requirements and address a broaden.
Speaker Change: Segment of the market.
Speaker Change: This work is being driven and informed by direct input from large, external customers. And from our own internal products teams,
Speaker Change: A key expect of prudently pursuing our Foundry. Ambition is also making sure we maintain sensible, optionality for our internal product teams.
Speaker Change: They will continue to work closely with both internal and external Foundry partners.
Speaker Change: They will do their homework and make process and supplier decisions based on what is best for our end, customers against criteria of performance cost year and time to markets.
Speaker Change: Our external Foundry strategy.
Speaker Change: Has always been rooted in the economic reality of semiconductor Manufacturing.
Speaker Change: up to and through Intel 18a, we could generate a reasonable return on our investments, with only Intel products,
The increase in capital cost at Intel 14a.
Speaker Change: Make it clear that we need both Intel products and a meaningful external customer to drive acceptable Returns on our deploy capital.
Speaker Change: And I will only invest when I'm confident those returns exit.
Speaker Change: I'm intimately familiar with The Foundry and fabulous ecosystem.
Speaker Change: Having helped create it over the last 2 decades.
Speaker Change: I'm using that experience to put our Intel Foundry on the more solid footing for the future.
Speaker Change: I will do. So, while being prudent with our capital,
Speaker Change: And ensure we can deliver attractive Returns on the investment. We make
I do not subscribe to the belief that if you build it, they will come
Speaker Change: under my leadership, we will build what customers need
Speaker Change: when they need it and earn their trust to consistent execution.
Speaker Change: Next on to our call.
Speaker Change: Acts 86 franchise.
Speaker Change: In client, our top priority is delivering our first penalty as coup by year end.
Speaker Change: Followed by additional skus in the first half of 2026.
Speaker Change: The successful launch of the penta League was solidify. Our strong share in the notebook market across consumer and Enterprise
We still have gaps to close in the high-end desktop Market.
Speaker Change: But I'm encouraged by our unmatched. Go to markets rich.
Speaker Change: Our.
Speaker Change: X86 ecosystem and the progress. We are making on Nova Lake due out at the end of 2026.
In traditional service we continue to have solid position in AI host notes and storage where our single threaded performance has been optimized for those workloads.
Speaker Change: Granite rabbits is ramping as planned and we continue to see good demand for our more established server products.
But substantial share Improvement in this market will take time.
Speaker Change: Specifically we need to improve in broader.
Speaker Change: hypers scale workloads
Where performance performs is key differentiator?
I have also taken steps to correct past mistakes regarding multi threading capabilities on our PC course.
I'm also making progress on bringing in new leadership in our data center business.
Speaker Change: And look forward to being able to announce these changes next quarter.
Platform teams is to Define products.
With clean and simple architecture better cost structure to simplify our SKU stack all while enable a path to robust product margin.
Speaker Change: I'm also instituting a policy where
Speaker Change: every major chip design need to be personally reviewed and approved by me before table.
Speaker Change: I have already begun this process.
Speaker Change: This discipline will improve our execution speed and move back towards a first-time, right mindset but also saving development costs.
Speaker Change: Finally planning to AI.
Speaker Change: In the past we approached AI with a traditional silicon.
Speaker Change: And training Centric mindset without a cohesive silicon system, software stack and strategy.
Speaker Change: But we do need to build and consolidate Upon Our silicon franchise.
Based upon our x86 CPU and our XE.
Speaker Change: Gpus.
Speaker Change: We recognize the need to move up. The abstraction stack.
Speaker Change: Into system and software.
Speaker Change: This is the area where Intel has traditionally been weak.
Or entirely absent.
Speaker Change: but we intend to incubate and grow this important skill sets,
Speaker Change: And capabilities under my leadership.
This will take time, but it will be vital for Intel to stay relevant in the next wave of computing.
In addition.
Speaker Change: We see the AI Market continuing to evolve and we are concentrating, our effort on areas. We believe we can disrupt and differentiate like inference and agentic AI.
Speaker Change: We need to start by first understanding emerging and real AI workloads.
Speaker Change: Then work backwards to design software systems and silicon to enable best.
Speaker Change: Outcome for those particular workloads.
Speaker Change: We will strive to become the compute platform of choice.
But we were also work towards a full stack, AI solution.
And I look forward to sharing more on our strategy in the coming months.
Speaker Change: Underpinning.
Speaker Change: Of this efforts.
Speaker Change: Is a strong focus on improving our balance sheet. We continue to maintain solid liquidity.
But despite meaningful Capital spending offsets, our last full fiscal year of positive. Adjust free cash. Flow was 2021. This is completely unacceptable.
How we allocate our owners capital and the return We generate for them are of Paramount importance to me.
Speaker Change: We have several major levels to generate better cash flow, including driving operating leverage and managing our capital outlays.
Speaker Change: I discussed earlier the actions, we are taking to reduce operating expenses and improve execution.
I'm very confident in our ability to hit our operating expenses targets for 2025 and 2026 respectively.
Speaker Change: We have already lower our capex guidance from the beginning of the year by roughly 5 billion year to date.
Speaker Change: While purchasing commitments make further reduction in 2025 difficult.
Speaker Change: We will continue to work to reduce Capital spending in 2026.
Speaker Change: Lastly.
As it relates to our non-core assets.
Speaker Change: We successfully monetize a portion of our ownership of mobile eyes earlier this month. And we look forward to closing the Altera transaction with Silver Lake. This quarter.
Speaker Change: I will evaluate other opportunities as we continue to sharpen our Focus around our Core Business and strategy.
I believe the actions we have taken during my first
Speaker Change: During Us in the right direction. Let's say, I also know that turning the company around will take time and require patient.
Speaker Change: We have a lot to fix in order to move the company forward.
Speaker Change: And I'm determined to drive the changes necessary to improve our performance.
Speaker Change: I am equally they of that. As we execute, we will rebuild this company and have a bright future.
Speaker Change: I will now turn it over to Dave to go into more detail on the financials.
Dave: Thank you. Lipa I'll start by characterizing the prevailing market conditions in Q2 on our q1 earnings call. We signal the economic landscape had become increasingly uncertain driven by shifting trade policies persistent inflation concerns and increased regulatory risk.
Dave: Fortunately markets, largely functioned normally in Q2 enabling the fundamental demand drivers. Underpinning, our core markets to manifest
Dave: In client, we saw continued solid demand driven by the end of service for Windows 10 and the Aging Co era installed base.
Dave: In addition, aipc is continued to grow as a percentage of our mix.
Dave: On the traditional server side, we saw hyperscalers and Enterprises continue to refresh their CPU installed base to take advantage of our newer products with better performance within a lower power envelope.
Dave: Both Dynamics underscore the durable demand within our 2. Largest markets in the enduring strength of the x86 ecosystem.
Dave: Second quarter Revenue was 12.9 billion coming in above the high end of our guidance range driven by strength across client and data center.
Dave: Similar to comments. We made in Q4 and q1. We think it's likely Q2 Revenue benefited from customer purchasing Behavior to mitigate tariff uncertainty. Although it continues to be difficult to quantify.
Dave: Turning to non-gaap growth margins and EPS. Last quarter, we indicated that incremental costs associated with our spending reduction plan would likely impact non-gaap growth margin. But since those costs were not yet calculated, they were not included in our Q2, gross margin and EPS, guidance of 36 and a half percent and break even respectively.
Dave: As such we recognized approximately 800 million dollars of non-cash impairment and accelerated depreciation, charges related to excess prior generation tools for which we couldn't find reuse and approximately 200 million dollars of 1 time. Period costs.
Dave: These charges resulted in Q2 gross margin of 29.7% and EPS of minus 10 cents.
Excluding these charges. Our second quarter, non-gaap gross margin would have been 37.5% and non-gaap EPS would have been 10 cents.
Dave: Both results ahead of our Q2 guidance.
Beyond those costs. We also were impacted by 1.9 billion dollars of charges that are excluded from our non-gaap results.
Dave: The large majority of those charges are associated with the severance for our headcount reduction aligned with our restructuring plan.
Dave: We expect the principal cash cost associated with the restructuring charges to land in Q3 255.
Dave: While difficult, these decisions have us firmly on track to meet our calendar year 2025 and calendar year. 2026 off XT targets of 17 billion and 16 billion dollars, respectively,
Dave: Q2 operating cash flow with 2.1 billion dollars with growth capex of 4 and a half billion dollars in the quarter and net capex of 3.1 billion resulting in adjusted free, cash flow of negative 1.1 billion.
Dave: We have 21.2 billion dollars of cash and short-term Investments, and remain focused on beginning. The process of de-levering this year as cash from operations continues to improve.
Dave: Moving to segment results for Q2 Intel products, Revenue was 11.8 billion up slightly sequentially and above our expectations across client and server.
I was pleased by the team's ability to support Revenue upside in the quarter as capacity for Intel, 7 remains very tight.
Dave: Ccg Revenue was up 3%, quarter of a quarter and above our expectation. With continued PC, refresh, demand, and upside and hedged deployments
Dave: within the quarter ccg launched a number of AI PCS with t OEM Partners announced the expansion of its Arc gpus for AI. Use cases tailored to inference. And professional workstations and made its open Edge platform code available to the developer community.
Dave: Support of the growing opportunity for us to compete as AI, inference moves to the edge.
Dave: Compute. In addition we saw upside to plan on the continued ramp of Zeon 6 codenamed, Granite Rapids,
Dave: In Q2 dcai launched 3, new Zeon 6 processors with priority core turbo technology to boost AI workloads.
1 of these Zeon 6 skus was selected as the host node for NVIDIA. Dgx B300 AI accelerated systems and the Imperial College. London chose Zeon 6 to power, its latest HPC. Supercomputer demonstrating Zeon Remains the CPU of choice for AI workloads.
Operating profit for Intel products, with 2.7 billion dollars, 23% of Revenue and down 250 million quarter of a quarter principally driven by the period costs, I highlighted earlier.
Dave: Intel Foundry, delivered revenue of 4.4 billion down 5% sequentially, and above expectations, on better than forecasted output of Intel 7 Wafers and increased Advanced packaging services.
Dave: In Q2, 18a reached a key Milestone with the start of production wafers. In Arizona, ahead of Intel products Q4 launch of its next Generation client product. Code named Panther Lake.
Intel Foundry, released an early version of Intel 14, A's pdk to lead. External customers, and at direct connect in April, announced an emib advanced packaging partnership with Amcor.
Dave: Intel Foundry operating loss in Q2 with 3.2 billion down 848 million sequentially materially driven by the 800 million impairment charges, I discussed earlier.
Dave: Turning to all other Revenue came in at 1.1 billion dollars and was up, 12% sequentially. And about expectations.
Dave: The 3 primary components of all other are mobili Alterra and IMS. Collectively the category delivered 69 million of operating profit.
Now turning to guidance historically sequential growth in Q3 has been up high single digits. However, we've seen 3 quarters of Revenue growth above our expectations, which we attribute at least in part to customers hedging against tariff uncertainty.
As such what we believe that underlying fundamentals of our core markets support growth, we feel it prudent to continue to plan for a below seasonal. Second half of 2025.
As such for Q3, we're forecasting. A revenue range of 12.6 to 13.6 billion dollars down to, to up 6% sequentially.
Dave: Within Intel products, we expect more strength in ccg. We expect Intel Foundry, Revenue down slightly quarter over quarter due to capacity, constraints, in Intel 7, which we expect to persist through the second half of the year and reduced expectations for external Advanced packaging Revenue.
Dave: For all other, we expect revenue for the sum of those parts to be roughly flat sequentially.
Dave: At the midpoint of 13.1 billion, we expect a gross margin of approximately 36% on an increase. Mix of outsourced products. The early ramp of Panther Lake and increased costs associated with tariffs.
Dave: We forecast a tax rate of 12% and break, even EPS all on a non-gaap basis.
We're forecasting 2025 Opex of 17 billion dollars with a 2026 Opex Target of 16 billion dollars.
Dave: We expect non-controlled income or NCI to be approximately, 250 to 300 million, in both Q3 and Q4 on a gap basis.
Dave: NCI is still expected to grow meaningfully, in fiscal year 2026.
Dave: In Q2, we took tangible steps to increase. Focus on our Core Business while leveraging non-core assets to shore up the balance sheet.
Dave: We raised approximately 900 million through the mobile eye offering and we are on track to complete the stake sale of Altera in Q3.
Dave: Our guidance includes Alterra for the full quarter, but we will Decon deal close.
Dave: Once the decal consolidation is complete, we will recognize our remaining Alterra investment within Equity, Investments on the balance sheet.
On the income statement, we will recognize our proportional share of altera's, net income on a 1, quarter lag through gains and losses on Equity Investments net, which is excluded from our non-gaap results.
Dave: As a result.
Dave: It is likely, our Q3 non-gaap results will reflect. Only a portion of the financial results for Altera.
Dave: Moving to capex.
We anticipate 2025 gross, capital investment will be approximately 18 billion dollars and forecast 8 to 11 billion dollars for net capex.
Dave: Better. Utilization of our construction and progress will allow us to deploy more overall, capex in 2025, than in 2024. And we expect the improved utilization to continue in 2026 resulting in lower growth and net capex next year.
Dave: Of delivering, our balance sheet in 2025 remains a top priority for us.
Speaker Change: I'll wrap up by saying Q2 operationally with the third consecutive solid quarter reflecting our commitment to maintaining a high say do ratio closely managed within our control and react quickly as the environment evolves. I have confidence that the Strategic priorities. We've established are the right ones and I'm optimistic about our ability to execute on them. While acknowledging there are no quick fixes with that. I'll turn 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 ask each of you to ask 1, question and a brief. Follow-up question were applicable.
Speaker Change: 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?
Hi guys, thanks for asking a question. Let's do the first ones for you, and thank you for walking through the Strategic details that you're putting into place. It seems like fixing The Foundry sides based on trust, as you said before, and that trust seems to have its origin in fixing the x86 side of the business. So I guess my question is, how fast can you fix that? I know you are having to sign off on every tape out, but in the trust that 188 can ramp dependent upon Nova Lake and Diamond, Rapids, are we talking 202728? What are the sort of steps? We need to see to build that trust in your x87?
Speaker Change: 6 business. So that the founder business can ramp
Speaker Change: El Ross, thank you so much for a good question. Uh, first of all, we focus on the 180, the last 2 months, and I have twice a week, uh, review with the team. And uh, you know, we mix Daily Progress on our technology towards the year, performance, Target and reliability. So I think, as you mentioned, 18a is a foundation for at least 3 generation of, uh, in Intel client and server business products. And, uh, we are committed to Ram that and so far, you know, the give me the confidence. We engaging with external, uh, ecosystem Partners to help us to look at the year and how can we improve? And, uh, that in the past. We didn't engage that. So, I really see that, you know, the for feedback from the partners that hey, the culture, the incent intensity for our team is really focused on the yield performance.
And that really like the attitude on that. So so far I think give me a lot of confidence that we can launch our Panna Lake SKU by the end of the year. And then uh and also I think the external customer include the secure and create with the US government and then with the sufficient internal volume and then show the good progress then we can have a better attraction to our exist. Our external customer
Customer. So I think this is a process to kind of build the trust with the customer. They can count on us on the reliability the yield and we can deliver on time on scale to really supporting them. And then they going to just put the resources in the on their revenue, based on our Foundry. So there's a lot of responsibility for us to deliver with high quality. That's something that I feel very committed and we like what we I see uh I give me a lot of more confidence.
Ross Seymour: Ross, do you have a follow-up question, please?
Speaker Change: I do uh, 1 potentially a little nearer term for Dave in the gross margin side. Uh, you mentioned that the gross margin was guided down a bit sequentially for a couple different reasons. Can you dive a little deeper and a little more deeply into those and and perhaps more importantly, just what do you see as the Tailwinds, and headwinds to gross margin as we look say, in next year, I know you're not going to guide it specifically, but just some of the puts and takes would be great. Thank you. Yeah. Okay, thanks for us. Um yeah, let's just delve into the gross margins for the third quarter. I say the predominant driver of the lower gross margins. In the third quarter is lunar Lake. Um, we expect a pretty significant ramp in lunar Lake in the third quarter. And, you know, I made this comment, I think of multiple times on calls, but, uh, it's got the memory in the package. Uh, and so, you know, we kind of pass it on at the same cost, we bought it and that really has a negative impact on the, on the way, the gross margins look, you know, optically. And so as we mix
Ross Seymour: Like so the cost of per wafer is going to be higher and so that is going to drive some headwinds obviously is lipo said, you know, yields improve more, importantly volumes increase, uh, that reduces the cost and so that that will transition to a, to a Tailwind ultimately, I think next year, um, you know, the, the big benefit for us, is this, you know, significant ramp in Panther Lake, um, you know, given that we're bringing a, a fair amount of Wafers back inside so that drives a lower cost, and we get those better cost structure of Panther Lake showing up with the higher volumes. That's clearly going to be beneficial to us in terms of, in terms of gross margin. Um, you know, that said, you know, a lot of this will be determined on mix and and we'll have to see how things play out through next year, in terms of the mix. Um, the last thing I'd say and maybe this maybe even a little bit more longer term than you asked. The question Ross is um you know the way we think about Foundry we you know as we as we ramp more Leading Edge nodes, that is going to be a benefit to us in terms.
In terms of gross margins, we think Foundry. Gross margins will expand next year and that will be a Continuing Story out for for several years. Um, the other side of things is the product side and I think there are 3 levers to products 1 is pricing and as said, he's really focused on bringing out products that customers really value. And as that, uh, becomes a reality, it'll show up in the pricing that will help out help us on Gross margins. The second is the cost structure. And look who's also really focusing on cleaner design.
Ross Seymour: Simpler designs, um, driving more efficient, uh, use of silicon and so forth and so, you know, as we get better cost structure as well over time and and there are products on the road map that already have it even as poor will see approvement uh in Gross margins and then in the near term while all this is going on. I'm looking at all the other extraneous, things that drive cost of sales, you know how many samples we do, you know how we run the Fabs and so forth and driving improvements there to
Ross Seymour: To position us, uh, for better gross margins.
Speaker Change: Ross, thanks for the question. Jonathan. Can we have the next question, please certainly in our next question comes from the line of Timothy. Curry from UBS your question, please.
Timothy Curry: Thanks a lot. Um, let do I wanted to ask about The Foundry strategy. Um, you did add a bunch of risk factors and language on 14, a that kind of seems to leave the door open to kind of walking away from its development. And I know you did talk about some of that, but if I'm an outside customer and I'm looking at your road map, and, and I'm an and, and I'm and I see this, you know, hedging on 14a. Why would why would I engage, I guess, how do you sort of? Marry the hedging on 14a development with trying to build an external Foundry business? I guess, you know, I kind of read it as maybe a hard pivot away from Foundry and doing what's right for the product business, but can you sort of talk about that?
Timothy Curry: Yeah, very good question. So I think on the 14a, you know, first of all, I think the team is laser focused on building up the basic building blocks, technology, definition transistor, uh architecture process Flow Design, enablement pdk, and Foundation IP, and the test chip the verify and improve the performance. And the defect density saying that, you know, clearly we learned quite a lot on the mistake we make on the 18th. So I think we learned a lot and the secondly, we also reach out to the outside, uh, you know, the partners to helping us with show them the data and how can we improve the yield and per month and so that we can drive that. Give me a lot of confidence. We can get there but even more important we are engaging with customers, they're going to enable us and then we clear Milestone to execute in term of process.
Timothy Curry: Development and uh, with pdk with all the different IP that we need to really put it together. So I think that give me a lot of more confident that this time we have customer are engaging early enough in the receptions and also we learned from our mistake and we can learn quicker and then get the better result. So I think all in all I think I give a lot of more confident that team is laser focused and the feedback from the partners and the outside is their wow.
Timothy Curry: Before I put capex into the, you know, operation. So that is something that you have to me to make my requirement in term of performance and yield, you know, it's a lot of responsibility to be serving our customer make sure that we can deliver the result consistent reliable result to them so that their revenue can depend on us.
Timothy Curry: Tim, do you have a quick follow-up question? I do? Yeah, yeah I guess I just kind of wonder how like how an external you know customer would, you know, continue to be engaged but but the um, you know, question really is for Dave. So Dave, you talked about capex coming down next year. What is maintenance capex? Like, how much can you cut capex next year? Could you take like 5 billion dollars out of gross capex, next year, if you can give some sense on that? Thanks, yeah. Okay, good question. Um, exactly. Let me unpack it a little bit. I, I would say why capex can come down next year. Is, uh, you know, we we bought a lot over the last few years quite honestly. And, um, you know, we have to digest that and that enables us to deploy more Capital than we have to spend, uh, which I guess is a good thing at this point. So that's what's driving. The fundamental view that we should be down in capex. It's not really moving at the maintenance capex. I would say, but I, you know, but to, you know, kind of ballpark a number, I'd say, probably half our capex is M, you know, about our normalized capex called at this 18 billion dollar level. For this year is probably
Timothy Curry: What you consider sustaining or maintenance capex?
Jonathan: Thank you. Jonathan. Can we get the next question? Please certainly in our next question. Comes from the line of Joseph Moore from Morgan Stanley. Your question, please?
Jonathan: Great. Thank you. Um, you mentioned again the Intel 7 being in short supply through the end of the calendar year. Can you talk about? You know, what's driving? That is there are you going to be able to drive more volume to the Intel 4 products?
Speaker Change: And you know, what do you have to add way for starts and Intel? So I'm just kind of curious with what's going on with that.
Yeah, I mean uh you know I wrap the lake is doing really well. I mean, that's the biggest driver of it. Um that's why it's back to my comments around lunar Lake ramping next quarter. Uh, you know, what, we're really seeing a lot of strength in as ramps are like right now. Um, I think, you know, the, the price points of raptor Lake are I think where a lot of consumers and Enterprises are buying, uh, PCS. And so that's what's kind of pulling it, pulling it in.
Speaker Change: Um, but I do suspect that we'll see mixes change. Um, you know, you mentioned Intel 43, you know, meter Lake. And, of course, we all are ramping and we're in the process of ramping Granite Rapids, which will drive more volume of Intel 43. So we're already, you know, building out
Speaker Change: The capacity and wafer out in in the in that area.
You have a follow-up question.
Speaker Change: Yeah, I do coming back to the capex. I mean, you still have the large amount of construction and progress that hasn't yet. Been productively employed. Are you going to be able to get full value out of that? I know there was a shell first strategy, is it going to continue to persist but there's a large amount of that or you know where you start to appreciating that at some point.
Yeah, there was a big chunk of it, that was Arizona actually and uh it we actually flipped that at the beginning of this quarter. Um, so that's all, you know, obviously already ramping on 18a. Uh, so we actually saw it come in. I think it was north of 50 at the end of 2q, 50 billion. And I think we're at this point. Now, down into the kind of mid to high 30s. So we, we've made a significant move in in, in the right direction. Um, you know, construction prices are assets under construction is a mix of equipment and um and buildings. And so the other thing that we're doing is trying to use more of that. So that will also bring the number down so we we, we should have a steady Improvement in that number through the rest of this year and the goal is to kind of drive it down further. Next year that said, we are going to, you know, we are going to want to continue to have optionality on Fab white space. And that's, you know, while we are slowing down Ohio, we're not stopping Ohio. So we're going to continue to make investments and there will
Speaker Change: Will be assets under construction or Construction in progress, uh, on our balance sheet to make sure we have flexibility as, uh, the demand drivers change. Thanks Joe. Jonathan, can we have the next question? Certainly, our next question comes from the line of Benjamin. Wright says, from Julius.
Benjamin Wright: Hey guys. Uh thanks for the question. Wanted to ask about servers um I may have missed it, but what's the trend, You're Expecting into the third quarter? And um, what are your thoughts about, uh, share uh, losses there? And and when perhaps those uh dissipate a bit, you know, into the following year.
Benjamin Wright: You know as far as share goes, you know, obviously you know we're not where we want to be in terms of a competitive portfolio and that's what lipo is really focused on. Improving that said you know, Granite Rapids is a better part. Uh, Diamond wrap is the next part will be a better part. So we think we, you know, continually improve our relative competitive position, but to really be where we want to be, um, still take some work. Uh, and so, you know, I think the great thing about it is we actually have held share relatively well, uh, despite, uh, you know, our position in the market in terms of performance. And I think it's a good Testament to, you know, the x86 ecosystem and the strength of that, uh, and our particular, um, capabilities in the XX x86 system in terms of, um, you know, the ecosystem that we we provide and to our customers.
Speaker Change: That do you have a follow-up?
Yeah. Uh I was wondering if lipu would mind expanding on his commentary around the AI strategy. Um obviously you're going to be updating that at some point. Um if you don't mind clarifying when that will be. But what what do you are you inferring that you you know, that you have a GPU Centric strategy or something else? Um and how should we be thinking about how you're going to attack that market thanks?
Speaker Change: Yeah, very good question. So I think we're going to unfold our AI strategy in the months to come. But let me just share with you. Uh, I think we're going to look at it from uh where are we going to Target and focus? And uh you know first of all is the inference side and also the agentic AI and that is really taking off and we want to provide that interception on that and then we're going to take a different approach. We're going to look at the whole system software to the silicon and then drive the, you know, the performance. And then, the agentic AI is very important is the accuracy and speed. So I think with all this AI compute going to be even more intensive, but the workload is a little bit different. So we want to look at how can we intercept using our franchise of 886, and then with the accelerator and then somehow drive that whole become the computer platform of the future. And so, those are the things that were in the drawing board.
Speaker Change: We are working on it and then we will share with you when we are ready. And we so far the engagement with customer. They love what we are. And basically, we have to put the team and we are delighted, we add on the field team members to come on board and also, we're going to focus on adding more software talents. So, in the way that we can really try some of these opportunity and bigger player uh in this opportunity but thanks for the question. Jonathan, can we have the next question, please? Certainly our. Next question comes from the line of Williamstown.
Speaker Change: From 2, Secours. Your question, please.
Speaker Change: Great. Uh thank you for taking my question. Um with bu I'd also like to uh lean into this AI topic a little bit because um I think you you might not have used the words full stack but that's um certainly what it sounds like and so when I think about the the opportunity that Intel has I guess I've thought of it as do you want to be sort of like Nvidia but Nvidia already has a very established position. You have cloud service providers doing as6 and you have AMD trying to do the same thing. So it it sounds almost like you're aiming to be the third, arguably, the fourth supplier in the market where you know there's really only 2 successful and so far Nvidia and it's and some of its customers.
Speaker Change: And I wonder to what degree you have considered or are still considering another approach like, doing Basics, uh, to, uh, to establish a better position in this market. I, I hope that question makes sense, but any clarification and education, you could provide us with to help a lot. I think. Thank you.
Speaker Change: Yeah, very good question. Thank you. And then first of all I think you are correct and know what I described about the system software is a full stack solution. We try to provide and then clearly we are behind and we had tried to find the area that we can really wage in and then drive a different uh, solution and service. And that Ding, meanwhile, I want to play into our strength in the 86 so that we can really
Speaker Change: Really Drive their performance. So absolutely, we're going to drive that opportunity.
Speaker Change: We'll do a follow-up question.
Speaker Change: Uh yeah, I'd like to maybe just asked about the, the write Downs in the quarter. It sounds like that was equipment, but I wonder if there was any inventory in that as well. And maybe any clarification on on what you're writing down to the degree. I think it it would help us. Thank you.
Speaker Change: Okay, yeah. Uh, we did have inventory, write downs but we weren't isolating that. That's just part of the normal. Um,
Cost of sales roll up uh the right? The this particular rate down that we're isolating, uh, mostly was around um,
Speaker Change: Uh, roughly around impairments of equipment. And then there was another couple hundred million dollars. That was a kind of an adjustment interns, how we take, uh, some certain extraneous costs, um, originally through inventory. And now moving at more to a period cost, uh, the equipment, it was kind of a bunch of different things but I would say I'll give you 1 of the bigger ones. That was an example, we had some tools that we had bought they were sitting in assets under construction
Speaker Change: was relatively had tools in the line that were older tools and we took the opportunity since we um had ex you know an extra excess amount is we took the newer tools put them in line took the older tools out they had a higher notebook value than the value we can get uh in the Open Marketplace if we sell them. So we wrote them down to to that value and um
Speaker Change: Well, they'll they'll be held in assets held for sale. So it was, it was things of that nature. Um, like I said, mostly older tools that, um, that, uh, we just couldn't find a purpose for
Speaker Change: thanks. Well, Jonathan, can we have the next question? Certainly, our next question comes from the line of Stacy, roskin from Bernstein, research your question, please?
Stacy Roskin: Hi guys, thanks for taking my questions. Um, for the first 1, I wanted to touch on 18 and 14 AC. You said 18a would be supplying the next 3 generations of Intel products so I guess that's 2026 27 and 28. So I guess that would suggest 148 if it comes out
Stacy Roskin: Would be 2029 at the earliest. I I, I guess number 1. Is that timing. Correct.
Stacy Roskin: And then, you know, just within that
Stacy Roskin: Given the plans, you know, at least the the contingency plans that maybe not do 148. I mean, I guess the suggested, if 148 dies does The Foundry strategy die with it and can you run a sustainable business? Just on internal volume with 18a and increasing Outsource at 148 doesn't uh, doesn't uh, do what it needs to do.
Stacey Roskin: Uh, Stacey is a good question. So first of all, I think the, as I mentioned earlier, 18a is important to us for the 3 generations of internal product. And then when we're ready, then we can go outside with more confident to get the customer, to support us and then on the 14th, a and out. Uh, you know, same as the A14 from tsmc,
Stacey Roskin: The timing is all in the 2829, so that's no different, no change. And clearly while laser focus, uh, on the process technology with the 2 engines customer and we clear Milestone to deliver and then clearly I think we're going to learn a lot and then we're not going to put any capex until we see the yield performance and also our internal customer and external customer feedback and the volume commitment that we will put the capex in. And so, the, the the P perception will be very clear. We are committed to The Foundry business and then Meanwhile, we're going to be very disciplined in the capex deployment. Make sure that we see the volume, see the customer commitment, then we deploy.
Stacey Roskin: And maybe I'll just add 1 more thing. If I understood the last question can, can you still do 18a? I think is what you said. Um, you know, we, we actually won't get to Peak volumes on 18a until probably the beginning of the next decade. So this is going to be a node that we use for a very long time. And we're expecting a really good Roi on it. Um, you know, we're largely our drive or let's see calculating that based on uh, the internal uses for it, given that most of that is coming internally. Uh, in the near term. I would say, I wouldn't write off 18a as potentially getting external customers. At some point, we clearly, we probably won't get a lot in Wave 1, uh, as it as it seems, but there will be multiple waves and 18, a will be, will find different.
Use cases over time and there'll be more opportunities for us to attract external customers. After we do so much improvement in terms of performance and yield on our own products.
Stacey, do you have a quick follow-up?
Stacey Roskin: I I do thanks. Um I want to ask about the the capex so you talked about sustaining capex.
Speaker Change: Ario for next year. I mean if if I take the current like run rate for this year, like the gross capex in the first half and 18 billion for the year, it suggests like a quarterly run rate of, I don't know. 3.6 billion be something like 14, 14 and a half billion.
For the year like or like, I guess I'm trying to figure out, like, what's a plausible number for where you might land next year. Given what you see is is 9 billion actually on the table, or is it closer to 14 or like what do you guys actually have in mind? Yeah, fair question. I see. Um, I was given like a ballpark, you know, what would be just you know, if we weren't like moving forward with something but uh clearly we're going to need you. Our assets under construction will not be enough to support uh all our capex investments even with maintenance Capital capex next year. So, you know, we haven't quite figured out exactly yet. What the plan will look like for next year. We don't lock in our capex until early in the year. Uh, so that would be, you know, call it sometime in the January time frame of 26 that will lock in 26, is capex. But I think it's meaningfully higher than uh 9 billion. But certainly we think it's going to be less than 18.
Stacey Roskin: Thanks Stacey. Jonathan can we have the next question please? Certainly our. Next question comes to the line of the fact, Aria from Bank of America, Securities your question, please.
Speaker Change: Uh thanks uh for my first. First question, I wanted to discuss competition and the server CPU Market. Um I see in your 10 Q, you mentioned uh server asps are down 8% uh from last year because of a competitive environment, I thought that you know, Rising uh course would mean greater ASP. So just if you could address that but then kind of more medium to longer term libu. How impactful is competition from arm who is claiming to take over half the server Market?
Speaker Change: Yeah, good question. So I think, uh, let me just look at the server Market, you know, clearly in our we still have about, you know, 55%, um, Market Market, Market market, shares, and clearly we have some mistake we make on the on the, uh, you know, the high-end performing server area. And I, you know, 1 thing is this called synchronized multi-threading and I think, um, you should be a Intel strength, uh, but somehow we Overlook it and then now we are double down. Make sure that we will have that performance Gap, we can narrow. And then, meanwhile, we also engaging with some of the big hyperscale and also high-end, uh, Enterprise. Uh, we learned what are the workload that require and we laser focus on getting the product group map, clear and simplify and make it easier to work with us and so I think we take all the step we listen to customer.
Speaker Change: 1 thing that I think we changed, we listened to customer very closely and then engaging with them early in the product development and different definition stage and they loved it. And so I think we have a chance to regain back and then with the new products so that we can really drive the success here.
Speaker Change: You have a quick follow-up. Yes, uh, thank you. Um, maybe 1 for Dave on, uh, gross margin. So Dave, let's say if your Sales Group, mid finger digit next year, hypothetically, what will gross margins do? When you look at all the puts and takes around the mix of 18 a and and what you need to Outsource. So I know you're not giving specific output but let's say your Topline growth is there a simple formula to look at the gross margins versus the 36% level that you are at right now.
Obviously, the devil's in the details on this, but I think a good rule of thumb is that we get, you know, somewhere in the 40 to 60% fall through uh, next year. Um, you know, hopefully closer to the higher end of that if uh, if things work out in our favor,
Speaker Change: Thank you, Jonathan. We have time for 1 last question, please. Certainly. And our final question for today, comes from the line of Aaron Rickers from Wells. Fargo your question, please?
Yeah, thanks for uh taking a question. Um, I want to go back to the server discussion as well. I know in the past you guys have talked about the progression of 18, a and clear water for us which I can appreciate. It's a lower Vol skew. But but you know, I'm curious as you think about stabilizing your market share, uh, and maybe being able to recapture share, do you do you think that that's, that's a function of diamond Rapids and if so you know how can we at all? Think about the timing of diamond Rapids is you know 2026 second half of 26, any Clarity on. That would be helpful.
Speaker Change: And clearly, we're going to be review the whole quarter market and uh, that will be on the 2829 and we make sure that we have a robust products to come out. So I think it's going to be fine. Tune and res. Not uh,
Speaker Change: Uh, discuss with the customer, get the validation from the customer and then, uh, so far, I think we are. And now, we can also have a new leader and need some changes. I'm making. And then clearly I think we're going to drive that whole data center is a very important business for us. We're going to be, you know, uh, become competitive again, and do you have a quick follow-up?
Speaker Change: Yeah, I do. Thanks John. Um, so real quickly just, uh, Dave, I want to go back like to skip, uh, or, or the Arizona and the Ireland. Fabs just remind us again. How we should be modeling that I think in the past, you talked about a 500 million uh headwind this year and then not going to like 1.3 to 1.5 billion next year and significantly higher in the in 2027. So any kind of update should we still think about that? Is that increasing? Just, you know, any color?
Yeah, those are roughly. The right numbers to forecast. Um, you know, obviously as we get out into the 2728 time frame, we're we're kind of hitting the normalized, Run rates of these skips so it'll it'll be higher than the 1 2 1 3. We'll we'll update you as we uh, as we progress.
Speaker Change: Thank you all for joining us today. I must say, I have been pleased with the teams and the progress. We have made transitioning to a financially disciplined Foundry. Resetting how we engage with our customer, and our partners, and simplify our operations.
Speaker Change: I look forward to discuss our continued progress with you next quarter. Thank you.
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.