Thank you for standing by, and welcome to Intel Corporation's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded.

And now, I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations..

Thank you, Jonathan. By now you should have received a copy of the Q2 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window.

I am joined today by our CEO, Pat Gelsinger, and our CFO, David 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 contains 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 financial measures that we believe provide useful information to our investors. Our earnings release, most recent Annual Report on Form 10-K, and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations.

They also provide additional information on non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Pat..

Thank you, John, and good afternoon, everyone. Q2 profitability was disappointing despite continued progress on product and process roadmaps. With our new operating model firmly in place, we are accelerating actions to improve profitability and capital efficiency by more than $10 billion in 2025, which I will discuss shortly.

For the quarter, we delivered sequential revenue growth in line with our forecast despite the unexpected timing of new export control restrictions announced in May.

Q2 profitability was below our expectations due in part by our decision to more quickly ramp core Ultra AI CPUs as well as other selective actions we took to better position ourselves for future quarters, which Dave will address fully in his comments.

We previously signaled that our investments to define and drive the AI PC category would pressure margins in the near term. We believe the trade-offs are worth it. The AI PC will grow from less than 10% of the market today to greater than 50% in 2026.

We know today's investments will accelerate and extend our leadership and drive significant benefits in the years to come. Our efforts will culminate with the introduction of Panther Lake in second half of 2025.

Panther Lake is our first client CPU on Intel 18A, a much more performant and cost-competitive process, which will additionally allow us to bring more of our tiles in-house, meaningfully improving our overall profitability. Another important driver of improved financial performance is the cost-reduction plan we announced today.

This plan represents structural improvements enabled by our new operating model, which we are pulling forward to adjust to current business trends. Having separate financial reporting for Intel Products and Intel Foundry clarifies and focuses roles and responsibilities across the company.

It also enables us to eliminate complexity and maximize the impact of our resources, taking a clean sheet view of the business is allowing us to take swift and broad-based actions beginning this quarter. As a result, we expect to drive a meaningful reduction in our spending and headcount beginning in the second half of this year.

We are targeting a headcount reduction of greater than 15% by the end of 2025 with the majority of this action completed by the end of this year. We do not take this lightly and we have carefully considered the impact this will have on the Intel family. These are hard, but necessary decisions.

Our actions will reduce OpEx to approximately $20 billion in 2024 and we see a bigger impact next year with 2025 OpEx targeted at $17.5 billion, more than 20% below prior estimates. We expect further benefits in 2026 with OpEx to decline in absolute dollars yet again.

Even as we lower overall spending, we will continue to fund the investments needed to deliver our strategy. Our new operating model is also driving benefits to our capital requirements, giving us the transparency to more rigorously scrutinize every project and every dollar of capital.

As a result, we now expect gross CapEx in 2024 to be between $25 billion and $27 billion. That is a reduction of over 20% from our plan entering the year and additionally reflects expectations for softer second half demand.

Combined with strong execution of our smart capital strategy, including our second SCIP with Apollo, we expect net capital spending in 2024 of between $11 billion and $13 billion. These benefits will carry forward to next year as well.

For 2025, gross capital spending is targeted between $20 billion and $23 billion and net capital spending between $12 billion to $14 billion. Increased capital efficiency has a positive impact to gross margins over time, but we will also accelerate improvements by generating roughly $1 billion of savings in non-variable cost of sales in 2025.

Once again, these reductions do not impact our ability to execute our plan. We designed our smart capital strategy to enable us to conservatively manage the day-to-day business to trend line growth, while maintaining the operational flexibility to quickly and cost-effectively capture upside when it comes.

We are taking the added step of suspending the dividend at the beginning of the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute our strategy. We reiterate our long-term commitment to a competitive dividend as cash flows improve to sustainably higher levels.

Reductions across OpEx, CapEx, and cost of sales total well over $10 billion in direct savings in 2025 and provides clear line of sight to a sustainable model with the ongoing financial resources and liquidity needed to support our long-term strategy.

We remain confident that we have and will continue to make the investments needed to drive long-term shareholder value and we view cost discipline as the compass that drives effective execution, helping teams stay on track to both prioritize and achieve measurable results.

The operational and capital improvements we are driving will be especially important as we manage the business through the near term. While we expect to deliver sequential revenue growth through the rest of the year, the pace of the recovery will be slower than expected, which is reflected in our Q3 outlook.

Specifically, Q3 will be impacted by a modest inventory digestion in CCG with DCAI and our more cyclical businesses of NEX, Altera, and Mobileye trending below our original forecast. Our outlook reflects industry-wide conditions without any meaningful change in our market share expectations.

As we look into Q4, normal seasonal revenue growth has historically been in a range of flat to up 5% quarter-on-quarter. With improved client inventory levels exiting Q3, we see Q4 revenue at the high end of that range. Let me now provide more details by our key business units, starting with Intel Foundry.

A key part of our strategy is returning to process leadership with our aggressive five-nodes-in-four-years march and the finish line is officially within sight. We are well into the ramp of Intel 4, Intel 3, and Intel 20A is been ready for production next quarter.

On Intel 18A, we released the 1.0 PDK last month and are on track to be manufacturing-ready by the end of this year with production wafer start volumes in first half of 2025. Panther Lake for client is now running Windows and looking very healthy.

This is the first microprocessor to use RibbonFet, PowerVia, and advanced packaging, achieving a significant milestone. Clearwater Forest for server, which also includes Foveros Direct and other key advanced packaging capabilities is booted and likewise looking very healthy.

These are the first of many Intel 18A products on track to bring Intel 18A to the mass market. Importantly, the launch of 18A will be our fifth node in four years, completing an historic pace of design and process innovation and returning Intel to process leadership.

Our team is resolute and determined to finish what we started and once we do, it will unlock further growth and value creation across our Foundry and Product businesses.

Our investments in a global footprint of leading-edge capacity continues to weigh on near-term profitability, but long term, they position us to profitably participate in the largest and fastest-growing parts of the semiconductor market.

We continue to expect the investments we're driving through this year to put us on a course for meaningful financial traction with operating profits for Intel Foundry troughing in 2024 and then driving to breakeven.

To help accelerate [Technical Difficulty] our Foundry Services business, Kevin has led large foundry and fabless businesses outside Intel and is a great addition to our leadership team.

He has hit the ground running [Technical Difficulty] considerable time with current and future Foundry customers as we ramp our process packaging and chipset capabilities for the AI era. We are also pleased to welcome Naga Chandrasekaran from Micron later this month to lead our Foundry Manufacturing and supply chain organization.

He brings more than 20 years of leadership in deep technical R&D and manufacturing expertise that will help advance our priorities. Overall, our Foundry team is driving excellent collaboration with our design ecosystem partners.

In Q2, Ansys, Cadence, Siemens, and Synopsys all announced the availability of reference flows for Intel's embedded multi-die interconnect bridge advanced packaging technology.

EMIB makes it possible to cost-effectively scale to a larger silicon area by connecting multiple die in a single package, which simplifies the design process and offers design flexibility.

These same partners also declared readiness for Intel 18A designs, and we will be collaborating closely with the ecosystem in the second half to prepare for next year's 18A launches. Beyond Intel 18A, we are well underway on Intel 14A and Intel 10A development.

Even as we continue to extend leadership and innovation on our process roadmap, we are transitioning to a more normal cadence of node development. The normalized cadence will have positive implications for both pace and magnitude of ongoing R&D and capital spending requirements. Let's now turn to Intel Products.

In our largest and most profitable business, CCG, we continue to strengthen our position and execute well against our roadmap. The AI PC category is transforming every aspect of the compute experience and Intel is at the forefront of this category creating moment.

Intel Core Ultra volume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models. This is an ongoing testament to the strong ecosystem we have nurtured through 40 years of consistent investments.

We have now shipped more than 15 million Windows AI PCs since our December launch, multiples more than all of our competitors combined, and we remain on track to ship more than 40 million AI PCs by year end, and over 100 million accumulative by the end of 2025.

Lunar Lake, our next-generation AI PC, which achieved production release ahead of schedule in July, will be the next industry-wide catalyst for device refresh. Lunar Lake delivers superior performance at half the power with 50% better graphics performance and 40% more power efficiency versus the prior generation.

Lunar Lake delivers 3 times more tops Gen-on-Gen with our enhanced NPU and will be the ultimate AI CPU on the shelf for the holiday cycle. Microsoft has qualified Lunar Lake to power more than 80 new Copilot+ PCs across more than 20 OEMs, which will begin to ship this quarter.

Lunar Lake will quickly be joined by Arrow Lake, which will scale AI to the desktop category next quarter. And as mentioned earlier, we are already gearing up to launch Panther Lake next year to further extend our leadership position. So very good progress in CCG and a super strong roadmap over the next 18 months. Let me now turn to DCAI.

This is one of the most important areas of focus as we work to improve our performance and market position.

We have a strong foundation of which to build, including the more than 130 million Xeon powering data centers around the world today, and our roadmap is designed to build upon this vast installed base to deliver greater performance and efficiency, enable AI solutions that are open, flexible, and scalable and reduce total cost of ownership for customers.

We took some important steps forward this quarter, starting with the launch of Xeon 6 with E-core processors, formerly codenamed Sierra Forest. This is our first Intel 3 product and is particularly well suited for high-density to scale our workloads. It drives performance up, power down, and dramatic rack consolidation.

Early adopters are already seeing 25% better performance per watt versus competitive solutions. This will be followed by Xeon 6 with P-Core, codenamed Granite Rapids, which delivers greater performance for the most demanding workloads and will begin shipping this quarter.

Looking to the future, we are excited about the launch of Clearwater Forest, our first Intel 18A server product featuring our industry-leading hybrid bonding. Clearwater Forest has achieved power-on and is on track to launch in 2025.

As we've reestablished Xeon's competitive position, we are strongly positioned as the head node of choice in AI servers. We are also focused on improving our accelerator roadmap.

We're delivering a combination of performance, flexibility, and value that is very compelling to customers, particularly cloud and enterprises seeking scalable, cost-effective Gen AI solutions.

Our focus on open models, open developer frameworks, and reference designs combining Xeon with accelerators through OPEA or Open Platform for Enterprise AI, are gaining considerable market traction. Launching in Q3, Gaudi 3 will take our accelerator performance to the next level, at just two-thirds the cost of competitive offerings.

To put it into perspective, we expect Gaudi 3 to deliver roughly 2 times performance per dollar in both inference and training versus H100. Gaudi 3 has strong ecosystem support, including Dell Technologies, Hewert-Packard Enterprise, Lenovo, Supermicro, Foxconn, Gigabyte, Inventec, Quanta Cloud Technology, and Wistron.

Turning to NEX, we continue to see stability in Q2, while introducing new products that will expand our leadership in edge and networking into the future.

As a founding member of the Ultra Ethernet Consortium, we announced an array of AI optimized scale-out Ethernet solutions, including the Intel AI Network Interface Card and Foundry Chiplets, which we'll launch next year.

Our recent IPU adapter for the enterprise supported by Dell Technologies and Red Hat broadens access to the solution co-developed with Google Cloud. We expect the IPU to be accretive to growth and profitability as it becomes an increasingly important part of acceleration in the AI data center.

We also announced the creation of Ultra Accelerator Link, a new industry standard dedicated to advancing high-speed, low latency communication for scale up AI systems, communication, and data centers. Combined with the growing number of use cases of AI on the edge, NEX is well-positioned to be an accretive growth driver in 2025 and beyond.

Lastly, as Altera reaches full operational separation by year end, we are actively working toward capitalizing the business to generate proceeds for Intel on a path to an IPO in the coming years. We are excited to provide Altera with the mandate focus and resources to realize their growth opportunities and execute their strategy.

We expect their increased autonomy will help to drive value for our shareholders, similar to the decisions we made with Mobileye two years ago and IMS last year. Before I turn to Dave, let me sum up by saying, it has been a hard fought first half of the year.

We have achieved several important milestones and we are taking clear and decisive actions to improve our sustainable financial performance. We have entered Q3 with a very clear focus and renewed intensity to up our gain and are motivated by the progress we are seeing as we execute our strategy and realize our vision.

That is the mindset driving us forward as we continue to build a stronger Intel. With that, I'll pass it over to Dave..

Thank you, Pat, and good afternoon, everyone. Second quarter revenue was $12.8 billion, down 1 point year-over-year and up 1% sequentially. Revenue was in line with the range we provided in May after receiving notice of an export license restriction, which negatively impacted our client business in China.

Intel Products and Intel Foundry both delivered 4% year-over-year growth, offset by headwinds in our more cyclical businesses. Profitability was significantly more challenged versus our previous expectations with Q2 gross margin of 38.7% and EPS of $0.02. Weaker than expected gross margin was due to three main drivers.

The largest impact was caused by an accelerated ramp of our AI PC product. In addition to exceeding expectations on Q2 Core Ultra shipments, we made the decision to accelerate transition of Intel 4 and Intel 3 wafers from our development fab in Oregon to our high-volume facility in Ireland, where wafer costs are higher in the near term.

However, this change resulted in approximately $1 billion of capital savings and will improve Intel 4 and Intel 3 gross margin long-term as we scale up the Ireland fab. Margins were also impacted by higher than typical period charges related to non-core businesses and charges associated with unused capacity.

Finally, we saw an unfavorable product mix and more competitive pricing than expected. Q2 operating cash flow was $2.3 billion, up approximately $3.5 billion sequentially on better working capital.

Gross CapEx of $5.7 billion was more than offset by $11.5 billion in grants and partner contributions, highlighted by Apollo's SCIP investment in our Ireland factory operations, resulting in adjusted free cash flow of $8.2 billion. Intel Products revenue was $11.8 billion, up 4% year-over-year.

The client business grew 9% year-over-year as the AI PC ramp contributed to higher volume and ASPs, partially offset by export license restrictions communicated during the quarter. DCAI revenue was roughly flat sequentially and down 3 points year-over-year.

We expect sequential growth in the data center through the second half as demand for traditional servers improves modestly.

Revenue for the NEX business was approximately flat both sequentially and year-over-year, so excluding the previously discussed inventory digestion impacting the telco market, NEX delivered 10% year-over-year growth in the first half.

Q2 operating profit for Intel Products was $2.9 billion, 25% of revenue and up approximately $400 million year-over-year, on higher revenue and reduced inventory reserves.

Intel Foundry delivered revenue of $4.3 billion, down 1 point sequentially and up 4% year-over-year, driven by increased wafer volume on Intel 7 and our first EUV nodes, Intel 4 and Intel 3. Foundry Services revenue more than doubled sequentially off a small base, including the start of advanced packaging revenue.

Foundry operating loss of $2.8 billion was worse sequentially. We expect operating losses to continue at approximately the same rate in Q3 with more than 85% of wafer volumes still coming from pre-EUV nodes with an uncompetitive cost structure and power performance and area deficits reflected in market-based pricing.

The continued ramp of our Intel 4 and Intel 3 Ireland facility and elevated R&D and start-up costs to support the rapid progression of our leading-edge technology development will also weigh on profitability. Mobileye revenue of $440 million improved 84% sequentially due to non-recurrence of the significant inventory drawdown that occurred in Q1.

The rapid revenue and margin recovery indicates digestion occurred in an organized, predictable fashion, and we believe it is now complete. However, difficult conditions in China, which are impacting many Western automotive suppliers, led Mobileye to lower their revenue and income guidance for the second half.

Altera delivered revenue of $361 million, up 6% sequentially with operating margins improving 4 points in the quarter. Revenue remains below consumption as inventory positions tied to previous supply constraints are worked down. We expect double-digit sequential revenue growth through the second half as customers return to more normal buying patterns.

Now turning to our Q3 guidance. Weaker spending across consumer and enterprise markets, especially in China, and continued focus on AI server investments in the cloud have reduced our TAM expectations for 2024. As a result, customer inventory levels are elevated.

We expect customers to reduce inventory over the second half of the year, along with the continued modest negative impact from export controls. These market dynamics should result in below seasonal revenue growth in Q3 with the client business flat to down and modest growth in data center and edge markets.

With an expectation of healthier inventory positions exiting the quarter and the continuation of an enterprise refresh cycle, we should see revenue growth at the high end of seasonal in the fourth quarter.

We expect gross margins to be moderately weaker sequentially with modest revenue growth and efficiencies offset by a continued ramp of new manufacturing nodes.

While we will continue our work to improve near-term profitability, a heavier dependence on external wafers as we ramp AI PC products over the next several quarters will pressure gross margins. As a result of these factors, we expect revenue of $12.5 billion to $13.5 billion in the third quarter.

At the midpoint of $13 billion, we expect gross margin of approximately 38% with a tax rate of 13% and EPS of negative $0.03, all on a non-GAAP basis. As Pat discussed earlier, lower than anticipated revenue in the back half of the year is putting pressure on gross margins and earnings.

We are taking aggressive actions to significantly reduce spending in response. These actions, while difficult, will help streamline the organization to improve productivity and make better decisions more quickly. Please note that we are likely to have charges associated with these actions, some of which may be included in our non-GAAP results.

Since we have not yet estimated these charges, they are not included in our guidance. Smart Capital continues to guide the pace and breadth of our global capacity expansion and our new operating model has uncovered opportunities to build and utilize manufacturing capacity more efficiently.

Additionally, we've responded to lower revenue by reducing 2024 gross capital investments to a range of $25 billion to $27 billion with a net capital spending of $11 billion to $13 billion, including our SCIP programs.

These adjustments ordinarily would bring us back to approximately breakeven adjusted free cash flow, but we now expect adjusted free cash flow to be modestly negative as we make payments related to the restructuring charges necessary to achieve our spending targets.

In 2025, with OpEx of approximately $17.5 billion and net CapEx of $12 billion to $14 billion, we expect to achieve positive adjusted free cash flow.

The suspension of the dividend, initial Altera capitalization, and positive adjusted free cash flow should significantly improve our liquidity in 2025 and position us to begin the process of meaningfully decreasing our leverage. Before I close, let me take a moment to highlight a couple of items as you model 2025.

As previously mentioned, we expect operating expenses to be reduced from Street expectations of $21 billion to approximately $17.5 billion. We will also reduce spending within non-variable cost of sales by approximately $1 billion.

While that will obviously have a positive impact on gross margins, we still only expect a roughly 60% fall-through for gross margin next year. The AI PC is a big winner for the company and the early signals on the performance of Lunar Lake are very positive. We therefore intend to ramp that product significantly next year to meet market demand.

While the product is great, it was originally a narrowly targeted product using largely external wafers and not optimized for cost. As a result, our gross margins will likely be up only modestly next year. The good news is the follow-on product, Panther Lake, is internally sourced on 18A and has a much improved cost structure.

As the momentum of AI PCs drives Panther Lake demand, together with the improvements from our new operating model and the cost savings from our lower capital spending, we will be in a great position to see meaningful gross margin expansion in subsequent years.

Lastly, the non-controlled income from Mobileye, Altera, and IMF and the portion of the SCIPs earned by our partners show up on a line below net income called non-controlling interest.

The NCI adjustment has been negligible so far, but we expect it to be a more meaningful driver, reducing our controlled share of income by approximately $700 million on a GAAP basis in 2025 and increasing as wafer production at our SCIP fabs in Arizona and Ireland increases in subsequent years.

In closing, the market has not recovered as expected and we're obviously not satisfied with our results. We're responding by aggressively adjusting 2025 spending to achieve profitability and positive adjusted free cash flow that is commensurate with the current market conditions, while continuing to invest in and execute our strategy.

In addition to these near-term actions, we're also seeing meaningful opportunities to improve financial results, leveraging our new operating model.

We remain optimistic that reduced spending, operating efficiencies, and more competitive products will keep us on track to our target model of 60% gross margin and 40% operating margin by the end of the decade. I'll now turn it back over to John to start the Q&A..

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

With that, Jonathan, can we please take the first caller?.

Certainly, our first question comes from the line of Vivek Arya from Bank of America Securities. Your question, please..

Thanks for taking my question. Pat, big picture, are the challenges the product issue, market issue, strategic issue, execution issue, I'm just wondering has the core issues been accurately diagnosed, because when we look at your CPU competitor, they appear to be doing much better in this same environment.

So I'm curious what is plan B if just cost cuts don't do the job?.

Yes. Thank you, Vivek. I'll start out, would say that this first phase of the recovery, restoration, and rebuilding plan is now well underway. With 18A, PDK 1.0, with Panther Lake, Clearwater Forest powered-on, our geo footprint now starting to take shape, we have more competitive products in every segment of the industry.

That said, with that foundation in place, it's time for us to focus on Phase 2, building a more financially sustainable model for the company for the future. Many of the new products are yet to ramp into the marketplace and we're just now getting to competitiveness.

But we need to build a more sustainable business model for us that allows us to have the financial wherewithal for the long-term journey. I'd say this rebuilding that we're underway, this is the most significant rebuilding of Intel since the transition from memory to microprocessors four decades ago. We firmly believe in the IDM 2.0 strategy.

We're building two world-class companies. The forensics that we've done this year, this clean sheet exercise as we could describe it, is building a world-class Intel Foundry and building a world-class Intel Products Group. These efforts we believe have identified many opportunities for us to have financial savings.

We've launched those aggressive steps today, and we believe that with the new products, a better financial position that we've done for a more efficient operation that we see the long-term opportunity for significant value creation for all of our stakeholders..

Vivek, do you have a follow-up?.

Yes. Thank you, John.

For my follow-up, I'm curious, what impact do the restrictions -- sorry, the restructuring actions have on either your R&D roadmap, your long-term external foundry opportunity, and any CHIPS Act funding? I think in the past you had suggested about $15 billion in long-term value from external foundry, is there any impact on those growth targets because of the restructuring action? Just what changes with these restructuring actions? Thank you..

Yes, thank you, Vivek. And fundamentally, we believe our strategy will be maintained even as we get these more efficient steps in place. The CHIPS grants -- taking your questions sort of one-by-one, on the CHIP side, these are milestone-based investments.

We still believe that we're comfortably able to execute against those milestones across the projects that we've announced. So we believe very comfortably that the CHIPS model that we've put in place, we've worked closely with the CHIPS program office in the U.S. government, we're very comfortable on those plans.

Also, the foundry, we are seeing a lot of momentum in areas like the advanced packaging areas where we're actually seeing quite a lot of uptake and expansion of those opportunities.

So the $15 billion of LDV that we've talked about and the $15 billion revenue by the end of the decade, we're very confident that those are still very solid guidelines for us to be building to.

Obviously, with the capital changes that we've made, we're going to be driving just like a world-class foundry does to be much more efficient with our capital investments and scrutinizing them more carefully.

And now that we've paid the capital to catch up, and I'll view -- this catch-up capital, we had no spare capacity, we had no site ahead, show ahead. We had no capacity to catch up.

As those investments are now largely completed, we're able to focus much more on capital efficiency for the future and aligning our capital spend to the market signals as we see to the future of our products as well as the foundry commitments that we have in place. Finally, I'll just say, again, we're building this against the market outlook.

We're going to flex our investments up and down appropriately, and we've now established a model with our smart capital to have that effectiveness that we can scale up and down to market conditions. So we feel like all of the things that we said for our strategy on track and we're now moving into Phase 2 of the execution of that strategy..

Thanks, Vivek.

Jonathan, can we have the next caller, please?.

Certainly. And our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please..

Hi, guys. Thanks for letting me ask the question. Kind of want to follow-up on the first two, and Pat, maybe just ask it a different way.

Part of what you're saying, it sounds like you're adjusting your spending across the board to reflect the macro reality, slower growth, et cetera, et cetera, but it seems like that would be difficult to do if it didn't impact any of the structural dynamics as well.

So I guess the real question is, are there any changes either to your competitiveness, the structure of the company, the long-term $100 billion target that you just saw weren't happening and therefore felt these cuts were necessary, so do any of the structural changes -- or can you describe any of the structural changes and what the outcome to your financial targets might be?.

Yes, let me point you back to what I said at the start. We started this forensics, this clean sheet analysis concurrent with the rolling out of our new operational model. We said we have to be a world-class foundry.

We are going to benchmark ourselves against world-class foundries and that's what Intel Foundry is going to become, and that's uncovered a lot of things, a lot of inefficiencies, a lot of ways that we can drive our capital footprint more effectively, and every aspect of that business is being analyzed and how we do maintenance, how we procure chemicals, how we run and price wafers and shuttle lots and everything like that so clean sheet analysis.

Similarly, on the product side, we've done exactly that same analysis. What does a world-class fabulous company look like. And we uncover quite a lot of areas where we don't leverage industry IPs. We're not using our EDA vendors as effectively. We've done too many steppings. We validate versus build-in design quality.

So many of these things are steps that we're taking to be a world-class Fabless company, and these are significant structural steps. We also realized that as an IDM 1.0, we were never built for efficiency. We were built for leadership. And now as we add this focus on efficiency, we see a lot of opportunities.

I'm having each of the four business areas, client, networking, and data center, look at their own portfolios, even though those are the right product areas for us for the future, and similarly, the portfolio of our Intel Foundry business and that's the work that we've now been undertaking and we're now accelerating based on the less than expected quarterly results, we're accelerating those impacts.

We're going to drive that in the second half of this year. We want to get these restructurings done quickly so that we can move forward more aggressively with the product lines next year. In terms of the long-term forecast, we're clearly tempering our view of how fast we can grow in the near-term based on the market conditions.

But our model is built that we will scale up or scale down the capital requirements appropriate to the market conditions we see. We believe the long-term guidance that we've given you, the 60:40, getting to the Foundry business model we've described, the growth areas that we've said, those are larger portions of our business.

We believe those are long-term still achievable in that regard and we're on track for many of those things in the models that we're laying out and today's actions will help accelerate us achieving those..

Ross, do you have a quick follow-up?.

Yes, I do. Dave, you went through with the good details of the cost structure and what would change the puts and takes for next year.

I wondered -- I know you're not going to guide to 2025 revenue, but the puts and takes from maybe a competitive positioning point-of-view, how you're feeling in CCG, DCAI, primarily relative to the competition, any sort of tailwind, headwind analysis or description for 2025 would be helpful..

Yes, sure. On the client side, obviously, we feel very good given our AI PC position, we're leading that new product category. And I think we talked a little bit in the prepared remarks about Lunar Lake, our next product coming in after Meteor Lake and the performance of that, so that looks like a phenomenally good product and position.

We're making the early inroads on the AI side of data center and that's only going to grow as we go into next year. The big question is when does the kind of traditional CPU market recover? It has been tempered this year, and of course, affected by other regions of the world like China spending and so forth.

That's obviously been a soft space and so we'll have to see how that plays out. And then NEX, obviously also outside of the telco space is starting to recover. And then we have these other businesses, Altera is starting to recover now.

So we're optimistic that next year will be a good year for them and we'll have to see how Mobileye plays out ultimately.

I think on the margin front, I talked about our kind of tempered view of gross margins next year, given the ramp of Lunar Lake, which with memory and package and almost all of the material getting sourced outside and they're seeing -- we're seeing inflation in that space that is impacting it.

But that part is followed by Panther Lake, that comes back into the fab.

And I think one of the bigger stories we'll have once we get beyond next year is kind of the resurgence of our internal facilities to start taking on a lot of the capacity that we had to move into the external sources should provide some meaningful improvement in terms of -- in terms of profitability.

And then, of course, we've done a lot, as Pat talked about in terms of restructuring the business and those will start to show up next year, but will be even more impactful the following year, including the new operating model.

So I think the good news for us is we actually don't need a ton of growth to see our model play out, both in the kind of medium term and long term in terms of gross margins and operating margins. And if we do get the growth, it puts us in an even better position..

Thank you, Ross.

Jonathan, can we have the next caller, please?.

Certainly. And our next question comes from the line of CJ Muse from Cantor Fitzgerald. Your question, please..

Yes. Thank you for taking the question. I guess, Dave, a follow-up to that prior question. I was hoping you could perhaps speak to how to think about gross margins beyond 2025. It's obviously very hard to offer the leverage when you're investing in both foundry capacity and at the same time outsourcing meaningful tiles to TSM.

So encouraging that you're bringing Panther Lake back in-house. How should we think about incremental margins there? And any of the other kind of moving parts that you've been speaking about on this call, including the unfavorable product mix and the more competitive pricing.

Is that just a near-term kind of phenomenon or something else we should be thinking about into 2025, 2026?.

Yes. So as I talked about to Ross, CJ, the good news for 2026 for us is that, that really begins the shift back to the internal manufacturing footprint for a lot of our tiles and so bringing back more wafers to the internal network will meaningfully improve the cost structure.

I think the adjustments in CapEx, which are clearly helpful in terms of cash flow in the near term become really beneficial to the cost structure as depreciation becomes kind of less of a headwind for us, so that will also be helpful.

And then like I said, we've got all these structural improvements that are coming our way, both from the actions we've taken today, but the new operating model and decisions will get made on a go-forward basis that will just optimize our business model going forward. I think 2026 should be a good year for us in terms of gross margins.

We'll save the actual number for a later date when we have more visibility into how things are playing out.

I think from a mix perspective, it's probably not going to be a big headwind or tailwind for us, just strict mix other than as we move towards more leading-edge wafers, the margins on those wafers are significantly better than the margins in pre-EUV nodes. So that will -- that will be one factor that will certainly help us.

It also -- in that regard, that also helps us on the pricing side because, obviously, from a wafer perspective, we get better pricing on EUV wafers as opposed to pre-EUV wafers.

And then ultimately, I think on pricing, it will really come down to when we have a competitive process and we have competitive products running on a competitive process and we're delivering what the customers want, that helps us in terms of the pricing dynamic.

And we're getting to the place as Pat talked about where we're starting to deliver on all those fronts. And so I feel good about our opportunity to realize that in the form of pricing as we progress through the next few years..

And just one thing to add on top of that, just to clarify, with Panther Lake already powered on, right, and showing good health, that is a product that we start ramping in the second half of next year, right? So we'll start to see some of those benefits, but obviously, the huge volume benefits of that really are in 2026, where we'll be very aggressive at bringing both the wafers home on a more competitive process with a more competitive product with Panther Lake, offsetting the volumes of Lunar Lake, which is almost entirely outsourced.

So we bring Tiles home with a more competitive product and a more competitive process, and that really is, I'll say, the story that will start to unfold as we talk to you more next year..

CJ, do you have a quick follow-up?.

Yes. Just a quick one on OpEx.

You gave us the $17.5 billion for all of calendar 2025, but could you share with us what you think the exit rate would look like? I'm coming to around $4.25 billion, is that in the ballpark?.

Yes. I'll say, given that some of the actions we're taking will kind of go through at least the early part of next year, we're going to enter at a higher number than we're going to exit, I'll give you that. And we should be down in 2026 relative to 2025.

Give me some time as we progress through the year to start to fine-tune the budget for 2026 and I'll give you more clarity around that..

Thank you, C.J.

And Jonathan, can we have the next question, please?.

Certainly. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please..

Great. Thank you.

You talked about the server roadmap with Sierra Forest shipping and Granite Rapids shipping this quarter, can you talk about how that -- where that puts you competitively? Do you think you're kind of have closed the gap or is it leadership product, and obviously, Clearwater for us is the longer-term focus, but where are we in the interim?.

Yes, thank you. And obviously, Sierra Forest, right, E-core product, very efficient, but a new category for us, so we have to go win sockets with it. Early customer feedback, very positive. As we said, greater than 25% TCO value that they're seeing from it, but it's early in its ramp.

Granite Rapids is really the peak core, I'll say, the more traditional Xeon for us and we'll start that ramp this quarter. But we'll take as anything in the server market, winning back share, winning back sockets is a longer-term cycle for that.

But a lot of encouraging signs for Granite Rapids, even though a lot of the data center energy right now is on the AI build-out, as you know. So in this environment, we're largely facing a period where much of the investment energy is going into the AI footprint.

So we're having to fight to win those socket back, but Granite Rapids looks very positive. The early health of Clearwater Forest is really spectacular. This is a really stunning technical achievement with the new design, 8A, this level of health, this are early in a major server product is really spectacular.

The new Foveros Direct and should have substantial TCO benefits for next year. And then the next P-Core version of that on 18A is also showing very good -- not in fab yet, but showing a very good design progress.

So we feel like the roadmap gets more competitive, and with it, we believe our market share position is fairly, I'll say, static, right? So year-on-year, we do see that overall the arm market share is more modest in the second half this year, so the X86 share, and we're stabilizing our overall position in the marketplace.

We believe as we then go to fight to win back. One of the good things that we've seen for our server market is the AI head nodes where we're quite advantaged and we're seeing a lot of interest in Xeon being the head node of choice for anybody's accelerator, including ours.

So a lot of things to unpack there, but we do feel like our position is stabilizing and strengthening with our products and the roadmap only improves from here..

Joe, do you have a follow-up?.

Yes. Just on the notion that AI has kind of stolen some of the focus from server, it seems like we would be looking at a ceiling in overall power budgets in a couple of years that would mean we need to invest in traditional server ecosystems and maybe do a significant refresh.

Do you see any indications of that and given that -- I perceive you guys are sort of stronger in enterprise than in cloud right now, like how are you positioned to take advantage of that when it does come?.

Yes. Thanks, Joe. And we do think that the enterprise market, right, is a more favorable market for us and we do have some early indications of a positive cycle there, but I'll say it's too early to give you any real firm indications, but we are starting to see, I'll say, better buying behavior, better signals from our OEMs in the enterprise market.

Similarly, for the cloud market, we do believe there will be a refresh cycle, right, as people get their AI strategies in place.

The TCO benefits of a server refresh now as we start talking about 3X, 4X consolidation ratios that they can have on their traditional, right, cloud environments, their container delivery environments, these are quite substantial.

So we do believe that as our products get to be more competitive, right, and there is a natural refresh cycle on that, that the markets will be more favorable for the traditional CPU market. But of course, the story is CPU plus GPU, right, and that's the bigger message that we'll be delivering.

And obviously, as Gaudi 3 starts shipping the CPU plus GPU use cases like we've described with OPEA, that will also help us for positioning on both sides of the cloud and the enterprise market for both CPU and GPU. That's the strategy that we're building toward..

Thank you, Joe.

Jonathan, can we have the next question, please?.

Certainly. And our next question comes from the line of Timothy Arcuri from UBS. Your question, please..

Sure, thanks. Dave, can you again explain how June gross margin was so much worse than you thought just three months ago? I mean, revenue is basically in line. I know you talked about mix, but it seems like it was probably a pretty small part of it mix was and it was really more the decisions around Intel 4 and Intel 3.

So can you just explain again, I'm not sure -- I'm not sure I understand why that was such a big..

Yes. Okay. That was the biggest one. Let me -- I'll just say that there were a couple of other things that we had to do some write-offs related to legacy businesses that impacted us. Our utilization was a bit lower that did impact us. But the biggest one was the shift.

We were originally planning to ramp Meteor Lake, Intel 3, and even run production on Intel 4 -- sorry, Intel 4, and then run production on Intel 3 in Oregon, which is our TD fab, our process technology fab, kind of our development fab. We made the decision to more quickly shift all of that over to Ireland.

And it's a good move because it saves capital. We don't have to spend capital twice essentially. And it starts to mature the Intel 4 and Intel 3 processes in Ireland more quickly. The downside of that is the wafers are expensive right now.

And so we get this kind of early ramp of the product at a much higher wafer cost that we're pushing through the system and that puts pressure on the margins. That's going to carry into next quarter.

I mean, we will do better in next quarter, obviously, but we're going to do more volume and the margins will be below the corporate average because of -- because while we're improving the wafer cost, it's not -- still not to the point where it's above corporate average yet. And so it will weigh down on margins for the third quarter as well.

After that, we start -- it gets more and more mature, the cost structure gets better and the situation on Meteor Lake will improve meaningfully..

Tim, do you have a quick follow-up?.

Yes. Pat, can you just talk about the foundry strategy given the CapEx cut? I guess my question is how you sort of execute on the plan with this lower CapEx. I mean kind of on one hand, you keep -- we keep talking about bringing all these wafers back in-house to help gross margin in 2026.

But I also hear about a lot more outsourcing to TSMC even in real-time so, is the cut more that some of your foundry customers are maybe structurally deciding that they're not as committed? I'm just trying to understand how you can kind of CapEx and still execute on this strategy. Thanks..

Yes, thank you. And at the highest level, the Foundry strategy unchanged. And we've built capacity corridor for Foundry customers. However, until we have committed orders, we're going to be modest on how much equipment we put against the shells and the sites that we have in place.

And how much of that corridor we keep available, how much flexibility working with our equipment suppliers that we need for that will be a subject of careful scrutiny as we go forward. We've also made some adjustments in the capital investment that we need to support our current view of market forecast. So all of those are, say, are adjustments.

The big thing is now that we're finishing this phase of aggressive build-out, right, and as you think about what we had to catch up, we had no EUV capacity. We had no shell ahead, side ahead capacity. We had no capacity to pull tiles home.

As those come into place, we've been making substantial capital investments over the last couple of years, and now we're focused on how do we harvest those investments in 2024, 2025, and 2026.

So we're putting much more aggressive view of capital utilization, right? How much capital require ahead of working with the suppliers to be more efficient in our capital dollars, just like a foundry does? And for that, we'll point you back to again, right, we're going to be a world-class fabless company.

Intel Products, we're going to be a world-class Foundry with Intel Foundry. The last point I'd make here on this is a lot of the early success that we're having with foundry customers is advanced packaging. And there, the capital requirements are not as significant as required for wafer capacity.

So we believe very much that we're seeing a surge of interest there. Customers in advanced packaging are clearly interested in us for capacity, but increasingly for our most advanced packaging technology. So that's an area that we believe we have as, and we've described before, as the on-ramp for Intel Foundry and that's continuing to look very good.

The final point is the Intel Foundry capacity will be aligned with, right, to the first order, the Intel product requirements. And clearly, there's a lot of tiles externally in 2025, we bring those home in 2026, that's when we'll start to really, as Dave said, see the benefits of the model that we've put in place.

Tiles coming home, leadership process technology, leadership products starts in 2025, deliver big-time in 2026 and beyond..

Thanks, Tim.

Jonathan, do we have the next caller, please?.

Certainly. Our next question comes from the line of Srini Pajjuri from Raymond James. Your question, please..

Thank you. A couple of follow-ups. Dave, on the move from Oregon to Ireland fab, you talked about that being a gross margin headwind.

Can you talk about how much -- can you clarify how much of a headwind that is right now? And also when it's fully-loaded on a like-for-like basis, how much of a headwind do you think that's going to be on an ongoing basis?.

I'm sorry, the second question is how much will the headwind be on....

On ongoing basis..

On an ongoing basis is what you're saying?.

Ongoing basis? Yeah..

Okay. All right. So I think the best way to think about it is, we were -- I don't know, 400 basis points or so off on the gross margin taking into account revenue was part of it. It was a meaningful chunk of that 400 basis points.

There was the write-offs related to legacy businesses and the mix and underutilization also affected and it wasn't an insignificant amount, but that was a good portion of that 400 basis points, let's call it that. And that will be the case in the third quarter probably given the increase.

I think we're talking about a 50% increase in Meteor Lake quarter-over-quarter in the third quarter. Beyond that, it's going to start to become less and less to the point where it's actually not going to be a headwind..

Yes, it becomes a tailwind..

Yes, exactly..

As the Ireland factory ramps, a production factory will have a lower-cost per wafer start than a TV factory like Oregon. So it becomes a headwind as we go into next year..

Tailwind as we go into... Now as we -- now the challenge for next year will be, we'll now be ramping Lunar Lake next year. Lunar Lake has the memory in the package, so we're going to have to essentially buy that at a price and turn around and include that in our price at 0% margin. So that puts some negative pressure on the margins.

And additionally, it's got more of the content sourced externally, and as you know, we're seeing some inflation.

So that one then becomes more of the -- Meteor Lake starts to be helpful, but Lunar Lake starts to become a drag on the Intel Products margins, which is why we're tempered in terms of our outlook for margins next year because we're going to have a lot of improvements on the Intel Foundry side.

It's going to be tempered on the product side and it's really going to be because of Lunar Lake..

And I was just going to add one thing, as we move the Intel 4, Intel 3 capacity into Ireland, it also gives our TD team more focus on their capital on 18A as well as then 14A and 10A, and we're taking, for instance, the second high NA tool is coming into our Oregon facility. So we're well underway on 14A.

So part of this was a capacity and cost decision for the long term. Part of it was an AI PC acceleration, but it was also a TD cadence decision and optimizing the use of our TD resources for the next-generation technologies, which are already well underway and showing good early indicators..

Srini, do you have a quick follow-on?.

Yes.

So, Pat, I think in the past, you talked about the foundry business potentially breaking even sometime 2027, and given all the cuts -- and you seem to at least sound confident that foundry opportunity is not changing, so I'm just curious, do you see a possibility that Foundry business could actually breakeven sooner given all the cuts?.

Clearly, that's our objective for Dave and I. You all say that said, we have a lot of wood to chop until we complete that journey. The steps that we've taken today are significant, right, ones for our operational efficiency that we're putting in place. So clearly that's our operating objective that we have.

But as we said, 2026 is really this year that many of these wafers come home, many of the new factory investments come online, the new process technologies. So I'd say that 2027 timeframe is still a good one, but you can trust that every aspect of what we're doing is to accelerate the profitability.

And the significant announcement today of the cost and financial focus, right, will give us, I'll say, the scrutiny and the lens by which to focus our Intel Foundry, $10 billion next year is a big number and we expect that many of these operational improvements will carry-forward in 2026.

Dave said, an acceleration of our adjusted free cash flow turning positive, so everything that we're doing is aligned with our thought, Srini..

Thank you, Srini. Jonathan, we've got time for one more question..

Certainly. Then our final question for today comes from the line of Matt Ramsay from TD Cowen. Your question, please..

Yes, good afternoon. Thank you, guys. I guess my first question is on the client space. I think, Dave, you might have mentioned client flat to down in September. I think your primary x86 competitor is going to be up double-digits or I think they mentioned above seasonal, however, you quantify seasonal now. Maybe you could give us a little color there.

There's lots of maybe noise in the system about ARM coming into the client market, I think that impact would be more modest relative to what you described. But if you could kind of give us puts and takes there and how the inventory with OEMs might be affecting what you're guiding for since September. Thanks..

Yes. I'll take that Matt. We feel very good with our client position, the momentum we have in AI PC. Here we have a very healthy ecosystem as well. And I'll say as the large market share position that we have, we're very focused on sell-in and sell-through in the channel.

So I believe our overall view of inventory levels, where our market share is, we're actually quite comfortable in the indications that we've given some inventory sell-through in the third quarter above seasonal in Q4.

Overall, the TAM expansion is low-single-digit, even though we're seeing a lot of enthusiasm around the AI PC and further TAM expansion as we go into 2025 as expected now broadly.

We'd also say that our position in the commercial portion of this market is very strong with our vPro assets and we believe we're coming into a refresh cycle on the corporate.

We also saw things like vPro have great success for customers as they were dealing with the CrowdStrike Blue Screen period and customers who are vPro customers were able to recover in a day or so, where customers not on vPro took weeks to recover from that. So a lot of reinforcement of the ecosystem, the leadership that we have on AI PC.

And as Dave said, Lunar Lake and Panther Lake only make our market position stronger. So I think we're very comfortable and every indication so far this quarter is very solid for those outcomes..

Matt, do you have a quick follow-on?.

Yes, I do. Thanks, John.

I wanted to ask -- I think in some of the prepared script and maybe early in the Q&A, Pat, you kind of reiterated the $15 billion funnel for the Foundry business, and I know in the medium term, a lot of that is packaging, but I wanted to ask about the customers that you've engaged with on 18A and maybe early on 14A, how have you seen the charts of the programs that they're planning to bring into your foundry progress in the last few quarters.

Are people still committed to ramping those things? Are they taking PDKs and maybe doing tape-ins? Are things moving forward? Have you seen any acceleration? Have you seen hesitation or maybe wait-and-see from those customers? I'm just trying to figure out how that stuff is progressing on 18A? Thanks..

Yes. Let me just clarify, the $15 billion is lifetime deal value of committed deals, right? So this isn't a pipeline. This is committed business that we now have in place. So I just want to clarify that, Matt, because I think your question suggests that the pipeline. There's a lot more in the pipeline. This is $15 billion of committed deals.

As you say, a lot of the near-term opportunity has been advanced packaging and we're seeing a significant expansion of that capability in terms of volume and technology.

On 18A specifically, a lot of customers have been waiting for the PDK, right, and now that we released the PDK last month, the 1.0 PDK, we've seen a flurry of activity with the EDA, the IP vendors, and the end customers.

So I'd be optimistic that we have good indicators coming in that area in the future, but this was really the starting point for many of them to go from test chips to start looking at production chips coming based on the PDK that we've just released. So we remain very comfortable with our earlier comments in that area.

I'd say, we do believe that we'll have further updates there, but as we've also indicated, customers are reluctant to put their name out there given the supply base and the traditional operation of the Foundry industry.

Overall, things are looking on track for what we've said with a meaningful acceleration in packaging over the last quarter, more updates to come. Maybe with that, John, I'll wrap us up. Thank you for joining our call. We appreciate the time as always.

And I'd say on a couple of these topics, I hope to see many of you at the Deutsche Bank Technology Conference coming up where we'll have some further updates.

I want to reiterate in a quarter like this that we are resolved to finish the audacious turnaround, the building of our process and product key milestones that we've achieved of this phase, but now we have to shift to putting more emphasis on the financial sustainability of our business. We're making difficult decisions as we rightsize.

We rebuild a more efficient, leaner, agile Intel for the future and one that we're confident will enable our long-term success. Thanks, and good afternoon, everybody..

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