Intel Q2 2022 Earnings Report

Intel EPS Results

• Actual EPS: $0.29
• Consensus EPS: $0.69
• Beat/Miss: Missed by -$0.40
• One Year Ago EPS: $1.28

Intel Revenue Results

• Actual Revenue: $15.30 billion
• Expected Revenue: $17.93 billion
• Beat/Miss: Missed by -$2.63 billion
• YoY Revenue Growth: -17.30%

Intel Announcement Details

• Quarter: Q2 2022
• Date: 7/28/2022
• Time: After Market Closes
• Conference Call Date: Wednesday, July 27, 2022
• Conference Call Time: 9:13PM ET

Intel (NASDAQ:INTC), founded in 1968 by Robert Noyce and Gordon E. Moore and headquartered in Santa Clara, California, is a leading global designer and manufacturer of semiconductor products. The company is historically notable for introducing the first commercial microprocessor and for driving the x86 architecture that underpins many personal computers and servers. Intel’s core business spans the design, fabrication and marketing of processors, chipsets and related components for a wide range of computing applications.

Intel’s product portfolio includes client and mobile processors marketed under brands such as Intel Core and Pentium, as well as high-performance Xeon processors for data centers and cloud infrastructure. The company also develops low-power processors for embedded and Internet of Things (IoT) applications, discrete and integrated graphics (including the Intel Arc family), programmable logic devices through its acquisition of Altera, networking and connectivity products, and software tools and developer platforms such as oneAPI and various AI acceleration toolkits. In recent years Intel has expanded into foundry services to manufacture chips for third parties and has pursued initiatives in autonomous-vehicle technologies and AI acceleration.

Intel operates a global manufacturing and research footprint, serving customers worldwide that include PC and server OEMs, cloud service providers, enterprise IT organizations and embedded-systems developers. The company maintains fabrication, assembly and R&D facilities across the United States, Europe and Asia to support design-to-manufacturing workflows. As of 2021, Pat Gelsinger returned to Intel as chief executive officer, leading the company’s strategic focus on process technology, manufacturing capacity expansion and broader industry partnerships to address demand across computing, networking and artificial intelligence markets.

Intel Q2 2022 Earnings Call Transcript

Key Takeaways

• Intel reported Q2 revenue of $15.3 B, a 15% miss to guidance, gross margin of approximately 45%, and cut its full‐year revenue outlook to $65–68 B, although it maintained its free cash flow target.
• The company exited six non‐core businesses, reduced core expenses, and affirmed its IDM 2.0 strategy—aiming for process parity in 2024 and leadership in 2025 across its five‐node roadmap.
• Intel’s foundry arm secured MediaTek as a major customer, now engages with six of the top ten fabless firms, boasts over $6 B in advanced‐stage opportunities, and launched the IFS Cloud Alliance to streamline design in the cloud.
• In the client segment, Alder Lake shipped over 35 M units and Raptor Lake will launch this fall, while the data center group faced macro headwinds, supply chain constraints, and Sapphire Rapids ramp delays.
• The NEX and Mobileye units each achieved record Q2 revenues, up 11% and 41% year‐over‐year respectively, while AXG graphics revenue grew 5% but fell short of GPU unit targets amid supply and software challenges.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the second quarter 2022 Intel Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I will now hand the conference over to your speakers today, John Pitzer, Corporate Vice President of Investor Relations at Intel. Please go ahead.

[John Pitzer, Corporate VP of Investor Relations at Intel]

You should have received a copy of our earnings release and the earnings presentation, both of which are available on our investor website, intc.com. The earnings presentation is also available in our webcast window for those joining us online. I'm joined today by our CEO, Pat Gelsinger, and our CFO, David Zinsner. In a moment, we'll hear brief comments from both, followed by Q&A. Before we begin, please note that today's discussion contains forward-looking statements based on the environment as we currently see it. As such, it involves risks and uncertainties. Our press release provides more information on the specific risk factors that could cause actual results to differ materially. We've also provided both GAAP and non-GAAP financial measures this quarter and will be speaking to the non-GAAP financial measures when describing our consolidated results.

[John Pitzer, Corporate VP of Investor Relations at Intel]

The earnings presentations and the release are available on intc.com, including full GAAP and non-GAAP reconciliations. With that, let me hand it over to Pat.

[Pat Gelsinger, CEO at Intel]

Thank you, John, and good afternoon, everyone. While we continue to make solid progress on our strategy, Q2 results were disappointing. Below the standards we have set for the company and below the commitments we have made to you, our shareholders. The sudden and rapid decline in economic activity was the largest driver of the shortfall, but Q2 also reflected our own execution issues in areas like product design, DCAI, and the ramp of AXG offerings. We have an obligation to remain vigilant and to respond to the changing business conditions while not losing sight of our long-term goals and opportunities. We will look to do both by adjusting and refocusing our spending levels in the near term at the same time as we accelerate the deployment of our Smart Capital strategy and improve product execution.

[Pat Gelsinger, CEO at Intel]

Collectively, these actions will begin to show dividends in the second half of the year, allowing us to return gross margins to our target range by Q4 and maintain our initial free cash flow outlook for 2022. While still early in our journey, we remain laser-focused on executing to our strategy to deliver leadership products anchored on open and secure platforms powered by at-scale manufacturing and supercharged by our people. The current economic backdrop only strengthens our resolve, and we are embracing this environment to accelerate our transformation. For example, regaining our leadership begins with Moore's Law and the capacity to deliver it at scale. Over the last 18 months, we've taken the right steps to establish a strong footing for our TD roadmap. We are well into the ramp of Intel 7, now shipping in excess of 35 million units.

[Pat Gelsinger, CEO at Intel]

Intel 4 is ready for volume production in the second half of this year, and Intel 3, 20A, and 18A are all at or ahead of schedule. We've received additional strong third-party validation for TD, IFS, and our manufacturing group just this week when we announced MediaTek as our next major foundry customer, a great example of our One Intel culture. I want to congratulate our teams on what we expect to be many announcements as we execute to become an at-scale, leading-edge, geographically diversified systems foundry. We must also be clear-eyed as we look into the second half. We are planning for volatility as the world adjusts to the end of a 2+ year pandemic and the unprecedented stimulus governments used to fight it.

[Pat Gelsinger, CEO at Intel]

Across the economy, supply chain issues have both limited the ability to meet demand in some areas and driven inventory well above normal levels in others. We are prepared to manage through a slowdown typical of the normal cycles the semiconductor industry has experienced over the last 50 years. While the depth and duration are still difficult to predict, we have a proven track record of being able to adjust and succeed in any environment. Let me address some of the specific actions we are taking. First, we further sharpened our focus in Q2, selling our drone business and making the difficult decision to wind down our efforts in Optane as we embrace CXL, a standard which Intel Corporation pioneered. These add to actions last year in NAND in the sale of McAfee.

[Pat Gelsinger, CEO at Intel]

In total, we have now exited six businesses since my return, providing roughly $1.5 billion for investments aligned with our IDM 2.0 strategy. We are also lowering core expenses in calendar year 2022, and we'll look to take additional actions in the second half of the year, which Dave will address later. Importantly, expense discipline is not impacting the strategy, and we remain firmly on track to achieve process performance parity in 2024 and unquestioned leadership in 2025. This goal is our true North Star. Second, our ability to invest aggressively and fulfill our commitment to a strong and growing dividend is anchored by the progress we are making in deploying our Smart Capital strategy. We are thrilled to see the bipartisan votes in the Congress this week and expect CHIPS Act to be on the President's desk shortly.

[Pat Gelsinger, CEO at Intel]

We have been integrally involved in moving this groundbreaking legislation forward. This progress, combined with the strong momentum in Europe, will reshape our industry and bring us toward a geographically balanced, resilient supply chain that we are uniquely positioned to enable and benefit from. Access to mission-aligned pools of capital supports the accelerated pursuit of our strategy and will enable our forward pace. Third, I rejoined Intel to reenergize and reestablish a culture of execution and innovation. With process technology and capacity expansion both now trending very well, we have the critical foundation we need for improved product execution. We have rebuilt our leadership team, now fully assembled for the first time, and together we have reestablished OKRs throughout the organization to drive common purpose, and importantly, a system of accountability.

[Pat Gelsinger, CEO at Intel]

In the coming months, we will begin to share more with the investment community on the next evolution of our Tick-Tock model to drive consistent and predictable cadence of process and design innovation. As we look beyond the near term, the semiconductor industry continues to be at the beginning of a new structural growth phase driven by four superpowers: one, ubiquitous compute; two, pervasive connectivity; three, cloud-to-edge infrastructure, and four, AI. Combined, these drivers support a semiconductor industry eclipsing $1 trillion by 2030. What remains very clear, even during this period of uncertainty, is the growing importance of silicon to the global economy and to each of our daily lives. However, as a result of macro weaknesses, we now expect the PC TAM to decline roughly 10% in calendar year 2022, characterized by broadening consumer weakness and relative strength in enterprise and higher-end SKUs.

[Pat Gelsinger, CEO at Intel]

Importantly, our Q2 PC unit volume suggests we are shipping below consumption as some of our largest customers are reducing inventory levels at a rate not seen in the last decade, and along with some pricing actions should allow for sequential growth into the second half, even as some customers manage inventory lower. While COVID-related dynamics like work from home and school from home pulled forward some demand, they also solidified the PC as an essential tool in the post-pandemic world. For example, PC and Chromebook usage remains historically high, even as the pandemic's most acute impacts diminished. Markedly higher per PC usage and a larger installed base, including 600 million PCs that are four years and older, supports a PC TAM sustainably above 300 million units. Data center trends are still well-entrenched.

[Pat Gelsinger, CEO at Intel]

Data has been growing exponentially at a 50% CAGR for over 20 years, but until recently, it has been uneconomical to turn that data into true actionable insights. With the advent of AI, along with CPUs, GPUs, and accelerators, we now have the tools to access and use more of the data we create, driving significantly higher compute demand and a multi-year CAGR in the data center TAM of at least mid-teens. Despite these drivers, demand will not be immune from economic headwinds. In addition to match set issues, which have constrained shipments for multiple quarters, increasing economic concerns are leading to a reduction in second half demand. As a result, we have lowered our server TAM assumptions to reflect more modest growth in 2022. Against this backdrop, let me highlight key developments in our businesses.

[Pat Gelsinger, CEO at Intel]

In response to supply chain and match set issues, we closely collaborated with our customers and suppliers to effectively address their most critical needs. We rapidly adjusted to changing market conditions, made cost reductions, and leveraged Smart Capital to execute towards our IDM 2.0 strategy. Despite significantly lower revenue impacting overall gross margins, Q2 saw continued strong performance in our factory network, and we exceeded our wafer cost goals with 10 nm unit cost declining approximately 8% year-on-year. In TD, we continue to deliver on the promise of Moore's Law and our ambitions to deliver 1 trillion transistors in the device by 2030. Intel 4 details were released at the recent VLSI conference to positive reviews, and we've now taped out the first stepping of the Granite Rapids CPU and expect to power on this quarter.

[Pat Gelsinger, CEO at Intel]

In the second half of this year, we plan to tape out numerous internal and foundry customer test chips on various process nodes, including Intel 3 and Intel 18A. In our client business, Alder Lake momentum continues. We have the strongest PC lineup in 5+ years, and we remain unapologetic about our growing leadership and share position. We are building on Alder Lake leadership with Raptor Lake in the second half of this year and Meteor Lake in 2023, exemplifying how our innovative design decisions can drive leadership performance even before reestablishing best-in-class transistor technology. In Q2, we launched the 12th Gen Intel Core HX processors, the final products in our Alder Lake family. The Alder Lake family is now powering more than 525 designs from Acer, ASUS, Dell, HP, Lenovo, LG, Microsoft, Samsung and others.

[Pat Gelsinger, CEO at Intel]

To date, we've shipped well in excess of 35 million units of Alder Lake. Within the current market, we are also seeing relative strength in the premium segments we serve across consumer and commercial. We expect to build on this momentum with the launch of our next gen product family, Raptor Lake, starting with our desktop SKUs this fall, followed by our mobile family by the end of the year. The Raptor Lake family will offer customers significant advantages, including double-digit performance gains, gen-on-gen and socket compatibility with Alder Lake. In 2023, we will deliver our first disaggregated CPU built on Intel 4, Meteor Lake, which is showing good health in both our and our customers' labs.

[Pat Gelsinger, CEO at Intel]

Turning to DCAI, as we stated at Investor Day, over the next couple of years as we rebuild our server product portfolio, we expect to grow slower than the overall data center market. That's not a fact we like, but the forecast we see. We have a singular focus to regain performance and TCO leadership across all workloads and use cases from enterprise to cloud. The advantage of our incumbency position remains underappreciated and provides significant opportunity to drive outsized advantages to our customers. For example, we expanded our supply agreement with Meta, leveraging our IDM advantage to ensure Meta can meet its expanding compute needs. Also in Q2, we agreed to expand our partnership with AWS to include the co-development of multi-generational data center solutions optimized for AWS infrastructure and Intel as a strategic customer for internal workloads, including EDA.

[Pat Gelsinger, CEO at Intel]

We expect these custom Xeon solutions will bring greater levels of differentiation and a durable TCO advantage to AWS and their customers, including Intel. In addition, NVIDIA announced the selection of Sapphire Rapids for use in their new DGX H100, which will couple Sapphire Rapids with NVIDIA's Hopper GPUs to deliver unprecedented AI performance. Beyond Xeon-based CPUs, we launched our next generation Gaudi 2 AI accelerator in the quarter with a whopping 4x improvement generation to generation. In the most recent MLPerf training benchmark test, Gaudi 2 has a substantial lead in ResNet-50 and BERT benchmarks. In the second quarter, we also began delivering our software strategy with the acquisition of Granulate, expanding our platform capabilities with real-time AI-driven continuous optimizations for cloud computing and the initial release of Amber, our security attestation service.

[Pat Gelsinger, CEO at Intel]

Since we acquired Granulate, their customer pipeline has doubled and their revenue pipeline has tripled. Finally, programmable solutions achieved record 2Q revenue and was just shy of an all-time record revenue quarter, driven by strong demand, including the ramp of the flagship Agilex FPGA family and improving supply. In NEX, we had an outstanding Q2. We achieved record revenue and PRQ'd Mount Evans, an IPU we co-developed and are now beginning to ramp with a large hyperscale partner with additional customers in 2023. In addition, our latest Xeon D processors, built specifically for software-defined infrastructure across the network and edge, launched at this year's Mobile World Congress and is ramping with leading companies, including Cisco, Juniper Networks, and Rakuten Symphony. Across the network edge, we're continuing to see interest to deploy more compute and AI capabilities.

[Pat Gelsinger, CEO at Intel]

For example, Ferrovial, a multinational Spanish infrastructure company, is using our edge computing, AI, and connectivity technologies to deploy roadside solutions that can identify wrong way drivers, warn of oncoming hazards, and more. In Singapore, Singtel has deployed a network solution with Xeon, Smart Edge, and OpenVINO to improve user experience for use cases like entertainment, industrial, smart manufacturing, smart transportation, and smart city. Lastly, ABB is helping utility providers modernize their electric grid and create a more sustainable energy market by adopting standardized rugged servers based on 3rd Gen Intel Xeon. NEX continues to clearly benefit from networks that are increasingly moving towards software and AI that is increasingly moving to the edge, and we expect another revenue record quarter in Q3. For AXG, while we will not hit our GPU unit target, we remain on track to deliver over $1 billion in revenue this year.

[Pat Gelsinger, CEO at Intel]

In Q2, we started to ramp Intel Arc Graphics for laptops and OEMs, including Samsung, Lenovo, Acer, HP, and ASUS. COVID-related supply chain issues and our own software readiness challenges caused availability delays that we continue to work to overcome. Intel Arc A5 and A7 desktop cards will start to ship in Q3. Our energy-efficient blockchain accelerator, Blockscale, achieved a major milestone in Q2 with revenue shipments to our lead customers going from tape-in to shipping in less than a year. We expect to ship millions of units this year, not originally in our forecast. Our data center GPU, code-named Arctic Sound-M, has started production and is now shipping to customers supporting a diverse range of workloads, starting with media streaming and cloud gaming, followed by support for AI visual inference and virtual desktops.

[Pat Gelsinger, CEO at Intel]

In high-performance computing, we highlighted the installation of the Argonne National Laboratory Aurora supercomputer at our Intel Vision event in May, and we are on track to deliver over 10,000 blades in 2022, enabling over 2 exaflops of peak performance. We also announced new partnerships, including the Barcelona Supercomputing Center, to set up a pioneering RISC-V zettascale lab, and our continued collaboration with the University of Cambridge to evolve their current lab from exascale to zettascale. Our IFS momentum continues. Creating a geographically balanced, secure, and resilient semiconductor supply chain, as well as access to our transistor technology, is driving strong customer interest in our foundry business. In addition to the MediaTek agreement that we announced earlier this week, we now have active engagements with six of the top 10 fabless customers across our offerings, including Intel 18A.

[Pat Gelsinger, CEO at Intel]

Overall, we are engaged with 30 customers for test chips and now have more than 10 qualified opportunities in advanced stages across our process and package offerings that collectively represents a deal value of greater than $6 billion. Augmenting our organic activities are our proposed acquisition of Tower Semiconductor. We now have regulatory approval or clearance in 4 geographies, including the U.S., and we still expect the acquisition to close by early next year. In Q2, we also launched the IFS Cloud Alliance. A partnership with leading cloud providers, including Microsoft Azure and AWS, and EDA tool providers, including ANSYS, Cadence, Siemens EDA, and Synopsys. The IFS Cloud Alliance is the next phase of our accelerator ecosystem program that will enable secure design environments in the cloud, improving foundry customer design efficiency and accelerating time to market.

[Pat Gelsinger, CEO at Intel]

Lastly, in Mobileye, we achieved another record quarter in revenue in Q2, and we continue to be poised to unlock further value with our proposed IPO later this year, pending market conditions. Mobileye's backlog continues to grow, with first half 2022 design wins generating 37 million units of projected future business compared to 16 million units actually shipped in the first half. As a result of Mobileye's high-definition map product called REM, we are currently crowdsourcing 43 million miles per day on average from approximately 1.5 million vehicles. This data is automatically built into a map which currently covers greater than 90% of all roads in both Europe and U.S., which will support systems across the entire driving assist to autonomous vehicle spectrum. Looking ahead, before turning it over to Dave, I want to close with a few thoughts.

[Pat Gelsinger, CEO at Intel]

First, after a very successful Intel Vision event in Q2, I am looking forward to hosting Intel Innovation on September 27th and 28th, our core technical conference for global developers, architects, and engineering leaders. I hope to see many of you joining me there. Second, as I said when we began our journey, Intel will be a source of innovation, driving new businesses and additional TAM in large and growing markets. Taken together, we have already announced over 10 new revenue-producing product lines so far this year, which are just beginning to ramp, and we expect to announce more in second half and calendar year 2023. The foundations for our growth story are taking shape. I know I speak for all of our employees when I say that while we have work to do, our best days are ahead.

[David Zinsner, CFO at Intel]

Thanks, Pat. Good afternoon, everyone. As Pat referenced, Q2 was a challenging quarter, negatively impacted by multiple factors. First, a weakening and uncertain macroeconomic environment impacted by inflation, higher interest rates, and the war in Ukraine. Second, a much larger than expected OEM inventory correction as our customers adjust to this new macroeconomic environment. Third, worse than expected COVID-driven demand reductions and supply dislocations in China and other parts of the supply chain. Due to the difficult macroeconomic environment, together with our own execution challenges, our results for the quarter were well below expectations and necessitate a significant revision to our full-year financial guidance. That said, we're taking the actions necessary to maintain our prior full-year adjusted free cash flow guidance, including a slowdown in hiring, CapEx reductions, and the expectation for increased capital offsets consistent with our Smart Capital strategy.

[David Zinsner, CFO at Intel]

We remain fully committed to the business strategy and long-term financial model presented during this year's investor meeting in February. Revenue was $15.3 billion, 15% below our original Q2 guidance as our CCG and DCAI businesses both underperformed our expectations. Note that even in this challenging environment, our NEX and Mobileye businesses achieved all-time record quarterly revenue. Gross margin for the quarter was approximately 45%, 600 basis points below guidance on lower revenue and Sapphire Rapids pre-production charges offset by lower manufacturing cost. EPS was $0.29, $0.41 below our guide on lower revenue and gross profit offset by lower operating expenses. Operational cash flow for the quarter was $800 million. CapEx for the quarter was $7.2 billion, resulting in an adjusted cash flow of -$6.4 billion.

[David Zinsner, CFO at Intel]

Our balance sheet remains strong with cash and investments of $27.5 billion, modest leverage, and a strong investment-grade credit profile. Now turning to our business unit results. CCG revenue was $7.7 billion, below expectations and down 25% year-over-year on global TAM weakness, particularly in the consumer education and small medium business markets. The shortfall was also driven by OEM inventory reductions as we work with our customers to lower their inventory, protect market share, and continue to manage through match set constraints. CPU ASPs were up 11% year-over-year on richer mix and strong demand for our high-end mobile and desktop products across both our commercial and consumer segments.

[David Zinsner, CFO at Intel]

Operating profit was $1.1 billion, down 73% year-over-year on lower revenue, increased 10nm and Intel 7 mix, and increased spending to further strengthen our product and platform roadmap. DCAI revenue was $4.6 billion, below expectations and down 16% year-over-year on OEM inventory reductions, mix-related ASP decline, and competitive pressures. Operating profit was $214 million, down 90% year-over-year on lower revenue, higher advanced node startup cost, increased investment in the product roadmap, and Sapphire Rapids pre-production charges. NEX achieved all-time record quarterly revenue of $2.3 billion, up 11% year-over-year on strength in data center networking products. Specifically, networking Ethernet and 5G. Operating profit was $241 million, down 60% year-over-year on mix shift to networking Ethernet and 5G.

[David Zinsner, CFO at Intel]

Increased investment in process technology and lower sell-through of reserved inventory. AXG revenue was $186 million, up 5% year-over-year on the ramp of super-compute and Alchemist discrete GPU products. Operating loss was $507 million versus an operating loss of $168 million in Q2 2021, with the increase driven by inventory reserves on our Ponte Vecchio and Alchemist products, and increased investment to deliver the roadmap of visual super-compute and custom accelerated graphics products. Mobileye achieved all-time record quarterly revenue of $460 million, up 41% year-over-year, outperforming the rate of increase of global automotive production, which was relatively flat year-over-year.

[David Zinsner, CFO at Intel]

Operating profit was $190 million, up 43% year-over-year on higher revenue, partially offset by increased investment in next generation ADAS products. IFS revenue was $122 million, down 54% year-over-year, driven by lower mask tool sales as well as revenue decrease in the automotive segment due to customer shortages in the automotive market. Operating loss was $155 million versus an operating profit of $52 million in Q2 2021, driven by lower revenue and increased investment to build out the custom foundry business. Before we transition to full year and Q3 guidance, after six months on the job, let me provide my perspectives on the opportunities I see and focus areas to improve our financial performance and achieve our long-term goals. At the highest level, I see opportunities to improve in two areas.

[David Zinsner, CFO at Intel]

First, ensuring we are allocating our capital to the programs that are clearly aligned to our revised business strategy and generate maximum long-term value to our shareholders. As Pat mentioned, two good examples of continuing to optimize our portfolio are exiting the Optane and NAND businesses. We continue to deeply evaluate all opportunities to more narrowly focus our resources on the highest value programs, increasing the probability of success for each of these programs. Second, driving structural product cost and operating expense efficiency across the company, taking full advantage of our IDM 2.0 strategy. A major focus for me is driving Intel to world-class product cost. Key to this is executing our five nodes and four-year strategy. There are many more aspects to achieving this goal, with programs in flight to dramatically reduce product cost.

[David Zinsner, CFO at Intel]

Likewise, there are opportunities in OpEx to ensure we are achieving world-class efficiency in everything we do. With my history in the memory business, where every penny counts, I know there are large opportunities for Intel to improve and deliver maximum output per dollar. As part of these focus areas, we expect to see restructuring charges in Q3, and I'll continue to provide regular updates on these efforts. Moving to our full year and Q3 guidance. For the remainder of the year, we expect macroeconomic conditions to continue to soften with the potential for a recessionary scenario to materialize. There's also risk for continued COVID-related impacts on demand and the supply chain to continue throughout the year. As a result of this high level of uncertainty, we're moving to a range-based approach to revenue guidance for the rest of the year.

[David Zinsner, CFO at Intel]

For full year revenue, we are now guiding a range of $65 billion-$68 billion, down from our prior guidance of $76 billion, driven by lower expectations for our CCG and DCAI businesses. More specifically, in our PC business, as Pat discussed, we now see TAM decreasing approximately 10% year-over-year due to the softening macroeconomic environment and inflationary pressures. Although these headwinds have reduced our CCG revenue forecast, we expect CCG revenue to increase in the second half of the year due to seasonal strength, OEM inventory returning to balance levels, inflation-related price increases to take effect, and the ramp of our leadership Alder Lake and Raptor Lake products to position us to compete for share.

[David Zinsner, CFO at Intel]

For DCAI, we expect to see second half revenue growth relative to Q2 levels, but growth will remain muted as competitive and macroeconomic headwinds persist, OEM inventory reductions continue, and component constraints impact certain segments. For NEX, we expect another record quarter in Q3 and continued growth throughout the year. NEX revenue tailwinds will be fueled by new product introductions, data center and telco networking demand, and continued improvement in pricing and component supply. For AXG, we continue to expect full year revenue greater than $1 billion, driven by the launch and ramp of the Alchemist, Arctic Sound-M, Ponte Vecchio, and Blockscale products. Finally, we expect to see second half growth in each of our two remaining businesses, Mobileye and IFS, as they ramp new products and secure new customers.

[David Zinsner, CFO at Intel]

For full year gross margin, we're guiding to 49% at the midpoint of revenue guidance, with the expectation that gross margin will return to the low end of our target range of 51%-53% in Q4 as revenue increases, we achieve scale on new product ramps, and costs continue to improve. We're forecasting a tax rate of approximately 8% and EPS of $2.30 at the midpoint of the revenue guidance. For net CapEx, we're revising down our forecast to $23 billion, $4 billion less than our previous guidance as we moderately adjust our investment and capacity and take advantage of potentially larger than originally forecast capital offsets, highlighting significant progress on our Smart Capital strategy.

[David Zinsner, CFO at Intel]

We expect these actions to offset lower than originally forecast operating cash flow, allowing us to reaffirm adjusted free cash flow of -$1 billion-$2 billion for the year. Finally, we paid dividends of $1.5 billion, a 5% increase year-over-year, and remain committed to growing the dividend over time. Now moving to Q3 guidance. Given the aforementioned market environment, we're guiding revenue of $15 billion-$16 billion. At the midpoint of the revenue guidance, we're guiding gross margin of 46.5%, a tax rate of 13%, and earnings per share of $0.35. In closing, the market turbulence and updated outlook are disappointing. However, we believe our turnaround is clearly taking shape and expect Q2 and Q3 to be the financial bottom for the company.

[David Zinsner, CFO at Intel]

We remain completely committed to the strategy and financial model communicated at Investor Day. The long-term financial opportunity of compelling revenue growth and free cash flow at 20% of revenue remains, and I believe this downturn represents an opportunity to more quickly make the transformations necessary to achieve these goals. With that, let me turn it back over to John and get your questions.

[John Pitzer, Corporate VP of Investor Relations at Intel]

All right. Thank you, David. Moving on now to the Q&A. As is our normal practice, we would ask each participant to ask just one question. Operator, please go ahead and introduce our first caller.

[Operator]

Thank you. As a reminder, to ask a question, you need to press star one one on your telephone. Our first question comes from C.J. Muse with Evercore ISI. Your line is open.

[C.J. Muse, Senior Managing Director at Evercore ISI]

Yeah, good afternoon. Thank you for taking the question. I guess for my question, your implied guidance calls for roughly 12% sequential growth into December. Would love to hear, you know, what gives you confidence that inventory correction and the supply chain issues will be behind you. As part of that, do you think a PC TAM of down 10% is conservative enough? Or is that something where, you know, there might be further risk ahead? Thanks so much.

[David Zinsner, CFO at Intel]

Thanks, C.J. When you look at the fourth quarter, first of all, you know, we are at this point, given the inventory burns in both CCG and DCAI, shipping at below the rate of consumption for those markets. There is a natural recovery that occurs that we would expect as we progress through the rest of the year once inventory is in a good place. We do feel we're at the bottom here in terms of revenue in the Q2, Q3 timeframe, and Q4 would recover just based on that alone.

[David Zinsner, CFO at Intel]

I'd say the other thing is we've got a good set of products coming out over the course of the second half of the year, and I think that, you know, we're kind of operating with wind in our sails in terms of product offerings in all of our businesses. Then third, we are increasing pricing. The pricing generally takes effect in the fourth quarter. We've gone a fair amount of time. The advantage of the IDM strategy is, you know, we can absorb a lot of inflationary and impacts that others can't. So we were able to, you know, kinda go a bit longer in terms of the price increases.

[David Zinsner, CFO at Intel]

At this point now that some of those pricing increase or inflationary increases have turned out to be more permanent, where there is a certain amount of that that we do need to pass on to the customers, and they're, you know, comfortable to do that. That also is a factor. Lastly, I would just say the fourth quarter is generally just a seasonally strong quarter for us, and particularly in the PC space. You know, I think all those factors give us, you know, really good confidence that, you know, Q2, Q3 represent the bottom for revenue and that the fourth quarter we'll see some strength.

[Pat Gelsinger, CEO at Intel]

In the fourth quarter, we also see that some of the new business unit areas, right, are starting to contribute more significantly as well. You know, in the PC TAM, you know, before we were above the market. With our down revision, you know, we're now exactly in line with the market. You know, we were over 350 million units before. Now market ranges are 310-325. Our range is consistent with that, C.J., so we don't see ourself ahead of the market like we were before. We were more optimistic. Now we're firmly in line, you know, with the market. Clearly, the market has shifted heavily on the consumer side, but there remains strength on the enterprise side, you know, which also gives us confidence.

[Pat Gelsinger, CEO at Intel]

In addition to the strength of the product roadmap, which Dave said, we also see the enterprise market remaining very, healthy and our position in the higher price points in the enterprise. You know, these are good markets for us, and as we're on the back of Alder Lake, over 35 million units, Raptor Lake ramping, you know, we're just coming into a great cycle of the overall, business. We'd also say that the PC is strong as that work from home, school from home device usage numbers are up significantly, you know, for the time that people use their PCs. We also have a strong replacement cycle in front of us. You know, we now have over 600 million PCs that are over four years old.

[Pat Gelsinger, CEO at Intel]

You know, we're definitely seeing that roll through the enterprise markets again, where we have stronger market share and better ASPs. All of that taken together, you know, we think we've ranged it, and that's consistent with the financial guidance that we've given you for the rest of the year.

[C.J. Muse, Senior Managing Director at Evercore ISI]

Thanks so much.

[Operator]

We have a question from Vivek Arya from Bank of America. Your line is open.

[Vivek Arya, Managing Director at Bank of America]

Thanks for taking my question. Pat, I'm curious, why didn't Intel choose to negatively pre-announce given the extent of the shortfall? I mean, I can understand the PC market being weak, but for data center to be, you know, almost 25% below expectations, that seems very, you know, very strange to me. I'm just curious, you know, why Intel took these actions. Then when we look at your data center revenue, especially in the reported quarter, most enterprise and cloud customers reported their sales and spending kind of in line with expectations. Is it mostly competitive pressures? If you could just help us understand what the thought process was for Q2. Thank you.

[Pat Gelsinger, CEO at Intel]

Yeah. Thanks, Vivek. I think that officially is actually two questions. Anyway, I'll, you know, we'll take them both. You know, on the market side, you know, we'll say we were well into the quarter, and we saw the market characteristics change quite suddenly, right? That resulted in both, you know, the sell-through in the marketplace, but also these, significant inventory adjustments. You know, we worked with our customers on those inventory adjustments. You know, as we said, these are like, once in ten year kind of inventory adjustments because customers were working through the quarter, you know, catching up to, demand that, you know, was, short for years, right? All of a sudden, as they saw that shifting, you know, they took quite significant adjustments, to their, inventory positions.

[Pat Gelsinger, CEO at Intel]

We wanted to be in a position that we had some thoughtful view of what the market was for the future. That's the reason that brought us to today. We think that we've, you know, given you a clear view of where the market is coming into the future. You know, the DCAI point, you know, as I said in my formal comments, you know, we were disappointed. You know, some of that was driven by the macro. It was also matched set issues that we've been struggling with as well, and Ethernet components, power supply components, et cetera, you know, have been challenged.

[Pat Gelsinger, CEO at Intel]

as we also said, we had some of our own unique execution issues, and we kept the quality bar high on Sapphire Rapids, and thus we did another stepping, which wasn't forecast, you know, which put some inventory and reserve issues in front of us as opposed to high ASP new product revenue. Some of those things were unique issues to us, you know, that we were addressing. That said, you know, we do feel like the progress on the data center, right, is clear in front of us. You know, we have Emerald is looking very good. We'll be powering on Sapphire or Sierra Forest, and Granite Rapids shortly. All of that taken together, we feel our competitive position is improving.

[Pat Gelsinger, CEO at Intel]

You know, we also see that, you know, we know where the market share is. Wins like we announced with AWS and Meta, we are gonna focus on every socket, every workload, every customer, you know, quite aggressively on both AWS and Meta. You know, these were substantial wins for us, this quarter, and we hope to be announcing several others like that as we go forward. You know, we're also bringing new capabilities. As we sort of said in our formal comments, you know, the size of our footprint here is underappreciated, and we're gonna be focusing on really benefiting from that and bringing new capabilities against that enormous footprint with capabilities like Granulate and our Amber Security service. You know, things that allow us to bring more value to our customers as well as harvest more revenue from that enormous installed base.

[Pat Gelsinger, CEO at Intel]

All of that taken together, we feel like we, you know, are owning up to the challenges that we had in data center, but we have a clear view of how we right this business for the future and are well underway on doing exactly that.

[David Zinsner, CFO at Intel]

Maybe I'll just add, in terms of profitability, you know, it was disappointing, where operating margins landed for the DCAI business for sure. You know, that was largely the impact of the decline in revenue. But keep in mind, we're also investing a lot for all the reasons that Pat said, to get to bring out great products that wow our customers. You know, that investment does also, you know, weigh down on the operating profitability of the business. We do see that getting better. You know, we took, as Pat mentioned, reserves on Sapphire Rapids, and those are kind of a one-off thing that dissipate as we go through the second half of the year.

[David Zinsner, CFO at Intel]

We also expect revenue to improve as we progress through the year. Those things combined should improve operating margins in the near term. In the long term, we see this business as a business that gives us greater than corporate average operating margins, gross margins and operating margins for that matter. It has traditionally actually for us and for the industry. You know, it's a matter of you know, just putting our nose down and executing to get those results, and we feel very confident we'll get there.

[Vivek Arya, Managing Director at Bank of America]

Thank you.

[Operator]

Our next question comes from Matt Ramsay with Cowen. Your line is open.

[Matt Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen]

Yes, thank you very much for taking the question. Good afternoon. I guess, Pat, I wanted to follow up a little bit on the prior question in the server business, particularly on the roadmap. You guys just mentioned some reserves being needed to take for Sapphire and the timelines have been pushed out. I guess the questions are, one, Pat, could you give us a more specific timing on where things are with Sapphire Rapids, not just early units, but actual volume production? And secondly, how does this impact the timelines for Emerald and Granite? Do you see those pushing out sort of congruent with the push out here, or are those timelines gonna be held and maybe the platforms be a little bit different?

[Matt Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen]

I'm just curious on the roadmap. Thank you.

[Pat Gelsinger, CEO at Intel]

Yeah, giving a bit more detail on Sapphire. You know, we're already ramping a number of SKUs of Sapphire Rapids already. They began ramping last quarter. You know, we have a number of those ramping. You know, the particular issue that we highlighted wasn't affecting those SKUs, so those continue to ramp. We did another tape out, which I'll say for the larger volume SKUs, and those will be volume shipping in the second half of the year. You'll see us ramping those and launching those, you know, so we're fully on track for that, and we feel like we're over all of the issues that we've had in bringing that product to the marketplace. We feel very comfortable with that. We're then working very closely.

[Pat Gelsinger, CEO at Intel]

Emerald goes into the Sapphire platform, so we're working very closely with our customers on the timing there. The product is looking very healthy, so we're nicely on track. That'll be a 2023 product. Then Granite and Sierra Forest is the 2024 product. Just to remind everybody, this is a major new platform. You know, we believe this is, you know, a major step forward as we go into Granite Rapids, but also is our first E-core product with Sierra Forest, right? This, we believe, is really sort of, you know, this ability to have a fleet offering where a lot of cloud workloads, they just say, you know, "Give me a great container and let me run that quite thermally efficient, TCO efficiently," and that's what Sierra Forest will do.

[Pat Gelsinger, CEO at Intel]

Then Granite Rapids, you know, clearly the performance leader in the marketplace. Both of those will be 2024 products. Again, right, we're powering on that this next quarter, so we're looking very healthy. Or this quarter, I should say, in Q3. Looking very good so far. We'll just say, you know, the roadmap is healthy, looking on track, and our execution here must improve. Many of these products were well underway when we showed up. As you said, you know, the culture, right, of execution needs to be rebuilt. We are working heavily to rebuild the culture of this team. In fact, we just completed our employee engagement survey, you know, and this is the most significant year-on-year improvements in history.

[Pat Gelsinger, CEO at Intel]

Many of our employee engagement survey results now are best in industry. You know, we've totally reversed the brain drain that we had, so teams are excited. You know, the momentum is building. Many of these products, hey, we're launching the new products with the revised, and you'll hear us talk more about our, you know, Tick-Tock execution discipline going forward. A lot of these products were underway, so they weren't launched with the new execution and methodology discipline, so we're working through those. As each one of these gets better, you know, our execution and confidence in those deliveries is improving. Culture's improving. We're making great progress. Thank you. Next question.

[Operator]

Our next question comes from Srini Pajjuri with SMBC Nikko.

[Srini Pajjuri, Managing Director and Senior Semiconductor Analyst at SMBC Nikko]

Thank you. David, if you can clarify why you're taking the Sapphire charges. Is it just a pre-production reserve, or is there something else going on? My question is, you know, based on your comments about, you know, the recovery profile for DCAI and I guess, DCAI in the second half, it seems like PC market is, at least your expectation is that the PC market will recover quicker than DCAI. I'm a little bit surprised by that because you have Sapphire ramping and, you know, I don't know if the inventory situation was worse in DC versus in PC. I'm just surprised by the fact that you're saying that PC will recover faster than, you know, DCAI. If you can clarify that'll be helpful. Thank you.

[David Zinsner, CFO at Intel]

Yes, you're right. Sapphire Rapids, we reserve the production in inventory when it's before it has gone what we call PRQ. It's the quality metric. We reserve all the product. Since the main, as Pat said, the main SKUs have not at this point reached PRQ, we continue to reserve them. Once they do, which we expect later this year, you know, we stop, first of all, reserving the production inventory. Then you know, the likelihood is some of this will also sell. You know, we'll be able to recover some portion of that reserve likely as we progress through the end of this year and next year.

[David Zinsner, CFO at Intel]

On CCG and DCAI, you know, I think the inventory correction in CCG was definitely more pronounced. You get this, the benefit of the shipping back to the consumption level is more pronounced when things recover. That's number one. We also will see more pricing improvement in CCG than DCAI. They're both, we are adjusting pricing, but the pricing is more significant in CCG. You know, that also gives CCG a lift in the later part of the year.

[Srini Pajjuri, Managing Director and Senior Semiconductor Analyst at SMBC Nikko]

Thank you.

[Pat Gelsinger, CEO at Intel]

Oh, next question.

[Operator]

We have a question from Joseph Moore with Morgan Stanley. Your line is open.

[Joseph Moore, Managing Director at Morgan Stanley]

Great. Thank you. I wonder if you could talk about the capital spending cuts. Can you give us a sense for where does that affect shells versus wafer fab equipment? And is there sort of any opportunity cost to that? And then to the extent that, you know, does that change to your comments about the overall trajectory over the next few years? Do you still expect CapEx to be rising from here?

[David Zinsner, CFO at Intel]

Yeah, good question. Important thing is that, you know, when you look at growth CapEx, it's about 25% of the reduction. About 75% of the reduction is actually increased capital offsets. It's not a significant adjustment to the growth number. It's almost entirely on the equipment side, the reduction, and some of it is just, you know, timing of receipts of equipment. Sorry, Joe, what was the other part of your question?

[Joseph Moore, Managing Director at Morgan Stanley]

Just the trajectory. I know, you know, you had talked about capital spending generally rising from here, but you also talked about guardrails. You know, can you just talk about the trade-offs of your business being slower versus not looking for forecasts, but how you're thinking about the long-term spending profile?

[David Zinsner, CFO at Intel]

We intend to manage to the guardrails for sure. What I think has become really positive for us is the CapEx offsets. Maybe I'll talk a little bit about it, and you can go into details about chips if you want, Pat. You know, we just are, in general, way more optimistic about what we're gonna get in terms of CapEx offsets. In fact, I think our forecast for the year is 4x what it was when we talked about it at Investor Day. You know, clearly for this year, we're gonna see strong offsets. I think, you know, given what happened today, I think we're gonna have good offsets in the coming years as well. I think that will really help us, you know, kinda keep the guardrails intact.

[David Zinsner, CFO at Intel]

I mean, obviously, on a long-term basis, we're always looking at our CapEx in relationship to demand. You know, we're building supply to meet demand and modulating that as the signals change on the demand front. At this point, I think, you know, given the long lead times of building out these factories, we're very confident that the growth rates of our markets are gonna be quite healthy, and we're gonna need the supply to come online. May we modulate or, you know, make tiny adjustments to it over the course of years? Yes. I wouldn't say it's gonna be a significant magnitude. Still, at the end of the day, we feel very good about the guardrails we talked about.

[David Zinsner, CFO at Intel]

It's gonna be more like mid-30s net CapEx intensity in our investment phase that goes through 2024. Then in 2025, 2026, you know, we'll see a step down as we start to get the benefits of that in terms of revenue growth and margin growth. We'll normalize more into the, you know, mid-20s.

[Pat Gelsinger, CEO at Intel]

Yeah. As David is alluding to, you know, the passage today, you know, by the House of the CHIPS Act following the Senate passage on Tuesday, you know, this is historic legislation. You know, literally since World War II, there might not have been a more important piece of industrial policy that came forward through Congress. We are thrilled by that. That also is something that we pointed to, and we've been very active, and, you know, I've been very active. You know, this is great for the semiconductor industry. You know, this is beneficial to Intel. This was one of the pieces of the Smart Capital program as we described back in Investor Day.

[Pat Gelsinger, CEO at Intel]

Now seeing this come across the line will clearly be part of that ability for us to invest aggressively in the strategy that we described to you. We see this as an accelerant to our strategy and something that will give us the capacity to, you know, both meet our product needs as well as our foundry customer needs as well. This is powerful and something that we are thrilled to have come across the line just today. We look forward to this being on the president's desk in the next couple of days and signed into law. You know, this was a historic moment, you know, for the semiconductor industry, and I hope everybody on the line just realizes how significant, you know, the passage of this was for semiconductors, for technology, for long-term research. This was huge.

[Pat Gelsinger, CEO at Intel]

We were thrilled to be a part of it.

[John Pitzer, Corporate VP of Investor Relations at Intel]

Next question, please, operator.

[Operator]

Our next question comes from Harlan Sur with JPMorgan. Your line is open.

[Harlan Sur, Executive Director of Equity Research at JPMorgan]

Good afternoon. Thanks for letting me ask a question. Pat, you led us your prepared remarks discussing the macro environment, but you also called out Intel-specific execution issues and specifically product design. Were you just referring to Sapphire Rapids or was this a general statement across several of your product segments, including client and graphics? And can you just articulate, like, what some of these product design issues are? Are they architectural issues, performance issues, design closure, changing customer requirements? Any help there would be great. Obviously, as you mentioned, many of these programs were already underway when you joined the team, but what is it specifically that you're doing now to ensure better design execution going forward?

[Pat Gelsinger, CEO at Intel]

Yeah. Thank you, Harlan. You know, if I would just to step back slightly, right? You know, I view the recovery rebuilding in three different chapters. One was TD and manufacturing. You know, build transistor capacity. Second, design and products. We have to deliver the products that we sell to our customers, and if they ask for it Monday at noon, Monday at 11:59AM, it is there, right, in the volumes we say, and you know, at the performance levels, power levels, et cetera. The third chapter is building growth, right? And establishing the new products, the new product lines for growth. You know, and obviously we've laid the foundations for all three. As TD and manufacturing are now making good progress, the focus really is get the product and design execution superb again.

[Pat Gelsinger, CEO at Intel]

I point back to that sort of Tick-Tock discipline that we had in the past. You know, that was a key part of what we're doing. That's exactly what we have underway, rebuilding that kind of product disciplined execution. Clearly, the Sapphire Rapids miss that we had. You know, we're raising the quality bars for that. We weren't shipping at the quality levels, you know, the security levels that we needed to in the past. You know, clearly, we shouldn't have had that bug in the product in the first place, so that caused another stepping for the volume release. You know, our software release on our discrete graphics, right, was clearly underperforming.

[Pat Gelsinger, CEO at Intel]

We thought that we would be able to leverage the integrated graphics software stack, and it was wholly inadequate for the performance levels, gaming compatibility, et cetera, that we needed. You know, we're not hitting our 4 million unit goal in the discrete graphics space, even as we're now, you know, catching up and getting better software releases. You know, we also. I'll say the timelines for our products as we've committed them to customers, hey, we don't think we're competitive with the best in class in the industry.

[Pat Gelsinger, CEO at Intel]

You know, our design timelines, we have to get them better, and we're focused on doing that, and that's for some of the longer roadmap term items, where we have to be best in class in our design cycles, design costs, power envelopes, you know, architectural leadership, things that you would expect from Intel in the past, and we're rebuilding those muscles for the future. So those would be the two examples we point to specifically that were visible this quarter, but we just have a lot more work to do. As I said, you know, it takes, you know, these are three- or four-year-long projects. Many of them were underway.

[Pat Gelsinger, CEO at Intel]

We're putting in place these disciplines now, and the products that are being launched with this entirely new methodology and alignment, well, they don't come out for a couple more years, so we're still working through that inventory of designs that were in process. A lot of work to do, a lot of rebuilding, and that's where a lot of my attention is being focused on. You know, maybe now that I spend a little bit less time in Washington, right? You know, this is the focus for us as a team, is getting that execution to be superb once again.

[John Pitzer, Corporate VP of Investor Relations at Intel]

Next question, please, operator.

[Pat Gelsinger, CEO at Intel]

Thank you.

[Operator]

We have a question from Randy Abrams with Credit Suisse. Your line is open.

[Randy Abrams, Managing Director and Head of Taiwan Equity Research at Credit Suisse]

Yes, thank you. A multi-part question. If you could talk about IFS some more on the MediaTek announcement, the product scope, and potential to expand that to advanced products or reference design cooperation. I also wanted to ask a bit more of the CHIPS Act, how it changes your approach to the business. For David, if the capital offsets assume some of the U.S. benefits and how it could impact the tax rate.

[Pat Gelsinger, CEO at Intel]

Good. On IFS, clearly, MediaTek, you know, they're the largest fabless supplier from Taiwan, you know. They're seeking to have a broadening of their supply chain. As we've said, our strategy is provide, you know, a pathway for customers to have a globally balanced, resilient supply chain. As I also mentioned in the formal comments, you know, six of 10 of the largest foundry customers in the world, you know, we now have active engagement, so the pipeline of customers grew. You know, we added another $1 billion to the pipeline this quarter. You know, MediaTek was an Intel 16 announcement, you know, one of the more mature offerings in the portfolio, which makes sense, right?

[Pat Gelsinger, CEO at Intel]

You know, Intel 3, Intel 18A, these are, you know, yet to be, I'll say, you know, designable products, and we have test chips underway, but we're not yet to the point that, the PDKs or the design libraries would be adequate for people to make design commitments, quite at this point in time. But overall, you know, great progress on IFS. We're thrilled with the MediaTek announcement and a robust pipeline of customers continues to build because, you know, this idea of a geographically balanced, resilient supply chain, Intel giving the best transistors and capacity corridors. You know, I'd also say that our IFS strategy pivots on this idea of system foundry. You know, the world is moving, we're moving from a board to a system and package.

[Pat Gelsinger, CEO at Intel]

A system and package needs advanced 2.5D and 3D packaging, an area of Intel's leadership. Interconnect standards. You know, we've announced the standardization of UCIe. We're leading that. You know, software assets, another area of advantage for us, and we'll engage with and deliver this, you know, across portfolio, across the technologies, ours and others. This idea of system foundry is gaining clear interest to our customers as well. With respect to CHIPS and capital, you know, we'll say, you know, we were driving this, you know, for the last year and a half, you know, and we, you know, we're fully expecting this to be the case in time. We're thrilled to get it done. You know, that said, you know, we also initiated such an effort with Europe, and that's making great progress as well.

[Pat Gelsinger, CEO at Intel]

As Dave said, we're also looking to other capital partners, as well, which we hope to be able to talk about more in the future with you as well.

[David Zinsner, CFO at Intel]

Just on your question, we have not assumed any CHIPS Act money in 2022. Our expectation is there'll be a process, and that process will take us into 2023 before we start receiving money from CHIPS. So not assumed in 2022, although, you know, we're assuming that we will see some in 2023. As you point out, you know, the CHIPS Act or the bill that was passed is a combination of grant money and tax credits. I think it's a little early to determine exactly how all that is administered and, you know, makes its way into our P&L.

[David Zinsner, CFO at Intel]

We'll table that until that becomes clearer to us, exactly how things shake out, and we'll give you more color once we have a better assessment of that.

[John Pitzer, Corporate VP of Investor Relations at Intel]

Thanks, Randy. Can we get the next question, please?

[Operator]

Our next question comes from Stacy Rasgon with Bernstein. Your line is open.

[Stacy Rasgon, Managing Director and Senior Analyst of US Semiconductors and Semiconductor at Bernstein]

Hi, guys. Thanks for taking my question. I'm a little confused. You said that Sapphire Rapids was on time and it's ramping in volume in the second half, but you also said data center growth in the second half was gonna be pretty muted off of a base that's really low. Then you also said that data center pricing improvements in the second half would be less than what you're seeing in clients. It doesn't really sound like the Sapphire Rapids ramp is helping at all. What is going on with that? Like, why, how should I be thinking about the impact of that Sapphire Rapids ramp as that ramps into volume? Or is the question, like, most of the volume coming into 2023 or why isn't it having more of an impact in the second half as it ramps?

[David Zinsner, CFO at Intel]

Yeah, we said in the prepared remarks that it's later than we expected, Sapphire Rapids. It's ramping later. We have some SKUs out, which is good, but the main SKUs are not out, and they happen later in the year. Of course, they'll contribute way more significantly to next year than they're going to contribute to this year. You know, we do see an opportunity in the client space, given our Alder Lake position, for pricing increases that are really, you know, passing on inflation, and we know customers understand that. Obviously, our competitive position is not as strong in the DCAI business and so, you know, there are opportunities to adjust pricing, but not across the board. That, you know, is impacting us a bit.

[Stacy Rasgon, Managing Director and Senior Analyst of US Semiconductors and Semiconductor at Bernstein]

You're basically saying that Sapphire Rapids is effectively a first half 2023 volume ramp. That seems to be what you're saying. Yes?

[David Zinsner, CFO at Intel]

I think there's some ramp this year and then mostly it ramps next year. Yeah.

[Pat Gelsinger, CEO at Intel]

Yeah. Like we said, we started shipping some of the SKUs earlier in the year, right? Those weren't some of the higher volume SKUs. You know, the volume ramp SKUs were pushed out, right, as we said, Stacy, and they will start ramping late in the year, but the bigger financial impact definitely is next year. You know, Sapphire Rapids, right, is still a leadership product. You know, we continue to get great reviews from our customers on the product areas like AI performance, you know, that we're competing with low, you know, the mid-tier of NVIDIA dedicated AI processors. The security capabilities is part of it, unquestioned. The accelerators in it, unquestioned leadership.

[Pat Gelsinger, CEO at Intel]

You know, we're also getting more and more momentum from our software optimizations that come with it as well. All of those taken together, a lot of enthusiasm. You know, every cloud vendor, every data center vendor, et cetera, is enthusiastic for this product. We're now, as I say, in the, you know, the final days of getting it completed and beginning those customer volume ramps. Obviously, financially, we'll start to see some of those inventory reserves reversing as well. Yeah, this was not our finest hour in execution. We're rebuilding our execution machine and this product, a lot of enthusiasm for it in the marketplace as we deliver it.

[John Pitzer, Corporate VP of Investor Relations at Intel]

Thanks, Stacy. Operator, we have time for one more question, please.

[Operator]

We have a question from William Stein with Truist. Your line is open.

[William Stein, Managing Director and Senior Analyst of Technology at Truist]

Great. Thanks for taking my question. It relates to that last topic of the timeliness of delivery of new products. So while Sapphire Rapids is delayed, sounds like something on the order of half a year, Pat, in the press release, it noted that the later nodes are still on track or ahead of track, I think was the language. As outsiders, what can we look to sort of judge and determine whether Intel is continuing to be on pace as we progress through the quarters, aside from just the sort of summary statements in the press release?

[William Stein, Managing Director and Senior Analyst of Technology at Truist]

Is there some other metric you could disclose to us or some way we can better understand whether Intel is, you know, getting back on track and keeping these commitments to, you know, deliver these products as you've scheduled it? Thank you.

[Pat Gelsinger, CEO at Intel]

Yeah. You know, maybe, you know, as we just run through the five nodes, you know, quickly. Intel 7, done. Volume shipments. You know, we said five nodes, four years. Intel 7, 35 million units. You know, you can go rip one apart. I'm sure our competitors have, you know, done tear downs on it, you know, done. Intel 4, right, we've said is, hey, Meteor Lake looking good. At this point, it's now broadly sampled to customers. So, you know, and it's looking very healthy as well. Also, we had the independent analysis of our detailed updates that we gave at the VLSI conference recently. If you go look at some of the reports from that, people were pleasantly surprised.

[Pat Gelsinger, CEO at Intel]

They said, "Oh, Intel 4, it looks as good as some of the, you know, three nanometer competitors." This is looking pretty good. Certainly we'll be giving more of those technical updates going forward on the real performance. You know, also, you know, we've given updates on Granite Rapids, you know, one of the lead vehicles of Intel 3. We also have said that, you know, we'll give you updates on 20A and 18A test chip updates and others. We'll also have independent assessments of those as we announce foundry customers, right? Which will be another point to validation that you'll see. We're gonna keep giving you more and more points of validation as we go along forward. You know, trust me, these are analyzed.

[Pat Gelsinger, CEO at Intel]

You know, the performance of each one of these process nodes, the defect densities of each of these process nodes, the maturity of the design collateral, you know, the resonance from the foundry customers for each one. It's being scrutinized extraordinarily well. With that, I think you'll get more and more confidence that what we're saying is, you know, not only verified by us, but independently by industry sources as well. With that, let me just wrap up our time. You know, first, I'd like to say thank you. You know, we're grateful for you joining us today. Opportunity that you've given us to update you on our business. You know, we summarize three key messages as we finish. You know, we're not satisfied with the quarter and the financial results that we gave you today.

[Pat Gelsinger, CEO at Intel]

You know, we have growing confidence in the strategy, and we are optimistic finally about the future. We deserve some tough questions this quarter, but also appreciate that they're fair and relevant to the business. Transformations are not easy, but nothing worthwhile ever is. Despite the headwinds that we're seeing, you know, we demonstrated substantial progress in IFS, NEX business records, you know, PSG record in that business, the CHIPS passage today, huge. Clear customer wins like AWS, Meta, and NVIDIA. Per the last question, great progress on our TD milestones and our manufacturing milestones. With that, we look forward to updating you again next quarter. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.

[Operator]

The conference will begin shortly. To raise your hand during Q&A, you can dial star one one.

Participants

Executives

• David Zinsner, CFO
• John Pitzer, Corporate VP of Investor Relations
• Pat Gelsinger, CEO

Analysts

• C.J. Muse, Senior Managing Director at Evercore ISI
• Harlan Sur, Executive Director of Equity Research at JPMorgan
• Joseph Moore, Managing Director at Morgan Stanley
• Matt Ramsay, Managing Director and Senior Semiconductor Analyst at Cowen
• Randy Abrams, Managing Director and Head of Taiwan Equity Research at Credit Suisse
• Srini Pajjuri, Managing Director and Senior Semiconductor Analyst at SMBC Nikko
• Stacy Rasgon, Managing Director and Senior Analyst of US Semiconductors and Semiconductor at Bernstein
• Vivek Arya, Managing Director at Bank of America
• William Stein, Managing Director and Senior Analyst of Technology at Truist