Patrick P. Gelsinger
Chief Executive Officer & Director 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 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. 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 result, 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. Intel four is ready for volume production in 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. But 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 two-plus year pandemic and the unprecedented stimulus governments used to fight it. 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.
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 '22, 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 vote in the Congress this week and expect CHIPS Act to be on the President's desk shortly. 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 torrid 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.
In the coming months, we will begin to share more with the investment community on the next evolution of our TikTok 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 '22, characterized by broadening consumer weakness and relative strength in enterprise and higher-end SKUs. Importantly, our Q2 PC unit volumes 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. 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 multiyear 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. 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-nanometer unit cost declining approximately 8% year-on-year. In TD, we continued to deliver on the promise of Moore's Law and our ambitions to deliver one 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 in the first stepping of the Granite Rapids CPU and expect to power on this quarter.
In the second half of this year, we plan to tape in numerous internal and foundry customer test chips on various process nodes, including Intel three and Intel 18A. In our client business, Alder Lake momentum continues. We have the strongest PC lineup in five-plus 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. 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. And 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. 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.
It'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 multigenerational data center solutions optimized for AWS infrastructure. And Intel is a strategic customer for internal workloads, including EDA. 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 Gaudi2 AI accelerator in the quarter, with a whopping four times improvement generation to generation. And in the most recent MLPerf training benchmark test, Gaudi2 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. 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 in PRQ-ed 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 processor 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. 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 third-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. In Q2, we started to ramp Intel Art Graphics for laptops and OEMs, including Samsung, Lenovo, Acer, HP and Asus. COVID-related supply chain issues and our own software readiness challenges caused the 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, codenamed 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. In high-performance computing, we highlighted the installation of the Argonne National Lab Aurora Supercomputer at our Intel Vision events in May, and we are on track to deliver over 10,000 blades in 2022, enabling over two 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 18A.
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 activity is our proposed acquisition of Tower Semiconductor. We now have regulatory approval or clearance in four 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.
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 to 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.
First, after a very successful Intel Vision event in Q2, I am looking forward to hosting Intel Innovation on September 27 and 28, 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 the second half and calendar year '23. 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.
