The operator introduces the conference call for Intel's second quarter 2024 earnings and reminds participants that the call is being recorded. The host, John Pitzer, introduces the CEO, Pat Gelsinger, and CFO, David Zinsner, for brief comments before the Q&A session. The discussion may contain forward-looking statements and references to non-GAAP financial measures. Despite progress on product and process roadmaps, Q2 profitability was disappointing. Intel is implementing actions to improve profitability and capital efficiency by more than $10 billion in 2025.

In the second quarter, the company experienced lower profitability due to investments in the AI PC category and the decision to ramp up Ultra AI CPUs. However, they believe these investments will lead to significant growth in the future. The company also announced a cost-reduction plan and a new operating model, which will result in a reduction in spending and headcount by the end of 2025.

Intel has made the difficult decision to reduce OpEx and capital spending in order to improve efficiency and reduce costs. This will result in a reduction of over 20% in OpEx and a decrease in gross capital spending. However, the company will still maintain its ability to execute its plan and will continue to invest in necessary projects. The new operating model is also expected to result in increased capital efficiency and improved gross margins over time. Additionally, the company plans to generate $1 billion in savings in non-variable cost of sales in 2025.

Intel is taking steps to prioritize liquidity and support their long-term strategy, including suspending the dividend and reducing costs. They remain confident in their ability to drive long-term shareholder value and are focused on cost discipline. The pace of the recovery may be slower than expected, but they expect revenue growth in Q4. They also provide updates on their key business units, including Intel Foundry's goal of returning to process leadership.

Intel is making progress with their Intel 4, Intel 3, and Intel 20A processors, with Intel 20A expected to be ready for production next quarter. They have released the 1.0 PDK for Intel 18A and plan to have it ready for production by the end of the year. Their Panther Lake and Clearwater Forest products, using advanced packaging technology, are also on track for release. This will be Intel's fifth node in four years, solidifying their position as a leader in process innovation. While their investments in global capacity have impacted profitability, they are expected to drive long-term growth and profitability. To accelerate their Foundry Services business, they have brought in Kevin, who has experience in the foundry and fabless industry. He will help with customer relations as Intel ramps up their process, packaging, and chipset capabilities for the AI era.

Intel is pleased to welcome Naga Chandrasekaran from Micron to lead their Foundry Manufacturing and supply chain organization. The Foundry team is collaborating well with design ecosystem partners, with several partners announcing the availability of reference flows for Intel's embedded multi-die interconnect bridge advanced packaging technology. They are also preparing for next year's 18A launches and are already working on Intel 14A and 10A development. In the CCG business, Intel is executing well against their roadmap and seeing strong growth in the AI PC category. Their Intel Core Ultra is powering AI capabilities in over 300 applications and 500 AI models, showcasing their strong ecosystem built over 40 years of consistent investments.

In the DCAI sector, Intel has a strong foundation with over 130 million Xeon processors powering data centers worldwide. Their roadmap aims to further improve performance and efficiency, enable flexible and scalable AI solutions, and reduce total cost of ownership for customers. They have made progress with the launch of Xeon 6 with E-core processors, which is their first Intel 3 product and is ideal for high-density workloads, delivering higher performance, lower power consumption, and rack consolidation. They also have a strong roadmap for the next 18 months, with Lunar Lake, Arrow Lake, and Panther Lake set to be released.

Intel's early adopters are already experiencing 25% better performance per watt compared to competitors. The company will be releasing Xeon 6 with P-Core, codenamed Granite Rapids, this quarter, which will offer even greater performance for demanding workloads. In 2025, Intel plans to launch Clearwater Forest, their first Intel 18A server product featuring hybrid bonding. They are also focused on improving their accelerator roadmap and have seen success with their open models and reference designs for AI servers. Gaudi 3, set to launch in Q3, will provide even better performance at a lower cost compared to competitors. In the networking and edge space, Intel is stable in Q2 and will introduce new products next year as a founding member of the Ultra Ethernet Consortium.

In the second quarter, Intel announced the release of an IPU adapter for enterprise use, which is expected to contribute to growth and profitability in the AI data center. They also created a new industry standard for high-speed communication in AI systems and data centers. The company is focused on capitalizing their business to generate proceeds for an eventual IPO. Despite facing challenges in the first half of the year, Intel remains determined to improve their financial performance and continue building a stronger company. In the second quarter, their revenue was $12.8 billion, in line with their expectations after facing an export license restriction in China.

In the second quarter, Intel Products and Intel Foundry saw a 4% year-over-year growth, but faced challenges in their more cyclical businesses. The company's profitability was lower than expected due to several factors, including an accelerated ramp of their AI PC product and higher wafer costs. However, they expect long-term improvements in gross margin as they scale up their Ireland fab. The company also saw higher operating cash flow and adjusted free cash flow, with revenue from Intel Products increasing by 4% and growth in the client business. Data center revenue was flat sequentially but is expected to improve in the second half of the year.

The NEX business saw flat revenue in the first half, but excluding inventory digestion, it had a 10% year-over-year growth. Intel Products had a Q2 operating profit of $2.9 billion, up $400 million from last year. Intel Foundry's revenue was down 1 point sequentially but up 4% year-over-year due to increased wafer volume. Foundry Services revenue more than doubled, but operating loss worsened sequentially. Mobileye's revenue improved by 84% due to the completion of inventory digestion, but they lowered their guidance for the second half due to difficult conditions in China. Altera's revenue was up 6% sequentially and operating margins improved by 4 points.

The company expects double-digit sequential revenue growth in the second half of the year, but lower spending and reduced TAM expectations have impacted their revenue. They anticipate below seasonal revenue growth in Q3 due to weaker spending and elevated customer inventory levels, but expect growth to pick up in Q4. Gross margins are expected to be weaker due to increased external wafer dependence. The company plans to reduce spending to improve productivity, but this may result in charges. Q3 guidance includes revenue of $12.5 billion to $13.5 billion, gross margin of 38%, and EPS of negative $0.03 on a non-GAAP basis.

In summary, Smart Capital has not yet estimated certain charges, which are not included in their guidance. They plan to expand global capacity and utilize manufacturing more efficiently. Adjustments to their spending targets may result in modestly negative adjusted free cash flow in 2024, but they expect to achieve positive adjusted free cash flow in 2025. They will reduce operating expenses and non-variable cost of sales, which will have a positive impact on gross margins. They also plan to ramp up production of their AI PC product, Lunar Lake, which has shown positive performance. However, the product was originally not optimized for cost.

The company's gross margins are expected to only increase slightly next year due to external factors. However, the release of a new product, Panther Lake, and improvements in the company's operating model and cost structure are expected to drive future gross margin expansion. The company's non-controlled income from various sources is shown separately from net income. To respond to the current market conditions, the company is aggressively adjusting its spending to achieve profitability and positive cash flow. They are also optimistic about their target model of 60% gross margin and 40% operating margin by the end of the decade. The call then transitions to a Q&A session.

During an earnings call, Vivek Arya from Bank of America Securities asked Intel's CEO, Patrick Gelsinger, about the challenges the company is facing. Gelsinger responded by stating that the first phase of their recovery plan is underway, with new products and a stronger market presence. However, he also acknowledged the need for a more financially sustainable business model and the company's efforts to build a world-class foundry and products group. This rebuilding process is the most significant in Intel's history and they believe it will lead to financial savings.

The company has taken aggressive steps to improve their financial position and become more efficient. They believe these actions will lead to significant value creation for all stakeholders. The restructuring will not have a significant impact on their R&D roadmap, external foundry opportunities, or CHIPS Act funding. They are still confident in their strategy and growth targets, but will be more efficient with their capital investments.

The company is adjusting its spending to reflect slower growth, but this may also impact structural dynamics. There may be changes to the company's competitiveness and structure, and the $100 billion target may be affected. The CEO points back to his earlier statements for more information.

The company has implemented a clean sheet analysis to improve efficiency and become a world-class foundry. This has uncovered areas for improvement in maintenance, procurement, and product development. The company is also restructuring to focus on efficiency and has adjusted their long-term growth forecast based on market conditions.

The company's model is built to scale capital requirements based on market conditions. They believe their long-term guidance is still achievable and actions taken today will help accelerate their goals. When looking at the competitive landscape for 2025, they feel confident in their position in the AI PC market and are making early inroads in the AI data center market. The traditional CPU market has been tempered this year and it remains to be seen when it will recover. Other businesses, such as Altera, are starting to show signs of recovery.

The company is optimistic about the next year and the potential for growth in their Mobileye division. They expect gross margins to be impacted by inflation in the space, but anticipate improvement in profitability in the future due to the resurgence of internal facilities and restructuring efforts. The company does not need significant growth to see their model play out, but growth would put them in an even better position. When asked about gross margins beyond 2025, the company acknowledged the challenges of investing in foundry capacity while outsourcing to TSM, but noted the potential for improvement with the return of Panther Lake in-house. They did not provide specific guidance on incremental margins.

David Zinsner explains that there are a few factors that will impact gross margins in 2026, including a shift to internal manufacturing, cost structure improvements, and a new operating model. He also mentions that the mix of products may not have a big impact on margins, but the move towards more leading-edge wafers will help with margins and pricing. Overall, 2026 is expected to be a good year for the company's gross margins.

The company is confident about their pricing strategy and expects to see benefits from competitive products and processes in the next few years. They also expect to see benefits from their new product, Panther Lake, in 2026. The company will also see a decrease in operating expenses in 2026 compared to 2025.

In the paragraph, the speaker discusses the current state of their server roadmap, mentioning the recent release of Sierra Forest and the upcoming release of Granite Rapids. They note that initial feedback for Sierra Forest has been positive, but winning back market share will take time. They also mention the success of Clearwater Forest and its potential cost benefits, as well as the progress of the next version of their P-Core product.

The speaker discusses the competitiveness of the roadmap and the company's market share position, which they believe is stabilizing and strengthening. They also mention the growing interest in Xeon as an AI head node and the potential for a positive cycle in the enterprise market. They anticipate a refresh cycle in the cloud market as companies implement their AI strategies.

Dave explains that the main reason for the lower gross margin in June was due to the shift in their production plans for Intel 4 and Intel 3. They had originally planned to ramp up Meteor Lake and run production on Intel 4, but then decided to run production on Intel 3 in their TD fab instead. This decision, along with some other factors such as lower utilization and write-offs for legacy businesses, had a significant impact on their gross margin.

Intel has decided to shift their production to Ireland in order to save capital and speed up the maturation of their processes. However, this has led to higher wafer costs and lower margins for the next quarter. The foundry strategy remains unchanged, but they will be more conservative with their CapEx until they have committed orders from customers.

The company is carefully considering the amount of corridor they need to keep available and their flexibility with equipment suppliers. They have made adjustments to their capital investments to support their current market forecast. They are now focused on harvesting their investments and being more efficient with their capital. They believe that they will be a world-class fabless company and foundry, with a surge of interest in their advanced packaging technology. They are also aligning their foundry capacity with their product requirements.

In 2025, Intel expects to see benefits from their new model, which includes bringing tiles back to the company and implementing new leadership processes and technologies. This will lead to significant growth in 2026 and beyond. The move from Oregon to Ireland is currently a headwind for gross margins, but this will decrease over time and eventually become a tailwind for the company.

The paragraph discusses the impact of Intel's new factories in Ireland and Oregon on their margins and product development. The Ireland factory will have a lower cost per wafer start, but the inclusion of memory in the Lunar Lake product will put negative pressure on margins. The TD team will have more focus on capital and next-generation technologies, such as 14A and 10A, while the second high NA tool will be coming to the Oregon facility. This decision was made for long-term cost and capacity optimization, as well as to accelerate AI PC development.

In response to a question about the potential profitability of the foundry business, Pat Gelsinger and Dave said that their objective is to break even sooner than the previously stated 2027 timeframe. They have implemented operational efficiency measures and expect the investments made this year to accelerate profitability. They also mentioned a $10 billion investment in Intel Foundry next year, and that everything they are doing is aligned with their goal. In regards to the client space, Dave mentioned that it is expected to be flat to down in September, while their primary competitor is expected to be up double-digits or above seasonal.

The company is confident in its position in the client market, despite potential competition from ARM. They have a strong ecosystem and market share, and are focused on selling through inventory. They expect low-single-digit TAM expansion and strong performance in the commercial market. The upcoming releases of Lunar Lake and Panther Lake will further strengthen their market position. Overall, they are comfortable with their current indications and have seen solid outcomes so far this quarter.

The speaker clarifies that the $15 billion mentioned earlier is the lifetime deal value of committed deals, not just a pipeline. The near-term opportunity for the Foundry business has been in advanced packaging with an expansion in volume and technology. With the recent release of the PDK, there has been a flurry of activity from EDA, IP vendors, and end customers, indicating potential for future growth. The speaker remains confident in their earlier comments about this area.

The speaker believes that there will be further updates on the progress of the company, but customers are hesitant to publicly share their involvement due to industry norms. The company is on track for a significant increase in packaging and will provide more updates in the future. The speaker hopes to see attendees at an upcoming conference for further updates. The company is focused on completing their turnaround and achieving key milestones, but also making difficult decisions to ensure financial sustainability. They are confident in rebuilding a more efficient and successful company for the future.

This summary was generated with AI and may contain some inaccuracies.