Intel Corporation

and welcome to Intel's third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your cell phone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, John Pitzer, Corporate Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator. By now, you should have received a copy of the Q3 earnings release and earnings presentation, both of which are available on our investor website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I'm joined today by our CEO, Pat Gelsinger, and our CFO, David Zinsner. In a moment, we will hear brief comments from both, followed by a Q&A session. Before we begin, please note that today's discussion contains forward-looking statements based on the environment as we currently see it. As such, it does involve risk and uncertainties. Our press release provides more information on the specific risk factors that could cause actual results to differ materially. We have also provided both GAAP and non-GAAP financial measures this quarter, and we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings release and earnings presentation include full GAAP and non-GAAP reconciliations. With that, let me turn things over to Pat.

Thank you, John, and good afternoon, everyone. Despite growing economic headwinds, Q3 revenue was flat sequentially and only modestly below the midpoint of our guidance. In June, we were one of the first companies to highlight an abrupt and pronounced slowdown in demand, which has brought it beyond our initial expectations and is now having an industry-wide impact across the electronic supply chain. We are adjusting our Q4 outlook, and we are planning for the economic uncertainty to persist into 2023. While we are not satisfied with our results, we remain laser focused on controlling what we can, and we are pleased that our PC share stabilized in Q2 and is now showing meaningful improvement in Q3. Our server share, while not where we want it to be, is tracking in line with our expectations, and we are encouraged by good execution in the quarter against our product roadmap. In addition, we are intensifying our cost reduction and efficiency efforts and we are aggressively moving into the next phase of IDM 2.0 geared to unlocking the full potential of the IDM Advantage. This afternoon, I will focus my comments in three areas. One, the key trends and dynamics that shape Q3 and are informing our outlook. The progress we are making on IBM 2.0, including our momentum on process and product roadmaps and our recent announcement that we are implementing an internal foundry model. And three, the actions underway to drive cost savings and efficiency gains aimed at accelerating our transformation. Specific to trends we are seeing, along with further deterioration in consumer PC demand in Q3, enterprise demand has begun to slow. We expect PC units to decline mid to high teens to approximately 295 million units in calendar year 22. Our own Q3 results reflect a strong product portfolio with Raptor Lake building on Alder Lake's momentum, as well as working closely with customers to optimize their inventory, our market share, and business objectives. We are still shipping below PC consumption, and the inventory correction continued in Q3, but not as quickly as we forecasted. Importantly, however, PC usage remains strong, demonstrating the increased utility and value of the PC and ultimately supporting a TAM well above pre-pandemic levels. We are targeting a calendar year 23 PC unit TAM of between 270 and 295 million units with a strong brand and product line driving additional share, especially at premium ASPs. The data center TAM is holding up better, although enterprise and China continue to show signs of weakness as do some, but not all cloud customers. Across our infrastructure and industrial exposed businesses, NEX demand was very solid, though not immune from the weakening economy. PSG continues to be a true standout with record Q3 revenue up over 25% year over year. PSG backlog is robust and it continues to be an area where we are supply chain limited. Despite the challenging business environment, we made solid progress toward our long-term transformation in Q3, and we remain fully committed to using the macro uncertainty to accelerate our efforts. Each quarter, our confidence grows in achieving our goal of five nodes in four years. On Intel 4, we are progressing towards a high-volume manufacturing that will tape out the production stepping of MeteorLink in Q4. The first stepping of Granite Rapids is out of the fab, yielding well with Intel 3 continuing to progress on schedule. Intel 4 and 3 are our first nodes deploying the UV and will represent a major step forward in terms of transistor performance per watt and density. On Intel 20A and 18A, the first nodes to benefit from ribbon FETs and Power Via are first internal test chips and those of a major potential foundry customer have taped out with silicon running in the fab. We continue to be on track to regain transistor performance and power performance leadership by 2025. IFS is a major beneficiary of our TD progress. We are excited to welcome NVIDIA to the RAMPC program, which enables both commercial foundry customers and the U.S. Department of Defense to take advantage of Intel's at-scale investments in leading-edge technologies. Since Q2, IFS has expanded engagements to 7 out of 10 largest Foundry customers, coupled with consistent pipeline growth to include 35 customer test chips. In addition, IFS increased qualified opportunities by $1 billion to over $7 billion in deal value, all before we welcomed the tower team with the expected completion of the merger in Q1 23. On the product front, we had a busy quarter. Within client, as mentioned earlier, we added to the strong Alder Lake momentum with the launch of Raptor Lake Desktop in Q3, driving a more than a 40% improvement in multi-thread performance, unquestioned leadership in gaming, six gigahertz out of the box, and record setting overclocking. We currently have over 500 OEM design wins. We launched Intel Unison to deliver best in industry multi-device user experience. In addition, we saw meaningful development progress across multiple OEM designs on Intel 4-based Meteor Lake with volume ramps in 2023. We now have all elements of the AXG portfolio in production with A770, giving our discrete graphics efforts a strong boost. The Flex family is building a strong pipeline of data center use cases, and Ponte Vecchio is now production for HPC offerings and production blades deployed for lead customers. Combined with Sapphire Rapids and Sapphire Rapids HBM, PVC is the basis for strong traction with HPC customers like Argonne National Laboratory and Germany's Leibniz Supercomputing Center. CSPs and telcos alike continue to move to software-based 5G, VRAN, and O-RAN deployments. We announced Sapphire Rapids EE with VRAN boost for inline acceleration of 5G and network workloads. Edge and AI are proving a powerful combination for us with OpenVINO momentum building with customers like Chipotle, and we launched the Intel Getty computer vision software platform for rapid AI training with early customers such as Brabant, Royal Brompton, and Harefield Hospitals. Further evidence of our AI portfolio taking shape was seen by Red Hat announcing support for Gaudi, Converge.io, and OpenVINO. Inspur announced Gaudi 2 with Sapphire Rapids for advanced AI use cases. Amazon will be accelerating large transform models with Gaudi instances in EC2. This was also a very strong quarter for DCAI execution. Sapphire Rapids volume SKUs have now PRQed with a high-quality leadership product and a very strong volume ramp expected. Google gave the first preview of its C3 instances showing Sapphire Rapids capabilities, as well as our leadership IPU, the E3200 or Mount Evans. We also saw strong milestones in the next three generations of server products. Emerald Rapids is showing good progress and is on track for calendar year 23. Granite Rapids is very healthy, running multiple operating systems across many configurations. And with Sierra Forest, our first E-Core product providing world-class performance per watt are both solidly on track for 24. It's obvious, but worth stating, our strategy is only as good as our execution. We have been taking aggressive action to rebuild our execution engine, driving execution excellence across our people, design, and development and operations. In Q1, I discussed our return to OKRs and their importance to our culture. Last quarter, I touched upon the next evolution of our TikTok model, or TikTok 2, as a disciplined approach to consistent, predictable product execution. This quarter, I wanted to spend a bit of time on operational excellence and discuss our recently announced IDM 2.0 Acceleration Office, or IAO, ushering in the next phase of our IDM 2.0 strategy. During the first phase of IDM 2.0, we aggressively focused on making the needed investments to approve our TD roadmap to regain transistor leadership and to ensure we have at-scale manufacturing capacity by building ahead on shells. Improvements in both areas now enables us to move forward with our next set of priorities, evolving our systems, business practices, and culture to embrace an internal foundry model and establish a leadership cost structure. This means we will create what I like to call a new and clean API for the company by establishing consistent processes, systems, and guardrails between our manufacturing teams and our business units. This will place our BUs on the same economic footing as external IFS customers and will allow our manufacturing group and BUs to be more agile, make better decisions, and uncover efficiency and cost savings. We have already identified nine different subcategories for operational improvement that our teams will aggressively pursue. For example, product teams will be heavily incented to drive to high-quality A0 steppings as they see the full costs of steppings, validation cycles, hot lots, and capacity changes. Factories will move to rigorous capacity loading cycles, transparency of costs for loading changes, and efficiency of capital utilization, structural and variable wafer costs. In addition to establishing better incentives, this new approach will provide transparency on our financial execution, allowing us to better benchmark ourselves against other foundries and drive to best-in-class performance. It will also provide improved transparency to our owners as we expect to share full internal foundry P&L in calendar year 24, ultimately allowing you to better judge how we are creating value and allocating your capital. A key benefit of IDM 2.0 is to unlock our full financial potential by capturing multiple profit pools not available to any one of our peers across architecture, design, wafer manufacturing, advanced packaging, supply chain, and software. These pools were only partially by long-term margin targets we established at Investor Day in February. Simple math would suggest there is meaningful upside to those targets as we execute and exploit the margin stacking potential IDM 2.0 provides. Best in class semiconductor companies achieve gross margin in the 60s and operating margins in the 40s. And we aim to be best in class. This next phase of IDM 2.0 is a significant evolution in how we think and operate as a company. But just as we optimize to drive outside returns in the IDM 1.0 era, We will optimize to achieve best-in-class returns in the IDM 2.0 era. It's what engineers do, and we have the best engineers on the planet. Complementing and augmenting these efforts will be an intensified focus to reduce costs and drive efficiencies in everything we do. As we stated during Q2 earnings, we have an obligation to our owners to be good stewards of your capital. We are responding to the current environment by taking aggressive actions to reduce costs across COGs and OpEx, while mindfully protecting the investments needed to accelerate our transformation and ensure we are well positioned for long-term market growth. In addition to reducing near-term costs, we have also identified structural cost reductions and efficiency drivers, which Dave will outline a bit later. In aggregate, our efforts should drive $3 billion in annual savings in the near term and $8 to $10 billion by the end of 2025. Not captured in these estimates are the startup costs to support five nodes in four years, which will begin to subside beyond calendar year 26, adding an additional $2 billion in COG savings. Inclusive in our efforts will be steps to optimize our headcount. These are difficult decisions affecting our loyal Intel family, but we need to balance increased investment in areas like leadership and TD product and capacity in Ohio and Germany with efficiency measures elsewhere as we drive to have best-in-class structures. We will also continue to use our smart capital approach to support and inform our capital spending aspirations, aggressively building ahead on shelves while aligning equipment purchases and installs with customer demand. We continue to see SCIPS, like our partnership with Brookfield, as an innovative financial structure to more closely align fab build out costs with fab output returns. Likewise, we see US and EU chips as vital to enable us to establish a geographically diverse and secure supply chain for the semiconductor industry. We are confident in re-accelerating free cash flow growth and driving industry-leading free cash flow margins once we get through this period of economic uncertainty affecting the entire industry and our own elevated investments to accelerate our transformation. Lastly, I was particularly pleased to join the Mobileye team earlier this week in New York to witness firsthand the successful completion of their IPO, especially in a difficult market. We believe that this will help unlock, mobilize full operational and financial potential and is an additional avenue to create value for our owners. We remain committed to optimizing our value creation efforts through portfolio honing, reallocation of resources to higher returns, higher growth businesses, M&A, and where applicable divestitures. Before turning it over to Dave, I want to close by saying I continue to be heartened and impressed by the dedication and commitment of all of our employees, by far the most important owners of this great company. They are passionately committed, like me, to reestablish Intel as a dominant driver of innovation and by the opportunity to improve the lives of everyone on the planet. It was also rewarding to see that same drive and dedication in the faces of our broader developer community at Intel Innovation, the rebirth of Intel IDF in September. We are the building blocks and enabler of their vision and aspirations, and it is our commitment to them to be great partners and collaborators. Our ambitions are equal by our passions, and our efforts across manufacturing, design, products, and foundry are well on their way to driving our transformation and creating the flywheel, which is IDM 2.0.