Intel Corporation

Welcome to Intel Corporation's first quarter 2023 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 telephone. If you wish to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. By now, you should have received a copy of the Q1 earnings release and earnings presentation, both of which are available on our investor relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I'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 does contain forward-looking statements based on the environment as we currently see it, and as such, are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release, most recent annual report in Form 10-K, and other filings with the SEC provide more information on the specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to the corresponding GAAP financial measures. With that, let me turn things over to Pat.

Thank you, John, and good afternoon, everyone. We delivered solid first quarter results on both the top and bottom line. Upside was driven by better than expected revenue and very disciplined expense management across our organization. The latter is not easy, and I want to thank the entire Intel team as we thoughtfully execute on cost reductions and efficiency improvements that support the investments critical to drive our strategy. Q1 results demonstrate the progress we are making to advance our transformation and the IDM 2.0 strategy. We still have more work to do as we reestablish process, product, and cost leadership, but we continue to provide proof points each quarter, and we remain committed to delivering long-term value for all our shareholders. Consistent with prior quarters, I'd like to focus my comments in three areas. One, our view of the macro and our markets. Two, key highlights from Q1. And three, an update on our strategic priorities with a focus on our move to an internal foundry model. As the industry continues to navigate through multiple global challenges and headwinds, we remain cautious on the macro outlook, even as we expect some modest recovery in the second half. We are seeing increasing stability in the PC market with inventory corrections largely proceeding as we had expected. However, the server and networking markets have yet to reach their bottoms as cloud and enterprise remain weak. As a result, our Q2 revenue guide embeds continued inventory corrections in our core markets and a range of normal seasonal to better than seasonal growth off depressed Q1 revenue levels. We remain focused on what is within our control and steadfast in our commitment to advancing our strategy. As we anticipated on our Q4 earnings call, the PC market depleted a significant amount of inventory in Q1 and is tracking to be at a healthy level by the end of Q2. Importantly, the PC install base is larger and usage remains well above pre-pandemic levels. And along with a better than expected Q1, strengthens our view that the PC market is on track to a sell-through of 270 million units in calendar year 23. As we highlighted during our PC webinar in January, strong usage, an installed base which is roughly 10% higher than pre-COVID levels, and what we see as a conservative refresh rate supports a longer-term PC TAM of 300 million units, plus or minus. In servers, Q1 consumption TAM declined. Both sequentially and year over year at an accelerated rate and we still expect to see first half 23 TAM decline year on year with a modest recovery in second half of the year. While all segments have weakened, we'd reiterate that the correction in enterprise and rest of world where we have stronger positions is further along and will likely recover more quickly. Lastly, in our broad-based markets like industrial, auto, and infrastructure, demand trends are relatively stronger, although as anticipated, NEX did see a Q1 inventory correction that we expect will continue for the next couple of quarters and likely will cause NEX revenue to decline this year. In contrast, PSG, IFS, and Mobileye continue on a strong growth trajectory, and we see the collection of these businesses in total growing year-on-year in calendar year 23, much better than third-party expectations for a mid-single-digits decline in the semiconductor market ex-memory. While the semiconductor industry is cyclical by nature, we continue to accelerate our transformation and position ourselves to capture the significant market growth in semis expected over the next decade, nearly doubling to more than 1 trillion by 2030. Combined with the need for globally balanced and resilient supply chains in a foundry market expected to be roughly 200 billion by 2030, we are well positioned to capitalize on multiple vectors of growth. On that front, let me highlight some key milestones from Q1. We are relentlessly focused on driving execution excellence across process and product roadmaps and throughout the company, including a rigorous focus on efficiency and cost savings. Looking first at the progress we are making with our process roadmap, we remain on track to regain transistor performance and power performance leadership by 2025. Relative to five nodes in four years, notably, two out of these five nodes, Intel 7 and Intel 4, are now essentially done. Intel 7 is in high-volume manufacturing, and Meteor Lake on Intel 4 is ramping production wafer starts today for a second-half product launch. We are quickly mastering EUV technology with Intel 4 as our first EUV node. As we focus on the next three nodes, Intel 3 is on track, and we highlighted in our recent DCAI webinar, Sierra Forest will begin shipping in first half of 2024, with Granite Rapids shortly thereafter, both on Intel 3. We also have significant milestones planned in Q2 for Intel 3, Intel 20A, and Intel 18A. I look forward to providing more details as we execute. Overall, we are squarely on track to deliver five nodes in four years. We understand that our foundry ambitions will not be realized overnight. Building a vibrant foundry ecosystem will take time, but we also understand our foundry success is vitally important to us establishing a geographically diverse and secure supply of semiconductors. We took a major step forward in building our ecosystem this month when we announced a multi-generation agreement with Arm Holdings. This will enable chip designers to build leading-edge mobile SOC designs on Intel 18A, giving the design community a new foundry alternative for product innovation and a fast time to market, while also opening up new options and approaches for a large ecosystem of ARM customers. We look forward to providing access to best-in-class CPU IP and the power of an open system system foundry with leading-edge process technology. Finally, as part of my recent trip to China, we continue to work hard to complete the tower acquisition and we'll update you appropriately. In our webinar last month, we provided a substantial update on our data center and AI business, highlighting the progress and health of our roadmap. Sapphire Rapids, our fourth gen Xeon, is one of the highest quality data center CPUs Intel has ever delivered. Service providers signaled readiness for Intel TDX instances, including Alibaba Cloud, with Microsoft announcing their preview on Azure and Google releasing joint research conducted pre-launch to further harden TDX in complex environments. Emerald Rapids, our fifth-gen Xeon Scalable, is already sampling with customers and is on track to launch in Q4 23. As stated earlier, Sierra Forest, our lead vehicle for Intel 3, will begin shipping in first half 24, with Granite Rapids shortly thereafter. both of which are receiving very positive responses from sampled customers. Sierra Forest is our first eCore server CPU, which will provide competitive performance per watt across workloads and leadership across many with all of the benefits of the x86 ecosystem. Clearwater Forest, which is the follow-on to Sierra Forest, is coming to market in 2025 and will be manufactured on Intel 18A, the node where we intend to achieve process leadership and representing the culmination of our five nodes in four years strategy. The combination of our roadmap strengthening as we highlighted in our webinar, better than expected Q1 market share results, and great execution on the Xeon Gen4 ramp, Q1 was a turning point as the first quarter of an improving data center position since I became CEO. Further in Q1, we taped in the Hibana Gaudi 3 AI accelerator, and the Hibana Gaudi 2 is in the market and offering substantial performance advantage over A100 in training and inferencing vision and language models. For example, Gaudi 2 delivers 60% higher power efficiency measured in throughput per watt for inferencing large language models such as Bloom 176 billion parameter model. Along with fourth-gen Xeon and Xeon Max, Gaudi enables us to address the accelerating growth in AI. Recent endorsements by Hugging Face and Stability AI are strong proof points of the validation in our AI roadmap and strategy. Our strategy is to truly democratize the incredible power of AI championing an open ecosystem with a full suite of silicon and software IP to drive AI from cloud to enterprise, network, edge and client across training and inference in both discrete and integrated solutions. Our one API now includes the open and royalty-free C++-based programming model, SYCL, which is critical to driving collaboration and innovation.