Intel Corporation

Thank you for standing by, and welcome to Intel Corporation's third quarter 2024 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 your question has been answered and you'd like 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, Investor Relations. Please go ahead, sir.

Thank you, Jonathan. By now, you should have received a copy of the Q3 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 am 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 reference to non-GAAP and segment financial measures that we believe provide useful information to our investors. Our earnings release, Most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP and segment financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Pat.

Thank you, John, and good afternoon, everyone. I appreciate you joining us today. We delivered Q3 revenue above the midpoint of our guidance, and we made significant progress on our cost reduction plan. That said, Q3 profitability was negatively impacted by the charges we referenced on our Q2 call. This reflects the aggressive actions we are taking to lower our costs, improve our efficiency, and enhance our market competitiveness. Dave will go into these charges in detail shortly. Operationally, Q3 results exceeded our expectations as we achieved key milestones across Intel Foundry and Intel products. Underlying trends in the business are improving at a measured pace and our outlook for Q4 is modestly above current consensus. Overall, our stepped up focus on efficiency and execution across the business is having a positive impact. We have a lot more ahead and we are acting with urgency to deliver on our priorities. We need to fight for every inch and execute better than ever before, and our teams are embracing this mindset as we build a leaner, more profitable Intel. Now, let me provide more detail, starting with an update on our cost reduction plan that we announced three months ago. First, we completed the vast majority of our headcount actions during Q3, and we are on track to our greater than 15% workforce reduction before the end of the year. These were hard. but necessary changes that are reducing complexity and making us a leaner, faster, and more agile company. Second, we have reduced our capital expenditures by over 20% relative to the plan we had entering the year. We are now well positioned with our shell ahead strategy to react quickly to market demand. With our transition to EUV now complete and the launch of Intel 18A on the horizon, we have a more normal cadence of node development at Intel 14A and beyond. In addition, our teams are maniacally focused on improving fab productivity, allowing us to produce more with less over time. Third, we have begun to simplify and streamline parts of our portfolio to unlock efficiencies and create value. We are reestablishing product portfolio leadership by narrowing our focus on fewer projects with the top priority being to maximize the value of our x86 franchise across the client, edge, and data center markets. As part of our portfolio simplification, we will move our edge business into CCG and refocus our NEX portfolio on networking and telco. We will also integrate our software business into our core business units to foster more integrated solutions that address our customers' most difficult challenges. We are evaluating other portfolio actions, which we will communicate when appropriate, and we plan to provide new segment reporting that reflects these portfolio shifts in Q1 of 2025. Related to our cost and efficiency actions, the restructuring charges we took in Q3 were significant and necessary to right-size the company as we reduced spending by over 10 billion in 2025. There was also a sizable impairment mostly related to Intel 7 equipment and space, reflecting excess COVID era spending that we have concluded cannot migrate to more advanced nodes now that we have fully transitioned to EUV processing. From a broader financial perspective, the actions we took in Q3 go a long way towards delivering the 2025 financial commitments we outlined last quarter. Specifically, we plan to reduce non-product cost of sales by $1 billion, lower OpEx to $17.5 billion, and drive gross and net CapEx to between $20 to $23 billion and $12 to $14 billion, respectively. We expect adjusted free cash flow to be positive next year, and we will focus on decreasing leverage and improving liquidity. Let me go into greater detail on the business, starting with Intel products. We continue to focus on our core x86 franchise and the ecosystems we have developed over 40 plus years of investing. They are a tangible source of value and differentiation for Intel, our partners, and our collective customers, and help to cement the x86 architecture as uniquely positioned to meet customer demands going forward. We are taking steps to supercharge and further unlock the value of our x86 franchise. We intend to drive new levels of customization, compatibility and scalability needed to meet current and future demands of next generation computing. And we see this unlocking a range of meaningful opportunities across all our businesses. I am particularly excited about our recent announcement with AMD to create the x86 Ecosystem Advisory Group. We are bringing together leaders from across the ecosystem to help shape the future of x86 with a focus on simplifying software development, ensuring interoperability and interface consistency across vendors, and equipping developers with standardized architectural tools and guidelines. Broadcom, Dell, Google, HPE, HP Inc, Lenovo, Meta, Microsoft, Oracle, Red Hat have signed on as founding members, as have industry luminaries, Linus Torvalds and Tim Sweeney. Turning to our product segments, in CCG, we continue to lead the AI PC category. In September at IFA, we launched our Intel Core Ultra 200V series processors, formerly named LunarLate. This is the most efficient family of x86 processors ever created, setting a new standard for mobile AI performance and significantly outperforming competitor platforms. LunarLate's combination of superior performance at comparable and competitive battery life positions us well to continue to define and lead the AIPC category. We also continue to nurture the most robust AIPC ecosystem in the industry with more than 100 ISVs, 300 applications, and 500 AI models powered by Core Ultra. And we remain on track to ship more than 100 million AIPCs accumulative by the end of 2025. Next up is Arrow Lake, which launched earlier this month and brings the power of the AI PC to the desktop, delivering a huge leap in performance per watt and bringing an NPU to enthusiast desktop and entry workstation platforms for the first time. All of this is paving the way toward the launch of Panther Lake in the second half of 2025. Panther Lake will be our first client CPU on Intel AT&A, a more performant and cost competitive process that will allow us to bring more wafers home and improve overall profitability. Overall, we are making good progress in CCG. Our share position is strong with a product roadmap and ecosystem that is increasingly setting us apart from our competition. especially in the enterprise market as customers continue to see increasing value from our vPro solutions. Turning to DCAI, our focus is squarely on delivering powerful AI systems that provide enterprise customers with greater choice and flexibility, optimal performance per one, and lower total cost of ownership. And this quarter's launches significantly enhance our market competitiveness, even as we recognize we have more work to do. We launched our latest Xeon 6 product, codenamed Granite Rapids, which doubles the performance of the prior gen with increased core counts, memory bandwidth, and embedded AI acceleration. The new Xeon 6 is tailor-made to handle compute intensive workloads with exceptional efficiency from edge to data center and cloud environments. This solidifies our position as the head node of choice in AI servers. Greater than 70% of of CPU-rated servers are already using Intel Xeon as the host CPU. And we have a significant opportunity to build on this as we continue re-establishing Xeon's competitive strength and market leadership. This quarter, we also launched our Gaudi 3 AI accelerator, which delivers twice the networking bandwidth and 1.5x the memory bandwidth of its predecessor for large language model efficiency. While the Gaudi 3 benchmarks have been impressive and we are pleased by our recent collaboration with IBM to deploy Gaudi 3 as a service on IBM Cloud, the overall uptake of Gaudi has been slower than we anticipated as adoption rates were impacted by the product transition from Gaudi 2 to Gaudi 3 and software ease of use. As a result, we will not achieve our target of $500 million in revenue for Gaudi in 2024. That said, taking a longer-term view, We remain encouraged by the market available to us. There is clear need for solutions with superior TCO based on open standards, and we are continuing to enhance the Gaudi value proposition. In NEX, we announced last month that we will be focusing the business on networking and telco as part of our efforts to simplify our portfolio, drive productivity, and enhance our market position. We will move our edge business into CCG, which creates a meaningful opportunity to more efficiently leverage our core client business and extend our leadership to a wide range of vertical edge solutions, especially as AI on the edge accelerates. As a simpler, more focused NEX, we are better positioned to gain profitable share in the most attractive markets in networking, We continue to further open source Ethernet solutions for connectivity through our Ultra Accelerator Link and Ultra Ethernet Consortium. Let me now turn to Intel Foundry. A key part of our strategy is returning to process leadership through disciplined execution of our roadmap. Intel 18A, our fifth node in four years, is healthy and continues to progress well at this stage in the development process. Our lead vehicles for Intel 18A, Panther Lake, and Clearwater Forest have met early 18A milestones ahead of next year's launches. In addition, we have seen good traction with the release of our 1.0 PDK last quarter and the material increase in the engagements and the number of RFQs we are actively quoting. While we will not win them all, we are confident in our head-to-head position based on feedback from potential customers. Most recently, as announced, we are finalizing a multi-year, multi-billion dollar commitment by AWS to expand our existing partnership to include a new custom Xeon 6 chip on Intel 3 and a new AI Fabric chip on Intel 18A. Beyond AWS, we added two additional 18A wafer design wins this quarter from compute-centric companies, and our pipeline of potential wafer designs has grown nicely over the quarter. Given our leadership and advanced packaging capabilities, we also added multiple back-end design wins this quarter. We were also awarded an additional $3 billion in direct funding under the Secure Enclave program to produce leading-edge semiconductors for the U.S. government. We are proud to be the U.S. government's partner of choice to fortify the domestic semiconductor supply chain and ensure the U.S. maintains its leadership in advanced manufacturing, microelectronic systems, and process technology. Moving forward, as we shared last month, we are creating clearer separation for Intel Foundry by establishing the business as an independent subsidiary. This is important to our external Foundry customers and will give us future flexibility to evaluate independent sources of funding and optimize the capital structure of Intel Foundry and Intel products. We are in the process of forming a fiduciary board for the new Foundry subsidiary, which will include independent directors with deep semiconductor experience. In our all other category, our number one priority is to unlock shareholder value. For Altera, revenue increased 14% sequentially and operating profit turned positive in Q3. We also announced the introduction of our new mid-range and small form factor products, Agilex 5 and Agilex 3, to serve broad market customers and segments. With an increasingly competitive roadmap, the business is well positioned to show continued top and bottom line improvements. Consistent with what we have said previously, We remain focused on selling a stake in Altera on a path to its IPO in the coming years. To that end, we have begun discussions with potential investors and expect to conclude in early 2025. For Mobileye, the company continues to be a leader in the development and deployment of advanced driver assistance systems. And by providing Mobileye with separation and autonomy, we have enhanced its ability to capitalize on growth opportunities and accelerate its path to creating even greater value. The company recently hosted an AI event, laying out a comprehensive strategy for camera-centric compound AI systems, providing a full range of autonomous driving solutions. Wrapping up, our Q3 results reflect heightened focus, discipline, and execution you can expect moving forward. We are rigorously managing our costs and improving our profitability to create long-term shareholder value. We are carefully managing our cash to strengthen our balance sheet and improve our liquidity. And we are staying closely connected with customers and partners as we innovate to meet their most challenging needs. Q3 also reflected some very difficult decisions we made to right-size the business, and I want to recognize the hard work of our employees. We put some points on the board over the past few months, but we are far from satisfied. We view every quarter as a new opportunity to up our game and continue to execute well, and that is our mindset entering Q4. With that, I will now turn it over to Dave.