Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Intel Corporation Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Mr. Trey Campbell, Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator, and welcome everyone to Intel’s second quarter earnings conference call. By now, you should have received a copy of our earnings release and the earnings presentation. If you’ve not received both documents, they’re available on our Investors website intc.com. The earnings presentation is also available in the webcast window for those joining us online. I’m joined today by our CEO, Bob Swan and our CFO, George Davis. In a moment, we’ll hear brief remarks from both of them, followed by Q&A. Before we begin, let me remind everyone that today’s discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. A brief reminder, that this quarter, we have provided both GAAP and non-GAAP financial measures. Today, we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentation and earnings release available on intc.com include the full GAAP and non-GAAP reconciliations. With that, let me hand it over to Bob.

Thanks, Trey. And thank you all for joining our call. Amid a very challenging environment, cloud and network infrastructure and PC capabilities have been vital in allowing businesses and people to continue to work, learn, stay connected, and provide critical goods and services. Those trends contributed to a very strong quarter in which we generated $19.7 billion in revenue and delivered $1.23 in earnings per share. We exceeded our guidance by $1.2 billion on the top line and $0.13 on the bottom line. Our data-centric businesses grew 34% and drove approximately 52% of the Company’s revenue, and our PC-centric businesses grew 7%. I continue to be amazed by our employees and supply chain partners who have diligently worked to keep our business operating at a high level during this unprecedented challenge. COVID-19 has driven redesigned workflows and added additional environmental stress that I know has strained employees and ecosystem partners as they try to maintain productivity in this new world. I want to thank our employees and partners for their incredible contributions. Our primary focus continues to be ensuring the safety and well-being of our global workforce, delivering for our customers and helping the communities in which we operate. On each earnings call, I give updates about our progress against three key priorities: Accelerating the growth of the Company; improving our execution; and continuing to thoughtfully deploy your capital. Let me give you a few thoughts on each. We’re transforming the Company to accelerate growth. That means not just playing defense but positioning our business to grow share in the largest market opportunity in our history. We’ve built scale businesses indexed to key technology inflections such as cloud, AI, 5G, and the intelligent and autonomous edge. We see a world where everything increasingly looks like a computer, including our homes, our cars, our cities, our hospitals, our factories, and now even our schools. In this new world, our opportunity set becomes more than just the CPU; it’s more and more Intel silicon inside more and more computers, so we can have a larger impact on our customers’ success. That diversity is one critical factor in driving today’s results. I’ll highlight a few examples from the past 90 days... ...AI use cases are becoming pervasive, and we are embedding AI capability into all our products. Our Xeon platform is foundational for data center AI, with value, scalability, built-in AI acceleration and inference leadership. This quarter, we launched our third-generation Intel Xeon Scalable processor Cooper Lake, which is the first mainstream server CPU with bfloat16 support, which increases AI throughput by reducing the amount of data required for the same accuracy. Developers can use and test the latest Intel-optimized versions of TensorFlow and PyTorch to train their models using bfloat16, and the Intel distribution of OpenVINO to deploy optimized inference from cloud to edge. In Q2, both our cloud and comms service provider businesses grew more than 40% year-over-year as critical cloud-delivered applications continued to scale and 5G build-outs accelerated. Leading cloud service providers, including Alibaba, Baidu, Facebook, and Tencent announced they are adopting our third-gen Intel Xeon Scalable processors into their infrastructure and services. Also this quarter, Azure introduced several new Xeon Scalable instances, including general-purpose and memory-optimized Azure Virtual Machines. We were also excited to be a part of an industry first with Rakuten’s full-scale commercial launch of its mobile carrier service. This service is the world’s first end-to-end fully virtualized cloud-native mobile network, and it’s powered by Intel processors and FPGAs from the radio access network to the 5G-ready mobile core. Compute capabilities are moving from the cloud to the edge and catalyzing a vast array of new usage and market opportunities. The largest opportunity we see at the edge is the $230 billion 2030 TAM for ADAS, data, and mobility-as-a-service technologies. Since the last call, we acquired Moovit, a leading mobility-as-a-service solution company. Combining Mobileye’s market-leading ADAS and AV technologies with Moovit accelerates our ability to become a full-stack mobility provider and truly revolutionize transportation. The most important demonstration of the power of our technologies is the commitment of our customers, and we were excited this week to announce a significant design win with Ford. Design wins to date in 2020 include multiple new ADAS production programs representing cumulative volume of over 20 million units. We’re also driving incredible innovation for our customers across a wide spectrum of PC use cases. This quarter, we introduced three new additions to our 10th gen processor family, extending our leadership in gaming and business. The Core S and H series processors for desktop and mobile gaming deliver speeds out of the box reaching up to 5.3 gigahertz, making them the world’s fastest gaming processors, and our new 10th Gen Intel Core vPro processors delivered uncompromised productivity and hardware-based security for commercial PCs... ...Q2 also marked the launch of Lakefield, featuring our new Intel Hybrid Technology, which is a hybrid CPU architecture for power and performance scalability. We also continue to work on improving our execution. Intel employees and our supply chain partners have role-modeled teamwork in navigating difficult conditions while working to support customer upsides during this crisis. We have made significant progress in increasing our capacity and improving our supply while delivering $2 billion above our plans through the first six months of the year. We’re on track to return to more normal levels of PC inventory as we work through the second half of the year. Acceleration of our next-generation products continues. We now expect to increase our 10-nanometer-based product shipments for the year by more than 20% versus our January expectations. Customer demand for our family of 10-nanometer-based SoCs for 5G base station designs is also very strong. We delivered a full node of performance improvement within our 14-nanometer-based products by optimizing our product and process together, and the power of our intranode improvements continues with our next-generation 10-nanometer-based client product, Tiger Lake. Tiger Lake delivers breakthrough performance in CPU, graphics, and AI, and will be shipping to customers in a matter of weeks. We are also targeting initial production shipments of our first 10-nanometer-based Xeon Scalable product, Ice Lake, for the end of the year. And we have a pipeline of exciting new product architectures for 2021, led by Alder Lake for client and Sapphire Rapids for server. Both products will start initial production shipments in the second half of 2021. Let me provide some updates on our technology roadmap. We continue to demonstrate proof points of our breakthrough advanced packaging technologies. Our Lakefield product, which I mentioned earlier, delivers scale production of our 3D packaging technology, Foveros, combining both 10-nanometer and 22-nanometer capabilities in a disaggregated architecture. This quarter also marked a significant milestone in our data center GPU technology. We successfully powered on a petaflop-scale GPU with high bandwidth memory using our advanced embedded multi-die interconnect bridge or EMIB 2D packaging technology... ...Turning to our 7-nanometer technology. We are seeing an approximate six-month shift in our 7-nanometer-based CPU product timing relative to prior expectations. The primary driver is the yield of our 7-nanometer process, which based on recent data, is now trending approximately 12 months behind our internal target. We have identified a defect mode in our 7-nanometer process that resulted in yield degradation. We’ve root-caused the issue and believe there are no fundamental roadblocks, but we have also invested in contingency plans to hedge against further schedule uncertainty. We’re mitigating the impact of the process delay on our product schedules by leveraging improvements in design methodology such as die disaggregation and advanced packaging. We have learned from the challenges in our 10-nanometer transition and have a milestone-driven approach to ensure our product competitiveness is not impacted by our process technology roadmap. Our overarching priority is to deliver product leadership for our customers, and we are taking the right steps to produce a strong lineup of leadership products. We will continue to invest in our future process technology roadmap, but we will be pragmatic and objective in deploying the process technology that delivers the most predictability and performance for our customers, whether that be in our process, external foundry process or a combination of both. Our advanced packaging technologies combined with our disaggregated architecture give us tremendous flexibility to use the process technology that best serves our customers. As an example, our data center GPU design, Ponte Vecchio, will now be released in late 2021 or early 2022, utilizing external and internal process technologies combined with our world-leading packaging technologies. We now expect to see initial production shipments of our first Intel-based 7-nanometer product, a client CPU in late 2022 or early 2023. We are also focused on maintaining an annual cadence of significant product improvements independent of our process roadmap, including the holiday refresh window of 2022. In addition, we expect to see initial production shipments of our first Intel-based 7-nanometer data center CPU design in the first half of 2023. Finally, while process technology is very important, it is only one of the six technology pillars of innovation that drive differentiation in our products. You will hear more about advances across all six technology pillars, process; packaging; architecture; memory; interconnect; and security/software at the upcoming Intel Architecture Day. Last, we are focused on the thoughtful allocation of your capital. We are investing to grow our capabilities even as we deliver significant free cash flow this year. Since 2015, we have grown R&D spending by more than $1 billion while divesting non-core assets and reducing overall spending as a percentage of revenue by 9 points. We also look for opportunities to augment our product lines and speed the pace at which we can grow the Company. As discussed earlier, we acquired Moovit this quarter, investing approximately $900 million to dramatically accelerate our capability to capitalize on the $160 billion mobility-as-a-service opportunity. We also announced a $250 million investment in Jio Platforms, a high-speed wireless connectivity and digital services provider, to help fuel digital transformation in India. Our purpose to deliver world-changing technology that enriches the lives of every person on earth has never been more essential. But the global problems we face are bigger than any one company can solve alone. That’s why we established 2030 corporate responsibility goals, which call for a collective response to revolutionize health and safety, make technology fully inclusive and help address climate change. We’ve also committed more than $50 million and extended our expertise, global reach, and influence to combat COVID-19 as well as social injustice. The early results of our Pandemic Response Technology Initiative, which we announced earlier this week, underscore Intel’s unique ability to partner and collectively solve critical problems. In closing, I want to thank all our employees who are working through this challenging time to deliver our purpose and support our customers.

Thanks, Bob and good afternoon, everyone. The atypical seasonal effects of COVID-related demand for mobility products and data center infrastructure continued in Q2, resulting in record Q2 revenue for CCG, DCG, and memory. Revenue came in at $19.7 billion, up 20% year-on-year and $1.2 billion higher than guided. Data-centric revenue of $10.2 billion, up 34% year-on-year, represented 52% of our total revenue, an all-time high. Strong demand for NAND and 5G networking solutions and richer server mix drove most of the upside versus our expectations. Q2 PC-centric revenue was $9.5 billion, up 7% year-on-year on strong notebook PC sales, enabled through increased manufacturing supply on capacity additions over the past year. Gross margin for the quarter was 55%, slightly below expectations on higher product costs from faster uptake of our 5G ASIC products, which are margin dilutive relative to the Company average and also continued acceleration of 10-nanometer products overall, partially offset by a shift of costs from cost of sales to R&D related to 7-nanometer product timing. As a reminder, we expected an approximate 3-point reduction in gross margin in the second quarter on the effect of pre-PRQ reserves for our Tiger Lake client product. This is largely a timing item concerning the full year as we benefit from the zero dollar units in our initial sales of the product, which will begin this quarter. Operating margin of 31% in the quarter was approximately flat versus last year as spending efficiency offset lower gross margin. Q2 EPS was $1.23, $0.13 above our guide as stronger-than-expected operating results from notebook, memory, and a richer mix of server products, along with higher gains in our trading asset portfolios, offset increased costs from our 10-nanometer acceleration and the effects of a discrete foreign tax item. In Q2, we generated $11.2 billion in operating cash flow, and invested $3.4 billion in CapEx with $7.7 billion of free cash flow, up 92% year-over-year. We returned $1.4 billion to shareholders via dividends. As a reminder, we paused our share repurchase program in Q1 as we felt it was prudent to do so in the current economic environment. We expect to complete the balance of our $20 billion share repurchase program and return to our historical capital return practices when market dynamics stabilize. Moving to segment performance in Q2, Data Center Group revenue of $7.1 billion was up 43% from the prior year, coming in higher than expectations with strength across our customer segments. Year-over-year platform volumes in ASPs were up 29% and 5% respectively. DCG adjacencies also delivered significant growth with revenue up 118% year-on-year on strong adoption of 5G networking solutions. While year-over-year comparisons for DCG benefited from a weaker Q2 ‘19, revenue in the quarter came in at the second highest level ever for DCG and the highest revenue ever in our cloud business. Revenue year-over-year was up 47% in cloud, 34% in enterprise and government, and 44% for communications service providers. Operating margin was 44%, up 8% year-on-year on higher revenue and high-end compute mix. We see increased competition this year but we’ve also seen strong customer response to our product portfolio and now expect to end the year with market share that is somewhat higher than our original expectations. Our other data-centric businesses were up 14% year-over-year, primarily on the NAND dynamics in Q2, despite significant COVID headwinds impacting demand in our more GDP-sensitive businesses, IOTG and Mobileye. IOTG revenue and operating income declined 32% and 76% respectively, primarily on lower revenue from industrial, retail, and vision segments. Mobileye revenue was down 27% and operating income turned to a modest loss as the decline in global auto sales more than offset continued ADAS penetration and new IQ program launches. NSG’s record quarterly revenue of approximately $1.7 billion was up 76% year-on-year on strong NAND bit growth and improved pricing. Q2 was an all-time record for quarterly revenue for our memory business. The business also returned to profitability this quarter, generating approximately $300 million in operating income. PSG revenue grew 2% year-over-year on cloud strength, which was partially offset by weaker demand from embedded and communications segments. Operating income was up 54% on richer product mix and improved unit costs. CCG revenue was $9.5 billion in Q2, up 7% year-over-year driven by notebook demand and higher modem and Wi-Fi sales, which more than offset lower desktop volumes. PC unit volumes were up 2% year-over-year on higher notebook demand and increased supply. We expect our share to improve throughout the remainder of the year as we begin to recover unit share in notebooks utilizing our smaller Core products, which we have not been able to fully serve given the strength of demand for our large Core products. Operating margin was 30%, down 12 points year-on-year as higher unit costs associated with the ramp of 10-nanometer products and the pre-PRQ reserves ahead of our Q3 Tiger Lake launch more than offset the benefits of higher revenue. Moving now to our third quarter outlook. Based on demand signals from our customers, we expect continued strength in cloud and comms infrastructure and consumer notebook PCs in Q3. But we expect that the weak economic environment will impact our commercial PC business, particularly the desktop form factor, and also drive lower demand for the enterprise and government segment in DCG and in IOTG and Mobileye. As a result, we expect total revenue of $18.2 billion with PC-centric and data-centric businesses down mid-single digits year-over-year. In Q3, we expect the PC TAM to be down high single digits year-over-year on OEM inventory drawdown, softer desktop demand, and the effects of the global recession. Gross margin is expected to be approximately 57%, down 3.5 points year-over-year as accelerated ramp of 10-nanometer products and lower platform revenue more than offset NAND margin improvement. We are expecting a tax rate of approximately 15.5% in Q3. This is approximately 2 to 2.5 points above our previous expectations, primarily due to a lower FDII benefit in the year, a temporary reduction in R&D tax credits in California, and the effect of a push-out of a foreign grant. The higher tax rate is reducing our EPS in the quarter by approximately $0.03 versus our prior rate expectation. As a result, Q3 EPS is expected to be approximately $1.10 per share. Moving to full year. We’re providing full-year guidance although visibility remains somewhat limited into the fourth quarter. Still, we do expect some part of the Company’s first half outperformance will be additive to our estimate for full year revenue. We are now forecasting revenue of $75 billion and EPS of approximately $4.85. We expect our PC-centric business to be flat to slightly down against the PC TAM that is down mid-single digits year-over-year. Following a very strong first half of the year, we expect demand trends to moderate in the second half as weaker global GDP and the maturing Win 10 commercial refresh drive a lower PC TAM. Again, we also expect to increase our market segment share as we have greater supply for entry PC designs. Additionally, we are forecasting lower modem revenue in the second half. We expect revenue from our data-centric businesses to be up approximately 10% for the full year on strong cloud demand and increased 5G buildouts. After significant cloud expansion in the first half and into Q3, we expect capacity expansion to moderate as CSPs move to a digestion phase. We’re also planning for an increasingly competitive environment as we move into the second half. We expect continued global GDP-related impacts to our IOTG and Mobileye businesses in the second half of the year. Overall, our implied first half, second half revenue contribution is an anomalous 53% to 47%, as opposed to a more typical year with underserved seasonal buying patterns of 46% and 54%, respectively. Gross margin is expected to be 58% for the year, down 1 point versus our reasonable expectations for the year and 2 points lower year-over-year. This change is being largely driven by higher costs from higher than expected demand for our 10-nanometer products, and the push out of a government grant for our memory business. These effects coupled with softness in our IoT businesses, more than offset the stronger overall demand, improved mix in DCG, and the shift in some spending between OpEx and cost of sales related to the product timing delays Bob discussed earlier. Spending for the year is expected to be approximately $19.7 billion or 26% of revenue, down one point year-on-year. Full-year spending is up versus our January expectations on higher R&D expenditures, including the previously discussed shift between OpEx and cost of sales, and costs related to COVID, partially offsetting the cost reductions on the modem exit and other portfolio actions, as well as ongoing SG&A productivity gains. The resulting operating margin is 32%, down 1 point, year-over-year. The tax rate is expected to be 14.5%, reflecting the impact of discrete items and the lower FDII benefit. Full-year EPS of $4.85 is $0.15 below our January expectations as increased server and notebook PC demand, and slightly higher equity gains are more than offset by COVID-related impacts to IOTG and Mobileye, higher product costs from accelerating 10-nanometer, a higher tax rate and the impact of improving our liquidity by raising additional debt and temporarily pausing our share buyback. The combination of our liquidity actions and the higher tax rate alone impact full year EPS by more than $0.15. We expect 2020 CapEx of approximately $15 billion and free cash flow of approximately $17.5 billion. To conclude, I’d like to join Bob in thanking our employees worldwide. Very much appreciate the hard work of our employees and contractors who delivered excellent results in the face of a very difficult environment.

All right. Thank you, George. Moving on now to the Q&A. As is our normal practice, we would ask each participant to ask just one question. Operator, please go ahead and introduce our first caller.

Our first question comes from Vivek Arya with Bank of America.

Thanks for taking my question. I wanted to dig into the competitive and the financial implications of the 7-nanometer delays that Bob mentioned. So, on the competitive side, by the time you come up with 7, TSMC is planning to be on the 3-nanometer, so will still be a generation ahead. So, what’s the market share implication of that? And then, related on the financial side, what’s the CapEx and gross margin implications, and even pricing implications if you stay on 10-nanometer longer next year? And I guess, the bigger question that a lot of investors would have is, at what point should Intel just consider outsourcing a lot more to foundries, so that you can keep in line with the state-of-the-art manufacturing technologies?

Thank you, Vivek. Our main priority is to consistently provide leadership products on an annual basis for our customers in a predictable way. Today, we presented a robust lineup for 2020, 2021, and 2022 for both client and server segments, and we are quite confident about it. Regarding our expectations for 10-nanometer technology, we aim to achieve improved performance similar to what we accomplished with 14-nanometer technology. We believe our product roadmap through 2022 is solid. Looking ahead to the next generation of products in late 2022 and 2023 and beyond, it’s crucial that we maintain strong performance. Ideally, our focus should be on leadership products developed on our process technology, allowing us to reap the economic benefits of Integrated Device Manufacturing. However, if necessary, we will prepare contingency plans to utilize other companies' process technologies. There are various factors at play, and if we opt to partner with another foundry, we need to ensure that our average selling prices align with our costs while still delivering leadership products to maintain appealing ASPs and minimize the capital required to invest in older technology nodes. Over the past couple of years, we have concentrated on product leadership and have engaged with the ecosystem more comprehensively. We are designing our products and improving our packaging technologies to enhance our flexibility in deciding whether to utilize our own fabs or those of other companies to meet our annual cadence for leadership products. We are optimistic about the timeline through 2022 and are currently assessing our options for 2023 and beyond.

Hey, Vivek. Regarding your question about what we might see next year, I want to mention that next year will essentially still be a 10-nanometer year with some 14-nanometer products, as we discussed in May 2019. The situation is evolving as we have progressed further along the yield curve, and we've seen more demand for 10-nanometer products in 2020 than we anticipated. We won't be updating our outlook for 2021 at this moment, but our primary concern is more about the state of the global economy than our progress with 10-nanometer technology.

Thank you.

Thank you. Our next question comes from C.J. Muse with Evercore. Your line is now open.

Yes. Good afternoon. Thank you for taking the question. I guess, a follow-up question on the 7-nanometer delay. I guess, curious, how should we think about the implications for CapEx and required capacity adds at 10-nanometer and 14-nanometer? And then, just to circle back on the comment around contingency plans after ‘22. Considering your first data center CPU will launch in the first half of ‘23, are you suggesting that that could be found out and not be built internally at Intel? Thank you.

In response to the first part of your question, regarding 2022, we anticipate a full range of 10-nanometer products. Our expectation is that, all else being equal, we will invest slightly more in 10-nanometer technology and less in 7-nanometer, assuming we continue to handle all of our production internally. However, if we decide to utilize third-party foundries more effectively, we would increase our investment in 10-nanometer and significantly decrease our spending on 7-nanometer. This flexibility is something we’ve integrated into our strategy as we assess the future of Moore’s law and our leadership in technology development. If it turns out that we aren't on track and a better alternative arises, we are ready to capitalize on that opportunity.

Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is now open.

Yes. Hi, guys. Thanks for letting me ask a question. Sticking on the same topic of 7-nanometer. Bob, if you could just help me understand yields are 12 months behind where you would expect them but the product ramp is only 6. If you could square that circle that’d be helpful. But more importantly, you had multiple sort of push-outs of 10-nanometer. You’re identifying this 7-nanometer push-out today. What confidence level do you have that this is sort of a one-and-done issue and it doesn’t turn into a repeat of 10 where you kind of had multiple periods of push-outs?

Thanks, John. First, we are experiencing a product schedule delay of about two quarters, while the process timeline is now expected to be around four quarters. This gap is due to a few factors. Firstly, we have included a buffer in our planning between process and product to minimize customer disruption caused by process issues. Secondly, as mentioned earlier, die disaggregation and advanced packaging allow us to distribute certain tasks for a system on chip, which helps us to expedite product delivery despite the process delays. This is why we feel confident about a six-month product delay, even with the process extending by 12 months. Regarding your second question, we have been in similar situations before. One significant lesson learned from our experience with 10-nanometer technology is the need for solid contingency plans if our process technology advancements do not progress as expected. We want to ensure we can still provide leading products to our customers on an annual basis. While we anticipate some challenges, we believe we have set ourselves up well with our 7-nanometer plans. Importantly, we will be practical about our manufacturing decisions, whether to produce internally or externally, and we will maintain the flexibility to adapt our strategy depending on the circumstances. Our key takeaway from the 10-nanometer experience is to have thorough contingency plans and clear milestones, enabling us to leverage external resources if necessary to avoid further product schedule delays due to process challenges.

Our next question comes from Ross Seymore with Deutsche Bank.

Hi, everyone. I’d like to follow up on the discussion about the 7-nanometer. Bob, it's encouraging to hear that you plan to take a more practical approach regarding internal versus external resources. However, it appears that the external option is viewed as a backup plan for three years down the line. Investors seem to be frustrated with the delays in manufacturing execution. Can you clarify if there are steps being taken to prioritize the external approach before 2023, particularly on the design side rather than the revenue aspect? Additionally, looking ahead three to five years, do you anticipate any changes to the proposed 20-80 mix of 20% external and 80% internal resources?

Maybe, I’ll flip those around. Over the last couple of years, we’ve been talking about, as we expand our capacity, evaluating more holistically, when do we use third-party foundries rather than do everything ourselves. And we call that engaging in the ecosystem in much more holistic ways for a variety of different reasons, so we don’t have to build everything ourselves as the capital associated with each node becomes a bit higher. So, in general, I would say for planning purposes, we’ve been engaging with the ecosystem much more. And all else equal, I would expect that roughly 28% to be a little bit higher as we focus on growing the business. Your first question in terms of planning then, we feel like we have a solid product roadmap, again for the second half of this year for ‘21 and for ‘22 and that we’ll do it on our existing 10-nanometer that’s ramping faster than we expected, it yields in line with what we expected. So, for the near term, we think we’ve got a great lineup of products and we expect to fight and protect our share, while standing the role we play in a variety of different places in the industry. But now is when we’re planning for ‘20, ‘23. And we are evaluating now in light of where we are, where we think the industry, the competition or third parties are, evaluating now what’s the best option for us to make sure that we can deliver an annual cadence of product leadership for our customers. And those decisions are not decisions that we’ll make in 2023. Those decisions, based on the information that we have along the way, will be made long before then. Whether it’s decisions that are about how much capacity we need to put in place or decisions about how do we leverage more effectively somebody else’s process capabilities and factories, so that we can get real good incremental returns on capital deployed.

Our next question comes from Stacy Rasgon with Bernstein Research.

I want to ask about the acceleration in 10-nanometer. Is this truly due to improved yields and increased demand, or is it an effort to compensate for the delay in 7-nanometer? The impact on margins is significant, which makes it difficult for me to reconcile the idea of yields improving substantially compared to where you expected them to be in January. How should we understand the factors driving the acceleration in 10-nanometer considering the delay in 7-nanometer, especially in relation to the margin situation?

Hey Stacy, this is George. I’ll provide a general overview of the margin situation for the year. This is clearly having an impact. The acceleration is tied to the fact that we're growing faster than we expected in 2020, and part of that growth is due to a higher mix on the PC side, as well as increased demand for products on the 10-nanometer process compared to our forecasts for the year. This is why we're seeing somewhat lower revenue flow-through than anticipated. Overall, it's a positive growth story as we see customers increasingly attracted to the 10-nanometer product.

Wait a minute. If I look at your annual guidance now versus higher, but it’s actually lower in the second half versus what you had implied when you first gave the annual guidance six months ago. How does that imply that demand is higher versus where you were, given you’ve actually lowered the second half?

Well, I think I’ll start with our full-year demand relative to where we were at the beginning of the year is our guidance is up by $1.5 billion in revenue.

Yes. But you just…

Let me finish by addressing your question. Our full-year demand for the Company is increased. The yields for 10-nanometer technology are aligning with our expectations for the first half of the year, and we feel optimistic about our yield performance. Additionally, the demand for our products in the PC segment and for the 5G SoC in the communications sector has exceeded our expectations. This demand plays a significant role in the $1.5 billion increase in revenue for the year. As we accelerate the 10-nanometer production, driven by customer demand, our margins will, all else being equal, be somewhat lower. George noted that these factors are key contributors to a one-point margin decline. The ramp-up of 10-nanometer products is occurring faster, and our 5G communications business in the data center group is growing more rapidly than we had forecasted. I consider the faster ramp-up of 10-nanometer production a positive development. Although we anticipate lower margins when initiating a new process compared to the end of an old one, the current margins for 10-nanometer are lower than for 14-nanometer. We believe that ramping up 10-nanometer technology is beneficial for our customers, even though it may temporarily reduce our yields if growth outpaces our expectations. Overall, this will affect our gross margin modestly for the full year due to higher growth in a challenging market and increased demand for our 10-nanometer products. Thank you.

Thank you. Our next question comes from Timothy Arcuri with UBS. Your line is now open.

Hi, thanks. I wanted to ask also on the same manufacturing topic. So, I think, Bob, when you were talking about Ponte Vecchio, I think you said that you’re going to package it internally, but it seemed like you were implying an external foundry contingency, even for this first GPU product. I guess, my question is, did I read that right? And also, I wanted to ask George, what the long-term implications are, if you move to somebody else’s fab? What does this do to your 57% to 63% long-term gross margin? And how does it impact free cash flow? I mean, obviously, it saves you on CapEx but can it be accretive to free cash flow?

Yes. The design of Ponte Vecchio originally includes an IO-based die, connectivity, a GPU, and some memory tiles all packaged together. From the start, we planned to have some of those tiles inside and some outside, utilizing packaging technology to demonstrate how we can combine different designs into a single package. This was our initial concept. As we discuss disaggregation, it allows for more flexibility and options in our designs, with some components inside and others outside. Ponte Vecchio on the data center side and Lakefield on the client side have served as our test products—one launched and the other in development. This design disaggregation provides us with significant flexibility moving forward. We can evaluate whether to introduce Ponte Vecchio with a mix of internal and external tiles. As we progress, we can consider replacing one of our tiles with a third-party foundry if needed. This flexibility is a key advantage of our new design approach, allowing us to adapt in case of any production delays by sourcing externally rather than manufacturing everything ourselves.

And with respect to the long-term outlook, first off, our long-term margin outlook is not 57%, we’ve talked about it being well above that over time. But in terms of as we dynamically move, potentially move product depending on where it is best provided, I think that certainly gives us more flexibility to optimize our capital spend, get a higher return on that capital spend. And it should be accretive to free cash flow. So, we talked a little bit about that actually back in May of ‘19 that embracing the ecosystem and balancing some of our activity externally is going to be important as we look to improving returns over time.

Our next question comes from Weston Twigg with KeyBanc Capital Markets.

I wanted to ask about the data-centric revenue heading into Q3. The mid-single-digit decline year-over-year implies a pretty big decline from Q2. You helped a little bit on the call, but I’m wondering if you could help us better understand the reason for that big quarterly drop. And kind of as an aside, you also mentioned increased competition in DCG in the second half, and I’m just wondering what exactly you were referring to on that side?

As we examine the data-centric revenue, several factors come into play. Year-over-year, we will notice the effects of the decline in IoT and Mobileye. However, on the DCG side, we believe that we peaked in cloud revenue during the second quarter, which was a record high. We likely reached our peak in enterprise and government back in Q4 of 2019. While the first quarter was relatively strong, a downward trend is expected in the coming quarters. There may be a slight rebound in Q4, but we will have to see how that unfolds. For our communications provider segment, we anticipate that Q2 was the peak, and revenue is expected to decline from there. Overall, everything in the DCG segment is stepping down from a very strong second quarter and is likely to continue decreasing in both cloud and communications based on our current outlook. Does that clarify things?

Yes. That’s helpful. And then, the comment on increased competition in DCG in the second half?

Yes. We anticipated that rising competition would emerge in the latter half of this year due to the competitors’ product plans. However, we have been pleasantly surprised by the robust demand for our products in the first half, which is continuing into the second half. Therefore, we don’t believe the competitive impact will be as significant in the second half as we initially expected. Additionally, when it comes to PCs, we expect to gain market share.

When we guided back in January, in the context of our guidance, we made that statement. So, George is just reiterating that we see a more competitive world and we’ll be prepared to deal with it. And we factored that into our outlook for the second half of the year.

Operator, I think, we have time for one more question, and then we’ll turn the call back over to Bob to wrap things up.

Thank you. And our final question comes from Srini Pajjuri with SMBC Nikko.

Thank you, George. I have a question about your guidance for the full year. I think, it implies DCG declining again in Q4, pretty much in double-digit sequentially. So, just trying to understand, I mean is it primarily because of digestion that you talked about? And also, if you can talk about to what extent do you have visibility into Q4 or are you just taking a conservative stance because you just simply don’t have visibility into Q4?

I believe, as mentioned in response to the previous question, that we have a reasonable expectation that spending in the cloud, enterprise, and communications sectors will decrease from very high levels. We anticipate this trend will continue into Q4. Overall, looking at the full year, our performance has been stronger than expected. Given the various global factors, we are pleased to be so close to our forecast. However, we've experienced significant demand, particularly in the cloud and communications sectors during the second quarter, and now we are entering a phase of some adjustment, which is expected.

Yes. Let me just kind of close out and end where we began. First, over the last couple years, as you know, we’ve expanded our TAM in the quest to play a much larger role in our customers’ success by investing in key leading technologies like 5G, AI, and intelligence at the edge. And we feel pretty good about the investments that we’ve been making. And last year, we wrapped up our year best year in the Company’s history, entering 2020. Obviously, this year has been an incredibly challenging year on multiple fronts. But, at the same time, we expect ‘20 to be the best year in our Company’s history, our fifth record year in a row, delivering better results than we expected in January at a time when the market is worse than we expected. So, competitively, we feel stronger as we exit 2020. Third point I’d make is our execution is improved. Capacity and supply is in place. We’re ramping a slew of 10-nanometer products across our portfolio. We are ramping 10 faster than we had planned. And we have a strong pipeline over the next several years. And we believe we can deliver another node of performance on 10-nanometer itself. Fourth point, at the same time, our 7-nanometer products will be delayed. We pushed out the timing of the 7-nanometer node. But along the way, we have taken steps, die disaggregation, advanced packaging, deeper engagement with the ecosystem and contingency planning as a sign of strength, not as a sign of weakness that gives us much more flexibility to make the decisions where it’s the most effective way to build our products to deliver that annual cadence of leadership for our customers. And we feel pretty good about where we are, though we’re not happy. I’m not pleased with our 7-nanometer process performance. But, as we sit here today, six months through the year, our people are safe. We’re delivering for our customers. The communities we operate in are better as a result of our presence and the passion of our employees for making a difference. And next 90 days from now, we’ll talk more about our efforts to create world-changing technologies that continue to enrich the lives of every person on earth. So, thanks for joining us. And we’ll talk to you soon.

Thanks, Bob. And thank you all for joining us today. Operator, could you please go ahead and wrap up the call?

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.