Good day, and thank you for standing by. Welcome to the Second Quarter 2022 Intel Corporation Earnings Conference Call. Please be advised that today’s conference is being recorded. I will now hand the conference over to your speakers today, John Pitzer, Corporate Vice President of Investor Relations at Intel. Please go ahead.

You should have received a copy of our earnings release and the earnings presentation both of which are available on our investor 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, Pat Gelsinger; and our CFO, Dave Zinsner. In a moment, we’ll have brief remarks from both, followed by Q&A. 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 involves risks and uncertainties. Our press release provides more information on the specific risk factors that could cause actual results to differ materially. We’ve also provided both GAAP and non-GAAP financial measures this quarter and will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentations and the release available on intc.com include full GAAP and non-GAAP reconciliations. With that, let me hand it over to Pat.

Thank you, John, and good afternoon, everyone. While we continue to make solid progress on our strategy, Q2 results were disappointing, below the standards we have set for the company and below the commitments we have made to you, our shareholders. The sudden and rapid decline in economic activity was the largest driver of the shortfall, but Q2 also reflected our own execution issues in areas like product design, DCAI, and the ramp of AXG offerings. We have an obligation to remain vigilant and to respond to the changing business conditions while not losing sight of our long-term goals and opportunities. We will look to do both by adjusting and refocusing our spending levels in the near term, while simultaneously accelerating the deployment of our smart capital strategy and improving product execution. Collectively, these actions will begin to show dividends in the second half of the year, allowing us to return gross margins to our target range by Q4 and maintain our initial free cash flow outlook for 2022. While still early in our journey, we remain laser-focused on executing to our strategy to deliver leadership products anchored on open and secure platforms, powered by at-scale manufacturing and supercharged by our people. The current economic backdrop only strengthens our resolve and we are embracing this environment to accelerate our transformation. For example, regaining our leadership begins with Moore’s Law and the capacity to deliver it at scale. Over the last 18 months, we’ve taken the right steps to establish a strong footing for our TD roadmap. We are well into the ramp of Intel 7 now shipping in excess of 35 million units. Intel 4 is ready for volume production in the second half of this year and Intel 3, 20A and 18A are all at or ahead of schedule. We’ve received additional strong third-party validation for TD, IFS and our manufacturing group just this week when we announced MediaTek as our next major foundry customer, a great example of our One Intel culture. I want to congratulate our teams on what we expect to be many announcements as we execute to become a leading edge, geographically diversified systems foundry at scale. But we must also be clear-eyed as we look into the second half. We are planning for volatility as the world adjusts to the end of a two-plus-year pandemic and the unprecedented stimulus governments used to fight it. Across the economy, supply chain issues have both limited the ability to meet demand in some areas and driven inventory well above normal levels in others. We are prepared to manage through a slowdown typical of the normal cycles the semiconductor industry has experienced over the last 50 years. While the depth and duration are still difficult to predict, we have a proven track record of being able to adjust and succeed in any environment. Let me address some of the specific actions we are taking. First, we further sharpened our focus in Q2 by selling our drone business and making the difficult decision to wind down our efforts in Optane, as we embrace CXL, a standard that Intel Corporation pioneered. These add to actions last year in NAND and the sale of McAfee. In total, we have now exited six businesses since my return, providing roughly $1.5 billion for investments aligned with our IDM 2.0 strategy. We are also lowering core expenses in calendar year 2022, and will look to take additional actions in the second half of the year, which Dave will address later. Importantly, expense discipline is not impacting the strategy and we remain firmly on track to achieve process performance parity in 2024 and unquestioned leadership in 2025. This goal is our true North Star. Second, our ability to invest aggressively and fulfill our commitment to a strong and growing dividend is anchored by the progress we are making in deploying our smart capital strategy. We are thrilled to see the bipartisan vote in Congress this week and expect the CHIPS Act to be on the President’s desk shortly. We have been integrally involved in moving this groundbreaking legislation forward. This progress, combined with the strong momentum in Europe, will reshape our industry and bring us toward a geographically balanced, resilient supply chain that we are uniquely positioned to enable and benefit from. Access to mission aligned pools of capital supports the accelerated pursuit of our strategy and will enable our torrid pace. Third, I rejoined Intel to re-energize and re-establish a culture of execution and innovation. With process technology and capacity expansion both now trending very well, we have the critical foundation we need for improved product execution. We have rebuilt our leadership team which is now fully assembled for the first time. Together, we have re-established OKRs throughout the organization to drive common purpose and, importantly, a system of accountability. In the coming months, we will begin to share more with the investment community on the next evolution of our TikTok model to drive a consistent and predictable cadence of process and design innovation. As we look beyond the near-term, the semiconductor industry continues to be at the beginning of a new structural growth phase, driven by four superpowers: one, ubiquitous compute; two, pervasive connectivity; three, cloud-to-edge infrastructure; and four, AI. Combined, these drivers support a semiconductor industry eclipsing $1 trillion by 2030. What remains very clear even during this period of uncertainty is the growing importance of Silicon to the global economy and to each of our daily lives. However, as a result of macro weaknesses, we now expect the PC TAM to decline roughly 10% in calendar year 2022, characterized by broadening consumer weakness and relative strength in enterprise and higher-end segments. Importantly, our Q2 PC unit volume suggests we are shipping below consumption as some of our largest customers are reducing inventory levels at a rate not seen in the last decade. Certain pricing actions should allow for sequential growth into the second half even as some customers manage inventory lower. While COVID-related dynamics like work-from-home and school-from-home pulled forward some demand, they also solidified the PC as an essential tool in the post-pandemic world. For example, PC and corporate usage remains historically high even as the pandemic’s most acute impacts diminish. Markedly higher per PC usage and a larger installed base, including 600 million PCs that are four years and older, supports a PC TAM sustainably above 300 million units. Data center trends are still well entrenched. Data has been growing exponentially at a 50% CAGR for over 20 years, but until recently, it has been uneconomical to turn that data into true actionable insights. With the advent of AI, along with CPUs, GPUs and accelerators, we now have the tools to access and use more of the data we create, driving significantly higher compute demand and a multi-year CAGR in the data center TAM of at least mid-teens. Despite these drivers, demand will not be immune from economic headwinds. In addition to match-set issues, which have constrained shipments for multiple quarters, increasing economic concerns are leading to a reduction in second-half demand. As a result, we have lowered our server TAM assumptions to reflect more modest growth in 2022. Against this backdrop, let me highlight key developments in our businesses: In response to supply chain and match-set issues, we closely collaborated with our customers and suppliers to effectively address their most critical needs. We rapidly adjusted to changing market conditions, made cost reductions, and leveraged smart capital to execute toward our IDM 2.0 strategy. Despite significantly lower revenue impacting overall gross margins, Q2 saw continued strong performance in our factory network, and we exceeded our wafer cost goals with 10 nm unit costs declining approximately 8% year-on-year. In TD, we continue to deliver on the promise of Moore’s Law, and our ambitions to deliver 1 trillion transistors in a device by 2030. Intel 4 details were released at the recent VLSI conference to positive reviews, and we’ve now taped in the first stepping of the Granite Rapids CPU and expect power-on this quarter. In the second half of this year, we plan to tape in numerous internal and foundry customer test chips on various process nodes including Intel 3 and Intel 18A. In our client business, Alder Lake momentum continues. We have the strongest PC lineup in over five years, and we remain unapologetic about our growing leadership and share position. We are building on Alder Lake leadership with Raptor Lake in the second half of this year and Meteor Lake in 2023, exemplifying how our innovative design decisions can drive leadership performance even before re-establishing best-in-class transistor technology. In Q2, we launched the 12th Gen Intel Core HX processors, the final products in our Alder Lake family. The Alder Lake family is now powering more than 525 designs from Acer, Asus, Dell, HP, Lenovo, LG, Microsoft, Samsung, and others. To date, we’ve shipped well in excess of 35 million units of Alder Lake. Within the current market, we are also seeing relative strength in the premium segments we serve across consumer and commercial. We expect to build on this momentum with the launch of our next-gen product family Raptor Lake, starting with our desktop SKUs this fall, followed by our mobile family by the end of the year. The Raptor Lake family will offer customers significant advantages, including double-digit performance gains generation-on-generation and socket compatibility with Alder Lake. In 2023, we will deliver our first disaggregated CPU built on Intel 4 Meteor Lake, which is showing good health in both our and our customers’ labs. Turning to DCAI, as we stated at Investor Day, over the next couple of years as we rebuild our server product portfolio, we expect to grow slower than the overall data center market. It’s not a fact we like, but it’s the forecast we see. We have a singular focus to regain performance and TCO leadership across all workloads and use cases from enterprise to cloud. The advantage of our incumbency position remains underappreciated and provides significant opportunity to drive outsized advantages to our customers. For example, we expanded our supply agreement with Meta, leveraging our IDM advantage to ensure Meta can meet its expanding compute needs. Also in Q2, we agreed to expand our partnership with AWS to include the co-development of multi-generational data center solutions optimized for AWS infrastructure and Intel as a strategic customer for internal workloads including EDA. We expect these custom Xeon solutions will bring greater levels of differentiation and a durable TCO advantage to AWS and their customers, including Intel. In addition, NVIDIA announced the selection of Sapphire Rapids for use in their new DGX-H100, which will couple Sapphire Rapids with NVIDIA’s Hopper GPUs to deliver unprecedented AI performance. Beyond Xeon-based CPUs, we launched our next-generation Gaudi 2 AI accelerator in the quarter with a substantial 4x improvement generation-to-generation, and in the most recent MLPerf training benchmark test, Gaudi 2 has a substantial lead in ResNet-50 and BERT benchmarks. In the second quarter, we also began delivering on our software strategy with the acquisition of Granulate, expanding our platform capabilities with real-time AI-driven continuous optimizations for cloud computing and the initial release of Amber, our security attestation service. Since we acquired Granulate, their customer pipeline has doubled and their revenue pipeline has tripled. Finally, programmable solutions achieved record Q2 revenue and were just shy of an all-time record revenue quarter driven by strong demand, including the ramp of the flagship Agilex FPGA family and improving supply. In NEX, we had an outstanding Q2. We achieved record revenue and PRQ’d Mount Evans, an IPU we co-developed, and are now beginning to ramp with a large hyperscale partner with additional customers in 2023. In addition, our latest Xeon D processors, built specifically for software-defined infrastructure across the network and edge, launched at this year’s Mobile World Congress, and are ramping with leading companies including Cisco, Juniper Networks, and Rakuten Symphony. Across the network edge, we’re continuing to see interest in deploying more compute and AI capabilities. For example, Ferrovial, a multinational Spanish infrastructure company, is using our edge computing, AI, and connectivity technologies to deploy roadside solutions that can identify wrong-way drivers, warn of oncoming hazards, and more. In Singapore, Singtel has deployed a network solution with Xeon, Smart Edge and OpenVINO to improve user experiences for use cases like entertainment, industrial applications, smart manufacturing, smart transportation, and smart city initiatives. Lastly, ABB is helping utility providers modernize their electric grid and create a more sustainable energy market by adopting standardized rugged servers based on 3rd Gen Intel Xeon. NEX continues to clearly benefit from networks that are increasingly moving toward software and AI that is increasingly moving to the edge, and we expect another revenue record in Q3. For AXG, while we will not hit our GPU unit target, we remain on track to deliver over $1 billion in revenue this year. In Q2, we started to ramp Intel Arc graphics for laptops and OEMs, including Samsung, Lenovo, Acer, HP, and Asus. COVID-related supply chain issues and our own software readiness challenges caused availability delays that we continue to work to overcome. Intel Arc A5 and A7 desktop cards will start to ship in Q3. Our energy-efficient blockchain accelerator Blockscale achieved a major milestone in Q2 with revenue shipments to our lead customers, going from tape-in to shipping in less than a year. We expect to ship millions of units this year, not originally in our forecast. Our data center GPU code-named Arctic Sound-M has started production and is now shipping to customers supporting a diverse range of workloads, starting with media streaming and cloud gaming, followed by support for AI visual inference and virtual desktops. In high-performance computing, we highlighted the installation of the Argonne National Lab Aurora supercomputer at our Intel Vision event in May, and we are on track to deliver over 10,000 blades in 2022, enabling over two exaflops of peak performance. We also announced new partnerships, including with the Barcelona Supercomputing Center to set up a pioneering RISC-V zettascale lab, and our continued collaboration with the University of Cambridge to evolve their current lab from exascale to zettascale. Our IFS momentum continues. Creating a geographically balanced, secure, and resilient semiconductor supply chain, as well as access to our transistor technology, is driving strong customer interest in our foundry business. In addition to the MediaTek agreement that we announced earlier this week, we now have active engagements with six of the top 10 fabless customers across our offerings, including 18A. Overall, we are engaged with 30 customers for test chips, and now have more than 10 qualified opportunities in advanced stages across our process and package offerings that collectively represent a deal value of greater than $6 billion. Augmenting our organic activity is our proposed acquisition of Tower Semiconductor. We now have regulatory approval or clearance in four geographies, including the U.S., and we still expect the acquisition to close by early next year. In Q2, we also launched the IFS Cloud Alliance, a partnership with leading cloud providers including Microsoft Azure and AWS, and EDA tool providers, including Ansys, Cadence, Siemens EDA, and Synopsys. The IFS Cloud Alliance is the next phase of our accelerator ecosystem program that will enable secure design environments in the cloud, improving foundry customer design efficiency and accelerating time-to-market. Lastly, in Mobileye, we achieved another record quarter in revenue in Q2, and we continue to be poised to unlock further value with our proposed IPO later this year, pending market conditions. Mobileye’s backlog continues to grow, with first-half 2022 design wins generating 37 million units of projected future business, compared to 16 million units actually shipped in the first half. As a result of Mobileye’s high-definition map product, called REM, we are currently crowd-sourcing 43 million miles per day on average from approximately 1.5 million vehicles. This data is automatically built into a map, which currently covers greater than 90% of all roads in both Europe and the U.S., which will support systems across the entire driving assist to autonomous vehicle spectrum. Looking ahead, before turning it over to Dave, I want to close with a few thoughts. First, after a very successful Intel Vision event in Q2, I am looking forward to hosting Intel Innovation on September 27 and 28, our core technical conference for global developers, architects, and engineering leaders. I hope to see many of you joining me there. Second, as I said when we began our journey, Intel will be a source of innovation driving new businesses and additional TAM in large and growing markets. Taken together, we have already announced over 10 new revenue producing product lines so far this year, which are just beginning to ramp, and we expect to announce more in the second half and calendar year 2023. The foundations for our growth story are taking shape. I know I speak for all of our employees when I say that while we have work to do, our best days are ahead.

Thanks, Pat, and good afternoon, everyone. As Pat referenced, Q2 was a challenging quarter negatively impacted by multiple factors. First, a weakening and uncertain macroeconomic environment impacted by inflation, higher interest rates, and the war in Ukraine. Second, a much larger than expected OEM inventory correction as our customers adjust to this new macroeconomic environment. Third, worse than expected COVID driven demand reductions and supply dislocations in China and other parts of the supply chain. Due to the difficult macroeconomic environment together with our own execution challenges, our results for the quarter were well below expectations and necessitated a significant revision to our full-year financial guidance. That said, we are taking the actions necessary to maintain our prior full-year adjusted free cash flow guidance, including a slowdown in hiring, CapEx reductions, and the expectation for increased capital offsets consistent with our smart capital strategy. We remain fully committed to the business strategy and long-term financial model presented during this year’s investor meeting in February. Revenue was $15.3 billion, 15% below our original Q2 guidance as our CCG and DCAI businesses both underperformed our expectations. Note that even in this challenging environment, our NEX and Mobileye businesses achieved all-time record quarterly revenue. Gross margin for the quarter was approximately 45%, 600 basis points below guidance on lower revenue and Sapphire Rapids preproduction charges offset by lower manufacturing costs. EPS was $0.29, $0.41 below our guide on lower revenue and gross profit, offset by lower operating expenses. Operational cash flow for the quarter was $800 million. CapEx for the quarter was $7.2 billion, resulting in an adjusted free cash flow of negative $6.4 billion. Our balance sheet remains strong with cash and investments of $27.5 billion, modest leverage, and a strong investment-grade credit profile. Now turning to our business unit results. CCG revenue was $7.7 billion, below expectations and down 25% year-over-year on global TAM weakness, particularly in the consumer, education, and small/medium business markets. The shortfall was also driven by OEM inventory reductions as we worked with our customers to lower their inventory, protect market share and continue to manage through matched set constraints. CPU ASPs were up 11% year-over-year on a richer mix and strong demand for our high-end mobile and desktop products across both our commercial and consumer segments. Operating profit was $1.1 billion, down 73% year-over-year on lower revenue, increased 10 nanometer and Intel 7 mix, and increased spending to further strengthen our product and platform roadmap. DCAI revenue was $4.6 billion, below expectations and down 16% year-over-year on OEM inventory reductions, mix related ASP decline and competitive pressures. Operating profit was $214 million, down 90% year-over-year on lower revenue, higher advanced node startup cost, increased investment in the product roadmap and Sapphire Rapids pre-production charges. NEX achieved all-time record quarterly revenue of $2.3 billion, up 11% year-over-year on strength and data center networking products, specifically networking Ethernet and 5G. Operating profit was $241 million, down 60% year-over-year on a mix shift to networking Ethernet and 5G. Increased investment in process technology and lower sell-through of reserved inventory. AXG revenue was $186 million, up 5% year-over-year on the ramp of Super Compute and Alchemist discrete GPU products. Operating loss was $507 million versus an operating loss of $168 million in Q2 2021 with the increase driven by inventory reserves on Ponte Vecchio and Alchemist products and increased investment to deliver the roadmap of Visual, Super Compute, and Custom Accelerated Graphics Products. Mobileye achieved all-time record quarterly revenue of $460 million, up 41% year-over-year. Outperforming the rate of increase of global automotive production, which was relatively flat year-over-year. Operating profit was $190 million, up 43% year-over-year on higher revenue partially offset by increased investment in next-generation ADAS products. IFS revenue was $122 million, down 54% year-over-year driven by lower mask tool sales and a revenue decrease in the automotive segment due to customer shortages in the automotive market. Operating loss was $155 million versus an operating profit of $52 million in Q2 2021, driven by lower revenue and increased investment to build out the custom foundry business. Before we transition to full year and Q3 guidance, after six months on the job, let me provide my perspectives on the opportunities I see and focus areas to improve our financial performance and achieve our long-term goals. At the highest level, I see opportunities to improve in two areas. First, ensuring we are allocating our capital to the programs that are clearly aligned to our revised business strategy and generate maximum long-term value to our shareholders. As Pat mentioned, two good examples of continuing to optimize our portfolio are exiting the Optane and drone businesses. We continue to deeply evaluate all opportunities to more narrowly focus our resources on the highest value programs, increasing the probability of success for each of these programs. Second, driving structural product cost and operational expense efficiency across the company and taking full advantage of our IDM 2.0 strategy. A major focus for me is driving Intel to world-class product costs. Key to this is executing our five nodes and four-year strategy, but there are many more aspects to achieving this goal with programs in flight to dramatically reduce product costs. Likewise, there are opportunities in OpEx to ensure we are achieving world-class efficiency in everything we do. With my history in the memory business where every penny counts, I know there are large opportunities for Intel to improve and deliver maximum output per dollar. As part of these focus areas, we expect to see restructuring charges in Q3, and I’ll continue to provide regular updates on these efforts. Moving to our full year and Q3 guidance. For the remainder of the year, we expect macroeconomic conditions to continue to soften with the potential for a recessionary scenario to materialize. There’s also risk for continued COVID-related impacts on demand and the supply chain to continue throughout the year. As a result of this high level of uncertainty, we’re moving to a range-based approach to revenue guidance for the rest of the year. For full year revenue, we are now guiding a range of $65 billion to $68 billion, down from our prior guidance of $76 billion driven by lower expectations for our CCG and DCAI businesses. More specifically, in our PC business, as Pat discussed, we now see TAM decreasing approximately 10% year-over-year due to the softening macroeconomic environment and inflationary pressures. Although these headwinds have reduced our CCG revenue forecast, we expect CCG revenue to increase in the second half of the year due to seasonal strength, OEM inventory returning to balance levels, inflation-related price increases to take effect, and the ramp of our leadership Alder Lake and Raptor Lake products to position us to compete for share. For DCAI, we expect to see second half revenue growth relative to Q2 levels, but growth will remain muted as competitive and macroeconomic headwinds persist, OEM inventory reductions continue, and component constraints impact certain segments. For NEX, we expect another record quarter in Q3 and continued growth throughout the year. NEX revenue tailwinds will be fueled by new product introductions, data center and Telco networking demand, and continued improvement in pricing and component supply. For AXG, we continue to expect full year revenue greater than $1 billion driven by the launch and ramp of the Alchemist, Arctic Sound M, Ponte Vecchio, and Blockscale products. Finally, we expect to see second-half growth in each of our two remaining businesses, Mobileye and IFS, as they ramp new products and secure new customers. Full year gross margin we’re guiding to 49% at the midpoint of revenue guidance with the expectation that gross margin will return to the low end of our target range of 51% to 53% in Q4 as revenue increases, we achieve scale on new product ramps, and costs continue to improve. We’re forecasting a tax rate of approximately 8% and EPS of $2.30 at the midpoint of the revenue guidance. For net CapEx, we’re revising down our forecast to $23 billion, $4 billion less than our previous guidance as we moderately adjust our investment in capacity and take advantage of potentially larger than originally forecast capital assets, highlighting significant progress on our smart capital strategy. We expect these actions to offset lower than originally forecast operating cash flow, allowing us to reaffirm adjusted free cash flow of negative $1 billion to $2 billion for the year. Finally, we paid dividends of $1.5 billion, a 5% increase year-over-year, and remain committed to growing the dividend over time. Now moving to Q3 guidance; given the aforementioned market environment, we’re guiding revenue of $15 billion to $16 billion. At the midpoint of the revenue guidance, we’re guiding gross margin of 46.5%, a tax rate of 13%, and earnings per share of $0.35. In closing, the market turbulence and updated outlook are disappointing. However, we believe our turnaround is clearly taking shape and expect Q2 and Q3 to be the financial bottom for the company. We remain completely committed to the strategy and financial model communicated at Investor Day. The long-term financial opportunity of compelling revenue growth and free cash flow at 20% of revenue remains. I believe this downturn represents an opportunity to accelerate the transformations necessary to achieve these goals. With that, let me turn it back over to John and get your questions.

All right. Thank you, Dave. 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.

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

Yes. Good afternoon. Thank you for taking the question. I guess for my question your implied guidance calls for roughly 12% sequential growth into December. Would love to hear what gives you confidence that inventory correction and the supply chain issues will be behind you? And as part of that do you think a PC TAM of down 10% is conservative enough or is that something where there might be further risk ahead? Thanks so much.

Thanks, C.J. So when you look at the fourth quarter, first of all, we are shipping at below the rate of consumption for those markets due to the inventory burns in both CCG and DCAI. As a result, there is a natural recovery that occurs as we progress through the rest of the year once inventory is in a good place. We feel we’re at the bottom here in terms of revenue in the Q2, Q3 time frame and Q4 would recover just based on that alone. I’d also say we’ve got a good set of products coming out over the course of the second half of the year. I think we’re operating with solid sales in terms of product offerings in all of our businesses. And then third, we are increasing pricing, which generally takes effect in the fourth quarter. The advantage of the IDM strategy is we can absorb a lot of inflationary impacts that others can’t. We were able to hold off on taking price increases, but some of those inflationary increases have turned out to be more permanent where there’s a certain amount of adjustments we do need to pass onto customers and they’re comfortable to do that. Lastly, the fourth quarter is generally just a seasonally strong quarter for us, particularly in the PC space. All those factors give us good confidence that Q2, Q3 represent the bottom for revenue and that fourth quarter will see some strength.

And in fourth quarter, we also see that some of the new business unit areas are also starting to contribute more significantly. On the PC TAM, before we were above the market, but with the downward revision, we’re now exactly in line with the market. So we don’t see ourselves ahead of the market like we were before. The market has shifted heavily on the consumer side, but the enterprise side remains strong, which gives us confidence. Along with the strength of the product roadmap, we also see the enterprise market remaining very healthy, and our position in higher price points is beneficial. Additionally, with Alder Lake's 35 million units shipped and the upcoming launch of Raptor Lake, we’re entering a promising cycle for the overall business.

Thanks so much.

We have a question from Vivek Arya from Bank of America. Your line is open.

So thanks for taking my question. Pat, I’m curious why didn’t Intel choose to negatively pre-announce, given the extent of the shortfall. I can understand the PC market being weak, but for the data center to be almost 25% below expectations seems very strange to me. I’m just curious why Intel took these actions? And then when we look at your data center revenue, especially in the reported quarters, most enterprise and cloud customers reported their sales and spending kind of in line with expectations. So is it mostly competitive pressures? If you could just help us understand the thought process for Q2? Thank you.

Yes. Thanks, Vivek. I think that’s actually two questions. On the market side, we were well into the quarter and we saw the market characteristics change quite suddenly, resulting in both the sell-through and marketplace redefining. This caused significant inventory adjustments. We worked with our customers to adjust their inventory, as these changes were like once-in-a-decade adjustments due to prior demand shortages. We wanted to ensure we had a thoughtful view of the future market as we approached today. Regarding the DCAI point, as I mentioned in my comments, we were disappointed. Some of that downturn was due to macro factors, as well as issues with our match set. Our execution issues also played a role, particularly with Sapphire Rapids, which consequently affected our inventory and reserves. We feel the progress in the data center is evident and are focused on wins such as those with AWS and Meta, which are substantial.

Indeed, the operating margins for the DCAI business were disappointing, primarily due to the revenue decline and ongoing investments in products. We see this improving, especially as we advance through the second half and as our revenue starts to climb.

Thank you.

Our next question comes from Matt Ramsay with Cowen. Your line is open.

Yes. Thank you very much for taking the question. Good afternoon. Pat, I wanted to follow up a bit on the prior question in the server business, particularly on the roadmap you guys just mentioned. Can you give us a more specific timing on where things are with Sapphire Rapids, not just early units, but actual volume production? Additionally, does this push out impact the timelines for Emerald and Granite? Do you see those timelines pushing out similarly or are they holding steady? I'm just curious as to the roadmap. Thank you.

Yes. Giving a bit more detail on Sapphire, we’ve already started ramping several SKUs of Sapphire Rapids. Those began ramping last quarter. However, our highlighted issue does not affect those SKUs, so they continue to ramp. We performed another tape out for the larger volume SKUs, and those will be shipping in the latter half of the year. We are on track for those. As for Emerald, which utilizes the Sapphire platform, we feel our timing is healthy. That product will be out in 2023. Granite and Sierra Forest will follow in 2024. Essentially, we’re ramping quickly on those products.

Next question, please.

We have a question from Srini Pajjuri with SMBC Nikko.

Thank you. Dave, can you clarify why you are taking the Sapphire charges? Is it just the pre-production reserve or is there something else going on? Based on your comments about the recovery profile for DCG in the second half, it seems like the PC market is expected to recover quicker than DCAI. I’m surprised by this because you have Sapphire ramping and I don't know if the inventory situation was worse in DC than in PC. So I’m curious as to why you think PC will recover faster than DCAI.

Yes, you’re right about Sapphire Rapids. We reserve production inventory before it has gone through our quality metrics, PRQ. We reserve all product until it reaches PRQ, which we expect to occur later this year, at which point we will stop reserving production inventory. We also anticipate recovering some portion of that reserve as we progress through the year and into next year. In CCG and DCAI, the inventory correction was more pronounced in CCG, meaning the recovery momentum will be more evident as it returns to consumption levels. Additionally, we expect more pricing improvements in CCG, which will further contribute positively. Next question.

We have a question from Joseph Moore with Morgan Stanley. Your line is open.

Great, thank you. I wonder if you could talk about the capital spending cuts. Can you give us a sense for whether this affects shells versus wait for fab equipment? Is there an opportunity cost to that? Also, does this affect your previously mentioned comments about the overall trajectory over the next few years? Do you still expect CapEx to be rising from here?

Yes, good question. So regarding gross CapEx, about 25% of our reduction relates to equipment adjustments, with about 75% pertaining to increased capital offsets. So the reduction isn’t significant. It mainly concerns timing and lower equipment receipts. Regarding trajectory, it’s essential to manage CapEx concerning demand, which we believe will remain robust. We anticipate growth rates in our markets will be favorable. Although we may make minor adjustments, we are confident about our guardrails going forward.

Yes, as Dave mentioned, the passage by the House of the CHIPS Act this week was significant. This legislation has the potential to reshape the semiconductor industry and benefit Intel. This was part of our smart capital program. We see this as an accelerant in our strategy and something that will give us the capacity to support customer needs as well as our foundry objectives.

Next question, please.

Our next question comes from Harlan Sur with J.P. Morgan. Your line is open.

Good afternoon. Thanks for letting me ask questions. So, Pat, you mentioned in your remarks discussing the macro environment, and you also called out Intel-specific execution issues, specifically product design. Were you referring only to Sapphire Rapids, or was this a broader statement across several product segments, including client and graphics? Can you elaborate on these product design issues? Are they architectural problems, performance concerns, design closure delays, or changing customer requirements? What changes are being implemented to ensure better design execution in the future?

Thank you, Harlan. I see the recovery rebuilding occurring in three chapters. One is TD and manufacturing, second is design and products, and finally, building growth. We need to deliver the products we communicate to customers promptly and at the required performance levels. Currently, the focus is on getting product design execution back to a high standard. I highlighted the recent quality issues with Sapphire Rapids and the underperformance of our discrete graphics software. Our software release on our graphics was inadequate cost-wise and compared to metrics we needed. Our timelines for product delivery to customers need to improve significantly as well. Many longer-term projects need to be the best in class in terms of design cycles, costs, power usage, architecture, and so on. We’re working hard to rebuild these capabilities, and while many products were already in development when I took my position, we are now instilling this disciplined execution across the team.

Next question, please.

We have a question from Randy Abrams with Credit Suisse. Your line is open.

Yes. Thank you. A multi-part question. If you could talk on IFS similar to the MediaTek announcement regarding the product scope and potentially expanded advanced products or reference design cooperation. Additionally, I would like to ask about the CHIPS Act and how it changes your approach to the business. For Dave, do the capital offsets assume some of the U.S. benefits, and how could it impact the tax rate?

On IFS, MediaTek is a leading fabless supplier from Taiwan seeking to broaden their supply chain. Our strategy provides pathways for a globally balanced resilient supply chain. Our pipeline of customers has grown significantly, and MediaTek's partnership marks a step forward in our Intel 16 phase, which makes sense given its maturity. Current offerings like Intel 3 and Intel 18A are under development and not yet at the design commitment stage. Overall, IFS is showing great progress, and we expect to build a robust customer pipeline as we move forward.

We have not assumed CHIPS Act money in 2022, as we believe the process for this funding will unfold in 2023. The bill encompasses both grant money and tax credits; however, exact details on administration and impact on our P&L are yet to be defined.

Thanks, Randy. Can we get the next question, please?

Our next question comes from Stacy Rasgon with Bernstein. Your line is open.

Hi, guys. Thanks for taking my question. I’m a little confused. You said that Sapphire Rapids was on time and it’s ramping in volume in the second half, but you also said that data center growth in the second half would be pretty muted off of a base that’s really low. Additionally, you mentioned that data center pricing improvements in the second half would be less than what you’re seeing in clients. So doesn’t really sound like Sapphire Rapids’ ramp is helping at all. How should I think about the impact of that ramp? Is that ramp’s contribution mostly a first half 2023 affair?

Yes. We said earlier that Sapphire Rapids' ramp as a whole is later than expected. We have some SKUs that are already ramping, which is positive, but the major SKUs will be ramping later in the year. A substantial financial impact will come next year, rather than this year. We do expect growth in the client space, especially through Alder Lake, which gives us important leverage as we account for inflation and incorporate price increases.

Yes. We began shipping several SKUs sooner, but the lower volume SKUs will ramp slightly earlier than planned. So, while we will see results from Sapphire this year, the larger financial results will materialize next year. Sapphire Rapids is indeed a leadership product, enjoying positive customer reviews on areas like AI performance.

Thanks, Stacy. Operator, we have time for one more question, please.

We have a question from William Stein with Truist. Your line is open.

Great. Thanks for taking my question. It relates to the timeliness of delivery of new products. While Sapphire Rapids is delayed, it seems like the later nodes are still on track or ahead of schedule. As outsiders, what can we look for to judge and determine whether Intel is continuing to be on pace? Aside from the summary statements or press release, is there some other metric you could disclose so we can better understand Intel’s commitment?

Yes. The five nodes I can summarize briefly: Intel 7 is done, with volume shipments well underway. Intel 4 is broadly sampled and looks good. In looking at Granite Rapids—we’ve also received positive reports validating our recent VLSI conference inputs. We can provide updates on prospective findings from independent assessments of these nodes as we move along to ensure third-party confirmation. As foundry customers sign on, those partnerships will validate our development progress. Expect ongoing confirmation on performance, defect density, and design collateral to assure you of our commitments.

With that, let me just wrap up our time. First, I’d like to say thank you. We’re grateful for you joining us today, and the opportunity you’ve given us to update you on our business. We summarized three key messages as we finish. We’re not satisfied with the quarter and the financial results that we shared today. We have growing confidence in the strategy and are optimistic about the future. We appreciate the fair and relevant tough questions this quarter. Transformations are not easy, but nothing worthwhile ever is. Despite the headwinds we are facing, we demonstrated substantial progress in IFS, NEX business, and PSG. The passing of CHIPS today is huge, alongside significant customer wins such as AWS, Meta, and NVIDIA. We see substantial progress on our TD milestones and our manufacturing milestones. We look forward to updating you again next quarter.

This concludes today’s conference call. Thank you for participation. You may now disconnect.