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pww.comIntel Corporation, Q2 2024 Earnings Call, Aug 01, 2024 - SEHK:4335

SEHK:4335

John William Pitzer [Corporate Vice President of Corporate Planning & Investor Relations] 💬

John William Pitzer, the Corporate Vice President of Corporate Planning & Investor Relations at Intel Corporation, made the following statements during the Q2 2024 Earnings Call:

  1. Introduction

    • "Thank you, Jonathan. By now, you should have received a copy of the Q2 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."

  2. Pre-Calls Instructions

    • "Before we begin, please note that today's discussion contains 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 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 non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures."

  3. Introduction of CEO and CFO

    • "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."

  4. Transition to CEO

    • "With that, let me turn things over to Pat."

  5. Transition to CFO for Q&A Session

    • "Before I turn to Dave, let me sum up by saying it has been a hard thought first half of the year... That is the mindset driving us forward as we continue to build a stronger Intel."
    • "With that, I'll pass it over to Dave."

  6. Q&A Session Instructions

    • "[Operator Instructions] With that, Jonathan, can we please take the first caller."

  7. Request for Follow-Up Questions

    • "Vivek, do you have a follow-up?"
    • "Ross, do you have a quick follow-up?"
    • "CJ, do you have a quick follow-up?"
    • "Joe, do you have a follow-up?"
    • "Srini, do you have a quick follow-on?"
    • "Matt, do you have a quick follow-on?"

  8. Closing Remarks

    • "Thank you for joining our call. We appreciate the time as always. And I'd say in a couple of these topics, I hope to see many of you at the Deutsche Bank Technology Conference coming up, where we'll have some further updates."

Throughout the call, John William Pitzer primarily facilitated the proceedings, introduced speakers, and managed the Q&A session, ensuring smooth transitions and providing instructions and reminders to participants.

Patrick P. Gelsinger [CEO & Director] 💬

Patrick P. Gelsinger, the CEO and Director of Intel Corporation, provided an overview of Intel's performance and strategy during the Q2 2024 Earnings Call. Below is a detailed summary of his statements:

Key Points from Patrick P. Gelsinger

  1. Overview of Q2 Performance

    • Q2 profitability was disappointing despite progress on product and process roadmaps.
    • Intel is accelerating actions to improve profitability and capital efficiency by more than $10 billion in 2025.

  2. Impact of Export Controls

    • Revenue growth was in line with forecasts despite the unexpected timing of new export control restrictions announced in May.

  3. Investments in AIPC Category

    • Investments in defining and driving the AIPC (AI Personal Computing) category have pressured margins.
    • The AIPC category is expected to grow from less than 10% of the market today to greater than 50% in 2026.

  4. Panther Lake Introduction

    • Panther Lake, the first client CPU on Intel 18A, is a more performance and cost-competitive process that will allow Intel to bring more of its tiles in-house, significantly improving overall profitability.
    • Panther Lake is scheduled for introduction in the second half of 2025.

  5. Cost Reduction Plan

    • Intel announced a cost reduction plan aimed at structural improvements and adjustments to current business trends.
    • The plan involves a headcount reduction of more than 15% by the end of 2025, with the majority of this action completed by the end of 2024.

  6. New Operating Model Benefits

    • Separate financial reporting for Intel products and Intel Foundry clarifies roles and responsibilities across the company.
    • This enables the elimination of complexity and maximizes the impact of resources.

  7. Operational and Capital Improvements

    • Intel expects to drive a meaningful reduction in spending and headcount beginning in the second half of 2024.
    • The company targets a reduction in OpEx to approximately $20 billion in 2024 and $17.5 billion in 2025, more than 20% below prior estimates.

  8. Capital Requirements

    • Intel's Smart Capital strategy is enabling the company to manage the business conservatively and maintain operational flexibility.
    • Gross CapEx in 2024 is expected to be between $25 billion and $27 billion, a reduction of over 20% from the plan entering the year.

  9. Dividend Suspension

    • Intel is suspending the dividend at the beginning of the fourth quarter to prioritize liquidity and support the investments needed to execute its strategy.

  10. Outlook for 2024 and 2025

    • Intel expects sequential revenue growth through the rest of 2024, but the pace of recovery will be slower than expected.
    • Q3 will be impacted by a modest inventory digestion in CCG (Client Computing Group) with DCAI (Data Center and Artificial Intelligence Group) and more cyclical businesses trending below the original forecast.
    • Q4 revenue is expected to be at the high end of the historical range of flat to up 5% quarter-on-quarter.

  11. Intel Foundry Services

    • Intel is making progress on its strategy to return to process leadership with the "Five Nodes in Four Years" march.
    • Intel 4, Intel 3, and Intel 28A are well into the ramp, and Intel 18A is on track to be manufacturing-ready by the end of 2024.
    • Intel Foundry Services is seeing excellent collaboration with design ecosystem partners, including Ansys, Cadence, Siemens, and Synopsys.

  12. Intel Products

    • Intel continues to strengthen its position in CCG, with the AIPC category transforming the compute experience.
    • Intel Core Ultra volume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models.
    • Intel shipped more than 15 million Windows AIPCs since the December launch and is on track to ship more than 40 million AIPCs by year-end and over 100 million cumulative by the end of 2025.
    • Lunar Lake, the next-generation AIPC, achieved production release ahead of schedule in July and will be the next industry-wide catalyst for device refresh.
    • Arrow Lake will scale AI to the desktop category in the next quarter, and Panther Lake will launch next year to further extend Intel's leadership position.

  13. Data Center and Artificial Intelligence Group (DCAI)

    • Intel is focused on improving its performance and market position in DCAI.
    • The company has a strong foundation with more than 130 million Xeons powering data centers worldwide.
    • Intel launched Xeon 6 with E-cores processors, which are particularly well-suited for high-density scale-out workloads.
    • Clearwater Forest, Intel's first Intel 18A server product, has achieved power-on and is on track to launch in 2025.

  14. Networking and Edge Group (NEX)

    • NEX continues to see stability in Q2 while introducing new products that will expand Intel's leadership in edge and networking.
    • Intel announced an array of AI-optimized scale-out Ethernet solutions and the creation of the Ultra Accelerator Link, a new industry standard for high-speed, low-latency communication.

  15. Altera

    • Intel is working toward capitalizing Altera to generate proceeds on a path to an IPO in the coming years.
    • Altera is expected to generate value for shareholders similar to the decisions made with Mobileye and IMS.

  16. Summary and Outlook

    • Despite a challenging first half of the year, Intel has achieved several important milestones and is taking clear and decisive actions to improve financial performance.

    • Intel is focused on renewed intensity and is motivated by the progress being made as it executes its strategy and realizes its vision.

    • Intel remains committed to building a stronger company for the long term.

David A. Zinsner [Executive VP & CFO] 💬

David A. Zinsner, the Executive Vice President and Chief Financial Officer of Intel Corporation, provided detailed commentary on the company’s second quarter 2024 financial performance and outlook. Here is a summary of his key points:

  • Second Quarter Financial Results:

    • Revenue was $12.8 billion, down 1% year-over-year and up 1% sequentially.
    • Gross margin was 38.7%, and EPS was $0.02, significantly below expectations.
    • Gross margin weakness was primarily due to three factors:
      • Accelerated ramp of AIPC products.
      • Higher-than-typical period charges related to non-core businesses and unused capacity.
      • Unfavorable product mix and more competitive pricing.

  • Capital Expenditure (CapEx):

    • Gross CapEx was $5.7 billion, offset by $11.5 billion in grants and partner contributions, including Apollo’s SCIP investment.
    • Adjusted free cash flow was $8.2 billion.

  • Intel Products:

    • Revenue was $11.8 billion, up 4% year-over-year.
    • Client business grew 9% year-over-year, driven by AIPC ramp.
    • Data Center Architecture and Artificial Intelligence (DCAI) revenue was flat sequentially and down 3% year-over-year.
    • Network Edge and Xeon (NEX) business revenue was flat sequentially and year-over-year.

  • Intel Foundry:

    • Delivered revenue of $4.3 billion, down 1% sequentially and up 4% year-over-year.
    • Foundry Services revenue more than doubled sequentially.
    • Operating loss of $2.8 billion, worsened sequentially due to the uncompetitive cost structure of pre-EUV nodes and elevated R&D/start-up costs.

  • Mobileye:

    • Revenue of $440 million, improved 84% sequentially.
    • Inventory digestion is complete, but difficult conditions in China led to lowered guidance.

  • Altera:

    • Revenue of $361 million, up 6% sequentially.
    • Operating margins improved 4 points in the quarter.

  • Third Quarter Guidance:

    • Revenue expected to be $12.5 billion to $13.5 billion.
    • Gross margin expected to be approximately 38%.
    • EPS expected to be negative $0.03.

  • Cost Reduction Measures:

    • Aggressive actions to reduce spending in response to lower-than-anticipated revenue.
    • OpEx target for 2025 is $17.5 billion, more than 20% below prior estimates.
    • Net CapEx for 2024 is expected to be between $11 billion and $13 billion.
    • Dividend suspended at the beginning of the fourth quarter.

  • 2025 Outlook:

    • OpEx of approximately $17.5 billion.
    • Net CapEx of $12 billion to $14 billion.
    • Positive adjusted free cash flow expected.
    • Gross margin expected to be modestly up, impacted by the ramp of Lunar Lake, which uses largely external wafers and is not optimized for cost.

  • Restructuring Charges:

    • Some restructuring charges may be included in non-GAAP results, but not yet estimated in guidance.

  • 2025 Non-GAAP Adjustments:

    • Expected operating expenses reduced from $21 billion to approximately $17.5 billion.
    • Spending within non-variable cost of sales reduced by approximately $1 billion.

  • Non-Controlling Interest:

    • Expected to reduce controlled share of income by approximately $700 million on a GAAP basis in 2025.

Throughout the call, David A. Zinsner emphasized the steps Intel is taking to improve financial performance, including significant cost reductions, capital expenditure adjustments, and strategic shifts aimed at achieving profitability and positive adjusted free cash flow in 2025.

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