Intel Corp (INTC) — Q3 2020 Earnings Call Transcript

Thank you operator and welcome everyone to Intel's third 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 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, 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. We delivered solid third quarter revenue and profitability despite increasing COVID-driven headwinds affecting significant portions of our business. Led by strong consumer notebook demand and continued cloud growth, we generated $18.3 billion in revenue and delivered $1.11 in EPS. We exceeded our topline expectation by $133 million and our bottom-line expectation by $0.01. I'm incredibly proud of our employees' performance through these challenging conditions. Our team has shown tremendous perseverance and has really come together as one Intel to deliver for our customers. Over the last couple of years, we have been focused on three critical priorities; improving our execution to strengthen our core business, extending our reach to accelerate the growth of the company, and continuing to thoughtfully deploy your capital. Let me discuss our third quarter progress. First, improving our execution to strengthen our core business. This quarter we launched our 11th Gen Intel Core processors with Intel Iris Xe graphics, codename Tiger Lake. This is the world's best processor for thin and light notebooks. In real-world workloads versus competitive products, Tiger Lake delivers up to 2.7 times faster content creation, 20% faster office productivity, and more than 2x faster gaming plus streaming. I'm excited to announce that we now expect 100 Tiger Lake-based designs in the market by the end of this year, double the expectation we provided in April. Tiger Lake is a shining example of the product leadership we can deliver for our customers through our six pillars of technology innovation; breakthrough architectural improvements in CPU, graphics, AI, and software combined with our newest 10-nanometer-based technology, SuperFin, which delivers the largest single inter-node performance improvement in our history. Accompanying the Tiger Lake launch, we also updated our master brand and debuted a new platform brand Evo. Based on 11th Gen Core, Evo designs support the sleekest thin and light form factors with premium connectivity, audio, and video. Each Evo notebook is verified to deliver consistent responsiveness, outstanding real-world battery life, instant wake, and fast charging. We expect our customers to have 40 Evo designs in market by the end of the year. Turning to our data center business, we and our customers are excited about the upcoming launch of our 3rd Gen Xeon Scalable product, Ice Lake. We're targeting qualification at the end of Q4 with volume ramp shortly after in Q1. Recently, Oracle announced that they plan to leverage the computing performance of Ice Lake for the next generation of cloud-based high-performance computing instances within Oracle cloud infrastructure. The combination of 3rd Gen Intel Xeon Scalable processors with other improvements in Oracle's new X9 generation instance can drive up to 30% higher performance gains on certain workloads compared with the existing X7 generation instances. CPUs are foundational to our business, but we are also adding a range of other processing engines or XPUs to our portfolio. We've made great strides in graphics and we are now scaling our graphics architecture from integrated to discrete levels of performance. Our first discrete GPU DG1 is shipping now and will be in systems for multiple OEMs later in Q4. We also powered on our next-generation GPU for client DG2. Based on our Xe high-performance gaming architecture, this product will take our discrete graphics capability up the stack into the enthusiast segment. Beyond the CPU and the GPU, our customers tell us that they want a diverse range of AI solutions to fit every power level and performance needs from the intelligent edge to the data center. For the most demanding AI workloads, our customers are looking for purpose-built XPUs that leverage a standard-based programming environment. With that in mind, we acquired Habana Labs almost a year ago. We've integrated Habana with our platform capabilities and added software resources, so that we can deliver game-changing capability to the performance tier of the data center market. Habana's inference card is now in volume production and shipping to customers. And we're also in proof of concepts with several major cloud service providers on Habana's training card. In addition to our architectural advancements and process improvements with SuperFin, we've also advanced our packaging technologies. Several weeks ago, the U.S. Department of Defense awarded us the second phase of its state-of-the-art heterogeneous integration prototype program or SHIPP. The SHIPP program enables the U.S. government to access Intel's state-of-the-art semiconductor packaging capabilities in Arizona and Oregon and take advantage of capabilities created by Intel's tens of billions of dollars of annual R&D and manufacturing investments. Software is another essential pillar for product leadership which is why we have more than 15,000 software engineers working across the stack from BIOS to application optimization. As an example, we have dedicated software experts who optimize key workloads using our hardware capabilities. Through these efforts we have increased the performance of top data center workloads such as the NAMD molecular dynamic simulation code used in the fight against COVID-19 by 1.8 times via AVX512 and natural language processing using the BERT model by 6.8 times via a range of software optimizations. Additionally, we have been working closely with the ecosystem on the open standard oneAPI effort as part of the XPU transformation. With oneAPI we are creating an open unified software architecture that can support the variety of XPUs that our customers demand. We've made tremendous progress with developers and released spec 1.0 of oneAPI in the third quarter and are on track to have the gold release of oneAPI software in the fourth quarter this year. Second, we're focused on extending our reach to accelerate our growth. We are actively executing against a diversified growth strategy and now have several multibillion-dollar businesses fueled by data and the rise of artificial intelligence, 5G network transformation, and the intelligent autonomous edge. We built these businesses by positioning the company to grow share in the largest market opportunity in our history, in a world where everything increasingly looks like a computer. Our ambitions are much greater. And to realize them we must play a larger role in our customers' success. Here are some recent examples. We created OpenVINO in 2018 so that developers could quickly accelerate applications with deep learning inference and solutions deployed from edge to cloud. In the third quarter our OpenVINO download rate was more than double our peak last year and we've now seen our OpenVINO-related edge design wins scale more than five times in the first half of this year versus the same time last year. And we're only beginning to realize the opportunities created by 5G. As communication service providers evolve their networks to support the rollout of future 5G networks, they are increasingly adopting a software-defined virtualized infrastructure. This quarter, Verizon successfully completed the world's first fully virtualized end-to-end 5G data session, leveraging Intel's vast portfolio of products including Xeon, FPGAs, ethernet cards, Flex-Ran software reference architecture, and our years of experience in virtualization. We continue to see excellent customer momentum in our Mobileye business. Year-to-date we now have 29 new design wins for more than 26 million lifetime units. Following last quarter's landmark design win with Ford, we announced collaborations with Geely, AHG, and WILLER. Geely Automotive Group the largest privately held auto manufacturer in China unveiled its new electric vehicle featuring Mobileye's SuperVision surround view for hands-free ADAS solution starting in late 2021. We expanded our Mobility-as-a-Service collaborations network with two important partnerships. The first is with Al Habtoor Group from the UAE; second with WILLER Japan to propel the deployment of autonomous vehicles and Mobility-as-a-Service. Mobileye is also first of our IOTG businesses to return to pre-COVID levels as global vehicle production improved in the third quarter. Finally we're always mindful of our role in thoughtfully allocating your capital. This week we signed an agreement to sell SK Hynix our NAND memory business for $9 billion. We believe this is a fantastic win-win transaction that allows us to focus our energy and investment in differentiated technologies, where we can play a bigger role in the success of our customers and deliver attractive returns to our shareholders. At the same time, SK Hynix can build on the success of our NAND technology at a greater scale and grow the memory ecosystem to the benefit of our data center customers, partners, and employees. We are retaining our Optane technology and intend to continue investing, developing, and scaling the Optane business. We've also significantly improved supply for our customers. We've expanded our capacity by more than 25% in 2020 and currently have three high-volume fabs producing 10-nanometer products to meet our customer demands. Earlier this quarter, we also entered into accelerated share repurchase agreements to repurchase $10 billion in stock. Following this repurchase, we will have completed approximately $17.6 billion of the $20 billion repurchase commitment we made in October of 2019. We have a very strong balance sheet. And even as macroeconomic uncertainty persists, we are confident in our long-term strategy and the value we create as we grow our business. Finally, let me share a few thoughts about the guiding principles we use to deliver the most value for our customers. Our overarching and most important priority is to deliver a predictable cadence of leadership products. A few years ago we decided that an architectural shift to die disaggregation enabled by our differentiated advanced packaging would be a potent tool for employing the best technologies that we and the ecosystem can provide. We also realized that delivering on that promise meant engaging the ecosystem in a different way: treating the equipment and EDA providers and third-party foundries not as suppliers but as strategic partners that we can learn from and that can help us solve customer problems. Now we have more flexibility in whether we make or buy or whether we make for others. Many of our future products can no longer be described as manufactured inside or outside or as being a large core or a small core product. These products will take advantage of hybrid architectural approaches and the universe of IP deployed both inside and outside the walls of Intel. That said, we have and do get great benefits from internal manufacturing. We call it our IDM advantage, because it provides us attractive economics, co-optimization of design and process technology development, and supply assurance. So as we engage the ecosystem more broadly, we want to preserve some of the advantages of IDM like schedule, performance, and supply, as we work with our strategic partners. Finally, I want to reiterate our intention to continue investing in leading process technology development to bring future process nodes and advanced packaging capabilities to market. This is a powerful force in creating future differentiation for our products and provides tremendous option value for our business. As I look to the next several years of products, I am excited about the products we have coming. We are now sampling our 2021 client CPU Alder Lake, and we'll be sampling our 2021 data center CPU, Sapphire Rapids later in the fourth quarter. Both will deliver significant capabilities enabled by our six pillars of innovation including our enhanced SuperFin technology. We have another great lineup of products in 2022 and I'm increasingly confident in the leadership our 2023 products will deliver on either Intel 7-nanometer or external foundry processes or a combination of both. I look forward to providing further updates in the January call.

Thanks, Bob. And good afternoon, everyone. Despite intensifying COVID-related demand impacts, particularly in our data center, enterprise, and government segment, we exceeded our revenue and EPS guidance, achieved record notebook sales and saw continued growth in our cloud and communications service provider data center segments. Revenue came in at $18.3 billion, down 4% year-over-year and approximately $100 million higher than guide. Data-centric revenue was $8.5 billion, down 10% year-over-year on COVID-related weakness in the DCG, enterprise, government segment in IOTG, and NSG. PC-centric revenue was $9.8 billion, up 1% year-over-year on strong notebook PC demand in consumer and education segments and on increased supply. Gross margin for the quarter was 55%, two points below expectations due to lower data center ASPs, driven by a mix shift from enterprise and government to cloud and lower PC client ASPs on increased demand for consumer and education PCs. Operating margin was 29%, down one point versus our expectations. Q3 EPS was $1.11 slightly better than our guide, as lower spending and the impact of our accelerated share repurchase more than offset lower client and data center ASPs. In Q3, we generated $8.2 billion in operating cash flow and invested $3.7 billion in CapEx resulting in $4.5 billion of free cash flow. We paid $1.4 billion to shareholders in dividends and initiated an accelerated share repurchase program for an aggregate of $10 billion of common stock. Following settlement of these agreements by the end of 2020, we'll have repurchased a total of approximately $17.6 billion in shares as part of the planned $20 billion share repurchase program announced in October 2019. We intend to complete the $2.4 billion balance and return to historical capital return practices when markets stabilize. Year-to-date operating cash flow is $25.5 billion, up 10% year-over-year; and year-to-date free cash flow is $15.1 billion, up 29% year-over-year. Let's move to segment performance in Q3. Against the challenging compare, Data Center Group revenue of $5.9 billion was down 7% from the prior year. COVID-driven headwinds significantly impacted our enterprise and government segment, which was down 47% year-over-year following two consecutive quarters of more than 30% growth. Our cloud and communications service provider segments were up year-over-year 15% and 4% respectively. DCG adjacencies grew 34% as strong adoption of 5G network solutions continued. Platform units were up 4% and ASPs were down 15% on higher networking SoC volume and weaker enterprise and government volume. Operating margin was 32%, down 17 points year-over-year on lower revenue, due to enterprise and government weakness and the ramp of 10-nanometer 5G base station SoCs and pre-PRQ reserves on our Ice Lake server product. Revenue in our other data-centric businesses was down 18% year-over-year, due to declines in our IOTG, NSG, and PSG businesses. IOTG revenue and operating income declined 33% and 80% respectively on continued COVID-related demand weakness. Mobileye returned to profitability with revenue up 2% year-over-year and 60% sequentially as global vehicle production improved. NSG revenue was down 11% year-over-year on lower volume, partially offset by higher ASPs. Operating income was $29 million for the quarter, up $528 million year-over-year on improved ASPs and reduced unit costs. PSG revenue was down 19% year-over-year on weaker embedded and communications segment demand, partially offset by cloud segment growth of 43%. Operating income was down 57% on the lower revenue. CCG revenue was $9.8 billion up 1% year-over-year driven by strong consumer notebook demand, offset by lower desktop volumes and declines in the modem and home gateway businesses due to divestiture. PC unit volumes were up 11% year-over-year on record notebook volume enabled by significantly increased supply. ASPs were down 6% year-on-year due to increased volume in our consumer entry in education segment. As Bob mentioned, Tiger Lake ramp is exceeding expectations with 100 design wins expected by end of year up from 50 forecasted in Q2. As supply increases and we see strong demand for our leadership products including Tiger Lake, we continue to expect to regain share through year-end. Operating margin was 36% down eight points year-on-year on higher unit cost associated with the ramp of 10-nanometer products. Moving now to our fourth quarter outlook, we see many of the same dynamics in Q4 that were in place in Q3. We see continued strength in consumer notebook PCs supported by work and learn-from-home dynamics and from increased supply. We also expect continued strong Mobileye growth as design win momentum continues and the automotive industry stabilizes. We expect continued demand weakness in IOTG and NSG as well as in the enterprise and government segment of DCG. Further, our guide assumes cloud segment demand moderates as key customers enter a digestion period following multiple quarters of above trend line growth. As a result, we expect total revenue of $17.4 billion with PC-centric down low single digits and data-centric down approximately 25% year-over-year. Gross margin is expected to be 55%, down five points year-over-year on the same operating environment we saw in Q3. Relative to our prior guide for Q4, we are expecting OpEx to be down modestly in the quarter and gains from our Intel capital portfolio to be up on the order of $0.08 per share. Q4 EPS is expected to be approximately $1.10 per share. Our non-GAAP tax rate in the quarter is expected to be 14.5%. In the fourth quarter, we announced the sale of our NAND business to SK Hynix. The sales consideration is $9 billion in two stages. The unique structure of this deal is strictly a factor of existing commitments within our long-term agreements with Micron. At the first close, subject to regulatory approvals, we will receive $7 billion and transfer the assets of the factory to the Dalian facility overall. We will continue to operate the factory for SK Hynix until we can transfer the entirety of the business in 2025. We will begin accounting for the NAND business as held for sale effective this quarter for GAAP purposes. Non-GAAP reporting will be unchanged in Q4 and then NAND will be excluded from non-GAAP reporting effective Q1 2021. Under held for sale, depreciation is suspended from the announcement date forward. The benefit of this change will not be seen until existing inventory-carrying depreciation and cost of sales is sold through. So earliest benefit will be later in Q1 2021 or Q2 2021. Capital spending for the NAND business will be shown in assets held for sale and excluded from free cash flow. This will reduce our forecasted capital spend for 2020 by approximately $300 million and raise our free cash flow by a similar amount. We believe this sale is a true win-win as SK Hynix will commit the necessary investment to bring this business to scale and Intel will dispose of a non-strategic asset to focus on our core opportunities ahead. Let's move to the full year. Based on our Q4 guidance, we expect revenue of $75.3 billion and EPS of $4.90, $300 million and $0.05 higher respectively versus our July expectations. We expect our PC business to be up mid-single digits year-over-year against a total addressable market that is also up mid to high single digits year-over-year. We expect revenue from our data-centric businesses to be up mid single-digits year-over-year on strong cloud demand, NSG growth, and increased 5G build-outs offset by COVID-related weakness in our IOTG business. Gross margin is expected to be 57% for the year down approximately one point versus July guidance on the mix dynamics we are seeing in both Q3 and Q4 and higher 10-nanometer volumes. Year-over-year gross margin is most heavily impacted by higher volumes of 10-nanometer products, partially offset by higher NAND margins on ASPs and lower modem volumes from exit of that business. Spending for the year is expected to be approximately $19.1 billion down approximately $400 million year-over-year. Spending as a percentage of revenue is expected to be approximately 25% of revenue, down two points year-on-year due to divestitures and improved operating leverage. The resulting operating margin is approximately 31.5%, down 1.5 points year-over-year. Full year EPS of $4.90 is $0.05 above July expectations as higher equity gains, reduced spending, and reduced share count are partially offset by lower COVID mix-related gross margins. We expect 2020 CapEx of approximately $14.2 billion to $14.5 billion and free cash flow of approximately $18 billion to $18.5 billion. To conclude, I'd like to join Bob in thanking our employees worldwide as they continue to deliver for our customers in a most challenging environment. And with that I'll hand it back to Bob for some additional thoughts before we go to your questions. Bob?

Thanks, George. Before we get to your questions just a little context on the year. 2020 has been the most challenging year in my career with a global pandemic, geopolitical tensions, challenging business principles of globalization, and social unrest. Despite all this, we expect to deliver the best year in our storied 52-year history. We plan to grow revenue by $1.8 billion more than our January expectations even as COVID has significantly impacted our business mix. Full year gross margin will be down approximately two points versus our January expectation primarily driven by acceleration of 10-nanometer-based products and a change in mix of products in a work-from-home, study-from-home environment. We've maintained spending discipline even as we invest in our workforce communities and supply chain to combat COVID, and the decision we made to sell our NAND business will drive one to two points of non-GAAP gross margin accretion next year. Finally, we are mindful of your capital and made decisions to increase shareholder value through our ASR and increase dividend and prudent management of our Intel capital portfolio. Nine months into 2020, we now expect to beat our January free cash flow guide by $1.5 billion to $2 billion. In closing, I want to thank all our employees who are working through difficult circumstances to deliver these financial commitments and support our customers.

All right. Thank you Bob. 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.

Thanks a lot. George, I guess I wanted to double quick on gross margin. It came in, obviously, below for Q3 and Q4 is about 400 basis points below what it was thought to be. So there's not much of a recovery in Q4. And I certainly understand the weaker enterprise and government and mix, but you were already pretty cautious on those segments and you already paid the price for the pre-quals on the Tiger Lake. So it sounds like that's at least on track. And Q4 revenue is about as you thought it would be three or so months ago if not a bit better. So I guess I'm just trying to understand how mix could account for this much lower gross margin. I guess, the point that investors are going to say is that this is competition and it's the beginning of a slippery slope. So I wonder if you can both talk about that. Thanks.

Thanks Tim. You summarized what happened in the third quarter well. The fourth quarter is quite similar with a few changes I'll mention. The two-point decline in the third quarter was due to it being different than we anticipated, with a much heavier mix in entry-level PC markets for both consumers and education. This affected the average selling prices even though we experienced strong demand for units. In the server, enterprise, and government sectors, after two consecutive quarters of growth at 30%, we saw a drop of 47% year-over-year. This market has historically been healthy for us from an average selling price perspective. Additionally, growth in our system on chips for the data center negatively impacted our average selling prices since they have lower average selling prices compared to server chips. Overall, this was a story about mix. We are noticing increased competition in the second half of the year, but it's not at levels beyond our expectations. We are confident in our position for the year. So, ultimately, it's a mix issue and very different from what we anticipated initially.

Maybe just…

Go ahead, go ahead.

To add, I wanted to mention that one other dynamic impacting us is the demand for our 10-nanometer products. Initially, we projected that it would increase by 20% in the second half of the year, but now we're looking at an increase of over 30% from our earlier estimates. This change is largely due to the strong demand for the Tiger Lake product we launched in the third quarter, which has resulted in double the design wins expected to be on the shelves during the fourth quarter, along with the ramping of three high-volume manufacturing fabs to boost supply. We're now anticipating more 10-nanometer products than we expected just 90 days ago. This is an important point to add to George's comments.

Yes. In Q4, you will see greater benefits from Tiger Lake as the volume increases. Consequently, notebooks will contribute more in Q4 compared to Q3. As we mentioned, we believe cloud digestion will begin, which may reduce gross margins since we do not anticipate E&G returning. The stronger notebook performance will improve flow-through, and we expect a similar gross margin outlook as before. However, this is a mixed situation, and we believe that as the mix normalizes, gross margins will become healthier.

Thanks Tim. Operator?

Good afternoon. Thank you for taking my question. Another question on gross margin. So the positive 10-nanometer demand acceleration this year, obviously, good to see but it is having the impact of muting your gross margins. You're still coming off the learning curve. But this should be a tailwind to gross margins in 2021 as more of the volume is going to be on 10, you're getting through the early yield learning and higher cost profile this year. Is that how the team sees it? And if so, should we expect the team to recapture the 200 basis points of gross margin next year that you gave up this year because of the more aggressive 10-nanometer pull-forward?

We believe that as we transition to 10-nanometer technology, which is replacing 14-nanometer, there will be an impact on margins. Despite seeing cost improvements and yield performance enhancements for the 10-nanometer process, these factors should have a positive effect moving forward. The influence of 10-nanometer technology will continue to be significant in 2021, as we indicated previously. The earlier ramp has altered our expectations for 2020 a bit and has created some pressure. However, I wouldn't characterize 2021 as a period of simply benefiting from tailwinds. We do have other positive factors contributing to our gross margins in 2021. For example, our IoT group experienced difficulties this year, but we anticipate a recovery which should help our margins. Mobileye has already shown year-over-year growth in the third quarter and we expect that growth to accelerate. Additionally, we saw an unusual trend with enterprise and government, where we had a strong first half followed by a weaker second half, but we believe things will normalize. While cloud absorption might take some time, we expect cloud services to rebound in 2021. Furthermore, our exit from the modem business should improve margins as we reduce our modem sales, and we also expect our planned exit from the NAND market to provide a one- to two-point boost to gross margins next year.

Great. Thank you.

Next question operator?

Hey guys. Thanks for question. Maybe just drilling down on the gross margin. Just looking at the op margin in DCG 32%, I think that's the lowest ever. So maybe if you can just redo that answer, I guess just focusing on gross margins in data center, because that's an area that you haven't yet really ramped 10-nanometer. So I'm just kind of curious how to look at that business as that layers in. And also you fold Optane in later.

Yes, we experienced lower revenue than anticipated due to the decline in E&G. The significant drop of 47% year-over-year in average selling prices has impacted our gross margin, which subsequently affects our operating margin. Additionally, we've included the Habana business in our spending profile, leading to some increased expenditures as we invest in AI. Overall, we expect strong margin performance in DCG as E&G recovers and the cloud sector improves.

As George mentioned earlier, there has been a 15% decline in average selling price year-on-year. However, examining the business segments reveals that cloud growth remains robust, with a mid-30% increase year-to-date. The cloud segment is performing relatively well. Our communications business also experienced substantial volume growth, as our role in networking and edge computing expands. Nonetheless, this significant unit volume growth is accompanied by lower average selling prices compared to our typical cloud and enterprise operations. Additionally, the enterprise decline has been considerable, where average selling prices tend to be higher, and this mix effect contributed significantly to the 15% average selling price decline. Although George highlighted these mix dynamics, the strong cloud growth indicates that the E&G segment is doing relatively well, having increased by 34% in the first half of the year. When factoring in third-quarter volumes, the E&G business is flat year-to-date in a challenging macro environment. Overall, during the second quarter leading into the third quarter, inventory levels in the channel seemed relatively high but decreased significantly in the third quarter. Consequently, being flat year-to-date aligns with our initial expectations, with a stronger first half and a weaker second half.

Yes. Another way to look at it, Harlan, is that we had a year with strong performance in the second half, while the first half showed significant increases in operating margin for DCG year-over-year. What we are observing is in line with our forecast of a weaker second half, which closely resembles the normal trends we expect in the first half.

Thanks for the color.

Thanks, Blayne. Next, operator?

Yes. Good afternoon, guys. Thanks for letting me ask question. Bob, I appreciate your comments around 7-nanometer and your ability to kind of want to maintain maximum flexibility around your 7-nanometer decisions. But there comes a point in time where your own lead time for capacity or a foundry's need for lead time for capacity forces the decision upon you guys. So I'm wondering if you could just help us understand the window close to when you have to make a decision on 7 and if you could help us understand kind of the scenarios we should be thinking through. Is this as much as an all or nothing? Or are we talking percentages here? And how should we think about that?

Thank you, John. We have a strong product lineup planned for 2020, 2021, and 2022 across client, server, and IoT segments. We feel confident about the next three years not only for our CPUs but also for GPUs for AI and FPGAs. Looking ahead to 2023 and beyond, we are assessing the necessary products and comparing our processes with those of external suppliers. Our evaluation criteria are fairly straightforward: we prioritize schedule and predictability, product performance, and supply chain economics—essentially our ability to maintain control over our supply chain. We are considering all these factors as we approach the end of 2020 and early 2021, as that will be the time to decide whether to invest in more 7-nanometer equipment or to collaborate with a third-party foundry on capacity. Since our last conversation, our 7-nanometer process has shown significant improvement. Previously, we encountered an issue that we have since resolved, and we've made great strides. However, we will continue to assess both our foundry and third-party options based on those criteria, with a decision coming towards the end of this year or early next year. In response to your last question about whether this is an all-or-nothing situation: we evaluate server or client needs, large cores versus small cores, and various segments within our product lineup. It is not necessarily an all-or-nothing scenario; it's likely a blend that will best support a reliable schedule of leading products for 2023 and 2024, similar to our expectations for 2020, 2021, and 2022. We expect to gather further insights over the next three months, which will help us make a more informed decision by January.

Thank you. Helpful color.

Great. Thank you. I wonder if you could talk a little bit about the server roadmap. And in particular, you've talked about Ice Lake being kind of more volume early part of next year and Sapphire Rapids also next year. It seems like a pretty quick transition to what seems like a pretty important Sapphire Rapids launch. Can you just talk about how that's going to play out with those two being so close together?

I believe, Joe, we have maintained a clear roadmap over the past 18 months, with Cascade Lake transitioning to Ice Lake by the end of the year and ramping up early next year. We see a very appealing and enhanced feature set for Sapphire Rapids, which is slated for release about four quarters later. This has been the plan we have communicated to our customers over the last 18 months, and there is considerable excitement surrounding the release of Ice Lake and the upgraded features of Sapphire Rapids. As long as we can keep this plan consistent and predictable, it allows our customers to prepare effectively. We aim to continue delivering a sequence of leading products, potentially within a timeframe of four to five quarters, which aligns with our past strategies.

Okay. So just to clarify, will Sapphire Rapids see increased volume in early 2022? Or am I being too precise in my question?

You're doing a little too fine cutting it. Thanks a lot.

Hi, good afternoon. Under a scenario where TSMC starts building leading node processes for you and I understand you haven't - you still have to reevaluate all of this over the next 90 days, can you explain how easy it is to transition from TSMC back to your internal manufacturing? How comfortable that is? And would that be for existing type of architecture or more like chiplet type of architectures?

Yes, that's a great question. I outlined the criteria regarding when we might consider transitioning to TSMC, primarily focusing on three factors: schedule predictability, performance, and economics. We are confident in our ability to transition our technologies to TSMC. Additionally, we also assess how easily we could revert back if necessary for either our core products or chiplets. Overall, we are increasingly confident that if moving to TSMC makes sense, we can do so. Furthermore, if we decide to come back to our internal manufacturing, we can manage that as well. These observations are general, but the decision can become complex depending on the type of product—whether it’s larger cores or more synthesizable cores. We are actively evaluating the conditions under which these transitions should occur.

Great. Thank you very much.

Thanks.

Pierre, please make sure your line unmuted. Using the speaker phone, lift the handset.

Can you hear me well?

We can now.

I would like to revisit the PC market and your comments on market share. It appears that you are regaining market share in the lower segment of the notebook market. How is the higher end, particularly regarding the gaming community? How did Q3 perform, and what are your expectations for the year ahead?

I’ll begin. George may add more later. Firstly, we have achieved a 9% increase in unit volume year-to-date and an 11% increase in the third quarter, with the total addressable market likely experiencing growth in the high single digits. At the start of the year, our goals were to increase capacity, which we have successfully done, launch strong products, and use this additional capacity along with an improved product roadmap to regain market share. Although we are uncertain about the exact Q3 total addressable market, we believe we've managed to recover some market share thus far, largely by focusing on the higher-end segment and reclaiming some of the small core market. These gains have been supported by a market that is performing better than we expected, as well as a significant shift in product mix that occurred in the third quarter, which we anticipate will continue into the fourth quarter, favoring mobile notebook products where we believe we have an excellent product lineup. Overall, we are expecting mid to high single-digit growth for the total addressable market this year. Our volume for the first nine months stands at 9%. We expect strong adoption of our 10-nanometer product during the holiday season and a robust supply chain as we approach this busy period.

Yes. In the first half of the year, we noticed an increase in our presence in the entry markets. However, we lacked the capacity to cater to both the higher-end PC markets and the entry-level segment. We anticipated a shift in product mix, but it was more pronounced than we expected in the third and fourth quarters. This has given us a chance to regain market share in this area. Frankly, if we could have produced more than what we did in the third quarter, we could have sold it, as the demand is exceptionally strong as we move into the fourth quarter and increase our capacity. We are optimistic about recovering and growing our share in the second half, especially after experiencing a decline in the entry market during the first half.

Thank you.

Thank you, Pierre.

Hi. Thanks, guys. Actually just a clarification first and then a longer-term question on gross margin. So when you talked about the reasons for the pressure on gross margin as far as mix goes I just want to make sure that there's no I guess aggressive pricing on your part or no pricing pressure from the competition? And then my longer-term question is, it seems like some of these headwinds on pricing such as mix and more comm revenue are not going away. So do you think longer-term, we should look at your gross margins as maybe being the range being a little bit lower than what you've indicated previously? Or is that going to be offset by the NAND situation? Maybe just a little clarification there.

Sure, I'll begin and Bob may want to add some points. Regarding the pricing challenges, they are primarily related to mix. We are experiencing the competitive environment we anticipated. While there is some pricing pressure from competition, the significant change is largely due to shifts in mix. Concerning long-term effects, we are in a unique situation this year, which has been a 55-45 split, along with a drastically different mix. Both factors have largely been influenced by COVID-related demand changes. Therefore, I wouldn't make too many long-term predictions based on this. Our priority is to maintain a competitive profile across all segments, and we believe that the mix will normalize to resemble 2019 levels more than those of 2020 in the long run.

As we approach the end of the year, I would like to address the outlook for 2021, considering that we face both tailwinds and headwinds. Overall, I believe these factors are relatively balanced compared to the long-term outlook we provided in May 2019. To emphasize some of the tailwinds, we have made strategic decisions regarding lower-margin businesses. For instance, this week's announcement on NAND and the anticipated decline in modem volume as we move into 2021, along with our exit from the home device connected business earlier this year, contribute positively to our business mix as we start the new year. Additionally, we have made significant advances in 10-nanometer yields this year, and we expect further improvements as we continue to mature next year. Furthermore, we will still maintain a considerable portion of our volume in 2021 at 14-nanometer, which will include an increasing amount of fully depreciated equipment. These tailwinds are consistent with what we anticipated 6, 12, or even 18 months ago. The decision regarding NAND remains a key positive factor. However, we do face some headwinds, particularly as we shift more of our volume from 14 to 10, which aligns with our plans. The competitive landscape remains largely unchanged from our prior assumptions, but one of the main uncertainties now is the mix, which has surprised us somewhat, particularly due to the dynamics in the second half of the year related to COVID and its implications for 2021 and beyond. Nevertheless, I would say there's a roughly equal chance of experiencing positive tailwinds or negative headwinds in this area. In summary, while we have both tailwinds and headwinds, I would characterize our position as somewhat improved compared to where we stood in May 2019.

Thanks a lot. That's very helpful.

Bob, maybe just a couple of thoughts, if you want to close the call out.

Yes. Well, first thanks for joining us. I'd just say through a very challenging market environment, we expect to grow revenue this year by $1.8 billion and free cash flow by $1.5 billion to $2.5 billion above what we laid out back at the beginning of the year. So despite all the inherent challenges, we'll deliver a stronger year and we'll have a better product portfolio as we go into next year. Second, we are relentlessly focused on delivering a predictable cadence of leadership products. And as I said in the prepared remarks, we have a great product lineup through 2022. The fact that we're working really hard on 2023 at this stage I think is a relatively good position to be in. Third, we continue to extend our reach and accelerate our growth by meeting these key technology inflections such as cloud, 5G, intelligent and autonomous edge computing and AI. So I think we're positioning more and more of our resources into real strong growth characteristics. And last thing I'd just say is we're incredibly grateful for the dedication and resiliency of Intel employees, the partners that we work with, and our collective efforts to continue to retain a health and safe environment while delivering for our customers. So we are collectively inspired by our purpose, which is simply to create world-changing technologies that enrich the lives of every person on Earth. And I can't imagine a time where that purpose could be more important than it has been during the course of this year. So thanks for joining us and we'll talk to you soon.

Thanks, Bob, and thanks everyone for joining the call. With that operator, let's go ahead and close the call.