Intel Corp (INTC) — Q1 2022 Earnings Call Transcript

Thank you, operator. Welcome to Intel's first 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, Pat Gelsinger; and our CFO, Dave Zinsner. In a moment, we'll have 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, it 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'll be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentation and earnings release available on intc.com include both the full GAAP and non-GAAP reconciliations. With that, let me hand it over to Pat.

Thank you, Tony, and thank you for joining us today. Q1 was another solid quarter where we beat on the top line, exceeded our guidance on gross margin and EPS, and where we continue to execute on our long-term growth strategy to unlock a $1 trillion market opportunity. As we laid out at our recent Investor Day, our strategy is built around four key pillars. We will deliver leadership products anchored on open and secure platforms powered by at-scale manufacturing and supercharged by our people. In Q1, we made great progress in all of these areas, and we are continuing to hold our full-year revenue outlook. In our data center and AI group, we began shipping initial SKUs of Sapphire Rapids to select customers as planned. We also unveiled our expanded dual-track Xeon road map that strengthens our position in both per core performance and performance per watt for cloud and enterprise workloads. We launched our Arc A Series GPUs for laptops, taking our first steps to give the graphics industry a much-needed new addition. Mobileye demonstrated its Level 4 self-driving system in Jerusalem, a major milestone in preparation for its upcoming robotaxi services. We continue to add to our talent with strong industry leaders like Christoph Schell, who recently joined us from HP as our Chief Commercial Officer. And finally, we took another major step in creating a balanced semiconductor supply chain with the announcement of our plans for new investments in Europe. We also held the grand opening of our latest leading-edge factory in Oregon, including a new name for the campus, the Gordon Moore Park at Ronler Acres, which recognizes our founder and the site's unique contribution to driving Moore's Law. Q1 also marked a special moment for Intel as we announced our plans to further reduce our greenhouse gas emissions and develop more sustainable technology solutions, including using 100% renewable energy across our global operations by 2030 and achieving net zero greenhouse gas emissions in our global operations by 2040. Overall, Q1 was a great start to the year as we continue to execute on the path to our long-term growth story. We still have a lot of work to do, but we are executing at a torrid pace, and I remain confident in our path forward. Before I get into specific updates for each of our business units, let me start with some observations of what we are seeing in the industry. I continue to believe we are just at the beginning of a long-term growth cycle across semiconductors. We continue to see some match set limitations in areas like Ethernet, some softening in low-end consumer PC, and some inventory adjustments, as we discussed on our last call. But overall, the demand signals from customers continue to be robust in areas like enterprise, cloud, AI, graphics, and networking. Semiconductors are the fuel of innovation and transformation across a wide range of industries. In the supply chain, lockdowns in Shanghai and the war in Ukraine have demonstrated more than ever that the world needs more resilient and more geographically balanced semiconductor manufacturing. The chip shortage cost the U.S. economy $240 billion last year, and we expect the industry will continue to see challenges until at least 2024 in areas like foundry capacity and tool availability. As an IDM, we believe we are in a good position in the industry to manage through these constraints. In fact, Intel is rising to meet this challenge. Following our announcements in Arizona, New Mexico, and Ohio, we recently announced a series of investments in Europe, spanning our existing operations as well as our new investments in France and Germany, the Silicon Junction. These investments position Intel to meet the future growth and represent a significant step toward our moonshot goal of having half the world’s semiconductor manufacturing located in the U.S. and Europe. The pace at which we can reach this goal is dependent on the actions of the U.S. and other governments. America showed leadership when Congress passed the CHIPS Act, but the global situation has grown even more serious since then. The EU has been very aggressive in moving legislation forward to meet this challenge, and I recently testified before the Senate to highlight the critical need for the U.S. to fund the CHIPS Act. I continue to encourage Congress to fund this critical legislation and enable us to move faster toward making a balanced semiconductor supply chain a reality. Turning now to Intel. We continue to make great progress on our plans to deliver five process nodes in four years. Intel 7 is ramping extremely well with Alder Lake, and on Intel 4, Meteor Lake has now successfully booted Windows, Chrome, and Linux. The speed at which the team was able to achieve this milestone is a significant sign of the health of both Meteor Lake and our Intel 4 process technology. We plan to deliver several additional milestones in 2022, demonstrating our process technology development remains on track. This includes early Sierra Forest preproduction wafers on Intel 3, IP test wafers on Intel 28, and foundry customer test chips and initial IP shovels on Intel 18a. Simply put, we remain on and in some places, ahead of schedule to deliver five nodes in four years. Our manufacturing network continues to perform well in a challenging environment. For the first time in years, Intel fabs and our substrate supply are close to meeting our customers' demand. Using our IDM advantage, the team was able to remix almost three million units within lead time to meet changing demand signals. For example, we were able to partner with Meta to improve their Xeon supply and meet their needs. Finally, our supply chain resilience showed as our teams worked tirelessly to mitigate any significant disruptions to our factory operations from the war in Ukraine, supplier shutdowns, and COVID lockdowns in China. Turning to our business groups. At our Investor Day, we laid out our long-term growth strategy centered around six distinct but highly complementary business units, a structure that provides investment flexibility, increased market resilience, and enhanced transparency for investors. And in fact, we will report our results in this structure for the first time today. Our client group continues to deliver world-class platforms, positioning us to win share, grow ASP, and win share of market. There is broad ecosystem agreement that the long-term PC market is sustainably larger going forward driven by PC density, refresh rates, and increased penetration as the PC remains the essential tool for work, learning, and play. We are seeing particular strength in gaming and in commercial PCs that is somewhat tempered by slower consumer, inflationary pressure, and customer inventory management, which Dave will talk more about later. Our 12th-gen Alder Lake family continues to ramp in Q1, and we have already shipped more than 15 million units. This family now has more than 250 designs planned this year from Acer, Asus, Dell, HP, Lenovo, LG, Samsung, and others. And it includes the world's fastest desktop processor, the Core i9-1200KS. Alder Lake will scale across every segment, including for businesses of all sizes with the launch of our latest vPro platform, which offers industry-leading manageability and security for businesses, including the first and only hardware-based ransomware detector with Intel Threat Detection. The strength of our client roadmap continues with Raptor Lake, where we are shipping both desktop and mobile samples to our customers today, and we plan to follow that with Meteor Lake in 2023. In the data center, DCAI had strong year-on-year growth as customers continue to choose Intel and as we continue to deliver increasing value and innovation. We are seeing strength in both hyperscaler and enterprise, and we expect the market to grow double digits going forward, driven by workloads like AI and security. Here, too, we are seeing ecosystem supply constraints, particularly in Ethernet that have limited end system shipments, which we expect to be a headwind through the year. Our third-generation Intel Scalable processor Ice Lake has now shipped almost four million units, and Amazon Web Services recently announced general availability of its EC2 I4i instance designed for storage and I/O intensive workloads. This is the 48th AWS instance powered by Ice Lake. I am also pleased to say that, as committed, we began shipping initial SKUs of our fourth-gen Intel Xeon scalable processor, Sapphire Rapids, to select customers in Q1. These are the first of many SKUs for Sapphire Rapids with more due to ramp throughout the remainder of the year. We also unveiled our expanded dual-track Xeon road map using performance and efficient cores delivered in a common platform, maximizing customer investments and on the cadence they prefer. Our first-generation E core Xeon will be Sierra Forest, which is designed to maximize performance per watt, providing high-density, ultra-efficient compute for the cloud. For workloads that benefit from high performance per core and low latency like AI, we have our redefined Granite Rapids on Intel 3 with a new and improved P-Core. The strength of Intel Agilex and Stratix 10 FPGAs generated record revenue as we continue to win designs and ramp into key markets. Intel FPGA-based IPUs are deployed in volume at five of the top six cloud service providers, and we continue to win designs with communication service providers utilizing Intel's latest generation FPGAs and eASICs. Our launch of the Habana Gaudi-based AWS EC2 DL1 instance has shown end customers how they can reduce training costs by as much as 40% versus GPU-based instances. One of the early customers, Mobileye, is now using DL1 for training their object detection models. Gaudi 2 is already sampling to customers and demonstrating leadership performance versus competitive GPUs on multiple workloads. Finally, we continue to build our extensive data center software capabilities and recently announced the acquisition of Granulate. Granulate is a SaaS service that improves performance in cloud costs with its autonomous dynamic optimization service to unmodified customer workloads. The Network and Edge market continues to be strong with the transformation from proprietary fixed-function devices to fully programmable, software-defined infrastructure. Our Network and Edge Group is uniquely positioned to capitalize on this transition and had record revenue in Q1. At Mobile World Congress, NEX launched our newest Xeon D processor, built specifically for software-defined infrastructure across the network and edge, our latest Xeon D has more than 70 leading companies working on designs, including Cisco, Juniper Networks, and Rakuten Symphony. We believe that in the network, O-RAN and vRAN, have reached a tipping point as the preferred model of all future network deployments. Nearly all commercial deployments running today are using Xeon and our FlexRAN software. We have more than 10 engagements with major global operators that we expect to be in high-volume commercial deployment within the next two years. We also launched a new version of our OpenVINO software toolkit, with downloads growing 70% year-over-year. Built on the foundation of One API, OpenVINO has enabled hundreds of thousands of developers to dramatically accelerate performance on rapidly growing AI workloads at the edge, including Z-block Computational, which is using OpenVINO to deliver their AI MicroCloud solution to cities everywhere. Going forward, the scale-out of 5G, the explosion of AI inferencing, and the growth of low-latency workloads will further drive the need for compute at the edge. They will eventually begin to shift compute from the cloud, making the edge the next wave of semiconductor growth. With a broad portfolio of hardware, software, and deep ecosystem partnerships, NEX remains positioned to lead the transformation across the network and to win the edge. Moving to our emerging businesses. Our Accelerated Computing Systems and Graphics Group builds on our installed base of CPUs, IP, and software and leverages a thriving open ecosystem to disrupt a large and growing market. In Q1, AXG had strong growth and celebrated a major milestone with the official launch of the Intel Arc A Series portfolio for laptops. Alchemist, the first of these products, has been shipping to customers since early Q1 with designs from Acer, Asus, Dell, HP, Lenovo, Samsung, and others. The A-Series enables up to a 2x performance improvement in graphics versus integrated graphics and incorporates Intel Deep Link technology, which utilizes Intel integrated graphics to increase application performance by up to 30%. The first laptops with Intel Arc 3 GPUs are available now. These will be followed by even more powerful designs with Intel Arc 5 and Intel Arc 7, along with desktop and workstation offerings later this year. In the data center, our flagship Ponte Vecchio GPU for high-performance computing and AI is sampling to customers. Ponte Vecchio, along with Sapphire Rapids with high-bandwidth memory, will power the 2 Exaflop Aurora Supercomputer at Argonne National Laboratory. In addition, Arctic Sound, our general-purpose data center GPU designed for industry-leading media graphics and AI inference capabilities, will be available in the second half of the year. Finally, in Q1, we announced our intent to contribute to the development of blockchain technologies. Intel will help advance this technology in a responsible and sustainable way by developing energy-efficient computing technologies at scale. Blockscale, our first blockchain accelerator, is sampling today and will ship in production later this year. AXG remains on track to deliver over $1 billion in revenue this year. Our Intel Foundry Services hit a $1 billion run rate for the first time as we continue to make progress towards being the trusted provider of foundry services. Our overall customer pipeline remains robust, and we now have more than 10 qualified opportunities in advanced stages of engagement across our process and package offerings that collectively represent a deal value of greater than $5 billion. We have over 30 test chips committed to Intel 16 this year, and we expect the first Intel 3 and Intel 18a customer test chips to tape out in the second half of 2022. Our work with our five target anchor customers is progressing well. We expect additional updates later this year. Finally, we have seen tremendous enthusiasm from customers for our acquisition of Tower. Tower shareholders recently approved the proposed acquisition. We have completed regulatory reviews in two jurisdictions outside the U.S. and hope to close the transaction as soon as possible. Building on its market leadership in ADAS and AV solutions, Mobileye Advanced system launches have continued, including the next-generation BMW 7 Series with the leading-edge combination of EyeQ5 and an 8-megapixel camera as well as BMW Highway Assistant, which enables hands-free driving on separated roadways up to 80 miles per hour. We also added Miami and Stuttgart to our global AV testing program, bringing the total number of places where we have tested AVs to 10 cities in 6 countries across 3 continents. Additionally, we recently showcased Mobileye's Level 4 self-driving system in action for the first time with a robotaxi navigating the streets of Jerusalem. Mobileye expects to launch its commercial robotaxi services in Munich and Tel Aviv by the end of 2022. And finally, we remain committed to unlocking shareholder value and are working on our plans to take Mobileye public in 2022. In March, we announced that we confidentially submitted a draft registration statement with the SEC. The IPO is proceeding smoothly, and we continue to make good progress as we work with the SEC to refine our Form S-1. Before turning it over to Dave, I wanted to close with a few thoughts. First, I look forward to hosting our customers, partners and analysts at our Intel Vision event in Dallas on May 10 and 11. This will be our second Intel ON Series event dedicated to the future of business and technology. Next, as I said at our Investor Day, we believe we have a tremendous growth story over the next several years. We're investing in innovation and embracing an open approach to compute platforms and manufacturing. We continue to add to our incredible pool of technical talent. And of course, we remain intensely focused on rebuilding our execution machine. Finally, we'll continue to highlight our progress in key operational milestones as we manage within the financial framework we laid out in February. I know I speak for over 120,000 Intel employees when I say that while we have work to do, our best days are ahead. With that, let me turn it over to Dave.

Thanks, Pat, and good afternoon, everyone. Q1 was a solid quarter, exceeding revenue, gross margin percentage and EPS guidance despite continued ecosystem supply chain constraints, inflationary pressures, and macroeconomic uncertainty. Three of our six newly formed business segments: NEX, Mobileye, and IFS, achieved record quarterly revenue. Revenue was $18.4 billion, slightly exceeding our guidance, led primarily by broad-based strength in our NEX business. Gross margin for the quarter was 53%, exceeding our guidance by 100 basis points on improved manufacturing yields and lower factory costs. EPS was $0.87, $0.07 above our guide on higher gross profit and slightly lower operating expenses. Operational cash flow for the quarter was $5.9 billion, and we received an additional $4.6 billion from the McAfee equity sale. Total cash and investments increased by $9.7 billion in the quarter to $39 billion, driven by the NAND divestiture and McAfee sale. CapEx for the quarter was $4.6 billion. Now turning to our newly formed business unit results. CCG revenue was $9.3 billion, down 13% year-over-year on a ramp down of the Apple CPU and modem business, the expected OEM inventory burn we cited in our Q4 call, as well as lower consumer and education demand. CPU ASPs were up greater than 25% 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 down 34% year-over-year on lower revenue, an increased 10-nanometer, and Intel 7 mix, and increased spending to further strengthen our product and platform roadmap. DCAI revenue was $6 billion, up 22% year-over-year on strong Xeon demand from both our hyperscale and enterprise customers. DCAI operating profit was flat year-over-year as increased revenue was offset by increased 10-nanometer mix, factory start-up charges, and increased investment in our technology and product roadmap. NEX achieved all-time record quarterly revenue of $2.2 billion, up 23% year-over-year on broad-based strength across the Cloud, Networking and Edge product lines. Operating profit was $366 million, up 51% year-over-year on higher revenue, offset by increased investment. Mobileye achieved all-time record quarterly revenue of $394 million, up 11% sequentially and 5% in comparison to Q1 ’21, which saw exceptionally strong auto production and pipeline rebuilding due to COVID-related recovery last year. Operating profit was $148 million, down 13% year-over-year on increased investment in next-generation products. AXG revenue was $219 million, up 21% year-over-year on the ramp of its supercompute and Alchemist discrete GPU products. Operating loss was $390 million versus an operating loss of $176 million in Q1 ’21, with the increase driven by new product qualification reserves on our Alchemist and Arctic Sound products, production ramp charges, and increased investment. IFS revenue was $283 million, up 175% year-over-year on increased IMF tool shipments, increased automotive demand, and initial revenue from Amazon and Cisco. Operating loss was $31 million, roughly flat year-over-year as revenue and gross margin increases were offset by increased investment to build out the custom foundry business. Moving to our full year and Q2 guidance. As Pat mentioned earlier, we continue to see strong end user demand for our products across each of our business units and we reaffirm our revenue guidance of $76 billion as lower than previously expected PC revenue is offset by NEX growth and DCAI hyperscale customer strength. More specifically, in our PC business, we continue to see strong commercial demand, offset by low-end consumer and education softness and the impact of no longer shipping to customers in Russia and Belarus. Further, component supply constraints continue to be a challenge with the most recent COVID lockdowns in Shanghai, further increasing supply chain risk and contributing to inflationary pressures that are having a negative impact on PC TAM for the year. As a result, we're seeing OEMs continue to lower inventory levels to better match demand and align with other system components. We expect elements of this inventory burn to continue in Q2, subsiding in the second half of the year. Although these headwinds have reduced our CCG revenue forecast, we expect CCG revenue to increase in the second half of the year as a return to normal seasonality boosts demand, OEM inventory burn subsides, and the ramp of our leadership, Alder Lake and Raptor Lake products position us to compete per share. For DCAI, we also expect to see a stronger second half of the year as hyperscale customer demand remains robust, component supply improves, and the ramp of Ice Lake and Sapphire Rapids increases competitiveness. For NEX, we expect the strength we saw in Q1 to continue with growth throughout the year, fueled by improving component supply, continued 5G ramp, and transformation at the edge. 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 remaining two businesses, Mobileye and IFS, as they ramp new products and secure new customers. For gross margin, we're guiding 52%, in line with the 51% to 53% range previously communicated. Note that the inflationary environment creates a headwind that we are continuing to monitor but we remain confident in our ability to mitigate the impact through continued cost reduction programs as well as increased pricing in certain segments of the business. For EPS, we're guiding $3.60, $0.10 higher than prior guide on the Q1 beat and a slightly improved tax rate of 12%. Finally, net CapEx guidance of $27 billion and moderately negative adjusted free cash flow for the year remain unchanged. We have made significant progress on our smart capital initiatives, and we'll continue to manage within the framework communicated at Investor Day. Moving to Q2 guidance. For revenue, we're guiding $18 billion, down 2% sequentially on the short-term headwinds detailed earlier and the impact of an additional 14th week in Q1. For the lockdowns in Shanghai, we're estimating the impact to be relatively contained under the assumption that these restrictions are nearing an end. Even under a short lockdown, we anticipate it will take some time for the supply chain to normalize. And if the lockdowns persist or spread beyond Shanghai, we could see more material impacts to our outlook. For gross margin, we're guiding 51%, down approximately 200 basis points sequentially on increased 10-nanometer and Intel 7 mix and Raptor Lake prequalification reserves. We had always expected Q2 gross margin to be at the low end of our range and with our full-year guide of 52%, we expect gross margin to inflect upward in the second half of the year as revenue increases and inventory reserve sell-through. Finally, we're guiding a tax rate of 12% and EPS of $0.70, down $0.17 sequentially on lower gross profit and higher OpEx. With that, let me turn it back over to Tony and get to your questions.

All right. Thank you, Dave. Moving on now to the Q&A. Operator, please go ahead and introduce our first caller.

Pat, I just wanted to get a little bit more color on the inventory dynamic you're talking about. Your inventory is up internally, but you're talking about some of the inabilities to ship with match sets, et cetera, going forward. So can you guys just give a little more color on where the specific Intel inventory is versus a more generic inventory and shortage problem, specifically in the PC side of your business, it seems?

Yes. Thank you, Ross. And I'll just start out by saying, again, I'm really pleased with the execution of our team and what had plenty of turbulence in Q1, and to meet and beat in Q1 was really spectacular. Now on the inventory piece, we did talk about that we are building 10-nanometer inventory. We have new products that we're ramping into the marketplace. And we do see some of those will be reversals as we go into the latter part of the year as that inventory will start flowing through the product area. So we would say this is very typical management of new product ramps and specifically around Sapphire Rapids, Alder Lake; we'll start seeing Raptor Lake as well. So those will be the key areas that you'll see that inventory shift occurring. Also, as we've indicated, we did see our customers' inventory burn down in Q1. We expect some of that to be in Q2 as well. But by the second half, we expect those adjustments, and obviously the strength of second half outlook, we do expect much of that inventory burn to have finished in the first half and a strong second half as we're ramping our new products that will have much better performance features, some of that with higher costs, but also coming with higher ASPs.

Operator, why don't you go to the next caller? We can just come back to C.J. later.

I know you held the full year, but I mean the first half is kind of coming in lower, so it does kind of imply that you're taking the second half probably up versus the prior expectations. But in that light, obviously, we've got PCs that maybe look like they're at risk. You talked about China shutdowns that if they last longer, that could bring risk. You talked about issues, I guess, with server builds with your customers that you said would persist. I guess what gives you the confidence that things actually will be inflecting? And it looks like you're looking for kind of a hockey stick across all of your businesses in the second half to the first? Like how do investors get confidence that that's after the way things are going to be playing out and that you've built enough conservatism in the guide? I guess, long story short, I'm asking why hold the annual guide in the wake of all that?

Thank you, Stacy. We clearly exceeded expectations in Q1. For Q2, we are slightly adjusting our outlook due to some factors, but it remains in line with our expectations. We have always anticipated a stronger second half of the year, which boosts our confidence. We have accounted for potential uncertainties in our yearly guidance, as any prudent company would. Let me highlight some factors that support our confidence. First, we are experiencing strong growth in our DCAI and NEX businesses, which have long lead times with our customers. We also see strength in our enterprise and governance sectors. As we transition from the first half to the second half, we typically experience normal cyclicality, and this time we expect to benefit from a robust product lineup with Alder Lake and Raptor Lake, along with improved inventory management for Raptor Lake and Sapphire Rapids. In the second half, we have an impressive array of products coming in, including discrete products from AXG and mobile products we launched in Q1, along with our new GPU offerings with Arctic Sound, the ramp-up of Ponte Vecchio, and our blockchain products. We anticipate strength in our Mobileye business as well. All these elements contribute to our confidence for the second half, aligning with the outlook we shared on Investor Day. We have accounted for a small overperformance in Q1 and some weakness in Q2, and we are positioned to achieve what we outlined. We are gaining momentum, thanks to our strong execution in the first quarter related to products, manufacturing, and navigating supply chain challenges. We are confident in our outlook for the second half.

Apologies for the confusion earlier. I guess given the change in segments, I would love to try to set the stage here for what expectations should look like for the big 3, CCG, DCAI, and NEX into Q2? And then for all of 2022, if there's any way you can kind of help plus or minus to the relative growth rates that you're guiding to for both June and the full year?

Yes, thank you, C.J. This is the first quarter where we are providing clear updates regarding the six business units. This includes separating the NEX business from what was previously counted as part of the data center for better clarity on their performance. In the client business, we anticipate some seasonality in addition to strong product line performance. For DCAI, we expect growth to continue into the second half of the year, and we achieved significant year-on-year growth in the data center and AI sectors in Q1. We also foresee NEX growing at a faster rate than the market, which is a strong business for us. Our position in the Network and Edge markets is particularly advantageous, evidenced by over 20% growth in Q1. While we may not maintain that growth rate throughout the year, it's still a solid growth area. Additionally, I’d like to point out that businesses like IFS, AXG, and Mobileye are showing strong growth, and we expect more meaningful contributions from them in the second half of the year. This addresses Stacy's earlier question as well, highlighting solid growth across all business areas and an overall positive outlook for the second half, with improved product and execution strength.

I'd like to focus on the 10-nanometer node and Intel 7. And maybe for you, Dave, first, you mentioned 100 basis points driven by improved yields. It's like really music to my ears, as you can imagine. And I'd love to hear a bit more, visibly this came as a surprise. So what's happening there? And could we hope for continued improved yield on Intel 7 driving some positive surprise on the gross margin? Or should we assume that this node has a very little room to improve? And maybe for Pat on the same topic, Intel 7, I don't know if it reflects reality, but there is a lot of noise in the market about products ramping slowly, which is a cadence at which Sapphire Rapid is ramping. It seems a bit slow, a bit difficult. So my question in all candor is do these nodes, 10-nanometer and Intel 7, make it difficult to get into the market with products? Is that slowing the pace at which Intel can execute on the velocity of the roadmap? And should we expect things to go much, much faster when you move to Intel 4 and Intel 3?

I'll start, and then I'll ask Dave to jump in. Overall, as we mentioned, our five nodes in four years are performing well. Intel 7 is ramping more quickly than we anticipated. We recently updated that Meteor Lake, our first product on Intel 4, is now powered on. For Intel 3, we will see the test wafers with our leadership products like Sierra Forest. Just today, we taped out our first Granite Rapids compute die as well. We also expect the test wafers for 20a and 18a to be significant foundry nodes. Overall, the technology pipeline is doing exceptionally well, and I'm very proud of our teams. Intel 10 is also ramping effectively, and we are experiencing good yields, which adds to our momentum. In terms of products, Alder Lake has been a standout, ramping ahead of our expectations, confirming the health of Intel 7. Sapphire Rapids had its first peer PRQs this quarter, with more SKUs expected in the second half of the year, which may explain the more subdued ramp. However, we delivered on our commitments regarding the first quarter PRQs of Sapphire Rapids, and we anticipate seeing strength in that area moving forward. Additionally, Ice Lake has ramped nicely for our 10-nanometer server product. Overall, our technology and manufacturing capabilities are performing well, setting a positive outlook for this year and the future. Dave, would you like to add anything?

Yes. So we had a good quarter in the first quarter in terms of yields. We are going to see a little bit of pressure on 10-nanometer in the second quarter. That's part of the reason we're seeing margins down to the low end of our stated range of 51%. But we do expect 10-nanometer to become a tailwind for us as costs improve through the back half of the year. And although Intel 7 is behind that, we're expecting the same from Intel 7.

Dave, I believe you mentioned that CPU ASPs and client sales increased by 25% year-over-year. That's a significant figure. Can you clarify how much of that is due to a shift away from products like Chromebooks and how much is attributed to the success of new offerings like Alder Lake? Could you provide some additional insight on this?

I mean a lot of it is obviously mix, either shifting away from consumer education and newer product ramps. But as I said in the prepared remarks, given the inflationary environment, we are looking for targeted price increases in certain segments. So that really hasn't shown up that much yet, but will be part of the story going forward through the year.

Yes. And I'll just say, overall, the product line is healthy. We're seeing the mix shifts as you move to Alder Lake, Raptor Lake being very strong, Ice Lake as well. We'll start to see Sapphire Rapids factor into that in the second half of the year. So overall, we're coming into a stronger product cycle, Joe, which just gives us more opportunity to deliver higher value to customers, remix the products to higher price points. But overall, just have a more competitive product line as we continue to compete for market share as well.

On Accelerated Computing and Graphics, client discrete GPU market is a pretty big market opportunity for Intel, right, $12 billion, $13 billion per year. So it looks like you guys started ramping your Arc GPU into notebooks now. Your first gen product, the reviews look quite constructive. Is the team still on track to roll out desktop versions this quarter and still on track to ship 4 million-plus discrete GPUs this year? And then any feedback from customers or gaming developers will be helpful as well.

Thank you, Harlan. Overall, AXG is progressing well. We have launched the mobile SKUs and will introduce the desktop SKUs in Q2. More SKUs will be added throughout the year as we expand our product line. There is significant work involved in qualifying games, and if you're a gamer, you understand that much individual optimization is needed for key titles. This work is currently in progress, and we are collaborating with our OEMs to enhance their product portfolios. You will see an increasing number of products entering the market, and we are set to release three versions: 5, 7, and 9 throughout the year as we develop that portfolio. Additionally, AXG has a wide range of products launching across various segments, including high-performance computing, data center GPUs, and blockchain products. Beyond our discrete graphics offerings, we have numerous products being introduced. Overall, we are on track to meet our volume goals and the $1 billion revenue target set during Investor Day, aiming to build this into a $10-plus billion business over the next five years. We see this as a substantial opportunity, bolstered by technologies like Deep Link, which leverage our strong installed base and years of software development within the PC platform. These factors contribute to our confidence in establishing a significant new business, transitioning from a small starting point into a vast, rapidly growing market that Intel is actively pursuing.

So the Q1 CapEx was about $4.6 billion, suggests a very big ramp in the back half to get to your $27 billion net CapEx target. We are hearing of a lot of constraints on equipment supply. I was hoping, Pat or David, if you could give us some color on the availability of tools and if there are any implications on your full-year sales outlook because of the availability of tools?

Yes, I'll begin with that, and then Dave can add. Overall, capital expenditures are uneven throughout the year. However, we believe we are still on target to meet our overall CapEx goal. We are proactively collaborating with equipment companies, maintaining solid, long-term relationships with them. Currently, we are aggressively working on our equipment objectives for 2023 and 2024, and we are confident that we have the supply chains in place to support our equipment needs and effectively manage the factory ramp cycles we've planned as we launch new facilities, such as our recently announced Oregon fab. We are also beginning to receive equipment for our Ireland facility and will soon start ramping up our Israel fab. We plan to break ground on our Ohio site later this year and will provide more updates about the German fab. We are diligently executing our capital expansion strategy and are pleased with our partnerships with equipment manufacturers. That said, there is some strain on the equipment supply chain. We are closely coordinating with our equipment vendors, many of whom utilize Intel FPGAs, to ensure we prioritize that demand and support their requirements. Dave, do you have anything to add?

Yes. I would just add that we did expect this quarter to be a bit lower than the quarterly average for the year to get to the $27 billion. So it's not a complete surprise, although it was lumpy, as you said, and did come in a little bit lighter. But we feel good. I would say the other thing is that when you look at it, I think we feel confident about the $28 billion growth CapEx. The $27 billion net CapEx obviously assumes a $1 billion of capital offsets. And I'd say the early read and of course, we're still early in the year, but looks quite good. So there's a potential we could actually do a bit better on the offset side, so that the net CapEx could potentially be a little bit better.

I wanted to ask a couple of questions on the DCAI segment. The revenue, I guess, went from $5 billion to $6 billion from last year, and you have operating margin down, I guess, 7 points. And I guess it's no surprise after some of the disclosures that we had last year. But maybe you could tease that apart a little bit mix between enterprise and cloud, were there big changes there? And I guess the real question, Pat, is what gets that margin moving in the right direction? Is it the move to Sapphire, where you have multi-die products that might yield better? Is it revenue growth? I'm just trying to understand the drivers to turn around the operating margin in that segment as we go forward.

Yes, I'll start with that. Overall, the DCAI performed slightly better than our expectations for Q1. I would say this aligns with our predictions. The main factor influencing margins was the ramp-up of the 10-nanometer product line and its associated costs. This was the most significant factor. During this period, we also experienced some strength in the cloud segment, while the hyperscalers and enterprise segments faced constraints related to matching sets. We did observe some of that impact in Q1. Looking ahead for the rest of the year, we are optimistic about both the hyperscaler and the enterprise and government segments. We are actively working to resolve the matching set issues, and we hope to improve in that area if we can address the shortages we’ve encountered, particularly with Ethernet. As we move into the second half of the year, the product line is set to strengthen further. With the ramp-up of Sapphire Rapids, we will be launching products like Sapphire Rapids, HBM, and aggressively increasing the volume of Ice Lake as we enter the latter part of the year. These developments point towards positive movement for the product line and corresponding improvements in margins. We have also received positive feedback regarding the long-term strategy for our segment and roadmap. As previously mentioned, we will offer both efficient and performance cores that better meet market demands. I believe this will lead to improved pricing and margins over time, as we won't be forced to stretch a single product across two distinct market segments, allowing us to create highly optimized products for both hyperscaler and enterprise needs. Overall, we think the strategy we've outlined has been well received by our customers. As I indicated earlier, we are on track to execute with Sapphire Rapids' first PRQs this quarter, with many more to follow throughout the year, and we will ramp that up aggressively while receiving positive customer feedback. Notably, with Sapphire Rapids, every hyperscaler and OEM has numerous SKUs prepared, and we anticipate this product will be highly regarded, accepted, and widely deployed in the market this year. Dave, do you have anything else to add?

I would just add, we set out a goal in the Investor Day for the company to have gross margins of 54% to 58% and call it, roughly 30% operating margin. And I think when we start to see the fruits of the investments we're making, both in terms of process technology that's weighing down on the COGS and the investments we're making in operating expenses to build out the product portfolio and get to leadership, those things will start to show strong scale on the top line side. And so I would bet this business is accretive to our overall corporate average.

I had two. I guess the first question is, TSMC is kind of pushing out the timing of the high-volume 3-nanometer EUV. And I guess the first question is sort of how that impacts your GPU and your CPU roadmap? And then I had a follow-up where really, Dave, I wanted to ask you on how you're going to account for subsidies? Are you going to account for those kind of in a contra account, so that as the depreciation ramps, you could offset some of that with that contrary account coming from subsidies?

Yes. And on the first part of it, clearly, the implications of foundry timing is something we have to work very carefully. And there is not just a question of the timing of a node, it's also the capacity of nodes. And with some of those changes that have been reported in the industry, we're just working through that with our product teams to make sure that we're aligning well to the availability of the foundry technologies. But I would say that our IDM model just gives us fundamentally an advantaged business model here, where given the majority of our volumes are internal, we are able to balance between what we use externally for wafers and what we use internally for wafers. And thus, we're able to do a much better job satisfying our customers and having a more competitive product line. I'd also again add, Tim, that our execution of our five nodes in four years on or ahead of schedule across it, this just reinforces the competitiveness that we've described where we do see ourselves coming back to a position of unquestioned process technology leadership, and we're building out the manufacturing capacity at scale to deliver that to our customers. So IDM 2.0, well leveraging the foundries, but even more importantly, building leadership technologies with that scale manufacturing to deliver the most robust product line in the industry. So Dave?

Yes, it somewhat depends on which capital offset you are referring to. Grants are typically aligned with a specific set of assets and are counter accounts that depreciate over the same lifecycle as the asset. Preplays, which we mentioned, function more like a financing arrangement, so they don't directly affect the profit and loss statement, but they will appear on the capital statement as a capital offset, similar to a partner contribution that helps reduce our cash flow burn. Prepays are managed as assets on the balance sheet, and as products are shipped, that account is reduced. Therefore, it depends on which aspect we're discussing, but I believe you are referring to government incentives, which are indeed counter accounts.

How should we look at your discrete GPU platform in terms of expanding that beyond just consumer? And if you could talk about the software ecosystem that you might be building around to encourage adoption?

Yes. Thank you. And the answer is yes, we're going to be delivering the GPU products first for mobile, as we said, next for desktop. It will be game-centric as we're bringing them out of the marketplace. But we're also going to have a full lineup, and we see actually some very unique advantages as we think about media, some of the professional developers where we're already demonstrating a radically advantage that positions like on some of the advanced graphics and media artist product lines. So these will be areas of strength. Particularly when we bring our Arctic Sound product into the marketplace later this year, this will be well optimized for GPU environments and particularly will be strong in areas like encoding and media processing as well that if you think about cloud, you can certainly think about AI and training workloads, but many clouds are actually spending far more time on transcoding and media operations. So that will be an area of unique strength of our Arctic Sound product line. So if you think about that taken together, we'll be competing in the integrated graphics, the discrete graphics, the GPU business, the high-performance computing business will really be leveraging that technology across the entire space of the market. And that's part of the reason that we're very encouraged by our ability to ramp this into a very significant business for Intel and one where we have a lot of advantages to build upon.

Okay. Last question?

Pat, I want to go back to the Sapphire Rapids ramp. Can you discuss how the ecosystem is developing since this is a new platform, particularly regarding DDR5 and PCIe 5.0? My main question is to understand your expectations for the ramp compared to previous generations. Do you anticipate this ramp will be faster or slower than Ice Lake? Additionally, when do you expect to see a public cloud instance based on Sapphire Rapids?

Yes, that's a great question. One of the strengths of Intel as a market leader is our ability to introduce new technologies quickly. With the Sapphire platform, we are integrating DDR5. A few months ago, we faced challenges with DDR5 due to issues with memory suppliers, which required us to debug the interfaces. Now, we are confident that multiple suppliers are qualified, and we are seeing positive momentum as our memory partners increase their supply chains for the Sapphire platform. This platform introduces a significant new memory technology into the market and reinforces Intel's leadership in the data center and server segment. We are carefully modeling this ramp compared to Ice Lake, aiming to increase the speed of the Sapphire platform's rollout. We are focused on optimizing the software stack, validating it, and addressing any initial concerns from customers to minimize defect rates. There is a strong variety of SKUs and instance types coming from all OEMs and hyperscalers in the market, and we anticipate broad availability in the second half of the year. To wrap up, thanks to everyone for joining us and allowing us to share our business updates. We are pleased to start the year on a positive note. Intel is making solid progress with our execution strategy, launching five nodes in four years, including Alder Lake, Sapphire Rapids, and Arc, while enhancing momentum with our customers. We are committed to building a balanced and resilient supply chain, and there are many positive developments underway, which give us confidence not only for Q2 but also support our guidance for the year. Our leadership team is energized, and we believe that this turnaround is exceptional. I'm honored to be part of this team. Thank you all for being here today.

All right. Thank you, Pat, and thank you for joining us today. Operator, can you please close the call?