Yahoo Finance Intel Corporation (NASDAQ:INTC) Q1 2024 Earnings Call Transcript
Intel Corporation (NASDAQ:INTC) Q1 2024 Earnings Call Transcript April 25, 2024
Intel Corporation beats earnings expectations. Reported EPS is $0.18, expectations were $0.13. Intel Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the Intel Corporation's First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations.
John Pitzer: Thank you, Jonathan. By now, you should have received a copy of the Q1 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Pat Gelsinger; and our CFO, David Zinsner. In a moment, we will hear brief comments from both followed by a Q&A session. Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it, and as such, are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe provide useful information to our investors.
Our earnings release, most recent annual report on Form 10-Q and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to corresponding GAAP financial measures. With that, let me turn things over to Pat.
Patrick Gelsinger: Thanks, John, and welcome, everyone. We reported solid Q1 results, delivering revenue in-line and EPS above our guidance as we continue to focus on operating leverage and expense management. Our results reflect our disciplined approach on reducing costs as well as the steady progress we are making against our long-term priorities. While first-half trends are modestly weaker than we originally anticipated, they are consistent with what others have said and also reflect some of our own near-term supply constraints. We continue to see Q1 as the bottom and we expect sequential revenue growth to strengthen throughout the year and into 2025, underpinned by, one, the beginnings of an enterprise refresh cycle and growing momentum for AIPCs. Two, a data center recovery with a return to more normal CPU buying patterns and ramping of our accelerator offerings.
And three, cyclical recoveries in NEX, Mobileye and Altera. We had an extremely productive Q1 and achieved several important milestones along our journey to reposition the company for improved execution, competitiveness and perhaps most importantly, financial results. We hosted our first-ever Intel Foundry Direct Connect, which drew nearly 300 partners, customers and potential customers to hear about the momentum we are building with our foundry offerings. We were pleased to announce Microsoft as our fifth Intel 18A customer. We also updated our lifetime deal value to greater than 15 billion and extended our roadmap with Intel 14A, the first process node in the industry to use High NA EUV technology. Shortly following Direct Connect, we were thrilled to join with President Biden and Commerce Secretary, Raimondo to announce our position as the national semiconductor champion, along with the single largest award from the CHIPS and Science Act of more than 45 billion of proposed grants, tax incentives and loans.
During the second week of April, we brought together more than 1,000 of our top customers and partners at Intel Vision 2024, where we introduced our next-generation Gaudi 3 accelerator. We were joined by NAVER, Dell, Bosch, Supermicro and Roche, among many others who shared how they are benefiting from Intel solutions. Vision led straight into Open Source Summit, where we led the launch of the Open Platform for Enterprise AI project. This industry initiative aims to accelerate GenAI deployments in what will be the largest market for AI applications starting with retrieval augmented generation or RAG. Our Xeon plus Gaudi use cases along with our established enterprise ecosystem have a big role to play here. Lastly, we hosted the industry's first sustainability summit, underscoring our deep commitment to building a more geographically diverse, resilient, trusted and of course, sustainable supply-chain for semiconductors.
We are proud of our leadership position in chemical conservation, renewable energy and water reclamation. Our accomplishments year-to-date build on all the work we have done to executing the strategy I laid out when I rejoined the company three years ago. Job number one was to accelerate our efforts to close the technology gap that was created by over a decade of underinvestment. The heart of Phase 1 was five nodes in four years. The rallying cry was torrid. It combined accelerating our node transitions with improving our product execution and cadence to regain customer trust. We have rebuilt our Grovian culture and execution engine and are on track to completing our five nodes four year goal, which many of our stakeholders thought impossible at inception.
In so doing, we are in a unique position with at-scale EUV technology, Western base capacity, and at the very least, a level playing field with the market leader. Intel 20A, which helps pave the way for Intel 18A, begins production ramp in the second-half of this year with Arrow Lake. We expect to release the 1.0 PDK for Intel 18A this quarter. Furthermore, our lead products, Clearwater Forest and Panther Lake are already in fab and we expect to begin production ramp of the Intel 18A in these products in the first-half of '25 for product release in the middle of next year. Given this progress, now is the time to turn our focus to matching technology leadership with a competitive cost structure. Establishing a foundry relationship between our products group and our manufacturing group was a critical step to achieve better structural cost.
This quarter, we officially transitioned to our new operating model and introduced Intel Products and Intel Foundry. Today, for the first time, we are reporting our results to reflect the new way in which we are running the company. Separating the internal financial reporting between Intel Foundry and Intel products was a critical step needed to provide transparency, accountability and the proper incentives to allow both groups to make better decisions to optimize their own cost structures. This change also provided the added benefit of giving more transparency to our outside owners. We knew that the day one P&L for Intel Foundry was going to spark debate, but we also knew it was important to establish a baseline and provide a target model based on reasonable to conservative revenue and cost assumptions that we have a high degree of confidence we will achieve.
I'm going to reiterate that point, so it is heard and understood. Our target model is reasonable, conservative and reflects a high degree of confidence in our ability to deliver. And you can rest assured that we will be working hard to beat these targets. If we can move faster and do better, we will and our new operating model is already catalyzing change and driving efficiencies across the organization. Let me highlight three important aspects of our business and our strategy that is underscored by the new model. First, with Intel Products, we have exposed a solid, fabless franchise with established powerful and hard to displace installed-base and ecosystem across enterprise, consumer and edge that provide meaningful benefits to our customers and partners.
Intel Products is a solidly profitable business today, despite just recently emerging from a semiconductor downturn and still competing with legacy process technology. That is changing rapidly as we ramp Intel 3 in 2024 and Intel 18A in 2025. Within client, we are defining and leading the AI PC category. IDC indicates the overall PC market is now expanding. And as stated earlier, as standards emerge and applications begin to take advantage of new AI-embedded capabilities, we see demand signals improving, especially in second half of the year helped by a likely corporate refresh. Our core ultra-ramp led by Meteor Lake continues to accelerate beyond our original expectation with units expected to double sequentially in Q2, limited only by our supply of wafer level assembly.
Improving second half Meteor Lake supply and the addition of Lunar Lake and Arrow Lake later this year will allow us to ship in excess of our original 40 million AI PC CPU target in 2024. Next year with Panther Lake, we will extend our lead with Intel 18A and further product enhancements. Our share position is strong and continues to strengthen as we execute on our product roadmap. Within DCAI, as committed, we have achieved product release on our first Intel 3 server product, the first generation E-Core Xeon 6 codename Sierra Forest. The next-generation P-Core Xeon 6 product, Granite Rapids will be released in Q3. At Vision, we demonstrated the 70 billion parameter model running natively on Xeon 6 with good performance. We continue to expect share trends to stabilize this year before improving in 2025.
While budgets are still being prioritized to generative AI build-out where we have a strong position in the head node, customer conversations continue to show improving signs for traditional CPU refresh starting in late Q2 and into the second-half. Our first Intel 18A product, Clearwater Forest is slated to launch next year and will allow us to accelerate share gains. Our Gaudi 3 launch gave us a strong offering to improve our position in accelerated computing for the data-center and cloud. We now expect over 500 million in accelerated revenue in second half of 2024 with increasing momentum into 2025 based on Gaudi 3's vastly superior TCO as well as our own expanding supply. In addition, we are finding good traction with the Intel Developer Cloud with customers onboarding with this platform, including Dell and Seekr, our largest IDC win to date.
We are encouraged by our progress, but far from satisfied. Lastly, within NEX, the business has stabilized and beat our Q1 targets with channel inventories approaching normal levels and business acceleration expected through the year as a result. We also recently announced our plans for scale-up and scale-out Ethernet-based AI networking delivered as a discrete NIC and chiplets for AI foundry customers with numerous key providers in the industry and market standardization through the Ultra Ethernet consortium. So that is Intel products, good momentum and a lot for us to build on. Let me turn to Intel Foundry. We are executing on our strategy to drive meaningful improvement in profitability over-time. We are obviously not there yet given the large upfront investment we needed to build-out this business, but we always said this was going to be a multi-year plan and we are right on track with where we expect it to be right now.
As we discussed during our webinar at the beginning of the month, the transition from pre-EUV wafers to post-EUV wafers is a powerful tailwind for us. We expect our blended average wafer pricing to grow 3x faster than cost over the decade, driving significant margin expansion. In addition, more competitive wafers will allow us to bring home many of the tiles that today are being manufactured at external foundries. Both dynamics are in our control and not dependent on revenue growth and are key elements to drive the business to breakeven, more than doubling our current earnings power at the Intel consolidated level. Of course, more competitive wafers combined with our position as the only company manufacturing with leading-edge wafers outside of Asia is drawing strong interest from potential external customers.
It is important to note that our leadership in advanced packaging creates more value in our wafer technologies and wafer level assembly and base dye opportunities further fill our factories and extend the useful life of our tools for increased financial returns. I am pleased to announce that this quarter, we signed another meaningful customer on Intel 18A, bringing our total to six. A leader in the aerospace and defense industry, this customer chose Intel Foundry based not only on the process technology benefits of Intel 18A, but also because of their desire to have a secure US only supply base. Just this week, we were very pleased to announce that the DoD awarded Intel Foundry Phase 3 of the RAMP-C Program, which we are confident will lead to additional federal aerospace and defense customers.
More broadly, we are seeing growing interest in Intel 18A and we continue to have a strong pipeline of nearly 50 test chips. The near-term interest in Intel Foundry continues to be strongest with advanced packaging, which now includes engagements with nearly every foundry customer in the industry, including five design awards. While we are highly focused on improving the near-term profitability of Intel Foundry, it is also important that we keep sight of the long-term opportunity here. The foundry market is expected to grow from $110 billion today to $240 billion by 2030 with almost 90% of the growth coming from EUV nodes and advanced packaging. Given this backdrop, we have clear line-of-sight to becoming the largest system foundry for the AI era and the second-largest overall by 2030, building on our EUV High NA process technology, leadership in advanced packaging, manufacturing capacity, our systems expertise and the surge in AI demand.
Put it another way, our 15 billion of external revenue embedded in our Intel Foundry target model would represent less than 15% of the leading-edge foundry market. It is not a question of if, but when Intel Foundry achieves escape velocity. And every day, we are proving to the market that Intel Foundry is a resilient, sustainable and trusted alternative to serve a semi-market on a path to top 1 trillion by the end of the decade. Let me wrap up by speaking to our all other category, where our number one priority is to unlock shareholder value. This quarter, we formally rebranded our programmable solutions group, Altera, an Intel company. We look forward to bringing in a private equity partner this year to help prepare the company for an IPO in the coming years.
This puts Altera on a similar path as Mobileye. We are excited about the future of both companies. By providing them with separation and autonomy, we believe we enhance their ability to capitalize on their growth opportunities in their respective market and accelerate their path to create value. Combined with IMS, our mask writing equipment business, we believe these three assets represent more than a quarter of our overall market value today. Along with a solid Intel products franchise and an Intel Foundry business rapidly approaching 100 billion in net tangible assets, we see the opportunity to unlock significant value for our shareholders as we meet our financial commitments, stand-up Intel Foundry and drive it to profitability and further leverage our opportunity in AI.
So overall, I'll say that there is a lot for us to build on coming out of Q1. We are systematically executing to our strategy and we are making steady progress. We are maniacally focused on executional excellence and fiscal discipline and we are relentless in our drive to regain process leadership and bring next-generation solutions to solve our customers' hardest problems. All of this gives me confidence in where we are headed. Yes, we have a lot of hard work in front of us, but we know what we need to do and the payoff will be significant in the end. Semiconductors are the currency that will drive the global economy for decades to come. We are one of two, maybe three companies in the world, that can continue to enable next-generation chip technologies and the only one that has Western capacity in R&D.
And we will participate in the entire AI market. Quarter-by-quarter, we are positioning ourselves well to capitalize on the immense opportunities ahead. With that, let me turn things over to Dave.
David Zinsner: Thank you, Pat, and good afternoon, everyone. We delivered solid results in the quarter with revenue finishing in-line and gross margin and EPS again beating guidance. Forward-looking demand signals in our core markets improved at a measured pace through the first-quarter and we expect to deliver full-year revenue and EPS growth in 2024 with the pace of revenue growth accelerating in the second-half. First-quarter revenue was $12.7 billion, up 9% year-over-year and just above the midpoint of our guidance with product segments performing in-line with expectations. Intel Products delivered 17% year-over-year growth, offset by inventory headwinds impacting Mobileye, Altera, and our 5G customers as well as the sunsetting of several non-core lines of business, including the traditional packaging business within Intel Foundry.
These non-core revenue headwinds drove a sequential decline of just over $1 billion, in-line with our Q1 guidance. Gross margin was 45.1%, 60 basis points above guidance and EPS of $0.18 beat guidance by $0.05 on operating spending discipline and strong sell-through of previously reserved inventory. Q1 operating cash flow was negative $1.2 billion. Net CapEx was $5 billion, resulting in an adjusted free cash flow of negative $6.2 billion and we paid dividends of $0.5 billion in the quarter. We expect Q1 to be the low-point for adjusted free-cash flow, driven by seasonal factors, including timing of annual bonus payments along with upsides from larger capital offsets expected in the second-half. As Pat mentioned, this is our first quarter reporting in the new operating segments.
The revised structure creates a foundry relationship between manufacturing and our products groups with Intel Products purchasing wafers and services from Intel Foundry at fair market prices. This quarter represents another important step in our transformation with increased transparency and accountability across all layers of the organization, which is already having a positive impact on decision-making, efficiencies and financial discipline. As I talk about our results, I'll categorize them between Intel Products, Intel Foundry and all other, with the all other category including the results of Mobileye and Altera. Additional detail can be found in our earnings release and SEC filings. Intel Products revenue was $11.9 billion, up 17% year-over-year.
The client business grew by more than 30% year-over-year with a strong product portfolio and share position and significantly improved customer inventory levels. The data center and AI business contributed 5% year-over-year growth, driven by higher Xeon ASPs and improved enterprise demand. NEX revenue declined 8% year-over-year. As discussed last quarter, we saw significant declines in the 5G market, partially offset by approximately 10% year-over-year growth in our network and edge markets, which we expect to continue to recover through the year. Intel Products operating profit expanded by more than $2.1 billion year-over-year, driven by higher revenue, better sell-through of reserved inventory and operating spending discipline, resulting in an operating margin of approximately 28% in the quarter.
Intel Foundry revenue was $4.4 billion, down 10% year-over-year on lower back-end services and sample revenue along with lower IMS tool sales. In addition, wafer volume was modestly higher in the quarter with ASPs modestly down driven by pricing for mature nodes. Operating profit declined by approximately $100 million year-over-year with lower revenue being partially offset by improved factory utilization. OP margin declined significantly quarter-over-quarter, driven by higher start-up costs and the conclusion of the traditional packaging business impacting revenue. The foundry P&L will remain challenged through the year and we expect operating margins to trough in 2024 as start-up costs associated with five nodes in four years peak and the P&L absorbs an expected increase of roughly $2 billion in depreciation.
Beyond 2024, as volume begins to shift toward leadership manufacturing nodes with a competitive cost structure, scale improves, including the return of compute tiles to internal process nodes and our efficiency actions begin to flow-through the P&L, we expect to see rapid profitability improvement. Mobileye revenue of $239 million and an operating loss of $68 million were both down meaningfully year-over-year due to a well-publicized drawdown of IQ customer inventory. Mobileye reiterated full-year guidance on their earnings call this morning. With the inventory digestion process on-track, financial results are expected to recover quickly. Altera revenue was $342 million, down significantly year-over-year with results impacted by the industry-wide inventory digestion following supply constraints in 2022 and '23.
Altera's $39 million operating loss is a result of lower revenue and spending associated with standing up Altera as a standalone company. We continue to expect Altera to exit 2024 at a $2 billion revenue run-rate as inventory positions normalize. I want to acknowledge the hard work and focused execution across the company to transition our systems and processes to our new reporting structure. We're already seeing the results of the increased transparency catalyzing change and driving efficiencies across the company. Now turning to our Q2 guidance. We expect revenue of $12.5 billion to $13.5 billion in the second-quarter, with the midpoint aligned to typical seasonal growth. At the midpoint of $13 billion, we expect gross margin of approximately 43.5% with a tax-rate of 13% and EPS of $0.10, all on a non-GAAP basis.
We see the client and data-center business roughly flat to Q1 results at the low-end of seasonal. Q2 client revenue is constrained by wafer-level assembly supply, which is impacting our ability to meet demand for our core ultra-based AI PCs. We do expect sequential growth from Mobileye, NEX and Foundry Services. As we look beyond Q2 guidance, we expect growth across all segments in the second half of the year, led by improved demand for general purpose servers from both cloud and enterprise customers and increased core ultra-assembly capacity to support a growing PC TAM driven by enterprise refresh and the AI PC. We should also see accelerating growth from our network and edge businesses, a return to growth for Altera and a meaningful Gaudi ramp in the second-half.
Despite 2024 representing the peak for five node in four year driven factory start-up costs, we expect roughly 200 basis points of FY'24 gross margin improvement compared to FY'23. Our net capital intensity forecast of mid-30s as a percent of revenue across 2023 and 2024 in aggregate remains unchanged. With significant capital offsets expected to land in the second-half of the year, we continue to expect approximately neutral 2024 adjusted free cash flow. While first-half demand signals have been a bit weaker, Q1 played out largely in line with our expectations. We achieved several important milestones towards our IDM 2.0 vision and we're participating in a large and growing TAM with encouraging market signals for the second-half of the year and into 2025.
By capturing margin at both the foundry level and the fabless product level, we have margin stacking advantage unique in the industry. We are three years into our transformation and 2024 represents the steepest part of the climb with five node in four year start-up costs peaking and the majority of our volume on pre-EUV process nodes with uncompetitive economics. However, as we the crest the hill and look toward the next few years, we have strong wins at our back and a clear path to achieving the mid and long-term financial targets we laid out earlier this month. With that, let me turn the call back over to John.
John Pitzer: Thank you, Dave. We will now transition to the Q&A portion of our call. As a reminder, we request that each of you ask one question and a brief follow up where applicable, so that we can get to as many of your questions as possible. With that, Jonathan, can we take the first question?
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