Intel Corporation Q2 2023 Earnings Conference Call Insights

Key highlights from Intel Corporation (INTC) Q2 2023 Earnings Concall

Management Update:

• [00:08:33] INTC said it’s seeing a sustained recovery in the second half of the year as inventory has normalized.

• [00:13:31] The company’s AI accelerator product portfolio is well-positioned to gain share in 2024 and beyond.

• [00:15:34] INTC said demand trends are relatively stronger across its PSG, NEX, and Mobileye businesses.

• [00:18:09] The company remains on track to achieve its goal of reducing costs by $3 billion in 2023 and $8-10 billion exiting 2025.

• [00:24:00] Despite a slower-than-expected recovery in key consumption markets like China and the enterprise, Intel maintains its forecast of sequential revenue growth throughout the year.

• [00:24:18] INTC said data center CPU TAM contracted in 1H23, and a slower-than-anticipated TAM recovery in China and enterprise markets delayed CPU TAM growth.

Q&A Highlights:

• [00:30:36] Ross Seymore at Deutsche Bank asked what drove the upside in DCAI in 2Q, and the concerns going forward, mainly with regards to the crowding out potential of accelerators versus CPUs. Pat Gelsinger CEO said INTC is executing well in the data center, but there is some softness in the near term due to inventory burn and cloud customers prioritizing AI. Intel sees AI as a workload, not a market, and is well-positioned to participate in both the CPU and accelerator portions of the market.

• [00:33:23] Ross Seymore at Deutsche Bank enquired about the factors that contributed to the GM beat in 2Q and the sequential increase in 3Q, and the factors that could impact GM in 2H23. David Zinsner CFO replied that the company expects GM to improve sequentially in 3Q and 4Q, driven by revenue growth, lower underloading charges, and reduced pre-PRQ reserves. However, longer-term GM improvement will be driven by process leadership, product performance, and the internal boundary model.

• [00:37:09] Joseph Moore at Morgan Stanley asked about the 17% YonY increase in data center pricing and the role of Sapphire Rapids in it, and the expected impact of Sapphire Rapids on platform cost and DCAI. David Zinsner CFO said INTC’s ASC is improving as the company increases core count and becomes more competitive in the market. This allows INTC to charge a premium for its products, which drives up revenue. However, the cost of increasing core count also goes up, so the longer-term drivers of GM improvement will be the internal foundry model, getting past startup costs on five nodes, and launching Sierra Forest and Granite Rapids.

• [00:38:44] Joseph Moore at Morgan Stanley queried about the cautious trends in servers for 3Q and if there is a difference between enterprise and cloud, and if there are any differences in data center trends between China and North America. Pat Gelsinger CEO said INTC expects the TAM to be down in 3Q due to a number of factors, including data center digestion, enterprise weakness, China market slowdown, and accelerator spend pressure. However, the company is optimistic about the long-term opportunities in data center.

• [00:41:03] CJ Muse of Evercore ISI asked about the role of AI as a TAM expander for servers and how productivity gains from acceleration will grow units, particularly in the context of training and inference. Pat Gelsinger CEO said that INTC believes that AI will drive new workloads and expand the TAM for semiconductors. The company is well-positioned to participate in this opportunity by democratizing AI and building AI into its products.

• [00:43:48] CJ Muse of Evercore ISI enquired about the scaling and power benefits of 18A and backside power, and how potential Foundry customers are looking at this technology. Pat Gelsinger CEO said Intel is making good progress on its five nodes in four years roadmap, with 18A as the culmination. The company is also seeing strong interest in its packaging technologies, which are particularly interesting in the marketplace for AI machines.

• [00:46:03] Timothy Arcuri at UBS asked about the decrease in third-party contributions and if the Arizona Fabric is still on track and if gross CapEx will still be first half-weighted with offsets being back half-weighted. David Zinsner CFO replied that INTC managed its CapEx more efficiently than expected in 1Q23. This resulted in lower capital offsets, but Intel is still on track to receive the same amount of capital offsets for the year through the CHIPS incentives.

• [00:48:06] Timothy Arcuri at UBS asked if the accelerated pipeline of more than $1 billion and the recent implication that INTC could do over $1 billion in Gaudi next year is a commitment. Pat Gelsinger CEO answered that INTC’s accelerator pipeline is growing rapidly, with the value of the pipeline now over $1 billion. The company is seeing strong demand for its Gaudi accelerators, and is already working on the next generation of products, Gaudi 3 and Falcon Shores. Intel is also working to make its software stack more flexible and compatible with future products.

• [00:50:54] Ben Reitzes with Melius Research asked about INTC’s comment on PCs with AI having a Centrino moment next year and what’s the bingo moment with AI that will accelerate the client business and benefit INTC. Pat Gelsinger CEO said INTC believes that AI will be increasingly used on client devices and at the edge. The company is working to bring AI capabilities to its client products, starting with Meteor Lake in 2H23. INTC believes that this will drive the TAM for AI and make AI more accessible to consumers and businesses.

• [00:55:59] Srini Pajjuri of Raymond James enquired about the demand for custom silicon in the AI market and Intel’s strategy for that market. Pat Gelsinger CEO answered that INTC is well-positioned to participate in the growing market for AI accelerators. The company has a strong pipeline of foundry customers for 18A foundry opportunities, and is also working with customers to develop custom AI accelerators. Intel’s advanced packaging capabilities also give the company an edge in the market.

• [01:00:09] Aaron Rakers at Wells Fargo asked about the PRQ and underload impacts on GM in 2Q vs. 1Q’s guidance of 250 bps for PRQ and 300 bps for underload. David Zinsner CFO said the costs were largely as expected, but they had a less significant impact due to the higher revenue. The costs and revenue will be lower in 3Q.