Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Intel Corporation Earnings Conference Call. At this time, all participants are in a 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. I would now like to introduce your host for today’s program, Trey Campbell, Head of Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome, everyone, 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, 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’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 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 had an outstanding Q1 in the midst of incredibly challenging circumstances. We generated $19.8 billion in revenue, expanded operating margin by 10 points and delivered $1.45 in earnings per share. We exceeded our guidance by $800 million on the top line and $0.15 on the bottom line. Our data-centric businesses grew 34% and now represent approximately 51% of the Company’s revenue, and our PC-centric business grew 14%. We’ll talk about business trends later, but first, I want to thank and commend all the Intel employees and supply chain partners who have helped keep our business operating during this unprecedented challenge. I want to give a special praise to those in our factories and labs and other on-site personnel who have role modeled the values of our company every day and every shift. I am so incredibly proud of your effort and commitment. I also want to thank the rest of our employees who are largely working remotely to help support the social distancing requirements of those that need to work from our sites. Ensuring the safety and well-being of our global workforce has and will continue to be our number one priority. That’s why we are investing more than $100 million in additional benefits to aid and support employees, including a special recognition award for employees that have been working on site. Intel’s purpose is to create world-changing technology that enriches the lives of every person on earth. Never before has our delivery of that purpose been more essential. Intel technology runs 95% of the world’s Internet communication and government digital infrastructure. And in a world where many of us are working remotely and socially distancing, the PCs and networking technologies delivered by Intel and our customers are providing…

Thanks, Bob, and good afternoon, everyone. Q1 marked a strong start to the year amidst significant economic uncertainty and the unexpectedly strong demand for both PCs and servers as work-from-home and learn-from-home dynamics played out globally. Revenue came in at $19.8 billion, up 23% year-on-year and $800 million higher than guide. Data-centric revenue of $10.1 billion, up 34% year-on-year, represented 51% of our total revenue, an all-time high. Strong server demand across segments and a richer mix of our Xeon devices drove a significant portion of the upside. Q1 PC-centric revenue was $9.8 billion, up 14% year-on-year on strong notebook PC sales and increased supply resulting from capacity additions over the past year. Gross margin for the quarter was 62%, beating expectations due to strong flow-through of higher platform revenue, partly offset by reserves associated with our memory business and from the sale of our Home Gateway Business. Operating margin of 38% in the quarter was up 10 points versus last year on higher gross margins and disciplined spending controls, consistent with the environment. Q1 EPS was $1.45, $0.15 above our guide on strong operational performance, partially offset by losses in our ICAP and trading asset portfolios, along with the effects of a slightly higher tax rate. The strength of these results show the remarkable talent and commitment of our global workforce in a difficult and rapidly evolving environment. In Q1, we generated $6.2 billion in operating cash flow and invested $3.3 billion in CapEx with $2.9 billion of free cash flow, up 76% year-over-year. We returned $5.6 billion to shareholders via dividends and share repurchases. As Bob mentioned, we announced a pause in our share repurchase program as we felt it was prudent to do so in the current economic environment. This does not change our commitment to returning…

All right. Thank you, George. Moving on now to the Q&A. As this our normal practice, we would ask each participant to ask just one question. Operator, please go ahead and introduce our first caller.

Certainly. Our first question comes from the line of John Pitzer from Credit Suisse. Your question please.

Yes. Good afternoon, guys. Congratulations on the solid results. I’m just wondering if you could give us a little bit more detail on the gross margin decline heading into the calendar second quarter. George, you kind of broke it up into three different categories. I’d be interested on magnitude of Tiger Lake versus just lower volumes and then other 10-nanometer parts. And I guess, more importantly, how do we think about kind of normalized sort of gross margins as you get past some of the start-up costs for a faster 10-nanometer ramp?

Yes. Thanks, John. So the margin picture is really unchanged from what we’ve talked about in the past in terms of how we think our product road map is going to move products that we expect to introduce and their margin structure. And what you’re seeing in Q2 is largely a timing issue. And about half of the impact that you’re seeing in gross margin in the quarter is from the Tiger Lake pre PRQ reserves. Obviously, the fact that – and that’s both sequentially and year-over-year. And so I think the way we would look at it is pretty much we’re not seeing anything as – if you take COVID out of the year, we’re really not seeing anything different in our basic view of gross margin dynamics, with the exception of we’re seeing stronger pull-in of demand for some of our 10-nanometer products. I mean I think one of the things – we got very strong demand for Tiger Lake. And so when you look at the impact that Tiger Lake reserves are having on the quarter, it’s about the same level of impact that we had on Ice Lake in Q1 of 2019. And yet we have about double the number of units in the – being reserved. And I think it gives you an indication of just how much our performance was improving on 10-nanometer.

So John, I would just say, relative to where we were 90 days ago, gross margins are stronger through the first quarter. They’re in line with our expectations through the second quarter. And to George’s point, despite the timing dynamics of pre PRQ reserves that we take in the second quarter and recoup in the second half, the only other change is just that we feel confident in accelerating the ramp for 10. So from our vantage point, at or better than kind of how we started the year, and we feel very good about gross margin performance. We’re very excited about the Tiger Lake products ramping going into the second half and the 5G Snow Ridge product that we announced. So all in all, gross margin dynamics, pretty strong. On the second part of your question, I’d go back to the commentary that George provided back at our Analyst Day in the spring, which is, obviously, when we transition from a mature node to a new node, margins tend to come down. We indicated that we plan to get back on a 2 to 2.5-year cadence, which means in 2021, we’ll be ramping 10-nanometer even more while we’re investing in 7-nanometer that we anticipate having in the fourth quarter of 2021. So those dynamics of – from a mature node to a new node, impacts the gross margins of the business, but we feel like it’s – we’re well on track from the plans we laid out and feel pretty good about a dynamite first quarter and an outlook for the second quarter in line or better than what we expected.

Thank you. Our next question comes from the line of Blayne Curtis from Barclays. Your question please.

Hey, guys. Thanks for taking my question. I guess a follow-on, John, with the gross margin. I mean I know you’re not guiding full year anymore, but when we look out at that trajectory that you had given us, I was wondering if you can just kind of step us through with the acceleration. And actually, maybe looking back to last year, if you look at the improvement you saw of that low quarter, just kind of any kind of directional guidance of where this gross margin can go from here.

Yes. I mean first off, I think you’re going to see, Blayne, that gross margin is going to improve, all things being equal, just from the fact that starting in the third quarter, we’ll start to see the chips that have been reserved this quarter coming out on a zero cost basis in the gross margin. And again, it’s really hard to think about the second half in terms of how demand is going to look compared to what we ultimately thought when we first gave guidance, which is because of the – all the obvious issues related to COVID. I’d just go back to – as we look at what we guided all the way back in May of 2019, if anything, we’re ramping 10-nanometer a little faster. We’re seeing clear evidence of improved performance on 10-nanometer. And so we feel good about the overall gross margin dynamics. You can see how our other cost initiatives are helping 5 points out of the 6-point impact that’s being offset by effectively the OpEx percentage. So overall, I would go back and say no real change to our fundamental outlook. But when you overlay COVID, it’s – we’ll just have to see how that plays out.

Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your question please.

Thanks for taking my question and I appreciate all the color in these uncertain times. I’m curious how you are directionally feeling about the CapEx guidance for the year. I think you had about a $17 billion number before. I understand the need to be responsive to the macro dynamics and in preserving the balance sheet. But you upsided first half by quite a bit, and you’re also accelerating the move to 10-nanometers. Does that create some upward bias or at least protect the kind of capital spending plans that you had for the year? Any puts and takes would be very helpful. Thank you.

Yes. Vivek, I’ll start, and then George will fill in. First, both our R&D and our capital spend for this year are directed towards the multiyear plan that we shared with you back last year. So both the product road map over the next several years, the capital required to support the growth that we anticipate over the medium to long-term horizon while adding capacity for the ramp of 10 as well. So coming into the year, we’re very bullish about the medium and long-term outlook. And we’re putting our capital to work to support that medium and long-term outlook, and that’s not going to change. That being said, in the near term, as we try to get a better read on what the demand signals will be for the second half, whether we’re dealing with being very disciplined on our spending levels, ensuring that wafer starts are in line with true demand signals and being very disciplined on the capital that isn’t directly related to more capacity and/or technology development, we are going to be very disciplined through this near-term horizon. But I’d just go back to the first point, which is we’re very bullish about the multiyear view. We have the largest TAM in the company’s history. We got a great set of products that we’re building and developing, and we’re going to invest to position ourselves well to capitalize on the current disruptions that we’re wrestling with.

Yes. What I would add is there’s some natural things in addition to the discipline that will help us lower CapEx a little bit. It’s part of why we said we think our free cash flow is going to be pretty resilient in the year because we’ve seen in some of the geographies where we have major construction projects underway, we’re actually seeing that being pushed somewhat by regulatory requirements. And so we – the way I would describe it is we probably see six to eight weeks’ worth of capital pushing out of this year. But any capital that is important for our 10-nanometer, 7-nanometer and even the start of 5-nanometer is going to be spent in line with the timetables that we’ve already laid out.

Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question please.

Great, thank you. I wonder if you could talk about some of the changes to the server road map? And it seems like you’ve deemphasized Cooper Lake and are more focused on Ice Lake server. Is that about confidence of the – in the 10-nanometer plus? Is that – just kind of describe what led to that decision.

Yes. Thanks, Joe. Yes, during the course of the year, we’ve been – our product road map for servers is very focused on delivering workload-optimized platform foundation that’s scalable for the real-world environments that our customers are operating in. So we ramped – Skylake was the fastest ramp in the Xeon history, followed by Cascade Lake, that was a very strong ramp. Next, we have a Cascade Lake refresh that is a relatively simple, simple upgrade, easier upgrade for our customers because the architecture is very simple to the fastest-growing Cascade Lake ramp. And we’re very focused on Ice Lake in the second half of the year or in the fourth quarter, as we indicated. So as we step back and look at the market dynamics and the product road map, we feel like we got the right products at the right time as we ramp and scale the high end of Cascade Lake and refresh while positioning for Ice Lake.

Okay. That makes sense. And as you’ve started to ramp 10-nanometer plus, is it possible to talk about the changes that you’ll see versus 10? Is it better clock speeds, better yields, better – is there better transistor performance implicit in that transition?

I presume you’re talking about second gen for server products, Sapphire Rapids product or – oh, for clients, sorry. Yes, the client – the Tiger Lake product, we are extremely excited about. We – as I think I mentioned in our prepared remarks that we have 50 designs that we expect to ramp in the holiday season this year. Clock speed, battery life, AI incorporation into the core design, a platform offering that we think is a real differentiator for customers on – in thin and light format. So this is going to be a great launch. We’re very excited about it. And to George’s earlier point, the demand signals we’re seeing and our confidence in both the product and the yield is – has us at a point where we expect to accelerate the ramp and adoption a bit faster than we did coming into the year.

Thank you. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question please.

Hi, guys. Thanks for taking my questions. I wanted to ask first about the 10-nanometer mix exiting the year just given what you’re seeing: a strong Tiger Lake demand signals and a potentially faster 10-nanometer. Like what do you think your product mix by node is going to be exiting the year? Do you think there’ll be a crossover point on 10-nanometers?

Stacy, this is George. I don’t think we’ll see a crossover point this year. And this is – again, I’m just going to take COVID out of the equation, so thinking through, I do think we’re going to see more demand on 10-nanometer this year than we thought going in. Again, I think Ice Lake demand was strong – is going to be strong in the first half. We’re seeing our 5G SoCs on 10-nanometer getting stronger demand as the market there just gets stronger and stronger on the comp side. But Tiger Lake is really, I think, going to be the driver for us in being above our expectations for all the reasons that Bob just covered. And – but it won’t be enough to cause a crossover.

Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question please.

Hey, guys. Thanks for that. I want to go to the Data Center Group, you have the color commentary about the enterprise and government being weaker in the second half, and I don’t think that surprises anybody. But I wanted to see what sort of color you’re getting in the other 70% of that segment on the cloud and the comms side? And specifically, you had worried earlier this year that we’d enter a digestion period. So I wanted to see if your views have changed on that. And then in the comms service provider side, how much of that actually acts like the enterprise and government versus the side that benefits from the 5G ramp? Any pluses and minuses there would be helpful as well. Thank you.

Yes. Thanks, Ross. First, on the cloud side, as you indicated, we came into the year off a very strong second half of 2019, and our expectations were that Q1 would continue that strength. But then the cloud service providers would go through their normal digestion stage, if you will. That was kind of what we indicated back in January. First quarter, as George flagged, demand was even stronger for the CSPs. In our raised outlook for Q2, we expect that demand for the cloud folks to – the strong demand to continue. And possibly, even going into the second half of the year, that’s TBD, but the trends are relatively encouraging, the demand signals are very high. The product that’s being pulled is the XCC product. So ASPs, as you saw in our results, were very strong. So purchasing is extending beyond what we thought a few months ago. And that drove Q1 upside, it drove Q2 upside, and we think it will be relatively strong kind of going into Q3. That’s TBD. On the comms side, fantastic growth in the first quarter. Our expectations are, as we go through the course of the year, it will stay relatively strong as we continue to gain share in that segment. And as we’ve expanded the 5G SoC, expanded our TAM within that sector and with the product that we just qualified a few weeks back. So we expect share gains, the infrastructure – share gains to continue, infrastructure in 5G to continue, if not go faster, and we’re relatively well positioned in the – with the key players of Nokia, Ericsson and ZTE going into the second half of the year. So we feel good about the comms segment as well. And as you flagged, the ones that we’re proud – that we’re most anxious about is just enterprise and government and what kind of demand signals we’ll see in the second half. So the first two are as good, if not stronger. Enterprise and government, a big – a bit of an unknown for us at this stage.

Thank you. Our next question comes from the line of Pierre Ferragu from New Street Research. Your question please.

Hey, thank you for taking my question. I’d like to get back to your performance in PC in the first quarter. So you’re up 40% year-on-year. I was wondering a couple of things. The first one is how much is that really stronger demand, and that’s just about it? And how much of that is more you catching up on capacity and being better able to serve the market and catching up maybe on demand you couldn’t meet in the two, three previous quarters? And then what’s your early view on market share? Are you starting to regain share in PCs? And if not, when do you see that happening this year?

Pierre, it’s George. I think what we saw is clearly some impact relative to our expectations from the work-at-home, learn-at-home dynamics. But we had expected a strong quarter in our initial forecast, which really reflected the dynamics that we’re talking about. We had customers who have been short of demand for a number of quarters who were seeing a chance to finally build some – a little bit of inventory, which gave us a seasonally strong first quarter relative to anything we might see historically. But we saw notebook volumes up over 20% in the quarter. And I would say that that’s more than just the pent-up demand. And that’s at a time when some of the OEMs were really struggling in the early part of the quarter with their supply chains, which is why there’s some parts in their channel that’s all opened up now. So we think that actually – one of the good signs is though even that’s opened up, we’re still seeing very strong demand coming in on the PC side. So – and we had expected solid PC in the first half. But I would say it’s – with COVID, it’s been even stronger and heavily weighted towards the notebook.

And the only thing I would add is in our fab network and the supply chain was able to – coming out of last year, not only able to deal with the backlog coming into the year but also meet the higher demand signals that George flagged at the latter part of March.

Yes. I should have mentioned that. It’s really heroic work, both at the supply chain level, we have a fantastic supply chain group, but also our manufacturing teams, keeping the factories up and running. Delivering 90% on-time commits in a quarter like this is really remarkable.

Thank you. Our next question comes from the line of C.J. Muse from Evercore. Your question please.

Yes, good afternoon. Thank you for taking the question. I realized that you removed your guidance for the full year. But if I look at your results and your guide for Q2, it would suggest data-centric tracking, maybe down 2% half-on-half in the second half; and PC, down 14%. I’m just curious, is that directionally how you’re seeing things? Or I guess given the positive the positive trends in notebooks and the weakness on the enterprise and government side, perhaps it’s a bit more muted, and would love to hear your thoughts on that.

Yes. We’re – I’m not going to be able to give you a full year guide by pieces. But I appreciate the question. I think the – maybe talking a little bit, C.J., headwinds and tailwinds, which we referred to on the call, clearly, cloud is a tailwind and – cloud and mobile compute are a tailwind for the first half for sure. I think cloud continues to be – will probably be helpful throughout the year. The – but at some point, we’re going to see the impacts of the recession start to impact demand on PCs. So we’re – that’s certainly a headwind. That is a reasonable expectation for the second half of the year. We’re already seeing the impact of the recession on IOTG, particularly in industrial and retail. We’re seeing in automotive, Mobileye had a record quarter in Q1. But I think the full year is going to be certainly weaker than we had expected coming into the year. Now not nearly as weak as automotive overall because they continue to grow. They’re in a part of the automotive market that is growing substantially. And they have the leadership position in ADAS. And so it will be more subtle of an impact, but still an impact nonetheless. And then as Bob said, on the data center side, enterprise and government appear to have been very strong in the first half, and so we would expect some digestion. How those things all play up and what percentages play out, C.J., I really can’t say, but those are the things that we’re watching to see how the year is going to play out.

Thank you. Our next question comes from the line of Srini Pajjuri from SMBC Nikko. Your question please.

Thank you. George, I want to go back to the gross margins. I think you did a great job giving us color about half of the impact from Tiger Lake. I’m just wondering, the remaining half, is that because of reserves, which is going to reverse in the second half? Or is this something more structural or mix related that’s going to persist for the next few quarters? I would love to hear some color on that. Thank you.

Well, I think the things that are structural is we’re going to see more 10-nanometer demand in the year than we had forecasted at the beginning of the year. And that will have a little bit of dampening on margins but not materially different from what we had seen coming into the year. The temporary impact is really the reserve action, which will reverse. It is about half of the year-over-year effect. And so I would say the other impact, again, is if we look year-over-year, we’re just seeing a much larger uptake of Ice Lake and 5G SoCs year-over-year, but much of that was expected. I would say both Ice Lake and the 5G SoCs are a little bit stronger than we would have thought coming into the year and – which is consistent with just the demand activity that we’re seeing in mobility and the infrastructure around that.

Yes. And just we came into the year with an outlook of 59% gross margin for the year. And I would just say through the first 90 days, we’re much better. To the next 90 days, we’re better or in line. And the dynamics of the pre PRQ reserve are no impact on the full year. Therefore, net-net, to the first six months of the year, we feel just as good about our gross margin performance and even better about our ability to ramp 10-nanometer. So we’re feeling very good about how the first half of the year is playing out relative to where we were 90 days ago across demand signals and gross margin performance.

Thank you. Our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Thanks a lot. I’m just wondering if you can talk about channel. Inventory, there’s a – customers in a lot of your end markets seem to be a little concerned about supply disruptions, and they – sell-in seems to be a little bit above sell-through. Sell-through seems to be weakening a little bit. So can you talk about the potential for some inventory correction later this year and sort of how you track that? Thanks.

We’re – obviously, we’re very focused on understanding that. I would say the – any kind of dislocation that we’re looking at right now is more a function of just the supply chain challenges that some of the OEMs had, particularly in the first half of the first quarter. But we’ve been watching that pretty closely because we want to make sure that this kind of buildup at our customer level makes its way through to the end customer. And we’re seeing customers telling us that their end-customer demand continues to be very strong, and their order profile reflects that they’re going to clear their existing revenue. Now when that plays out, I’m not sure. It’s part of why we struggle to understand how that second half is going to play out. But we feel good about the demand signals we’re seeing now, and we understand the movements of our products in the system from the dynamics that we saw in the first quarter.

Thanks, Tim. Operator, I think we have time for one more question, and then we’ll turn the call back over to Bob to wrap things up.

Our final question then comes from Chris Danely from Citi. Your question please.

Hey, guys. Thanks for squeezing me in. Can you just run down the supply demand sort of balance throughout the server, desktop and notebook lines? I guess are you on track for the high single-digit unit increase in output? And then did the shortages anywhere get any worse during the during Q1? Or it sounds like they’re abating in certain areas? Just any color there would be great.

Yes. On – as we indicated at the beginning of the year, our intention – well, we did add capacity last year, and our intention this year was to add another mid-20% growth in capacity, which would generate real strong output. And we are on track, maybe even a little bit better than what we said at the time. Obviously, in the first quarter, demand was also greater. It was greater for – across the board, server and notebook, in particular. And we were able to keep pace with accelerating demand as the quarter closed. So we’re in pretty good shape in terms of the promise we’ve made to our customers, and that is that we will not – we’ll put the capacity in place so we are not a constraint on their growth. So we’re in very good shape despite all the challenges. That being said by, we haven’t replenished inventory levels. So meaning mix dynamics across the board is – we’re still not quite there yet, but we’re in line a little bit better than we had hoped. We delivered more demand, and we got to continue to build the inventory levels back so we can deal with the variation by SKU mix.

Thanks, Chris.

Yes. So look, thanks, everybody, for joining us today. I just kind of want to wrap with – to reiterate our purpose, and that is to create world-changing technology that enriches the lives of every person on earth. And that’s never been more important than it is during this time. Our strategy is resolute, and our business is built to withstand challenges. We have a very diversified portfolio of businesses that are highly leveraged to major technology inflections like cloud, 5G, intelligent and autonomous edge computing and artificial intelligence. We generate significant and durable free cash flows, and our team of 110,000 people is operating as one team to enable our customers’ success. So guided by our cultural values, our competitive advantages and our financial strength, we’re confident that we will emerge from this situation even stronger. Thanks again for joining us. We hope you all stay safe as we work together to overcome this global crisis. And we look forward to hopefully seeing you in person over the near term. Thanks again for joining us.

Thanks, Bob, and thank you all for joining us today. Operator, could you please go ahead and wrap up the call?

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.