Patrick Gelsinger
CEO at Intel
Thank you, John, and good afternoon, everyone. Q2 profitability was disappointing despite continued progress on product and process roadmaps. With our new operating model firmly in place, we are accelerating actions to improve profitability and capital efficiency by more than $10 billion in 2025, which I will discuss shortly. For the quarter, we delivered sequential revenue growth in-line with our forecast despite the unexpected timing of new export control restrictions announced in May. Q2 profitability was below our expectations due in-part by our decision to more quickly ramp core Ultra AI CPUs as well as other selective actions we took to better position ourselves for future quarters, which Dave will address fully in his comments.
We previously signaled that our investments to define and drive the AIPC category would pressure margins in the near term. We believe the trade offs are worth it. The AIPC will grow from less than 10% of the market today to greater than 50% in 2026. We know today's investments will accelerate and extend our leadership and drive significant benefits in the years to come. Our efforts will culminate with the introduction of Panther Lake in second half '25. Panther Lake is our first client CPU on Intel 18A, a much more performant and cost-competitive process, which will additionally allow us to bring more of our tiles in-house, meaningfully improving our overall profitability.
Another important driver of improved financial performance is the cost reduction plan we announced today. This plan represents structural improvements enabled by our new operating model, which we are pulling forward to adjust to current business trends. Having separate financial reporting for Intel Products and Intel Foundry clarifies and focuses roles and responsibilities across the company. It also enables us to eliminate complexity and maximize the impact of our resources, taking a clean-sheet view of the business is allowing us to take swift and broad-based actions beginning this quarter. As a result, we expect to drive a meaningful reduction in our spending and headcount beginning in the second half of this year. We are targeting a headcount reduction of greater than 15% by the end of 2025 with the majority of this action completed by the end of this year. We do not take this likely and we have carefully considered the impact this will have on the Intel family. These are hard but necessary decisions.
Our actions will reduce opex to approximately $20 billion in 2024 and we see a bigger impact next year with 2025 opex targeted at $17.5 billion, more than 20% below prior estimates. We expect further benefits in 2026 with opex to decline in absolute dollars yet again. Even as we lower overall spending, we will continue to fund the investments needed to deliver our strategy.
Our new operating model is also driving benefits to our capital requirements, giving us the transparency to more rigorously scrutinize every project and every dollar of capital. As a result, we now expect gross capex in 2024 to be between $25 billion and $27 billion. That is a reduction of over 20% from our plan entering the year and additionally reflects expectations for softer second half demand. Combined with strong execution of our Smart Capital strategy, including our second SCIP with Apollo, we expect net capital spending in 2024 of between $11 billion and $13 billion. These benefits will carry-forward to next year as well. For 2025, gross capital spending is targeted between $20 billion and $23 billion and net capital spending between $12 billion to $14 billion, increased capital efficiency as a positive impact to gross margins over time, but we will also accelerate improvements by generating roughly $1 billion of savings at non-variable cost of sales in 2025. Once again, these reductions do not impact our ability to execute our plan.
We designed our Smart Capital strategy to enable us to conservatively manage the day-to-day business to trend-line growth while maintaining the operational flexibility to quickly and cost-effectively capture upside when it comes. We are taking the added step of suspending the dividend at the beginning of the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute our strategy. We reiterate our long term commitment to a competitive dividend as cash flows improve to sustainably higher levels. Reductions across opex, capex and cost of sales total well over $10 billion in-direct savings in 2025 and provides clear line of sight to a sustainable model with the ongoing financial resources and liquidity needed to support our long-term strategy.
We remain confident that we have and will continue to make the investments needed to drive long-term shareholder value and we view cost discipline as the compass that drives effective execution, helping teams stay on-track to both prioritize and achieve measurable results. The operational and capital improvements we are driving will be especially important as we manage the business through the near term. While we expect to deliver sequential revenue growth through the rest of the year, the pace of the recovery will be slower than expected, which is reflected in our Q3 outlook. Specifically, Q3 will be impacted by a modest inventory digestion in CCG with DCAI and our more cyclical businesses of NEX, Altera and Mobileye trending below our original forecast. Our outlook reflects industry-wide conditions without any meaningful change in our market-share expectations.
As we look into Q4, normal seasonal revenue growth has historically been in a range of flat to up 5% quarter-on-quarter. With improved client inventory levels exiting Q3, we see Q4 revenue at the high-end of that range.
Let me now provide more details by our key business units, starting with Intel Foundry. A key part of our strategy is returning to process leadership with our aggressive five nodes in four-year March and the finish line is officially with Insight. We are well into the ramp of Intel 4, Intel 3 and Intel 28 is being ready for production next quarter. On Intel 18A, we released the 1.0 PDK last month and are on-track to be manufacturing ready by the end of this year with production wafer start volumes in first-half of '25. Panther provides for client is now running windows and looking very healthy. This is the first microprocessor to use RibbonFet, PowerVia and advanced packaging achieving a significant milestone. Clearwater Forest for server, which also includes Foveros Direct and other key advanced packaging capabilities is booted and likewise looking very healthy. These are the first of many Intel 18A products on-track to bring Intel 18A to the mass market.
Importantly, the launch of 18A will be our fifth node in four years completing an historic pace of design and process innovation and returning Intel to process leadership. Our team is resolute and determined to finish what we started and once we do, it will unlock further growth and value-creation across our Foundry and product businesses. Our investments in a global footprint of leading edge capacity continues to weigh on near term profitability, but long-term, they position us to profitably participate in the largest and fastest growing parts of the semiconductor market.
We continue to expect the investments we're driving through this year to put us on a course for meaningful financial traction with operating profits for Intel Foundry troughing in 2024 and then driving to breakeven. To help accelerate [Technical Issues] our Foundry services business, Kevin has led large foundry and fables businesses outside Intel and is a great addition to our leadership team. He has hit the ground run and spending considerable time with current and future Foundry customers as we ramp our process packaging and chipset capabilities for the AI era. We are also pleased to welcome Naga Chandrasekaran from Micron later this month to lead our Foundry Manufacturing and Supply Chain Organization. He brings more than 20 years of leadership in deep technical R&D and manufacturing expertise that will help advance our priorities.
Overall, our Foundry team is driving excellent collaboration with our design ecosystem partners. In Q2, Ansys, Cadence, Siemens and Synopsys all announced the availability of reference flows for Intel's embedded multi-die interconnect bridge advanced packaging technology. EMIB makes it possible to cost-effectively scale to a larger silicon area by connecting multiple die in a single package, which simplifies the design process and offers design flexibility. These same partners also declared readiness for Intel 18A designs, and we will be collaborating closely with the ecosystem in the second half to prepare for next year's 18A launches. Beyond Intel 18A, we are well underway on Intel 14A and Intel 10A development.
Even as we continue to extend leadership and innovation on our process roadmap, we are transitioning to a more normal cadence of no development. The normalized cadence will have positive implications for both pace and magnitude of ongoing R&D and capital spending requirements.
Let's now turn to Intel Products. In our largest and most profitable business, CCG, we continue to strengthen our position and execute well against our roadmap. The AI PC category is transforming every aspect of the compute experience and Intel is at the forefront of this category creating moment. Intel core ultra volume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models. This is an ongoing testament to the strong ecosystem we have nurtured through 40 years of consistent investments. We have now shipped more than 15 million Windows AI PCs since our December launch, multiples more than all of our competitors combined, and we remain on-track to ship more than 40 million AI PCs by year end and over 100 million accumulative by the end of 2025.
Lunar Lake, our next-generation AI PC, which achieved production release ahead of schedule in July, will be the next industry-wide catalyst for device refresh. Lunar Lake delivers superior performance at half the power with 50% better graphics performance and 40% more power efficiency versus the prior generation. Lunar Lake delivers three times more tops Gen on Gen with our enhanced NPU and will be the ultimate AI CPU on the shelf for the holiday cycle. Microsoft has qualified Lunar Lake to power more than 80 new Copilot plus PCs across more than 20 OEMs, which will begin to ship this quarter. Lunar Lake will quickly be joined by Arrow Lake, which will scale AI to the desktop category next quarter. And as mentioned earlier, we are already gearing up to launch Panther Lake next year to further extend our leadership position. So very good progress in CCG and a super strong roadmap over the next 18 months.
Let me now turn to DCAI. This is one of the most important areas of focus as we work to improve our performance and market position. We have a strong foundation of which to build, including the more than 130 million Xeon's powering data centers around the world today and a roadmap is designed to build upon this fast installed-base to deliver greater performance and efficiency, enable AI solutions that are open, flexible and scalable and reduce total cost of ownership for customers. We took some important steps forward this quarter, starting with the launch of Xeon 6 with E-core processors formerly codenamed Sierra Forest. This is our first Intel 3 product and is particularly well-suited for high-density scale-out workloads. It drives performance up, power down and dramatic rack consolidation. Early adopters are already seeing 25% better performance per watt versus competitive solutions. This will be followed by Xeon 6 with P-Core code named Granite Rapids, which delivers greater performance for the most demanding workloads and will begin shipping this quarter.
Looking to the future, we are excited about the launch of Clearwater Forest, our first Intel 18A server product featuring our industry-leading hybrid bonding. Clearwater Forest has achieved power-on and is on-track to launch in 2025. As we've reestablished Xeon's competitive position, we are strongly positioned as the head note of choice in AI servers. We are also focused on improving our accelerator roadmap. We're delivering a combination of performance, flexibility and value that is very compelling to customers, particularly cloud and enterprises seeking scalable, cost-effective Gen AI solutions. Our focus on open models, open developer frameworks and reference designs combining Xeon with accelerators through OPEA or Open Platform for Enterprise AI are gaining considerable market traction.
Launching in Q3, Gaudi 3 will take our accelerator performance to the next level, at just two-thirds the cost of competitive offerings. To put it into perspective, we expect Gaudi 3 to deliver roughly 2x performance per dollar in both inference and training versus H100. Gaudi 3 has strong ecosystem support, including Dell Technologies, Hewlett-Packard Enterprise, Lenovo, Supermicro, Foxconn, Gigabyte, Inventec, Quanta Cloud Technology and Wistron.
Turning to NEX. We continue to see stability in Q2 while introducing new products that will expand our leadership in Edge and Networking into the future. As a founding member of the Ultra Ethernet Consortium, we announced an array of AI-optimized scale-out Ethernet solutions, including the Intel AI Network Interface Card and Foundry Chiplets, which we'll launch next year. Our recent IPU adapter for the enterprise supported by Dell Technologies and Red Hat broadens access to the solution co-developed with Google Cloud. We expect the IPU to be accretive to growth and profitability as it becomes an increasingly important part of acceleration in the AI Data Center. We also announced the creation of Ultra Accelerator Link, a new industry-standard dedicated to advancing high-speed, low-latency communication for scale-up AI systems, communication and data centers. Combined with the growing number of use cases of AI on the Edge, NEX is well-positioned to be an accretive growth driver in 2025 and beyond.
Lastly, as Altera reaches full operational separation by year-end, we are actively working toward capitalizing the business to generate proceeds for Intel on a path to an IPO in the coming years. We are excited to provide Altera with the mandate focus and resources to realize their growth opportunities and execute their strategy. We expect their increased autonomy will help to drive value for our shareholders, similar to the decisions we made with Mobileye two years ago and IMS last year.
Before I turn to Dave, let me sum-up by saying, it has been a hard-fought first-half of the year. We have achieved several important milestones and we are taking clear and decisive actions to improve our sustainable financial performance. We have entered Q3 with a very clear focus and renewed intensity to up our gain and are motivated by the progress we are seeing as we execute our strategy and realize our vision. That is the mindset driving us forward as we continue to build a stronger Intel.
With that, I'll pass it over to Dave.
