Hi, guys. Thanks for letting me ask a question. Congrats on the strong results. I wanted to focus, Pat, on the data center, the DCAI side of things. Strong upside in the quarter but it sounds like there’s still some mix trends going forward. So, I guess a two-part question. Can you talk about what drove the upside and where the concern is going forward? And part of that concern, that crowding out potential that you just discussed with, accelerators versus CPUs, how is that playing out and when do you expect it to end? Pat Gelsinger (CEO): Yes. Thanks, Ross, and thanks for the congrats on the quarter as well. I’m super proud of my team for the great execution this quarter, top, bottom line, beats, raise, just great execution across every aspect of the business, both financially as well as road map execution. With regard to the data center, obviously, the good execution, I’ll just say we executed well, winning designs, fighting hard in the market, regaining our momentum, good execution. As you said, we’ll see the Sapphire Rapids at the 1 millionth unit in the next couple of days, our Xeon Gen 4. So overall, it’s feeling good. Road map’s in very good shape, so we’re feeling very good about the future outlook of the business as well. As we look to 5th Gen E-core, P-core with Sapphire and Granite Rapids, so all of those, I’ll just say we’re performing well. That said, we do think that the next quarter, at least, will show some softness. There’s some inventory burn that we’re still working through. We do see that big cloud customers, in particular, have put a lot of energy into building out their high-end AI training environments. And that is putting more of their budgets focused or prioritized into the AI portion of their build-out. That said, we do think this is a near term, right, surge that we expect will balance over time. We see AI as a workload, not as a market, right, which will affect every aspect of the business, whether it’s client, whether it’s edge, whether it’s standard data center, on-premise enterprise or cloud. We’re also seeing that Gen 4 Xeon, and we’ll be enhancing that in the future road map, has significant AI capabilities. And as you heard in the prepared remarks, we expect about 25% today and growing of our Gen 4 is being driven by AI use cases. And obviously, we’re going to be participating more in the accelerator portion of the market with our Gaudi, Flex and MAX product lines. Particularly, Gaudi is gaining a lot of momentum. In my formal remarks, we said we now have over $1 billion of pipeline, 6x in the last quarter. So, we’re going to participate in the accelerator portion of it. We’re seeing real opportunity for the CPU as that workload balances over time between CPU and accelerator. And obviously, we have a strong position to democratize AI across our entire portfolio of products. John Pitzer (Head of Investor Relations): Ross, do you have a quick follow-up?

I do. I just want to pivot to Dave on a question on the gross margin side. Nice beat in the quarter and the sequential increase for the third quarter as well. Beyond the revenue increase side, which I know is important, can you just walk us through some of the pluses and minuses sequentially into the third quarter and even into the back half, some of the pre-PRQ reversals under utilization? Any of those kind of idiosyncratic blocks that we should be aware of as we think about the gross margin in the second half of the year? David Zinsner (CFO): Yes, good question, Ross. In the second quarter, as I mentioned in the prepared remarks, our performance was primarily driven by revenue, which exceeded expectations significantly, leading to strong gross margin results due to the fixed cost structure of our business. This helped us achieve substantial gross margin outperformance in that quarter. Looking ahead to the third quarter, we anticipate sequential revenue growth, which will contribute positively to gross margin improvement. We expect to see a good fall-through with the additional revenue. We also anticipate a modest decrease in underloadings for two reasons: one, we will incur a period charge due to some underloading, and two, certain underloading is related to inventory costs, which will take time to resolve. While the decline will be modest, it will still provide some improvement in gross margins. Additionally, we will have pre-PRQ reserves in the third quarter, though they will be significantly lower than in the second quarter. Meteor Lake will not create a pre-PRQ reserve in the third quarter as we plan to launch it soon, but we expect Emerald Rapids to have some impact, along with other SKUs. Therefore, while the reserves will decrease, they won’t be eliminated, allowing us to potentially perform better in the fourth quarter, depending on revenue and similar factors, as we expect the pre-PRQ reserves to drop further then. We should also see improvements with loading in the fourth quarter, which suggests some favorable conditions for gross margins. On a longer-term perspective, we will continue to face challenges from underloading for several quarters as it cycles through inventory impacts on cost of sales. For multiple quarters, we will incur underloading charges. Furthermore, since Pat joined and we initiated our five-nodes-in-four-years strategy, we predict a considerable amount of startup costs affecting our gross margins for a couple of years. Nevertheless, we are optimistic about the long-term trajectory of gross margins. Eventually, we will reach process parity and leadership, which will alleviate the impact of startup costs. The launch of high-performance products will reflect positively on our margins. As Pat mentioned, the internal foundry model will yield significant benefits, and we expect a substantial amount of that to materialize by 2026. However, this is just the beginning, as we see numerous opportunities over the coming years to enhance our gross margins. null (Operator): And our next question comes from the line of Joe Moore from Morgan Stanley.

Dave, I think you said in your prepared remarks that data center pricing was up 17% year-on-year and that Sapphire Rapids was a factor there. Can you just talk to that? And kind of obviously, Sapphire Rapids is going to get bigger. Can you talk about what you expect to see with platform cost in DCAI? David Zinsner (CFO): Platform costs are improving as we increase core count and become more competitive with our product offerings, which gives us confidence in our pricing in the market. However, an increase in core count also raises costs. The major factors influencing our cost structure will stem from our internal foundry model as we scale up and move away from underloading charges. Additionally, as we overcome the start-up costs associated with five nodes in four years, this will impact the data center significantly. In the long run, these elements will be key drivers of gross margin improvement. The launch of Sierra Forest in the first half of next year, followed by Granite, will allow us to produce highly competitive data center products and strengthen our margin outlook, ultimately improving the overall profit and loss of the data center. John Pitzer (Head of Investor Relations): Joe, do you have a follow-up question?

Sure. Regarding servers in Q3, you mentioned some cautious trends. Can you discuss the differences between enterprise and cloud? Are there any variations between the two? Additionally, are you observing anything distinct in China for data centers compared to North America? Pat Gelsinger (CEO): Yes, thank you for the question, Joe. As mentioned in our prepared remarks, we expect to see the total addressable market decline in Q3, which is influenced by several factors. There is some data center digestion among cloud providers, weakness in enterprise demand, and increased inventory levels. The recovery in the China market has not been as strong as anticipated. Additionally, there is greater pressure from spending on accelerators. These factors combined have led to some weakness, at least for Q3. However, our overall position is improving, and our products are advancing. We are experiencing the benefits of AI capabilities and improvements in our Gen 4 and subsequent products. Moreover, we are starting to see notable use cases like Graph Neural Networks and Google’s AlphaFold achieving top results on CPUs, gaining momentum in the industry as companies seek innovations in data preparation and processing. Considering all of this, we remain optimistic about our long-term opportunities in data centers, particularly with our promising roadmap for Gaudi2, Gaudi3, and Falcon Shores. We have also begun working with our first wafers for Gaudi3. Thus, while we face some near-term challenges due to a weaker market, we have strong long-term optimism. null (Operator): And our next question comes from the line of C.J. Muse from Evercore ISI.

I guess, first question, in your prepared remarks, you talked about AI being a TAM expander for servers. And I guess, I was hoping you could elaborate on that, given the productivity gains through acceleration, would love to hear why you think that will grow units, and particularly, if you could bifurcate your commentary across both training and inference. Pat Gelsinger (CEO): Yes. And thanks, C.J. And generally, there are great analogies here that from history we point to. Cases like virtualization was going to destroy the CPU TAM and then ended up driving new workloads, right? If you think about a DGX platform, the leading-edge AI platform, it includes CPUs, right? Why? Head nodes, data processing, data prep dominate certain portions of the workload. We also see, as we said, AI as a workload where you might spend 10 megawatts and months training a model but then you’re going to use it very broadly for inferencing. We do see with Meteor Lake ushering in the AI PC generation, where you have tens of watts being responsive in a second or two. And then, AI is going to be in every hearing aid in the future, including mine, where it’s 10 microwatts and instantaneous. So, we do see as AI drives workloads across the full spectrum of applications. And for that, we’re going to build AI into every product that we build, whether it’s a client, whether it’s an edge platform for retail and manufacturing and industrial use cases, whether it’s an enterprise data center where they’re not going to stand up a dedicated 10-megawatt farm, but they’re not going to move their private data off-premises, right, and use foundational models that are available in open source as well as in the big cloud and training environments as well. We firmly believe this idea of democratizing AI, opening the software stack, creating and participating with this broad industry ecosystem that’s emerging. It was a great opportunity and one that Intel is well positioned to participate in. We’ve seen that the AI TAM, right, is part of the semiconductor TAM. We’ve always described this trillion-dollar semiconductor opportunity and AI being one of those superpowers, as I call it, of driving it. But it’s not the only one and one that we’re going to participate in broadly across our portfolio. John Pitzer (Head of Investor Relations): C.J., do you have a follow-up question?

Yes, please. You talked a little bit about 18A and backside power. Would love to hear what you’re seeing today in terms of both, scaling and power benefits and how your potential foundry customers are looking at that technology in particular. Pat Gelsinger (CEO): Yes. Thank you. And we continue to make good progress on our 5 nodes in 4 years. And with that, that culminates in 18A. And 18A is proceeding well and we got a particularly good response this quarter to PowerVia, the backside power that we believe is a couple of years ahead as the industry measures it against any other alternative in the industry. We’re very affirmed by the Ericsson announcement, which is reinforcing the strong belief they have in 18A. But over and above that, I mentioned in the prepared remarks the two major significant opportunities that we made very good progress on as a big 18A foundry customers this quarter and an overall growing pipeline of potential foundry customers, test chips and process as well. So we feel 5 nodes in 4 years is on track. 18A is the culmination of that and good interest from the industry across the board. I’d also say that as part of the overall strength in the foundry business as well and maybe tying the first part and the second part of your question together is that our packaging technologies are particularly interesting in the marketplace, an area that Intel never stumbled, right? This is an area of sustained leadership that we’ve had. And today, many of the big AI machines are packaging limited. And because of that, we’re finding a lot of interest for our advanced packaging, and this is an area of immediate strength for the foundry business. We set up a specific packaging business unit within our foundry business and finding a lot of great opportunities for us to pursue there as well. null (Operator): And our next question comes from the line of Timothy Arcuri from UBS.

First, Dave, I had one for you. If I look at the third-party contributions, they were down a little bit, which was a little bit of a surprise. But you did say that the Arizona fab is on track. Can you sort of talk about that? And I know last quarter, you said gross CapEx would be first half weighted and the offsets would be back half weighted. Is that still the case? David Zinsner (CFO): Yes, we managed our capital expenditures better than I expected. Initially, we thought it would be more front-end loaded, but it's turning out to be more evenly distributed between the first and second halves. This quarter, we handled our CapEx particularly well, which contributed positively to our free cash flow. When you effectively manage CapEx, it reduces offsets. This resulted in lower capital offsets for this quarter. However, we're still on track for the anticipated capital offsets for the year through SCIP, which is where most of our capital offsets have come from thus far. In the near future, as we tap into CHIPS incentives, we will see additional offsets. Looking ahead to next year, we will also start benefiting from the investment tax credit, which will further assist with the capital offsets. For now, SCIP and SCIP1 are our main focus, depending on how spending lands each quarter. Pat Gelsinger (CEO): Yes. To add to that, we’re excited about the approval of the EU Chips Act for our projects in Germany and Poland, which will move forward for formal DG competition approval. We are also pleased to have submitted our first proposal for the on-track Arizona facility, and we plan to submit three more proposals for the U.S. CHIPS Act this quarter. We are progressing well in this area, and we are very happy with the strong engagement from both Europe and the U.S. Department of Commerce as we continue to work through the application processes. John Pitzer (Head of Investor Relations): Tim, do you have a follow-up question?

I do. Yes, Pat. So, you talked about an accelerated pipeline of more than $1 billion. And I think Sandra has been recently implying that you could do over $1 billion in Gaudi next year. So, the question is, is that the commitment? And then also at the Data Center Day, you had talked about merging the GPU and the Gaudi road maps into Falcon Shores but that’s not going to come out until 2025. So, the question really there is wondering where that leaves customers in terms of their commitment to your road map, given those changes. Pat Gelsinger (CEO): Yes. And let me take that and Dave can add. Overall, as we said, the accelerator pipeline is now well over $1 billion and growing rapidly, about 6x this past quarter. That’s led by but not exclusively Gaudi but also includes the Max and Flex product lines as well. But the lion’s share of that is Gaudi. Gaudi2 is shipping volume product today. Gaudi3 will be the volume product for next year and then Falcon Shores in '25, and we’re already working on Falcon Shores 2 for '26. So, we have a simplified road map as we bring together our GPU and our accelerators into a single offering. But the progress that we’re making with Gaudi2, it becomes more generalized with Gaudi3, the software stack, our One API approach that we’re taking will give customers confidence that they have forward compatibility into Gaudi3 and Falcon Shores. And we’ll just be broadening the flexibility of that software stack. We’re adding FP8. We just added PyTorch 2 support. So every step along the way, it gets better and broader use cases. More language models are being supported. More programmability is being supported in the software stack. And we’re building that full, right, solution set as we deliver on the best of GPU and the best of matrix acceleration in the Falcon Shores time line. But every step along the way, it just gets better. Every software release gets better. Every hardware release gets better along the way to cover more of the overall accelerator marketplace. And as I said, we now have Gaudi3 wafers. First ones are in hand, so that program is looking very good. And with this rapidly accelerating pipeline of opportunity, we expect that we’ll be giving you very positive updates there in the future with both customers as well as expanded business opportunities. null (Operator): And our next question comes from the line of Ben Reitzes from Melius Research.

Pat, your comment about PCs next year and AI having a Centrino moment really caught my attention. Could you elaborate on that? When Centrino was introduced, it was clear that we moved away from wired connections, and investors understood that. What is the moment with AI that will speed up the client business and benefit Intel? Pat Gelsinger (CEO): Yes. And I think the real question is what applications are going to become AI-enabled? And today, you’re starting to see that people are going to the cloud and experimenting with ChatGPT, writing a research paper and that’s like super cool, right? And kids are, of course, simplifying their homework assignments that way. But you’re not going to do that for every client becoming AI-enabled. It must be done on the client for that to occur, right? You can’t go to the cloud. You can’t round trip to the cloud. All of the new effects, real-time language translation in your Zoom calls, real-time transcription, automation, inferencing, relevance portraying, generated content and gaming environments, real-time creator environments being done through Adobes and others that are doing those as part of the client, new productivity tools being able to do local legal brief generations on clients, one after the other, right, across every aspect of consumer, of developer and enterprise efficiency use cases. We see that there’s going to be a raft of AI enablement and those will be client-centered. Those will also be at the edge. You can’t round trip to the cloud. You don’t have the latency, the bandwidth or the cost structure to round trip, let’s say, inferencing in a local convenience store to the cloud. It will all happen at the edge and at the client. So with that in mind, we do see this idea of bringing AI directly into the client immediately, right, which we’re bringing to the market in the second half of the year, is the first major client product that includes native AI capabilities, the neural engine that we’ve talked about. And this will be a volume delivery that we will have. And we expect that Intel is the volume leader for the client footprint, is the one that’s going to truly democratize AI at the client and at the edge. And we do believe that this will become a driver of the TAM because people will say, 'Oh, I want those new use cases. They make me more efficient and more capable, just like Centrino made me more efficient because I didn’t have to plug into the wire, right? Now, I don’t have to go to the cloud to get these use cases. I’m going to have them locally on my PC in real time and cost-effective. We see this as a true AI PC moment that begins with Meteor Lake in the fall of this year. John Pitzer (Head of Investor Relations): Ben, do you have a follow-up question, please?

Yes. I wanted to double click on your sequential guidance in the client business. There are some concerns out there with investors that there was some demand pull-in, in the second quarter, given some comments from some others. And just wanted to talk about your confidence for sequential growth in that business based on what you’re seeing and if there was any more color there. Pat Gelsinger (CEO): Yes. Let me start on that and Dave can jump in. The biggest change quarter-on-quarter that we see is that we’re now at healthy inventory levels. And we worked through inventory in Q4, Q1 and some in Q2. We now see the OEMs and the channel at healthy inventory levels. We continue to see solid demand signals for the client business from our OEMs and even some of the end-of-quarter and early quarter sell through are clear indicators of good strength in that business. And obviously, we combine that with gaining share again in Q2. So, we come into the second half of the year with good momentum and a very strong product line. So, we feel quite good about the client business outlook. David Zinsner (CFO): I’d just add, normally over the last few quarters, you’ve seen us identify in the 10-Q strategic sales that we’ve made where we’ve negotiated kind of attractive deals which have accelerated demand, let’s call it. When you look at our 10-Q, which will either be filed late tonight or early tomorrow, you’ll see that we don’t have a number in there for this quarter, which is an indication of how little we did in terms of strategic purchases. So to your question of did we pull in demand, I think that’ll probably give you a pretty good assessment of that. null (Operator): And our next question comes from the line of Srini Pajjuri from Raymond James.

Pat, I have a question about AI and custom silicon. It's encouraging to see that you've announced a customer for 18A on custom silicon. There seems to be a significant demand for custom silicon in the AI sector. Some of your hyperscale customers are already using custom silicon as an AI accelerator. I'm curious about your strategy in this market. Is it a key focus for you? If yes, do you currently have any customer engagements? Pat Gelsinger (CEO): Yes. Thank you, Srini. And the simple answer is yes, and I have multiple ways to play in this market. Obviously, one of those is foundry customers. We have a good pipeline of foundry customers for 18A, foundry opportunities. And several of those opportunities that we’re investigating are exactly what you described, people looking to do their own unique versions of their AI accelerator components, and we’re engaging with a number of those. But some of those are going to be variations of Intel standard products. And this is where the IDM 2.0 strength really comes to play where they could be using some of our silicon, combining it with some of their silicon designs. And given our advanced packaging strength, that gives us another way to be participating in those areas. And of course, that reinforces some of the near-term opportunities will just be packaging, right, where they already have designed with one of the other foundry, but we’re going to be able to augment their capacity opportunities with immediately being able to engage with packaging opportunities and we’re seeing pipeline of those opportunities. So overall, we agree that this is clearly going to be a market. We also see that some of the ones that you’ve seen most in the press are about particularly high-end training environments. But as we said, we see AI being infused in everything. And there’s going to be AI chips for the edge, AI chips for the communications infrastructure, AI chips for sensing devices, for automotive devices, and we see opportunities for us, both as a product provider and as a foundry and technology provider across that spectrum, and that’s part of the unique positioning that IDM 2.0 gives us for the future. John Pitzer (Head of Investor Relations): Srini, do you have a follow-up question?

Yes, it’s for Dave. Dave, it’s good to see the progress on the working capital front. I think previously, you said your expectation is that free cash flow would turn positive sometime in the second half. Just curious if that’s still the expectation. And also, on the gross margin front, is there any, I guess, PRQ charges that we should be aware of as we go into fourth quarter? David Zinsner (CFO): Okay. So, let me just take a moment just to give the team credit on the second quarter in terms of working capital because we brought inventory down by $1 billion. Our days sales outstanding on the AR front is down to 24 days, which is exceptional. So, a lot of what you saw in terms of the improving free cash flow from Q1 to Q2 was working capital. So, I think the team has done an outstanding job just really focusing on all the elements that drive free cash flow. Our expectation is still by the end of the year to get to breakeven free cash flow. There’s no reason why we shouldn’t achieve that. Obviously, the net CapEx might be a little different this year than we thought coming into the year. But as we talked about, there’s just a focus on free cash flow, the improved outlook in terms of the business. We think we can get to breakeven by the end of the year. As it relates to pre-PRQ reserves in the fourth quarter, we’re likely to have some, but it should be a pretty good quarter-over-quarter improvement from the third quarter, which was obviously a good quarter-over-quarter improvement from the second quarter. John Pitzer (Head of Investor Relations): Srini, thanks for the questions. Jonathan, I think we have time for one last caller, please. null (Operator): Certainly. And our final question for today then comes from the line of Aaron Rakers from Wells Fargo.

I have a quick follow-up as well. Going back to the gross margin a little bit, Dave, when you provided guidance for this quarter, you mentioned that looking back, the PRQ impact would be about 250 basis points. There was also an underload impact that you indicated would be around 300 basis points. I'm curious about what those numbers were in the most recent quarter as we try to frame expectations going forward. David Zinsner (CFO): Yes, they were largely as expected, although it was off of a lower revenue number. So, the absolute dollars were as expected. They had a little bit of less of an impact, given the revenue was higher. And both of those numbers, like I said, will be lower in the third quarter. John Pitzer (Head of Investor Relations): Aaron, do you have a quick follow-up?

I do, just real quickly on just kind of the AI narrative. We talked about Gaudi a lot in the pipeline build-out. I’m curious as you look forward, as part of that pipeline, Pat, do you expect to see deployment in some of the hyperscale cloud guys and competing against directly some of the large competitors on the GPU front with Gaudi in cloud? Pat Gelsinger (CEO): Simple answer. Yes. Right? And everyone is looking for alternatives. Clearly, the MLPerf numbers that we posted recently with Gaudi2 show very competitive numbers, significant TCO benefits for customers. They’re looking for alternatives. They’re also looking for more capacity. And so, we’re definitely engaged. We already have Gaudi instances on AWS as available today already. And some of the names that we described in our earnings calls, Stability AI, Genesis Cloud. So, some of these are the proven, I’ll say, at scale Tier 1 cloud providers but some of the next-generation ones are also engaging. So overall, absolutely, we expect that to be the case. We’re also on our own dev cloud, we’re making it easier for customers to test Gaudi more quickly. And with that, we now have 1,000 customers now who are taking advantage of the Intel Development Cloud. We’re building a 1,000-node Gaudi cluster so that they can be at scale with their testing a very large training environment. So overall, the simple answer is, yes, very much so, and we’re seeing a good pipeline of those opportunities. So with that, let me just wrap up our time together today. Thank you. We’re grateful that you would join us today, and we’re thankful that we have the opportunity to update you on our business. And simply put, it was a very good quarter. We exceeded expectations on top line, on bottom line. We raised guidance and we look forward to the continue opportunities that we have of accelerating our business and seeing the margin improvement that comes in the second half of the year. But even more important to me was the operational improvements that we saw, a good fiscal discipline, cost-saving discipline and best of all, the progress that we’ve made, right, on our execution, our process execution, product execution, the transformational journey that we’re in. And I just want to say a big thank you to my team for having a very good quarter that we could tell you about today. We look forward to talking to you more, particularly at our Innovation in September. We’ll be hosting an investor Q&A track and we hope to see many, if not all of you there. It will be a great time. Thank you. null (Operator): Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.