All righty. Good afternoon, everyone. Thanks for coming. I'm Christopher Danely, your friendly neighborhood semiconductor analyst here at Citigroup. Next up, a company that needs no introduction, Intel, and a CFO that needs no introduction, Dave, "The Hammer" Zinsner, is what we're calling you. In all sincerity, I've known Dave for quite some time. I literally think he's the best CFO we have in semis, and I wrote as much when he first joined Intel. So before we get to me beating him up, I do have a couple of housekeeping items to talk about. I guess this is some sort of a safe harbor statement. There we go. Before we begin, please note that today's discussion may contain forward-looking statements-- Really? Great!
I like forward-looking statements that are subject to various risks and uncertainties and may reference non-GAAP financial measures. Please refer to Intel's most recent earnings release and annual report in Form 10-K, and other filings with the SEC for more information on the risk factors that could result in actual results. Who wrote that? Result in actual results to differ materially and additional information on their, not our, non-GAAP financial measures, including reconciliations where appropriate, to the corresponding GAAP financial measures. All right. With that out of the way, let's get to the questions. So, you guys had a very interesting conference call/print. You announced some changes. Maybe let's just hit the cost reduction plan.
Sort of, you know, broad picture, run through it again, where the cuts are going to come from, could there be more, and then we'll. I'm sure we'll go all over the place after that.
Right. Okay. So, yeah, first of all, thanks for having me, Chris. Appreciate it.
Thanks for coming, Dave.
Yeah, so, you know, as we rolled out the new operating model, where we divided the company into a foundry business and a products business and started to, you know, operationalize that, but also, you know, manage the financials, one of the benefits to doing that was to begin to benchmark each of those entities to their corresponding competitors.
Mm-hmm.
to get a better sense of, you know, where we were overspending, relative to, other peers in the industry. And once we, you know, in the first quarter, we announced or showed our first quarter P&L in that format, and then I kicked off a process to start to do all of this benchmarking work. And internally, and sometimes you hear Pat describe it this way, we called it the Clean Sheet Analysis.
Yeah.
So it was basically saying, "Hey, we now have a fabless business at a particular size. What are the elements of how much finance do they need? How much HR do they need? How much design engineering do they need? How much facilities expense should we expect?" And we went through, kind of, line by line through all of those. Now, it was supposed to take the greater part of the year.
Mm-hmm.
And we were gonna finish it off by the end of the year. We'd have that now to work with, and then we'd go forward into 2025 and beyond, making all the necessary decisions to get to those benchmarks for both foundry and products. As you know, as it became clear that the back half of the year wasn't gonna have this uplift that we were thinking.
Mm-hmm.
which, you know, generally took the whole kind of five-year horizon and shifted it downward. It became clear that, hey, we're gonna need to action these, and we need to action them relatively quickly. And so we accelerated the end of it, such that at least the analysis, we would get there by the end of August, so or end of July, so basically the August earnings call, that we'd be able to announce what we were gonna find or and cut. And we looked at all three elements. We looked at cost of sales, we looked at operating expenses, and we looked at capital expenditures, and in operating expenses, it was pretty easy.
You know, you kind of look at the quartiles of every competitor in terms of what they're spending and look at it relative to us, and we're fairly far out of the benchmarks. And so some of it was just, hey, you know, finance needs to reduce their spending to be in the top quartile. HR needs to reduce their spending to be in the top quartile. Some of it was kind of overarching, you know, aspects or functions of the business, so, you know, we have repetitive processes in a number of different areas. Everybody wanted to hold their specific way of coming up with market share data and so forth. So, like, relooking at all of those things to drive more efficiency, you know, we have facilities. Pat mentioned this last week, but we have facilities all over the world.
Almost every one of them has a lab. You know, we can't have, like, seventy labs out there. I mean, that's just not efficient. So it's getting at all those things to drive more efficiency. And then there's just an aspect of it that is, you know, we have a lot of layers within the organization, and we need to have more of those layers, either actively in the design, actively in the production, or actively in the sales of those products. The stuff that goes on behind the scenes, we need to have less of that-
Mm-hmm.
That activity. You know, kind of off the field versus on the field mix. And then lastly, we're just looking, you know, through the product portfolio and going, you know, kind of product by product and looking at areas where, you know, we don't see good profitability, and we don't have good confidence around our ability to drive profitability in those, in those individual product lines and, you know, make reductions in, in those areas. And what we came to is that, hey, we think we can get the OpEx down, in light of all of that, down to kind of the seventeen and a half range, for next year, and then get it down even further in the following year.
Mm-hmm.
You know, I feel, you know, basically, at this point, we're largely through a lot of it. We should be mostly through all of the cuts by the time we're announcing earnings this quarter. There'll be some stuff that, you know, kind of straggles on, but most of the decisions will have been actioned and communicated, and, you know, we wanted to do this quickly. On the cost of sales side, it's kind of a similar thing. You know, there's a function within cost of sales that is part of process technology development, and, you know, there are areas to be more efficient there, and, you know, we will. That's how we're gonna get the billion-dollar cut to next year's cost of sales is through attacking that area. 'Cause we're looking at process technology kind of holistically.
Mm-hmm.
Some of it gets allocated to cost, some of it gets allocated to operating expenses, and then lastly, there's a CapEx part, and, you know, I look at CapEx in kind of three buckets. One is, you know, what do we need to invest in to keep the process technology moving forward? We're not gonna do anything to affect that. Obviously, that's the most important thing we do.
Yeah, the core CapEx, I guess, what you call that?
What's that?
Core CapEx.
Call it core CapEx, maintenance CapEx, whatever. Then there's an amount that we are gonna want to invest in to be a bit, to have some white space. And we've dialed back how much white space we think we need, but we still need to have white space. Because the problem with white space is, or call it shell space, is that if you don't have it and suddenly decide you need it, it's five years before you're gonna get it now, because it takes so long to build that out. So we wanna make sure that we're still kind of leaning ahead on that space. And then the rest of it is capacity, and we can modulate capacity based on demand. And obviously, you know, with the change in the demand profile, we saw an opportunity to reduce our spending.
You know, it. I wouldn't say it was easy, but there was a fair amount of low-hanging fruit in that capital spend to be able to adjust it. One of the things that we did that will benefit us in CapEx, will also benefit us on the spending side in the P&L, is we're gonna skip over productizing 20A. That's another example of something that we'll do. 18A, which is our, you know, most advanced process now, had its 1.0 PDK in July, looking really good. Pat mentioned last week that, you know, we'll have Panther Lake out in production on 18A by the end of the year. At this point now, you know, having the 20A was nice to have and relatively expensive.
We figure we'll spend or save about $500 million just from that activity between some CapEx, some and some spending in the P&L to get us there. You know, no stone will be left unturned as we kind of work our way through hitting these targets that we talked about.
Okay. Just a few questions to dig into on that. I think Pat talked about this at one of our dastardly competitors' conferences last week. Would you say that? So, and I think you alluded to it, would you say that the main catalyst for the cost cuts was the second half, you know, sort of plan being lowered? Or was there something else there?
Yeah.
I'm just wondering-
I would call it-
Turn on the light bulb or-
Yeah, I would call it. It was all we were going down the path of this, no matter what.
Got it.
We understood we were overspending. It didn't make sense. When we provided our 60/40 target model by 2030, it implies a 20% of revenue for OpEx, and, you know, we're well in excess of that-
Mm-hmm
... as we are, as we look today. So we definitely have needed to bring that down. What we did, though, is accelerate it. So rather than just meander it out over the course of the year and into next year, we decided we're gonna commit to something and go action a lot of these things pretty quickly. And so, you know, that's kind of where we are.
Yep. And then I guess, an operational question. So when you announce the cuts, you know, thousands of people and this much money and stuff like that, how do you guys sort of come up with that number? Because it sounds like most of the cuts will be done by the end of the quarter. Do you just figure, okay, you know, it looks like we're gonna, you know, get rid of some of these, people or this much and that much, and then we'll figure out the nitty-gritty later? Or was, you know, pretty much most of the specific cuts already done and in that number? I'm just kind of curious as to how-
Yeah, I mean, because we had done all this, this analysis-
Ah!
... this Clean Sheet Analysis, we kind of understood, you know, function by function, what the spend should be and what the people count should be, in each one of those areas. And so, and that's a majority of it. The area that we still needed to work through is, kind of portfolio activities. And, you know, that does affect, you know, specific groups of, or specific teams within the company. But we'll, you know, largely actually be through that by, again, by the time we announce our earnings in the third quarter.
Do you feel like the plan you have is fine for now, or could there be, you know, additional cuts? Was this the first cut of the cuts or-
Yeah
... you know, could there be anything else?
I think, you know, this puts us in a good place in terms of benchmarking.
Mm-hmm.
I think we will make the necessary decisions around businesses that we think, you know, we don't have high confidence around performing.
Yep.
So I would say, you know, never say never, but largely this should, this should be it. The only thing is that there, there are some things that have a longer period of time between the time you make the decision and the time you, you know, actually can, you know, make or do the actions necessary to, to hit the target. And so there will be a few things that's, you know, kind of drag into 2025. And that's why the savings that we talked about for 2025, which is, you know, to get down to the $17.5 billion OpEx-
Yep
... we said, "Hey, by the end of the year, we'll actually be exiting at a lower rate than that.
Yep.
And so we could see a lower number for 2026, and that's because some of the things kind of straddle into the 2025 year.
We'll definitely see. Does that mean we'll see the bulk of the impact in Q4 or, like, Q4 and then first half of next year as far as the bulk of the benefits?
Yeah, I think, you know, by the time, you know, we actually. You know, there's some things that are around notification and so forth, by the time it actually gets action, we'll see a little bit of savings in the fourth quarter, and probably most of the savings you'll really see in 2025. The other thing that will happen is in the third quarter, you know, obviously, some of this stuff is gonna come with, you know, restructuring or one-time charges-
Mm-hmm
... associated with it. That will mainly show up in the third quarter. I could see some of it straggling into the Q4, maybe into the Q1, but for the most part, I'd say most of it will get kind of done in Q3. The one other kind of nuance to this is there are some one-time charges that we clearly can call restructuring and clearly pro forma out of the P&L. And we alluded to this in the earnings call. I'm not sure if you picked it up, but there are some of these charges that we have traditionally not pro forma'd, even if they're big and one-time in nature.
So there may be some things that show up in our non-GAAP numbers that will be, you know, kind of associated with some of these activities, and we'll, you know, we'll identify them, we'll call them out to make sure that that's clear. It will make the modeling a little funky for the next couple quarters.
Okay. And it seems like you broke out the cost cuts into, there's definitely gonna be some OpEx. Sounds like it's a little more towards R&D than SG&A, certainly some product lines and CapEx. Would you say those are the, the three biggest? And then where do you expect to save more on? Would it be on OpEx or gross margin or CapEx, or are they all sort of equal?
On the cuts?
Yes.
Yeah, mostly, I would say, hard to say. You gotta define what, what's the biggest. I mean, we're bringing CapEx down by more than $10 billion next year.
Yeah.
So, and I guess in that regard-
I was thinking that would be the biggest,
It's the biggest-
Yeah
... biggest reduction. OpEx is, you know, depending on what your model suggested next year, would be somewhere in the kind of $3.5-$4.5 billion reduction off of whatever you thought next year's OpEx would be, and then cost of sales, you know, is the $1 billion.
Yep. Okay, great. And then, you guys talked about moving some manufacturing, I forget exactly which chip line to Ireland, and it resulted in a gross margin impact. Maybe just, you know, run us through that, you know, sort of what happened, where did the miscalculation occur? Is this something you typically do, and it was earlier than expected, or
Yeah
... maybe just take us through that.
Yeah, I think, you know, stepping back to the second quarter gross margins, there were three things that impacted gross margins. There was this shift, quick shift to Ireland. There was some kind of reserves we took either for demand or in some cases, we took reserves associated with businesses that were, you know, kind of end of lifing. And so, you know, all those things we hadn't baked into the model for one reason or another, and, you know, they all kind of hit us at once. And I would say, you know, we generally have a few things that go this way for us, but usually there's some things that offset it, and so you don't really notice it.
It was just an unlucky quarter for us, where we had things that went against us, and nothing really hit us to the positive, and so it kind of exacerbated the gross margin situation for us. On the Ireland specifically, the Ireland move, you know, typically what we have done is we ramp up the volume to a pretty reasonable level in Oregon, and then once it's kind of you know kind of clicking along there, then we switch it over to a high volume fab to really ramp it up to a production level. In this case, you know, also trying to kind of be very smart around our CapEx.
We had the opportunity to, if we shift it faster, we can reduce the spend that we would ordinarily need to have in Oregon to expand that footprint. Now, we have opened up space that they can just slot into for the advanced nodes. And so it was good in that regard. I think it saved us, like, $1 billion of cash flow-
Okay
... to do it. And then the second benefit was if you ramp the high volume fab, the fab that you have identified as the high volume fab quicker, you get to a better cost, for those wafers quicker.
Yeah.
Now, you have to take some pain in the beginning, but over time, it's actually a good move, and so we went hard to shift it, and we also pushed the team to sell Meteor Lake as hard as possible.
Mm-hmm.
You know, those two things combined drove a pretty significant gross margin pressure on us. You know, we missed it by, I don't know, three or four. It was like 500 basis points. This was like a third of it, that we-
Yep
...that, that drove the miss. Now, we kind of knew we were doing that in the, in the quarter before. I would say it was a combination of ordinarily, when you're pushing hard on something, it's usually not negative to you, but in this case, it was just because it's an early ramp of the wafers that we just weren't, you know, kind of baking into the forecast.
Mm-hmm.
And then the second piece of it was, with this new model that we have, where we have foundry rolling up a P&L and the products P&L, we kinda lost the storyline on this one. You know, it was a good answer for products, and we didn't kind of track how this would be actually negatively pressuring gross margins.
Growing pains, probably?
Yeah, a little bit-
Yeah
... on the kind of the new reporting structure. It's different, you know, because there's a massive amount of elimination when you combine these two businesses to create the total company, so it makes it a little noisy. We've worked out those kinks, but we probably should have had better line of sight to those gross margins, you know, when we guided the second quarter back in whenever it was, April.
Yeah. Do you think that this is something that you'll start to do on a more normal basis, or is this more of a one-off as far as the early move?
Yeah, I-
'Cause it is gonna be a longer-term gain.
It is a good question. You know, and we're looking at it, and I think you'll see that there will be opportunities for us to be more aggressive in ramping our wafers in the high volume fab earlier.
Mm-hmm.
To get the learnings earlier and to keep, you know, the capacity, the precious compute capacity in Oregon available to us to ramp the newer nodes early on. You're likely to see us try, you know, play around with that a little bit, and it is the way generally the industry works.
Okay, let's shift gears a little bit, but stay on the CapEx topic, CHIPS Act. So you guys have your grant allegedly in hand. How does the, you know, sort of CapEx cut fit in with CHIPS Act? Is CHIPS Act gonna change? You know, are you already seeing some money flow in? How long is this gonna take? Maybe just sort of run us through the expected benefits and timeline of the CHIPS Act.
Okay. Yeah, so, so let's start. There's two parts of CHIPS. There's one is the grants, and the other is the Investment Tax Credit. Now let me go into the CHIPS part and break that down. There are kind of three components to getting awarded money for CHIPS. First, there was an application process that led to a term sheet, and that's what we announced-
Mm-hmm.
$8.5 billion. There was then a process to get a long form, so kind of an expanded term sheet, essentially, that just kind of fleshes out certain elements. You know what a term sheet looks like.
Yeah.
It's usually got, like, four sentences for every topic that's a major topic.
Yeah.
So it's got to be expanded upon. So we went through that process, and we are complete through that process. Now we go through kind of the documentation of the awards in a really detailed fashion, that'll feel like a definitive agreement almost to some extent. And we're not there yet. So there's been no money sent to us yet on the CHIPS grants, and it won't be until we have that, and then there'll be some kind of process by which we go then say, "Okay, we've accomplished a milestone, you know, now, let's get the grant money." So the likelihood is, you know, we don't see actual cash coming in the door until later this year, is my guess.
Oh, okay.
And, you know, that's the process that, you know, has kind of been built in by the CHIPS office. So, everyone is going through that same process as-
Do you think it'll get paid out over a year, five years, 10 years?
So it's milestone based. You know, it's over a few years that it gets paid out.
Okay.
But it's, like, specific milestones. You hit this, you know, you finish off a certain construction or implementation of equipment, or you sign up a customer, or you know, get to a certain wafer level. So there's a whole bunch of milestones that we have to hit, and every time-
Yeah
... you hit one of those milestones, you get, you know, you get a certain amount of the grant money.
Okay, and then the investment tax credit?
Okay. So then on the Investment Tax Credit side, that one's a little bit more straightforward. There's essentially two points in which you can claim a credit. One is when the fab is kind of ready for tooling.
Mm-hmm.
And the second is when the tools are in and it's production ready, at which time, you know, you file it on your tax return and, and then, you know, it kind of nets out in your taxes, subsequently. We have already, in some cases, started to account for some of the Investment Tax Credit, because we know we've already earned it. You know, there was something like, I don't know, last year it was like $500 million of-
Yep
... of credits that showed up in the balance sheet. We still got to collect that, the actual cash on that, but that's already in flight. And so, you know, those will extend for some time as we kind of build out the project. And it's simpler in the sense that, you know, you invest a dollar and you know, kind of what kind of grant you're gonna get. It's 25 cents on the dollar, and so you get 25 cents, you know, through this process that I just outlined.
Okay. Does the restructuring change anything about the CHIPS Act as far as-
No.
Any grants and so forth?
Yeah.
Okay.
It shouldn't.
And let's talk about the, you know, big news so far this year is, you know, splitting of Intel into foundry and design. What can we expect the company to, you know, look like in, let's say, three to five years? I mean, you guys have actually given, like, a six-year timeline, but will we see, you know, two completely separate companies, separate stocks, or will this be, you know, sort of one entity with, you know, two parts? Or what, what's the vision that you-
I'll tell you what I can predict. What I can't predict is a lot of those things, but what I can predict is we are going to create more separation between these two businesses. It's important for customers to see that separation, and I think it makes the whole system better, right? I mean, the whole reason to split these up is the foundry business starts to become, you know, very focused on cost and very focused on spending and very focused on making sure they, you know, the utilization is at a maximum. That is not the way Intel ran the business.
Yeah.
They didn't care necessarily about cost. It was all about getting the last wafer they could possibly get out.
Mm-hmm.
If you were, you had too much capacity, who cares? So be it. So it's creating that mindset within the business that's important. Same thing is true on the fabless side. Their margins were mostly affected by loadings in the fab, and that's all they ended up caring about.
Yep.
In reality, they should have been caring about, you know, how much silicon they're using, what their test times are, are they using the most effective packaging? Now they're focused on all those things.
Mm-hmm.
So we will get benefit. You know, part of what allows us to talk about, you know, the reductions we're talking about in terms of OpEx and the improvements in gross margins to ultimately get to the 60% gross margin by 2030, is because of this model that we're driving the business to, and you know, we're going to put separate systems in place. I'm in the process of implementing ERP systems that upgrade significantly these old, clunky ERP system, the ERP system we had. We will have a separate ERP system for products and a separate ERP system for foundry, and there'll be lots of kind of firewalls in place to make sure you know, our foundry partners with products don't feel like information's getting shared back to foundry.
Mm-hmm.
That the IP that other companies are providing are leveraging within our foundry to develop their products aren't impacted by, or aren't, you know, leading into the products company. That's, that is our stated plan, and it has been from the very beginning that we talked about this operating model. You know, where it goes from there is difficult to say. I just say, you know, our goal here is to drive maximum shareholder value, and that's, that's the way we think about this every day, and I think you can expect us to continue to think about it in that light.
Mm-hmm. When we had you here in this same seat last year, you talked about the actual, you know, act of benchmarking your foundry manufacturing versus other leading edge foundries, was already having tangible benefits. Can you just share with us, now that we're a year past it, what has been, you know, like, the better than expected part of the separation, besides obviously, you know, waking up the, you know, TMG or engineering to, "Wow, you know, this is what TSMC does-
Yeah.
-and we should probably figure it out?
Yeah, I think, you know, we had a goal to... I gave a, like, a stretch goal to... So I'm tracking all the savings that we get from this new model.
Mm-hmm.
I have a team that looks at it on a regular basis and then reports it out. We said we want. I can't remember what the exact number last year, but it was minimal. It was, I think, something like $200 million. We wanted to save $200 million in cash flow from the model already by the time we even implemented it.
Yeah.
This year I said, "Okay, well, they got to $200 million. Let's make it a big number." So I said, "I want $1 billion out of cash flow." Now, it doesn't... You know, some of it got reinvested and so forth.
Mm-hmm.
But let's get $1 billion of cash flow improvement just from operating in this new model, and they are so close to actually hitting this target now.
That was a stretch target, right?
It was a stretch target. And, you know, it's just, quite honestly, I, you know, one of them was this kind of shift from Oregon to Ireland, was one of the things they thought through as now just being their own business and thinking about their own profitability and how they could make their cash flows look better. They made that call, and so I think there and I can't remember exactly all of them, but it all added up to about $1 billion of savings that we credited the organization with, based on developing the new model. On the product side, we saw it kind of right away.
I mean, the amount of focus on test times, which I mean, I don't think anybody even talked about test times much before that, has been significant. It's all their focus. And in some ways, it's in this interesting dynamic where, you know, all of a sudden, the products business is like, "I gotta cut my test times down," and that actually is revenue to them. So there's a little bit of a going back and forth by both of those businesses because, you know, they're now kind of somewhat self-optimizing a little bit, but it's the healthy thing to do over time.
Mm-hmm.
The one other thing that happened almost immediately was the products business would always just, you know, push a whole bunch of what we call internally, Hot Lots, but it was essentially-
Yeah
... all these lots of wafers going through that suboptimize the flow of the fab. And,
If it didn't hurt their P&L, what do they care?
Yeah. Yes, what do they care? So they just did it. And, you know, it was such a fractional thing to them ultimately, and it got spread over all the businesses, that any business never felt like their specific action affecting their specific P&L.
Yep.
As soon as it became a charge, like, "Hey, if you're gonna do a hot lot, I'm gonna charge you," it went down, like, 90%.
Amazing how that happens.
Suddenly didn't need hot lots as much.
Yeah. Cool. So just to touch on the foundry business, you know, a big push for you guys. When can we expect, I guess, material foundry revenue for products that are, you know, outside Intel?
Yeah. Yeah, okay. So to start with, you know, and this was probably the biggest surprise to the positive that we got with the foundry business, is that our packaging is actually very competitive, quite interesting to customers, and we're getting a lot of interest there. And so, you know, we had really kind of thought, okay, foundry's gonna be kind of like zero, and then in 2027, it's gonna be something, you know? Because we were thinking it was all gonna be about wafers. As it turns out, you know, that's not gonna be the case. We are gonna win packaging. Customers will have packaging revenue in the back half of this year. We had a little bit in 2Q. It'll be bigger next year.
And so this will be a nice, kind of growth business for us over the course of the next few years, as we wait for the wafer revenue, really.
Mm-hmm.
And the beauty of it, beyond just getting revenue early, is that it gives us an opportunity to kind of on-ramp customers. You know, they get to test us out in packaging, and then we can pull them in on the wafer side over time. And so I think it's just a great opportunity for us to be successful on the foundry side. The wafer side, you know, it's gonna take some time. We have 12 RFQs right now that we're dealing with-
Yep
... on 18A. I would imagine a lot of them will sort themselves out by the end of this year, and probably, you know, maybe some revenue in 2026, but probably 2027 is the year where we see some meaningful revenue from that set of customers.
And-
You know, just maybe one other thing, sorry to jump on you, but we just, in July, we talked about this on the earnings call, but just to reiterate it, July twenty-second or so, we launched the 1.0 PDK for 18A.
Yep.
So what that does is it says, okay, you know, are your yields at an acceptable level, or is your performance at a success, respectable level? And kind of, you know, benchmarks that relative to where it should be in terms of its maturity. And, you know, we hit that point on July twenty-second, and so then that allows the ecosystem partners to start building out the ecosystem to support those, you know. And now we have, you know, now you start to see the RFQs come in, you know.
Yep.
Like, okay, now that you got something, this is real, we can start using our own, you know, silicon on the process. Let's, you know, let's evaluate it. You know, will we win all of them? Probably not, but I think we will win a meaningful amount of them. And, you know, we don't need a whole lot of wafers, quite honestly, to make this work for us from an ROI perspective.
That kind of leads to my next series of questions. So you expect to have material packaging or advanced packaging revenue next year?
Yes.
on the foundry side?
Yep.
That'll impact it. Begs the question, what will the margins and like, the margin profile look like of that business? Will it be accretive, dilutive? We don't know yet.
Accretive to where it is now, because right now, gross margins are negative. But, I would say, you know, right now the margins we're getting on this business is roughly what we hope would be the average of the overall business. And we said we're roughly trying to get this business to be a 40%/30% kind of business, 40% gross margins, 30% operating margins over time, and that's kind of the goal by 2030. I'd say this is like, supports that up.
Yeah. And so how will the margins go up? Just more volume, better yields? Any, any, any other aspects?
Yeah. I mean, what's keeping the margins under pressure right now for them is, you know, we've got a whole lot of startup costs-
Yep
... because we're running so many nodes through-
Yep
At one time. It's, it's really putting pressure on the margins, and then our cost structure in pre-EUV wafers is not great.
Mm-hmm.
The price is not that great. When you look at the progression from those pre-EUV nodes up through 18A, it's like a 3X increase in pricing relative to cost.
Mm-hmm.
And so that alone drives the gross margins significantly. So you take those two things, that has a dramatic impact on the gross margins. I think over time, though, of course, scale is gonna matter.
Yep.
You know, I mean, it needs to have some scale to ultimately get to the 40%,3 0%. But a lot of it is really within our control.
Yeah. Is the advanced packaging you're offering, is that Foveros, or is that, you know, something else?
It's Foveros, it's EMIB. Yeah, both.
Okay, great. So getting back to, I guess your core CPU manufacturing, it seems like, you know, five nodes, four years, all on track, looking pretty good, hitting all the milestones, products out?
Yeah. I thought, I think Pat probably would've liked to have beaten the five nodes in four years. We're gonna hit it right around the four-year mark for 18A. I think if he had his druthers, he would've liked to see that come in earlier. But we hit, you know, what we committed, and I think that's pretty significant, given how five nodes in four years when I got here sounded like such a crazy idea to begin with. We will have Panther Lake, which is our first 18A product, in production by the end of the year, end of this year. You know, all the-
Like, out on the shelves?
Just ramping in production-
Okay
... of the factory. You know, all the early silicon that we've been you know, testing both in Clearwater Forest and in Panther Lake, those products look really good. So I'm pretty happy with where we are in terms of the process both from a you know, foundry perspective, but also from a products perspective-
Yep
... because it's important that those products were gonna be successful in the market and, you know. Looks good.
Sierra Forest, Granite Rapids.
Sierra Forest. Granite Rapids, you know, we said we would have it qualified in the back half of the year. Looking good. I think that is a meaningful step for us-
Yep
... competitively. Clearwater Forest will be on 18A. That'll be next year, coming out, and then we have Diamond Rapids, also, you know, out, you know, as the next generation.
Yep. Great. Had to check all those boxes.
Yeah.
So manufacturing's on track. You know, we've gone out and said at some point in the first half of next year, you guys could catch up to the competitor. Do you share that assessment? And, you know, when will we start to see some tangible market share gains?
Yeah. So I, on the client side, and-
Feel free to say no, Dan, you're good.
On the client side, I would just say we're in a great place in terms of market share. And, you know, with Lunar Lake that we just launched, formally launched yesterday, I mean, this has 120 platform TOPS. They run it continuously, and, you know, with applications running, and it had 20 hours of battery life. This is gonna be a terrific part, and I think it answers any of the outstanding competitive questions around kind of Arm-based solutions in the client space. So, you know, probably not for me to make market share predictions, but I would just say we feel like we're in a great competitive place in client.
And that was the only lingering question, and I think we've answered it.
Great.
You know, after Lunar Lake, there's Arrow Lake and Panther Lake, and there's gonna be a steady kind of successive-
Headquarters to Minneapolis.
A set of products coming out, so that's in good place. Where we still haven't, you know, completely, gotten the business to a good place is in the data center side of CPU. You know, I think Granite is a meaningful step forward for us in terms of making us competitive. Diamond will definitely put us in a good place competitively. And so it's just important that we, you know, kind of work our way through the roadmap to get us to where we wanna be in terms of competitive position.
Sure.
You know, we'll see.
Speaking of client, you know, what, what's your take on the overall PC market? Is it still healthy? Is it plateauing? You know, we've had other companies talk about that... You know, we saw a very strong PC market in the first half, and now there's any, you know, headwinds, flattening out, slowing down. Some folks are saying it's fine.
Yeah.
What, what's your take on the PC?
I would call it fine, although we had thought, you know, we were gonna see a pretty meaningful recovery.
Super seasonal, yeah.
Part of our, part of our back half recovery thesis was that, you know, client would, would have a, a step up in the back half of the year. The AI PC part of it has done well, but it's mostly kind of cannibalized the, you know, the, the non-AI PCs. And so, you know, that, that business is, you know, up a little bit from last year in, in terms of TAM. Up a little bit in, on a units basis versus last year, but it's not a significant improvement. And the way we're thinking about, like, funding the business, we're, we're gonna kind of be pretty conservative around our views of this bit, of, of the client space. Relatively conservative growth for next year and the following year. But it does have an opportunity to outperform.
You know, there is the Windows 10 end of service that should drive refresh. There is, you know, the AI PC might create an innovation cycle that could drive more meaningful refresh. And there is a whole bunch of old PCs out there that were procured in COVID and before that, you know, do need to be refreshed over time. But I think for us, we're just trying to be conservative around our modeling there, and we'll be pleased to the upside if we're wrong.
Yeah. And so I think you guys talked about, you know, a little bit of an inventory build in the PC channel in Q2, that's gonna get worked down in Q3.
Yeah
and then it'll take about a quarter, then Q4 should be
Yeah.
So-
Exactly.
Once you've done. Great. All right, I think that's all we have time for.
All right.
Thanks, David. Thanks, everyone.