Intel Corp. Q2 FY26 Earnings Call | $INTC | 🔴 WATCH LIVE

Thank you, Lipu. We delivered another strong quarter driven by robust demand and disciplined execution that resulted in upside to our supply. Second quarter revenue was $16.1 billion, $1.8 billion above the midpoint of our guide. And collectively, our AI-driven businesses grew greater than 70% year-over-year, including record data center growth, and contributed approximately 70% of revenue. It's important to note that despite exceeding our expectations for wafer outs in the quarter, strengthening demand continues to outstrip our growing supply. Q2 non-GAAP gross margin was 41.8%, approximately 280 basis points better than guidance. The upside was driven by higher revenue, better yields, and higher ASPs due to mix and pricing actions. We delivered second quarter non-GAAP earnings per share of $0.42 versus our guidance of $0.20 on higher revenue, stronger gross margins, and solid operating leverage. Q2 operating cash flow was $7 billion, and we exited the quarter in a strong liquidity position, including approximately $30 billion in cash and short-term investments. Our Q2 results reflect the ongoing progress in our operational transformation. We're moving faster, holding ourselves more accountable, and staying closer to our customers.

Moving to segment results. CCPG revenue was $8.9 billion, up 15% sequentially, and better than our expectations. The client TAM continued to hold up well despite broad component constraints and price inflation. Our AIPC revenue grew 26% sequentially and now represents two-thirds of our client revenue mix. In addition, we saw solid performance in our edge deployments, now representing roughly 10% of CCPG revenue. Operating profit for CCPG was $2.3 billion, 26% of revenue, and down approximately $173 million quarter-over-quarter due to inventory charges taken to optimize our factory network through overall customer demand across client and server. Our client group has now brought 18A to full scale with 400-plus designs for Series 3 across consumer and commercial. During a period of inflationary pressures, CCPG brought Core Series 3 to market at the ideal time on its optimized mainstream compute capabilities. Our integrated ARC graphics solution continues to see strong market adoption with 40-plus ARC integrated graphics designs across creator, workstation, commercial, and gaming targeted designs. Building on our success in gaming notebooks in Q2, CCPG also introduced Intel ARC G-Series processors, a new family of products designed for next-generation handheld gaming systems, an additional vector for growth. On the commercial side, activations for our market-leading vPro manageability software have surged 1500% over the last four quarters, underpinning that manageability and enhanced security are critical must-haves in the agentic workplace. We expect enterprise adoption of AI to be a long-term tailwind for CCPG, but our AI-driven market prospects don't stop there as the edge and physical AI opportunity is likely to at least match the client TAM over time. CCPG showcased this growing opportunity with 130 Series 3 design wins for edge AI applications, including brain and control deployments for robotics.

DCAI revenue was $6.3 billion, an increase of 24% sequentially and 59% year-over-year, meaningfully ahead of expectations. The result was driven by strong demand across hyperscale and enterprise. We also continue to see strong momentum in our purpose-built silicon product line with revenue up roughly 20% sequentially and nearly tripling year-over-year. Operating profit for DCAI was $2.5 billion, 40% of revenue, and up approximately $1 billion quarter-over-quarter on higher revenue, improved product margins, and lower operating expenses. Within the quarter, DCAI launched Xeon 6 Plus, codenamed Clearwater Forest, our first server-class product on 18A. The team announced rack-scale and disaggregated inference innovations with partners Samba Nova and Foxconn. In addition, DCAI further enhanced our connectivity offerings by introducing new controller and adapter products supporting data center, enterprise, and telco applications which scale from 10 to 200 Gbit Ethernet.

Turning to Intel Foundry, revenue of $5.88 billion was up 6% sequentially on higher fab volumes driven by strong growth in Intel 18A with output approximately 25% above target and up more than 50% quarter-over-quarter. External Foundry revenue was $293 million in the quarter. Intel Foundry operating loss in Q2 was $2.1 billion, $348 million better quarter-over-quarter as higher yields, improved cycle times, and increased factory scale across Intel 4, 3, and 18A drove improved wafer costs. Progress on 18A has been very good. Intel Foundry has driven down the cost of our primary Panther Lake sku by roughly 50% year-to-date and is on track for an additional 20% this year with further meaningful reductions planned in 2027. Within the quarter, in addition to delivering output above our expectation, Intel Foundry also entered risk production for 18A and met critical milestones towards delivering the 0.9 PDK for Intel 14A in October. We stepped up investments in Q2 for Intel 14A to prepare for risk production in 2027 and committed high volume ramps in 2028.

Now turning to guidance. Looking ahead, customers continue to signal a strong and sustainable spending environment driven by the unprecedented demand for AI compute. Industry-wide supply constraints across wafers, memory, and substrates remain the dominant challenge our customers are facing to support the AI infrastructure buildout. Our wafer output across our major nodes exceeded expectations from 90 days ago, and Q3 quarter-to-date 18A yields are trending ahead of targets set in March. Even with this strong execution and the positive trends as we enter the quarter, supply remains very tight, and the near-term linearity of our supply growth is more skewed towards the end of Q3 and into Q4, especially for servers. From an end market perspective, we expect PC consumption to be subseasonal in the second half of the year and down low double digits percent for all of 2026, impacted by rising memory prices and constraints. This is in line with industry peers and third-party estimates. At the same time, improving supply, a strengthening product portfolio, and encouraging tailwinds for edge deployments provide us with some positive offsets. Our outlook for server CPU demand has improved again since our last earnings report. And we're forecasting strong double-digit unit growth for the industry this year and next with momentum extending into 2028. Taken together, we're guiding Q3 revenue to a range of $15.8 to $16.8 billion. At the midpoint of $16.3 billion, we forecast gross margin of 42%, a tax rate of 11%, and EPS of $0.38, all on a non-GAAP basis. We continue to tightly manage non-GAAP operating expenses to roughly $16.5 billion for the year. And we expect non-controlling interest, or NCI, to net to approximately $250 million in each of Q3 and Q4 of this year and be approximately $1.1 billion for 2027 and 2028 on a GAAP basis.

Turning to capex, due to strong customer demand signals, we're raising our outlook for 2026 and now expect our capex to be more than $20 billion, which is up significantly versus our expectations entering the year. We're also aggressively locking in tool purchase orders from our vendors, accelerating our clean room buildouts, and actively securing supply of substrates and memory. As a result, we're forecasting 2027 capital expenditures to be significantly above the 2026 levels with the vast majority spent across our US network. In fact, as we look back from 2021 through 2026, our total capital spending in tools and space in the US is approaching $100 billion, significantly higher than any other semiconductor company over that time frame. We remain committed to tightly matching our expenditures with customer demand and remain financially disciplined as we capture the growth ahead. In closing, Q2 was another strong quarter financially and operationally. The client TAM is unfolding as expected, and server CPU demand continues to far outpace available supply. Emerging markets in physical AI, purpose-built silicon, advanced packaging, and external wafers are each multi-billion dollar annual revenue opportunities for us in the not too distant future. I'm confident in our ability to leverage our broad IP portfolio to solve our customers' most pressing needs and drive long-term value for our shareholders. With that, I'll turn it over to John to start the Q&A.

Okay, let me just write that down. So, let me take the second one first. The capex is fairly broad-based. It's going to include advanced packaging as Lipu talked about. We're pretty excited about our prospects on EMIB, and so we will be investing in that. That said, the cost of a fab for the front end is much more expensive than a packaging facility. So, it will be skewed towards the front end. But nevertheless, both of them will be important to us. As it relates to customers, I would just say that this increased investment is a signal of our confidence in customers across all of our business units. We feel very confident, particularly in places where we've gotten long-term agreements, that we now have the signal to be able to forecast out what the outlook looks like for the next few years in terms of demand, and we're putting forth the capacity in anticipation of that across all of our businesses. That said, as I said in the prepared remarks, we remain very disciplined around spending, and Lipu I think has beaten that into us. We will put capex in place when we feel very confident we can generate a very good return on it. These fabs that we're building, initially from a cash flow perspective, are net cash out, that's why you see the capex going up next year, but over time they generate significant return, and particularly now as we migrate towards a model where we keep these processes on longer, the returns are quite significant. In fact, we're seeing that in Intel 7 today given the length of time we had that process in place.

Yeah, I mean without putting a number out there, we obviously recognize that this is a strong market. It's going to grow significantly. Lipu's talked in the past about the ratio of CPU to GPU going up, and we now believe we're almost at parity at this point and it could eventually even skew more to CPUs on a unit basis. So I think this market is great. We think we have a strong position in the market, an opportunity to capture a significant share of that market. It's going to be a big number. Whether anybody can actually predict exactly the number and pinpoint the number, I'm not sure they can, but from all the inputs we're getting from our customers in terms of the level of spend and also the long-term agreements we put in place, the visibility we've gotten, we feel like the growth is going to be significant.

Yes, there is a gross to net. At this point, most of the gross to net is AIC or the investment tax credit. It's running in the kind of single-digit, low single-digit billions. Right now, although as we progress, I think we'll start to see that become bigger in terms of chunkiness. At the end of the day, it's a timing thing, but we're getting 35 cents on the dollar back from the investment tax credit on everything we invest in the US. As I said in my prepared remarks, the lion's share of our capital spend is devoted to the US. So it should be pretty significant, but there'll be a delay factor because we've got to build the factory, then we can start claiming tax credits on the factory, and then we have to get it - once we're putting the tools in, it's got to be all the way to production ready before we can claim any sort of credits on the tools. And then of course you have to file it with the IRS. So there's a bit of a delay from the time you spend to the time you get it back. But yes, there is a gross to net. From an investment perspective, I'm not sure we look at it exactly that way. We really look at how many wafer starts we want in a given node and we invest to the wafer starts we're looking for on the front end. We have a point of view based on all the demand drivers within the business of what that number looks like, and that's what we're putting in the purchase orders with our suppliers to be able to meet those expectations. Of course, we remain nimble as we get more information and we progress on the packaging side. We are already getting significant backlog, so we already know we need to ramp that up. That's partly our own internal manufacturing facilities, but we also need to procure substrates from vendors, and there are some requirements there in terms of putting money up in advance of getting the substrates. So we're making those investments probably more quickly right now to get ourselves ready for that.

Yeah, client obviously exceeded expectations. I would say it was largely ASP, of which some of that was mix related. Some of that was our own like-for-like changes in ASPs where we thought we had seen some inflation on our cost and needed to pass that on to the end customer. When you look at it year-over-year, it's definitely down that market. It had a really good 2025 because of the Windows refresh, so it was coming off a little bit as it relates to that. And then of course memory in terms of cost and even availability, I think, has caused that market to be a little softer, but we skewed the mix to the higher end and that helped a lot in terms of ASPs and helped it perform. I'd say as we look into next quarter, probably on a revenue basis it's going to be kind of flattish for us. Overall, CCPG is likely to be up a bit, but I think it will be driven by good growth on the edge, and client will be flattish. Underlying that, the market is softer. I think that market is struggling with the memory dynamics in the marketplace. So we think it'll be down in the quarter, but because they have been living relatively tight with inventory on CPUs, we likely would see some build in CPUs for Q3 and then Q4. I think it will be, we'll start to experience that in our own business and be soft. The good news for us is we need it because we need the CPUs for the data center side. We can't fulfill the demand as Lipu was mentioning. So we'll pivot as much of the production as possible over to CPUs and data centers to try to do our best to catch up to what is a pretty significant difference between our ability to supply and the demand out there.

Oh, okay. So let me unpack that. Just sorry, Stacy, you're talking about inventory on our balance sheet per client, or you're talking about inventory charges that the margins in the client even on? Yeah, sorry, I didn't follow that. Yeah, okay. We took some products where they weren't fully completed from a match set perspective, and it just made better economic sense for us to try to pivot more to some of our other products and not complete them given the challenges around match set. So given it was somewhat stranded inventory, we wrote that down. And you're right, we are guiding flat quarter to quarter. So obviously we get a lift from not expecting to have that write-down in the second quarter. The offset of that is even though Panther Lake and Granite are doing better in terms of their cost quarter to quarter, they're also becoming a really significant part of the mix and they're still below the corporate average because they're still relatively early in their life cycle. So that's weighing the margins down a little bit on the offset to the lift we get in terms of the reserves and why we think things will be flat. But eventually both of those things turn into a tailwind. As yields improve on 18A further, we do expect margins to improve on Panther Lake, and they will be above the corporate average, and that will help start lifting the margins there. And obviously we're keenly focused on improving gross margins over time. I would say while there's a lot of puts and takes in gross margins, our number one goal this year, which everyone in finance here can attest to because I was a dog with a bone on this, was to get gross margins comfortably into the 40s in every quarter, and I think the team did a really good job getting there at least for the first two quarters, and our outlook for Q3 would suggest the same. So our goal is to be solidly in that, and then we can kind of pivot from there and look to improve the gross margins off of that base.

Yeah, obviously we only guide one quarter out, which would be my standard response. That said, yes. Of course if we are able to start to see inventory improve or supply improve towards the end of the third quarter and into the fourth quarter, we would expect a lift from that. I would point out that while things will improve, we will not catch up. We will be behind in the fourth quarter. And I think the team internally, it's tight with wafers internally. I wouldn't dismiss that, but they have done a very good job trying to meet demand, and it's upside us, Lipu and I, a bit in terms of what they've been able to accomplish. But our supply is a combination of the wafers that we manufacture internally plus advanced packaging like substrates, we've got teal glass, we have memory, and so procuring all of that is also a bit of a choke point for us. In fact, I'd say in some of those areas are probably our most challenged parts of our supply chain. So we're working to improve that. While front-end wafers can be a little bit more linear in terms of our improvement, some of those are a bit chunkier. And so we start to see some of the logjam break towards the end of the third quarter, which is why we're more flattish this quarter, but see upside in the fourth quarter.

Yeah, longer term I think we'd expect that to be somewhat the fall-through somewhere in the 40 to 60 range. Every quarter has got unique dynamics to them that affect whether you're at the low end of that range or at the high end or the midpoint, but I think it's a relatively good rule of thumb for us.

Yeah, maybe it might make sense to start with '26 and just unpack capex so it's clear. We invested a lot in space over the last few years, so we are in a very good place in terms of space. There's still obviously a little investment to facilitize some of the factories, but it's relatively modest. So we're really at a point where all the capex, or most of the capex dollars, are going to tooling. We will increase tooling in '26 by 40% relative to '25. So we're investing a significant amount in tooling, and it's where you might expect: Intel 3, it's 18, it'll be 18AP. I purposely didn't mention a number for '27 because we're still working out the exact details of what number we'll land at. Typically in this industry you release that number really at the very beginning of the year. But I did want to give investors at least a line of sight to expect that the number will be up. But you'll just have to bear with me. I think we need another quarter or two to really solidify the number. And then where it's going to, as I said, it's going to both. We're investing for all of our business units, both internally and externally, and we take a holistic view of what our wafer demand will look like from all of those customers, and we build capacity that is aligned with that view.

Yeah, it's a good question. We feel like we're in a really good place from a balance sheet perspective. We have over $30 billion of cash. We have a $10 billion revolver. So we've got $40 billion of liquidity. That enabled us to delever, which we felt was important to keep us solidly in investment grade territory, which we wanted to do. Obviously the fact that revenue and profitability and EBITDA are all expanding helps a lot in terms of the cash flow that throws off to the business. Additionally, we have roughly call it $10 billion of what I call non-core assets that can still be monetized on the balance sheet, and although we're not anxious in any stretch to do anything there, that's available to us in the event that we need it. And we have seen by the way our customers willing to invest with us, and we've had prepays from customers that have enabled us to unlock capacity that's helped us. That said, if we're super successful, which we're driving to, we may need to tap the capital markets to drive some more investment, and we'll stay tuned. If we need to do that, we'll certainly keep the shareholders apprised.

Yeah, I think obviously we're driving. Maybe step back and say all of our server wafers are procured internally for the most part. Some of the ASIC stuff isn't, but for the most part it's all procured. And we are investing heavily in expanding the wafer starts in our key nodes, in particular the most important node for us on servers is Intel 3 because that's our node to produce Granite Rapids. And we're seeing tremendous demand there. In fact, as strong as demand is across all of our products within data center, Granite Rapids is extremely tight because the reception there has been fantastic. So we are building capacity there over time. It will be a little bit chunky, but I think in general we have a pretty good ramp of Intel 3 planned for the rest of this year and next year. The challenge, as I said, is it's not just the front end that we have to expand capacity. We also have to expand capacity on the back end, which gets into areas that are tight like substrates. So we're working to expand that. I think they did a good job in the first half of the year getting more capacity, but more work to be done to drive that to the levels that we would need. I think when we're talking about the market in general from a units perspective, we think the growth rate on a units basis looks quite good. Obviously the units are getting more weighted average core counts, and we generally this market is priced on an ASP per core basis. So as you get more cores, you easily get more ASP uplift. And that will definitely be a component of the revenue growth in this business and gives us some real confidence that this is going to be well north of a double-digit CAGR for us in terms of growth rate over the next few years.

No, we're going to be more thoughtful around it. I would say just if you look at the straight business and look at what we think we can do from a cash flow from operations perspective, just the base business, look at what capex even if we step up capex investment, and the offsets that we get from AIC, our cash flow actually looks pretty good. But we are likely to have to make investments in the back end as well, particularly with third parties, that could be a drag to gross margin or to cash flow next year and make getting it to a positive number a little bit more challenged. But that said, all of the investment we're making has tremendous ROI. So I think as long as we feel confident in the growth rate, confident in what we think we can do in terms of pricing and cost structure for those products, and we know that when we make investments in these nodes, the lifetime of these nodes is fairly significant and almost always drives a good ROIC, we'll make the investment. We're just going to be very careful around making bets ahead of customer commitments. I think that's the most significant change with Lipu is until we really know that we've got the customers, we don't want to put significant amount of capital. And you can read that now inversely given our confidence around next year that we must have pretty significant confidence in our customers or we wouldn't be putting the POS in place today.

What was the question?

Of AS6. I mean, I would say that today we're probably running at about a $2 billion run rate, or at least approaching a $2 billion run rate for that business. We think in the not too distant future we'll be at a $4 billion run rate for that business. So I think that probably gives you a good sense. And we think that Lipu mentioned the hundred billion dollar TAM. We think we deserve a good chunk of that given our IP portfolio and what we bring to bear. So stay tuned.