Good day, ladies and gentlemen, thank you for standing by, and welcome to Intel Corporation's First Quarter 2022 Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker host, Tony Balow, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome to Intel's first quarter earnings conference call. By now you should have received a copy of our earnings release and the earnings presentation. If you've not received both documents, they're available on our investor website, intc.com. The earnings presentation is also available in the webcast window for those joining us online. I'm joined today by our CEO, Pat Gelsinger; and our CFO, Dave Zinsner. In a moment, we'll have brief remarks from both of them, followed by Q&A. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, it does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. A brief reminder that this quarter, we have provided both GAAP and non-GAAP financial measures. Today, we'll be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentation and earnings release available on intc.com include both the full GAAP and non-GAAP reconciliations. With that, let me hand it over to Pat.

Thank you, Tony, and thank you for joining us today. Q1 was another solid quarter where we beat on the top line, exceeded our guidance on gross margin and EPS, and where we continue to execute on our long-term growth strategy to unlock a $1 trillion market opportunity. As we laid out at our recent Investor Day, our strategy is built around 4 key pillars. We will deliver leadership products anchored on open and secure platforms powered by at-scale manufacturing and supercharged by our people. In Q1, we made great progress in all of these areas, and we are continuing to hold our full year revenue outlook. In our data center and AI group, we began shipping initial SKUs of Sapphire Rapids to select customers as planned. We also unveiled our expanded dual-track Xeon road map that strengthens our position in both per core performance and performance per watt for cloud and enterprise workloads. We launched our Arc A Series GPUs for laptops, taking our first steps to give the graphics industry a much needed new addition. Mobileye demonstrated its Level 4 self-driving system in Jerusalem, a major milestone in preparation for its upcoming robotaxi services. We continue to add to our talent with strong industry leaders like Christoph Schell, who recently joined us from HP as our Chief Commercial Officer. And finally, we took another major step in creating a balanced semiconductor supply chain with the announcement of our plans for new investments in Europe. We also held the grand opening of our latest leading-edge factory in Oregon, including a new name for the campus, the Gordon Moore Park at Ronler acres, which recognizes our founder and the site's unique contribution to driving Moore's Law. Q1 also marked a special moment for Intel as we announced our plans to further reduce our greenhouse gas emissions and develop more sustainable technology solutions, including using 100% renewable energy across our global operations by 2030 and achieving net zero greenhouse gas emissions in our global operations by 2040. Overall, Q1 was a great start to the year as we continue to execute on the path to our long-term growth story. We still have a lot of work to do, but we are executing at a torrid pace, and I remain confident in our path forward. Before I get into specific updates for each of our business units, let me start with some observations of what we are seeing in the industry. I continue to believe we are just at the beginning of a long-term growth cycle across semiconductors. We continue to see some match set limitations in areas like ethernet, some softening in low-end consumer PC and some inventory adjustments, as we discussed on our last call. But overall, the demand signals from customers continue to be robust in areas like enterprise, cloud, AI, graphics and networking. Semiconductors are the fuel of innovation and transformation across a wide range of industries. In the supply chain, lockdowns in Shanghai and the war in Ukraine have demonstrated more than ever that the world needs more resilient and more geographically-balanced semiconductor manufacturing. The chip shortage cost the U.S. economy $240 billion last year and we expect the industry will continue to see challenges until at least 2024 in areas like foundry capacity and tool availability. As an IDM, we believe we are in a good position in the industry to manage through these constraints. In fact, Intel is rising to meet this challenge. Following our announcements in Arizona, New Mexico and Ohio, we recently announced a series of investments in Europe, spanning our existing operations as well as our new investments in France and Germany, the Silicon Junction. These investments position Intel to meet the future growth and represent a significant step toward our moonshot goal of having half the world’s semiconductor manufacturing located in the U.S. and Europe. The pace at which we can reach this goal is dependent on the actions of the U.S. and other governments. America showed leadership when Congress passed the CHIPS Act, but the global situation has grown even more serious since then. The EU has been very aggressive in moving legislation forward to meet this challenge, and I recently testified before the Senate to highlight the critical need for the U.S. to fund the CHIPS Act. I continue to encourage Congress to fund this critical legislation and enable us to move faster towards making a balanced semiconductor supply chain a reality. Turning now to Intel. We continue to make great progress on our plans to deliver 5 process nodes in 4 years. Intel 7 is ramping extremely well with Alder Lake and on Intel 4, Meteor Lake has now successfully booted Windows, Chrome and Linux. The speed at which the team was able to achieve this milestone is a significant sign of the health of both Meteor Lake and our Intel 4 process technology. We plan to deliver several additional milestones in 2022, demonstrating our process technology development remains on track. This includes early Sierra Forest preproduction wafers on Intel 3, IP test wafers on Intel 28 and foundry customer test chips and initial IP shovels on Intel 18a. Simply put, we remain on and in some places, ahead of schedule to deliver 5 nodes in 4 years. Our manufacturing network continues to perform well in a challenging environment. For the first time in years, Intel fabs and our substrate supply are close to meeting our customers' demand. Using our IDM advantage, the team was able to remix almost 3 million units within lead time to meet changing demand signals. For example, we were able to partner with Meta to improve their Xeon supply and meet their needs. Finally, our supply chain resilience showed as our teams worked tirelessly to mitigate any significant disruptions to our factory operations from the war in Ukraine, supplier shutdowns, and COVID lockdowns in China. Turning to our business groups. At our Investor Day, we laid out our long-term growth strategy centered around 6 distinct but highly complementary business units, a structure that provides investment flexibility, increased market resilience and enhance transparency for investors. And in fact, we will report our results in this structure for the first time today. Our client group continues to deliver world-class platforms, positioning us to win share, grow ASP and win share of market. There is broad ecosystem agreement that the long-term PC market is sustainably larger going forward driven by PC density, refresh rates and increased penetration as the PC remains the essential tool for work, learn and play. We are seeing particular strength in gaming and in commercial PCs that is somewhat tempered by slower consumer, inflationary pressure and customer inventory management, which Dave will talk more to later. Our 12th gen Alder Lake family continues to ramp in Q1, and we have already shipped more than 15 million units. This family now has more than 250 designs planned this year from Acer, Asus, Dell, HP, Lenovo, LG, Samsung and others. And it includes the world's fastest desktop processor, the Core i9-1200KS. Alder Lake will scale across every segment, including for businesses of all sizes with the launch of our latest vPro platform. vPro offers industry-leading manageability and security for business, including the first and only hardware-based ransomware detector with Intel Threat Detection. The strength of our client road map continues with Raptor Lake, where we are shipping both desktop and mobile samples to our customers today, and we plan to follow that with Meteor Lake in 2023. In data center, DCAI had strong year-on-year growth as customers continue to choose Intel and as we continue to deliver increasing value and innovation, we are seeing strength in both hyperscaler and enterprise, and we expect the market to grow double digits going forward, driven by workloads like AI and security. Here, too, we are seeing ecosystem supply constraints, particularly in Ethernet that have limited end system shipments, which we expect to be a headwind through the year. Our third-generation Intel Scalable processor Ice Lake has now shipped almost 4 million units and Amazon Web Services recently announced general availability of its EC2 I4i instance designed for storage and I/O intensive workloads. This is the 48th AWS instance powered by Ice Lake. I am also pleased to say that as committed, we began shipping initial SKUs of our fourth gen Intel Xeon scalable processor, Sapphire Rapids, to select customers in Q1. These are the first of many SKUs for Sapphire Rapids with more due to ramp throughout the remainder of the year. We also unveiled our expanded dual-track Xeon road map using performance and efficient cores delivered in a common platform, maximizing customer investments and on the cadence they prefer. Our first-generation E core Xeon will be Sierra Forest, which is designed to maximize performance per watt, providing high-density, ultraefficient compute for the cloud. For workloads that benefit from high performance per core and low latency like AI, we have our redefined Granite Rapids on Intel 3 with a new and improved P-Core. The strength of Intel Agilex and Stratix 10 FPGAs generated record revenue as we continue to win designs and ramp into key markets. Intel FPGA-based IPUs are deployed in volume at 5 of the top 6 cloud service providers, and we continue to win designs with comm service providers utilizing Intel's latest generation FPGAs and eASICs. Our launch of the Habana Gaudi-based AWS EC2 DL1 instance has shown end customers how they can reduce training costs by as much as 40% versus GPU-based instances. One of the early customers, Mobileye, is now using DL1 for training their object detection models. Gaudi 2 is already sampling the customers and demonstrating leadership performance versus competitive GPUs on multiple workloads. Finally, we continue to build our extensive data center software capabilities and recently announced the acquisition of Granulate. Granulate is a SaaS service that improves performance in cloud costs with its autonomous dynamic optimization service to unmodified customer workloads. The Network and Edge market continues to be strong with the transformation from proprietary fixed-function devices to fully programmable, software-defined infrastructure. Our Network and Edge Group is uniquely positioned to capitalize on this transition and had record revenue in Q1. At Mobile World Congress, NEX launched our newest Xeon D processor, built specifically for software-defined infrastructure across the network and edge, our latest Xeon D has more than 70 leading companies working on designs, including Cisco, Juniper Networks and Rakuten Symphony. We believe that in the network, O-RAN and vRAN, have reached a tipping point as the preferred model of all future network deployments. Nearly all commercial deployments running today are using Xeon and our FlexRAN software. We have more than 10 engagements with major global operators that we expect to be in high-volume commercial deployment within the next 2 years. We also launched a new version of our OpenVINO software toolkit, with downloads growing 70% year-over-year. Built on the foundation of One API, OpenVINO has enabled hundreds of thousands of developers to dramatically accelerate performance on rapidly growing AI workloads at the edge, including Z-block Computational who is using OpenVINO to deliver their AI MicroCloud solution to cities everywhere. Going forward, the scale out of 5G, the explosion of AI inferencing and the growth of low latency workloads will further drive the need for compute at the edge. They will eventually begin to shift compute from the cloud, making the edge the next wave of semiconductor growth. With a broad portfolio of hardware, software and deep ecosystem partnerships, NEX remains positioned to lead the transformation across the network and to win the edge. Moving to our emerging businesses. Our Accelerated Computing Systems and Graphics Group builds on our installed base of CPUs, IP and software and leverages a thriving open ecosystem to disrupt a large and growing market. In Q1, AXG had strong growth and celebrated a major milestone with the official launch of the Intel Arc A Series portfolio for laptops. Alchemist, the first of these products has been shipping to customers since early Q1 with designs from Acer, Asus, Dell, HP, Lenovo, Samsung and others. The A-Series enables up to a 2x performance improvement in graphics versus integrated graphics and incorporates Intel Deep Link technology, which utilizes Intel integrated graphics to increase application performance by up to 30%. The first laptops with Intel Arc 3 GPUs are available now. These will be followed by even more powerful designs with Intel Arc 5 and Intel Arc 7, along with desktop and workstation offerings later this year. In the data center, our flagship Ponte Vecchio GPU for high-performance computing and AI is sampling to customers. Ponte Vecchio, along with Sapphire Rapids with high-bandwidth memory, will power the 2 Exaflop Aurora Supercomputer at Argonne National Laboratory. In addition, Arctic Sound, our general purpose data center GPU designed for industry-leading media graphics and AI inference capabilities, will be available in the second half of the year. Finally, in Q1, we announced our intent to contribute to the development of blockchain technologies. Intel will help advance this technology in a responsible and sustainable way by developing energy-efficient computing technologies at scale. Blockscale, our first blockchain accelerator, is sampling today and will ship in production later this year. AXG remains on track to deliver over $1 billion in revenue this year. Our Intel Foundry Services hit a $1 billion run rate for the first time as we continue to make progress towards being the trusted provider of foundry services. Our overall customer pipeline remains robust, and we now have more than 10 qualified opportunities in advanced stages of engagement across our process and package offerings that collectively represent a deal value of greater than $5 billion. We have over 30 test chips committed to Intel 16 this year, and we expect the first Intel 3 and Intel 18a customer test chips to tape out in the second half of 2022. Our work with our 5 target anchor customers is progressing well. We expect additional updates later this year. Finally, we have seen tremendous enthusiasm from customers for our acquisition of Tower. Tower shareholders recently approved the proposed acquisition. We have completed regulatory review in 2 jurisdictions outside the U.S. and hope to close the transaction as soon as possible. Building on its market leadership in ADAS and AV solutions, Mobileye Advanced system launches have continued, including the next-generation BMW 7 Series with the leading-edge combination of EyeQ5 and an 8-megapixel camera as well as BMW Highway Assistant, which enables hands-free driving on separated roadways up to 80 miles per hour. We also added Miami and Stuttgart to our global AV testing program, bringing the total number of places where we have tested AVs to 10 cities in 6 countries across 3 continents. Additionally, we recently showcased Mobileye's Level 4 self-driving system in action for the first time with a robotaxi navigating the streets of Jerusalem. Mobileye expects to launch its commercial robotaxi services in Munich and Tel Aviv by the end of 2022. And finally, we remain committed to unlocking shareholder value and are working on our plans to take Mobileye public in 2022. In March, we announced that we confidentially submitted a draft registration statement with the SEC. The IPO is proceeding smoothly, and we continue to make good progress as we work with the SEC to refine our Form S-1. Before turning it over to Dave, I wanted to close with a few thoughts. First, I look forward to hosting our customers, partners and analysts at our Intel Vision event in Dallas on May 10 and 11. This will be our second Intel ON Series event dedicated to the future of business and technology. Next, as I said at our Investor Day, we believe we have a tremendous growth story over the next several years. We're investing in innovation and embracing an open approach to compute platforms and manufacturing. We continue to add to our incredible pool of technical talent. And of course, we remain intensely focused on rebuilding our execution machine. Finally, we'll continue to highlight our progress in key operational milestones as we manage within the financial framework we laid out in February. I know I speak for over 120,000 Intel employees when I say that while we have work to do, our best days are ahead. With that, let me turn it over to Dave.

Thanks, Pat, and good afternoon, everyone. Q1 was a solid quarter, exceeding revenue, gross margin percentage and EPS guidance despite continued ecosystem supply chain constraints, inflationary pressures and macroeconomic uncertainty. 3 of our 6 newly formed business segments: NEX; Mobileye and IFS, achieved record quarterly revenue. Revenue was $18.4 billion, slightly exceeding our guidance, led primarily by broad-based strength in our NEX business. Gross margin for the quarter was 53%, exceeding our guidance by 100 basis points on improved manufacturing yields and lower factory costs. EPS was $0.87, $0.07 above our guide on higher gross profit and slightly lower operating expenses. Operational cash flow for the quarter was $5.9 billion and we received an additional $4.6 billion from the McAfee equity sale. Total cash and investments increased by $9.7 billion in the quarter to $39 billion, driven by the NAND divestiture and McAfee sale. CapEx for the quarter was $4.6 billion. Now turning to our newly formed business unit results. CCG revenue was $9.3 billion, down 13% year-over-year on ramp down of the Apple CPU and modem business. The expected OEM inventory burn we cited in our Q4 call as well as lower consumer and education demand. CPU ASPs were up greater than 25% year-over-year on richer mix and strong demand for our high-end mobile and desktop products across both our commercial and consumer segments. Operating profit was down 34% year-over-year on lower revenue, increased 10-nanometer and Intel 7 mix and increased spending to further strengthen our product and platform road map. DCAI revenue was $6 billion, up 22% year-over-year on strong Xeon demand from both our hyperscale and enterprise customers. DCAI operating profit was flat year-over-year as increased revenue was offset by increased 10-nanometer mix, factory start-up charges and increased investment in our technology and product road map. NEX achieved all-time record quarterly revenue of $2.2 billion, up 23% year-over-year on broad-based strength across the Cloud, Networking and Edge product lines. Operating profit was $366 million, up 51% year-over-year on higher revenue, offset by increased investment. Mobileye achieved all-time record quarterly revenue of $394 million, up 11% sequentially and 5% in comparison to Q1 '21, which saw exceptionally strong auto production and pipeline rebuilding due to COVID-related recovery last year. Operating profit was $148 million, down 13% year-over-year on increased investment in next-generation products. AXG revenue was $219 million, up 21% year-over-year on the ramp of its supercompute and Alchemist discrete GPU products. Operating loss was $390 million versus an operating loss of $176 million in Q1 '21, with the increase driven by new product qualification reserves on our Alchemist and Arctic Sound products, production ramp charges and increased investment. IFS revenue was $283 million, up 175% year-over-year on increased IMF tool shipments, increased automotive demand and initial revenue from Amazon and Cisco. Operating loss was $31 million, roughly flat year-over-year as revenue and gross margin increases were offset by increased investment to build out the custom foundry business. Moving to our full year and Q2 guidance. As Pat mentioned earlier, we continue to see strong end user demand for our products across each of our business units and we reaffirm our revenue guidance of $76 billion as lower than previously expected PC revenue is offset by NEX growth and DCAI hyperscale customer strength. More specifically, in our PC business, we continue to see strong commercial demand, offset by low-end consumer and education softness and the impact of no longer shipping to customers in Russia and Belarus. Further, component supply constraints continue to be a challenge with the most recent COVID lockdowns in Shanghai, further increasing supply chain risk and contributing to inflationary pressures that are having a negative impact on PC TAM for the year. As a result, we're seeing OEMs continue to lower inventory levels to better match demand and align with other system components. We expect elements of this inventory burn to continue in Q2, subsiding in the second half of the year. Although these headwinds have reduced our CCG revenue forecast, we expect CCG revenue to increase in the second half of the year as a return to normal seasonality boost demand, OEM inventory burn subsides and the ramp of our leadership, Alder Lake and Raptor Lake products position us to compete per share. For DCAI, we also expect to see a stronger second half of the year as hyperscale customer demand remains robust, component supply improves and the ramp of Ice Lake and Sapphire Rapid’s increased competitiveness. For NEX, we expect the strength we saw in Q1 to continue with growth throughout the year, fueled by improving component supply, continued 5G ramp and transformation at the edge. For AXG, we continue to expect full year revenue greater than $1 billion, driven by the launch and ramp of the Alchemist, Arctic Sound-M, Ponte Vecchio and Blockscale products. Finally, we expect to see second half growth in each of our 2 remaining businesses, Mobileye and IFS, as they ramp new products and secure new customers. For gross margin, we're guiding 52%, in line with the 51% to 53% range previously communicated. Note that the inflationary environment creates a headwind that we are continuing to monitor but we remain confident in our ability to mitigate the impact through continued cost reduction programs as well as increased pricing in certain segments of the business. For EPS, we're guiding $3.60, $0.10 higher than prior guide on the Q1 beat and a slightly improved tax rate of 12%. Finally, net CapEx guidance of $27 billion and moderately negative adjusted free cash flow for the year remain unchanged. We have made significant progress on our smart capital initiatives, and we'll continue to manage within the framework communicated at Investor Day. Moving to Q2 guidance. For revenue, we're guiding $18 billion, down 2% sequentially on the short-term headwinds detailed earlier and the impact of an additional 14th week in Q1. For the lockdowns in Shanghai, we're estimating the impact to be relatively contained under the assumption that these restrictions are nearing an end. Even under a short lockdown, we anticipate it will take some time for the supply chain to normalize. And if the lockdowns persist or spread beyond Shanghai, we could see more material impacts to our outlook. For gross margin, we're guiding 51%, down approximately 200 basis points sequentially on increased 10-nanometer and Intel 7 mix and Raptor Lake prequalification reserves. We had always expected Q2 gross margin to be at the low end of our range and with our full year guide of 52%, we expect gross margin to inflect upward in the second half of the year as revenue increases and inventory reserve sell-through. Finally, we're guiding a tax rate of 12% and EPS of $0.70, down $0.17 sequentially on lower gross profit and higher OpEx. With that, let me turn it back over to Tony and get to your questions.

All right. Thank you, Dave. Moving on now to the Q&A. [Operator Instructions] Operator, please go ahead and introduce our first caller.

And our first question is coming from the line of Ross Seymore with Deutsche Bank.

Pat, I just wanted to get a little bit more color on the inventory dynamic you're talking about. Your inventory is up internally, but you're talking about some of the inabilities to ship with match sets, et cetera, going forward. So can you guys just give a little more color on where the specific Intel inventory is versus a more generic inventory and shortage problem, specifically in the PC side of your business, it seems?

Yes. Thank you, Ross. And I'll just start out by saying, again, I'm really pleased with the execution of our team and what had plenty of turbulence in Q1 and to meet and beat in Q1 was really spectacular. Now on the inventory piece, we did talk about that we are building 10-nanometer inventory. We have new products that we're ramping into the marketplace. And we do see some of those will be reversals as we go into the latter part of the year as that inventory will start flowing through the product area. So we would say this is very typical management of new product ramps and specifically around Sapphire Rapids, Alder Lake, we'll start seeing Raptor Lake as well. So those will be the key areas that you'll see that inventory shift occurring. Also, as we've indicated, we did see our customers' inventory burn down in Q1. We expect some of that to be in Q2 as well. But by the second half, we expect those adjustments and obviously the strength of second half outlook, we do expect much of that inventory burn to have finished in the first half and a strong second half as we're ramping our new products that will have much better performance feature, some of that with higher costs, but also coming with higher ASPs.

And our next question coming from the line of C.J. Muse with Evercore ISI.

Operator, why don't you go to the next caller. We can just come back to C.J. later.

Our next question is coming from the line of Stacy Rasgon with Bernstein Research.

I know you held the full year, but I mean the first half is kind of coming in lower, so it does kind of imply that you're taking the second half probably up versus the prior expectations. But in that light, obviously, we've got PCs that maybe look like they're at risk. You talked about China shutdowns that if they last longer, that could bring risk. You talked about issues, I guess, with server builds with your customers that you said would persist. I guess what gives you the confidence that things actually will be inflecting? And it looks like you're looking for kind of a hockey stick across all of your businesses in the second half to first? Like how do investors get confidence that that's after the way things are going to be playing out and that you've built enough conservatism in the guide? I guess, long story short, I'm asking why hold the annual guide in the wake of all that?

Yes. Thank you, Stacy. And clearly, we overachieved in Q1, right? Q2, we were -- it's a little bit lighter, right? Given some of those, we've taken it down a bit, given some of those factors, but not substantially. This is very in line with what we expected. We were always forecasting a stronger second half of the year. And that's what gives us confidence. We have built into our year guide, some room, right, for things to happen. Like any good company would we built some expectations that not everything goes right. And that's why we're very confident in reaffirming our overall yearly revenue guidance. Now let's tease apart some of the factors that give us that confidence. First, we'd say, hey, we see strong growth in our DCAI business. We see strong growth in our NEX business. And particularly those areas, those are long lead time businesses with our customers. We have strong views of the business expectations that we have. We do see strength in the enterprise and governance business. First half to second half, you always see the normal cyclicality of the client business and particularly in the second half, we're going into a much stronger product line with Alder Lake and Raptor Lake and the reversal of inventories for Raptor Lake and Sapphire Rapids starting to hit there as well, which will be very nice to improve both operating gross margins as well as the revenue outlook. And then, right, we have an extraordinary set of products that were coming in the second half of the year. When you think about AXG, we have all of the discrete products ramping in addition to the mobile ones that we launched in Q1. We have our new GPU products with Arctic Sound. We have Ponte Vecchio ramping. We also have our blockchain products ramping. We have the new Xeons and NEX ramping, IFS is ramping. We see strength in our Mobileye business. So all of these give us confidence in the second half. And this is very consistent with the outlook that we gave in our Investor Day. We were always expecting this to be the characteristic of first half and second half. And obviously, a small beat in Q1, a little bit of weakness in Q2 that we've accounted for these disruptions and strength in the second half. We are on track to do exactly what we said at the Investor Day, and we're building momentum to accomplish exactly that, with the great execution that we saw in the first quarter around products, around manufacturing, around dealing with supply chain challenges. This machine is building momentum. We're confident in our second half outlook.

Our next question is coming from the line of C.J. Muse with Evercore. C.J. Muse: Apologies for the confusion earlier. I guess given the change in segments, I would love to try to set the stage here for what expectations should look like for the big 3, CCG, DCAI and NEX into Q2? And then for all of 2022, if there's any way you can kind of help plus or minus to the relative growth rates that you're guiding to for both June and the full year?

Yes. Thanks, C.J. And overall, this is the first quarter we're giving clear updates against the 6 business units. Clearly, that means things like DCAI, we're pulling out the NEX business from what might have been counted for before as part of data center. And we're giving clear views of how those businesses are performing, respectively. Overall, what we said in the client business, we'll see the seasonality plus a bit in the client business because of the strength of the product line. In DCAI, we see growth through the second half of the year. And we had strong year-on-year growth in the data center and AI business in Q1. And NEX, we expect that we're growing faster than the market. This is a good business for us. We're uniquely well positioned, and we see the strength of the Network and Edge being an area of particular growth. We were well over 20% growth rate in that business in Q1. So -- well, I don't think we'll see those kind of growth rates for the rest of the year, but a very strong growth businesses. But I'd also highlight that we are seeing the growth businesses, IFS, AXG and Mobileye being very strong growers for us, and they'll start more meaningfully as we go into the second half of the year, which is a little bit of the answer to Stacy's question before, solid growth across all of the business areas of the company, and we're starting to -- start seeing these new areas contribute in meaningful ways. So overall, affirming the second half of the year, seeing strength in all of the business areas, the product, the execution, all of them getting stronger.

Our next question is coming from the line of Pierre Ferragu with New Street Research.

I'd like to focus on the 10-nanometer node and Intel 7. And maybe for you, Dave, first, you mentioned 100 basis points driven by improved yields. It's like really music to my ears, as you can imagine. And I'd love to hear a bit more, visibly this came as a surprise. So what's happening there? And could we hope for like continued improved deal on Intel 7 driving some positive surprise on the gross margin? Or should we assume that this node has a very little room to improve? And maybe for Pat on the same topic, Intel 7, I don't know if it reflects reality, but there is a lot of noise in the market about products ramping slowly, which is a cadence at which Sapphire Rapid is ramping. It seems a bit slow, a bit difficult. So my question in all candor is do these nodes, 10-nanometer and Intel 7, make it difficult to get into the market with products? Is that slowing the pace at which Intel can execute on the velocity of the road map? And should we expect things to go much, much faster when you move to Intel 4 and Intel 3?

So I'll start, and then I'll ask Dave to jump in. So overall, as we said, our 5 nodes in 4 years, we're performing well. Intel 7 is ramping more rapidly than we would have expected. Intel 4, we updated that we have Meteor Lake now powered on, which is our first product on Intel 4. Intel 3, we'll see the test wafers on that with our leadership products with Sierra Forest. In fact, just today, we taped out our first Granite Rapids compute die as well. We'll have the test wafers on 20a and 18a, which we expect to be a big foundry node as well. So I'll say, overall, the technology pipeline is doing tremendously well and really proud of our teams there. Intel 10, it's ramping very well. We're seeing good yields on that as Dave reflected, which overall gives us good momentum. In terms of products, Alder Lake has been a star, and it's ramping comfortably ahead of our expectations there, which has reaffirmed the health of Intel 7. Sapphire Rapids that you called out, it was first peer PRQs this quarter, and many of the additional SKUs, PRQ in Q2 -- in the second half of the year, and that's why you might be getting some of that views of the more muted ramp there. But we delivered on exactly what we said. First quarter PRQs of Sapphire Rapids, and we'll see strength in that as we go through the rest of the year. Also, Ice Lake has ramped very nicely now for our 10-nanometer server part. So overall, the technology and the manufacturing machine are performing quite well and really bode well for our outlook for this year and the years to come. So Dave, if you might add?

Yes. So we had a good quarter in the first quarter in terms of yields. We are going to see a little bit of pressure on 10-nanometer in the second quarter. That's part of the reason we're seeing margins down to the low end of our stated range of 51%. But we do expect 10 nanometer to become a tailwind for us as costs improve through the back half of the year. And although Intel 7 is behind that, we're expecting the same from Intel 7.

Our next question is coming from the line of Joseph Moore with Morgan Stanley.

Dave, I think I heard you say CPU ASPs and client were up 25% year-over-year. It's a pretty big number. Is that -- how much of that is -- if I heard that right, how much of that is mix shift away from things like Chromebooks? How much of that is success with new products like Alder Lake? Can you just give us a little bit more color on the delta there?

I mean a lot of it is obviously mix, either shifting away from consumer education and newer product ramps. But as I said in the prepared remarks, given the inflationary environment, we are looking for targeted price increases in certain segments. So that really hasn't shown up that much yet, but will be part of the story going forward through the year.

Yes. And I'll just say, overall, the product line is healthy. We're seeing the mix shifts as you move to Alder Lake, Raptor Lake, being very strong, Ice lake as well. We'll start to see Sapphire Rapids factor into that in the second half of the year. So overall, we're coming into a stronger product cycle, Joe, right, which just gives us more opportunity to, right, to deliver higher value to customers, remix the products to higher price points. But overall, just have a more competitive product line as we go compete for market share as well.

Your next question is coming from the line of Harlan Sur with JPMorgan.

On Accelerated Computing and Graphics, client discrete GPU market is a pretty big market opportunity for Intel, right, $12 billion, $13 billion per year. So it looks like you guys started ramping your Arc GPU into notebooks now, your first gen product, the reviews look quite constructive. Is the team still on track to roll out desktop versions this quarter and still on track to ship 4 million plus discrete GPUs this year? And then any feedback from customers or gaming developers will be helpful as well.

Yes. Thank you, Harlan. And overall, AXG is on track. And we launched the mobile SKUs. We'll have the desktop SKUs coming in Q2. And we'll have more SKUs as we go through the year as well. We'll be filling out the product line. A lot of work, right, in qualifying games. And if you're a gamer, you know that there's just a lot of individual optimization work on some of the key titles so that work is underway, working with our OEMs to populate their portfolios of products as well. So I'll say you're going to see more and more of that hitting the market, and we'll be filling out -- we have the 3 versions. We'll have the 5, 7 and 9 versions of the year products coming out as we go build up that portfolio this year. And also, as I alluded to, AXG just has a boatload of products that is coming out across different segments, our high-performance computing products, our GPU products for data center, our blockchain of products. So in addition to the discrete graphics products, we have just a lot of products coming out of it. So overall, it's on track for the volume goals as well as for hitting the $1 billion revenue goal that we said at Investor Day as we go build, as we said, over the 5-year horizon to a $10-plus billion business. We see this as a great opportunity for us. And we have some unfair advantages with technologies like Deep Link, where we really get to build on the strong robust installed base that we have, the many years of software work that we've built into the foundations of the PC platform. So these are reasons that we do think that we have a great opportunity to build a major new business for us and one that's -- we're coming from a very small place into a very large market, a great growth opportunity for Intel that we're executing on aggressively.

Your next question is coming from the line of Vivek Arya with Bank of America.

So the Q1 CapEx was about $4.6 billion, suggests a very big ramp in the back half to get to your $27 billion net CapEx target. We are hearing of a lot of constraints on equipment supply. I was hoping, Pat or David, if you could give us some color on the availability of tools and if there are any implications on your full year sales outlook because of the availability of tools?

Yes, I'll start with that one, and then Dave, you can add. Overall, CapEx is lumpy as we go through the year. And as such, we think overall that we'll still be on track to the overall CapEx target that we laid out. We are working very aggressively with the equipment companies. And we have deep, strong, long-term relationships there. And clearly, some of the '23 and '24 equipment goals are ones that we're working on aggressively right now, but we do feel comfortable that we have the supply chains lined up to meet our equipment objectives and really importantly, to meet the factory ramp cycles that we've laid out for the marketplace as we're opening up the new factories like we just announced. Our Oregon fab coming online. We have the next -- we're starting to take equipment now into our Ireland. We'll soon be doing that for our Israel fab ramp, we'll be groundbreaking on Ohio later this year. We'll be talking more about the German fab. So one by one, we're just executing on an aggressive build-out of our capital network and really quite pleased with the relationship that we have with the equipment companies to make that possible. That said, there definitely is some pressure on the equipment supply chain. We're also working closely with the equipment vendors. Many of them use Intel FPGAs. So we're working closely to make sure that we prioritize that piece of the demand to support them in that requirement. Dave, anything else you'd add?

Yes. I would just add that we did expect this quarter to be a bit lower than the quarterly average for the year to get to the $27 billion. So it's not a complete surprise, although it was lumpy, as you said, and did come in a little bit lighter. But we feel good. I would say the other thing is that when you look at it, I think we feel confident about the $28 billion growth CapEx. The $27 billion net CapEx obviously assumes a $1 billion of capital offsets. And I'd say the early read and of course, we're still early in the year, but looks quite good. So there's a potential we could actually do a bit better on the offset side, so that the net CapEx could potentially be a little bit [good].

Your next question is coming from the line of Matt Ramsay with Cowen.

I wanted to ask a couple of questions on the DCAI segment. The revenue, I guess, went from $5 billion to $6 billion from last year, and you have operating margin down, I guess, 7 points. And I guess it's no surprise after some of the disclosures that we had last year. But maybe you could tease that apart a little bit mix between enterprise and cloud, were there big changes there? And I guess the real question, Pat, is what gets that margin moving in the right direction? Is it the move to Sapphire, where you have multi-die products that might yield better? Is it revenue growth? I'm just trying to understand the drivers to turn around the operating margin in that segment as we go forward.

Yes. And I'll start on that one. Overall, the DCAI performed a little bit better than we expected for Q1. So I'd say overall, this is what we expected. The biggest factor on margins was the ramp of the 10-nanometer product line and the costs associated with that. So that was the biggest factor associated with it. As we're looking at that, there also was, I'll say, relative strength in the cloud piece of that business, the hyperscalers and the enterprise piece of the business was a little bit more constrained by match set. So we did see a little bit of that effect in Q1. As we go through the rest of the year, we do see good outlooks on both the hyperscaler as well as on the enterprise and government side. We're working aggressively to solve the match set problems. So we are hopeful that we'll be able to do a bit better in that area if we are able to address some of the shortages that we've seen in areas like Ethernet. Obviously, as we go into the second half of the year, the product line gets stronger. As we see Sapphire Rapids ramp, we'll be launching products like Sapphire Rapids, HBM and the HPC segment, we’ll be ramping Ice Lake more aggressively with higher volumes as we go into the second half of the year. So all of those start moving the product line in the right direction and margins commensurately with it. We also have gotten great response for the longer-term view of our segment and road map. And as we've laid out, we'll have both the efficient cores as well as the performance cores which better satisfy the market requirements. And I believe that will be a factor of better pricing as better -- as well as better margins over time because you're not trying to stretch one product across really 2 distinct segments of the marketplace and really having highly optimized products for both the hyperscaler as well as the broader enterprise requirements. So overall, we think that the strategy that we've laid out, we've gotten great response from our customers for, and as I already indicated, we're executing as we set Sapphire Rapids' first PRQs this quarter, many more as we go through the rest of the year, and we'll be ramping that aggressively and seeing a good response from the customers. And I'd also say, particularly with Sapphire Rapids, every hyperscaler, every OEM has many SKUs lined up for this. This product will be extremely well respected, accepted and broadly deployed in the marketplace this year. Dave, anything else you would add?

I would just add, we set out a goal in the Investor Day for the company to have gross margins of 54% to 58% and call it, roughly 30% operating margin. And I think when we start to see the fruits of the investments we're making, both in terms of process technology that's weighing down on the COGS and the investments we're making in operating expense to build out the product portfolio and get to leadership, those things will start to show strong scale on the top line side. And so I would bet this business is accretive to our overall corporate average.

Your next question is coming from the line of Timothy Arcuri with UBS.

I had two. I guess the first question is, TSMC is kind of pushing out the timing of the high-volume 3-nanometer EUV. And I guess the first question is sort of how that impacts your GPU and your CPU road map? And then I had a follow-up where really, Dave, I wanted to ask you on how you're going to account for subsidies? Are you going to account for those kind of in a contra account, so that as the depreciation ramps, you could offset some of that with that contrary account coming from subsidies?

Yes. And on the first part of it, clearly, the implications of foundry timing is something we have to work very carefully. And there is not just a question of the timing of a node, it's also the capacity of nodes. And with some of those changes that have been reported in the industry, we're just working through that with our product teams to make sure that we're aligning well to the availability of the foundry technologies. But I would say that our IDM model just gives us fundamentally an advantaged business model here, where given the majority of our volumes are internal, we are able to balance between what we use externally for wafers and what we use internally for wafers. And thus, we're able to do a much better job satisfying our customers and having a more competitive product line. I'd also again add, Tim, that our execution of our 5 nodes in 4 years on or ahead of schedule across it, this just reinforces the competitiveness that we've described where we do see ourselves coming back to a position of unquestioned process technology leadership, and we're building out the manufacturing capacity at scale to deliver that to our customers. So IDM 2.0, well leveraging the foundries, but even more importantly, building leadership technologies with that scale manufacturing to deliver the most robust product line in the industry. So Dave?

Yes, sure. So it somewhat depends on the -- which capital offset you're talking about, the grant are usually aligned with a certain set of assets. And so they are contra and they get depreciated over the same life cycle of the asset. Things like [Indiscernible] that we talked about is a bit more of a financing arrangement. So it doesn't necessarily have an impact on the P&L, but it will be shown on the capital statement as a capital offset, like a partner contribution that will reduce our cash flow burn we have. Prepays are handled more or less like they show up as an asset on the balance sheet. And as you ship products, you reduce that account. So it's somewhat dependent on which one we're talking about. But the one I think that you're talking about is the government incentives and yes, you're right there, they're contra accounts. They're on the contra account.

Your next question is coming from the line of Tristan Gerra with Baird.

How should we look at your discrete GPU platform in terms of expanding that beyond just consumer? And if you could talk about the software ecosystem that you might be building around to encourage adoption?

Yes. Thank you. And the answer is yes, we're going to be delivering the GPU products first for mobile, as we said, next for desktop. It will be game-centric as we're bringing them out of the marketplace. But we're also going to have a full lineup and we see actually some very unique advantages as we think about media, some of the professional developers where we're already demonstrating radically advantage that positions like on some of the advanced graphics and media artist product lines. So these will be areas of strength. Particularly when we bring our Arctic Sound product into the marketplace later this year, this will be well optimized for GPU environments and particularly will be strong in areas like encoding and media processing as well that if you think about cloud, you can certainly think about AI and training workloads, but many clouds are actually spending far more time on transcoding and media operations. So that will be an area of unique strength of our Arctic Sound product line. So and -- so if you think about that taken together, we'll be competing in the integrated graphics, the discrete graphics, the GPU business, the high-performance computing business will really be leveraging that technology across the entire space of the market. And that's part of the reason that we're very encouraged by our ability to ramp this into a very significant business for Intel and one where we have a lot of advantages to build upon.

Okay. Last question?

And our last question is coming from the line of Srini Pajjuri with SMBC.

Pat, I want to go back to the Sapphire Rapids ramp. Can you talk about how the ecosystem is coming together given that this is a new platform, especially in DDR5 and PCIe 5.0, et cetera? My question -- the real question is I just want to understand what your expectation for the ramp is versus the previous generations? Do you think this is going to be faster ramp versus Ice Lake? Or this is going to be a slower ramp? And also, when do you expect we'll see a public cloud instance based on Sapphire Rapids?

Yes. Great question, Srini. And clearly, one of the things that Intel as the market leader, right, the volume leader, it is this ability to ramp key new technologies. And with the Sapphire platform comes DDR5. And if we were talking 90 days ago, we were fighting through some challenges on DDR5 with the memory of suppliers and really working on debugging those interfaces. We now feel very confident that multiple suppliers are now qualified. We're seeing good momentum from the memory partners in this area, they're ramping up their supply chains for the Sapphire platform, right? It's really that one that brings a major new memory technology into the marketplace and really reinforces Intel as the leader in data center and server market. Overall, we're modeling very carefully, your exact question about looking at this versus the Ice Lake ramp. And our objective is to ramp this platform meaningfully faster than we did the Ice Lake platform. We're doing a lot of work for the software stack, the validation of that, making sure that we've really worked through all of the early sitings that customers would have, driving down the defect rates in the platform that our customers can ramp this at volume. And as I already indicated, we're seeing a tremendous amount of SKUs and instance types across all of the OEMs as well as all of the hyperscalers in the marketplace, and we're looking forward to those being broadly available in the second half of the year. As we -- and I think then maybe just wrapping up the call today, we're grateful for all of you joining us the opportunity to update you on the business. It's great that we start the year with a beat. We are looking at the momentum of the execution machine of Intel seeing solid progress, so 5 nodes in 4 years, Alder Lake, Sapphire Rapids, Arc launch, increasing momentum with our customers. We remain true to this building out of a geographically-balanced and more resilient supply chain. And there's just lots of good things in flight that gives us confidence, not only in Q2 but to reaffirm our guidance for the year. And our leadership team, we're fired up, and we believe that this is the greatest turnaround story in history, and it's my honor as the CEO of this great company to be able to be part of this leadership team. So thank you all for joining us today.

All right. Thank you, Pat, and thank you for joining us today. Operator, can you please close the call?

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.