Operator:

Thank you for standing by, and welcome to the Intel Corporation's First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded.

John Pitzer:

Thank you, Jonathan. By now, you should have received a copy of the Q1 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window.

Patrick Gelsinger:

Thanks, John, and welcome, everyone.

David Zinsner:

Thank you, Pat, and good afternoon, everyone.

Operator:

And our first question comes from the line of Ross Seymore from Deutsche Bank.

Patrick Gelsinger:

Yes. Starting out, so Ross, thanks for the question. I'll just say the market was weaker. You've seen that in a number of others that have commented as well. So I'll say somewhat across the board a bit. We've seen that, cloud customers, enterprise, across geos. So I'll just say a bit weaker demand, right, we'll just say at the low end of seasonality Q1 to Q2 that we saw. And as we go into the second half of the year, we're engaging deeply with our customers today, our OEM partners, and we just see strength across the board, right?

Ross Seymore:

I do. Maybe for Dave, on the gross margin side, nice upside in the first quarter, but the drop in the second quarter is a little bit puzzling with revenues going up. So could you just talk a little bit about that second quarter drop and then the confidence in the rebound in the second half? Is that just revenue driven in the second half? Or what's the key metrics there, please?

Operator:

And our next question comes from the line of Ben Reitzes from Melius.

Patrick Gelsinger:

Yes. Thank you, Ben. And obviously, as we look at our position in the data center, I'll just say we're stabilizing. And with that, we're improving our competitiveness. We also see, as I mentioned in the comments, that the ASPs are going up comfortably as well. So socket fairly stable through the year, but the ASP per socket with increased core count improves our position. And then new products like Sierra Forest or Xeon Gen 6 product, definitely gives us power performance capabilities. So overall, we're seeing a very healthy growth rate, mid-20s as we go through the year. We're also seeing increasing interest in the AI capabilities of Xeon. And we're winning head node positions, and we're seeing pretty extraordinary performance at Vision.

John Pitzer:

Ben, do you have a quick follow-up?

Patrick Gelsinger:

Yes. Thanks, Ben. And obviously, pipeline converting into revenue, revenue is much more meaningful and as we said, greater than $500 million for the year, and that's obviously quarter-on-quarter accelerating rapidly, which also gives a great indication for the business in '25 as well. At our Vision event, we had over 20 customers publicly describing their embrace of Gaudi 2 and Gaudi 3. And I was super pleased to see the breadth of those customers. It was CSPs like Naver and Ola and IBM Cloud. It was ISVs like Zeekr, right, coming on board, but maybe most importantly, enterprise customers.

Operator:

And our next question comes from the line of Joe Moore from Morgan Stanley.

Patrick Gelsinger:

Yes. So Sierra Forest, our first Xeon 6 product on Intel 3, and I'm super proud, right? Now we have a leadership process technology back on American soil for the first time in a decade. This is really exciting. And Sierra Forest, high core count, 144, 288 core product, very focused on power, performance, efficiency, and we do see a good pipeline of customers and a good pipeline of, I'll say, socket win backs because the area of power performance has been an area that we've been carrying a deficit, being on an older node. And now that we're on leadership nodes, we definitely see share gains for that.

Joseph Moore:

Yes, I do. Thank you. On the foundry webinar, you had sort of talked about Intel 3 volume being kind of more of an inflection next year. Does that mean it was in server that these Intel 3 products are sort of get to volume crossover kind of some point next year? Or could we see -- obviously, the leadership you just talked about is important. What's kind of keeping you from getting those products ramping in the second half?

Vijay Rakesh:

Just a quick question on the Grand Rapids, any thoughts on the timing? And do you expect to regain some computing share, server share there with those ramps?

John Pitzer:

Vijay, do you have a follow-up?

Patrick Gelsinger:

Yes. And Gaudi 3 announcement this quarter, extremely well received. And as I mentioned already, 20-plus customers for Gaudi 2, 3, so we're seeing that build. Obviously, Falcon Shores will build on that momentum. We'll be bringing that late next year when Falcon Shores when we combine the great systolic performance of Gaudi 3 with a fully programmable architecture, and all of that comes together with Falcon Shores. And then we have a rich -- a very aggressive cadence of Falcon Shores products following that. We also added the Gaudi 3 PCIe card to it. This use case of Xeon plus an accelerator or Gaudi accelerator is getting very good response from customers as well. So we'll be bringing that out later this year. But the real story is delivering the TCO value, delivering the enterprise use cases. Falcon Shores will just build on the momentum that we're establishing with Gaudi 2 and 3.

Operator:

Our next question comes from the line of Timothy Arcuri from UBS Securities.

David Zinsner:

Yes. Good question. So there will be additional start-up costs next year. We do think it on a percent of revenue basis, it will be lower. So that should help lift the margins. Of course, the expectation would be we see growth in revenue. That also should help. On top of that, we already are seeing good decision-making and changing decision-making around how we operate now under this new different business structure that we have at this point. A lot of that stuff doesn't actually show up in the P&L. We have all these decisions get made this year, but a lot of the decisions made -- sorry, a lot of the benefits to those decisions don't show up until next year and the year after. So we should see some benefit from that as well.

John Pitzer:

Tim, do you have a follow-up question?

Patrick Gelsinger:

Well, overall, I like to say it's hard to predict, right, exactly how these will play out in light of the overall gen AI surge that we've seen. That said, products are good, right? We came into the year improving our market share position in the first quarter of the year. It does take time to ramp these new products. But better products, rebuilding trust with our customers that we're delivering on these and now hitting the, what we would call the early end of the cycles on these new products is giving us a lot of interest with the market and the customer. New use cases also demonstrated a 70 billion parameter model running natively on Granite Rapids at our Vision event, all of these just make us more and more confident in our business execution.

Srinivas Pajjuri:

My question is on the client side. I think, Pat, you mentioned something about supply constraints impacting your 2Q outlook. If you could provide some color as to what's causing those supply constraints and when do you expect those to ease as we, I guess, go into the second half. And then in terms of your AI PCs, I think you've been talking about $40 million or so potentially shipping this year. Could you maybe put that into some context as to how it actually helps Intel? Is it just higher ASPs? Is it higher margin? I would think that these products also come with higher costs. I just want to understand how we should think about the benefit to Intel as these AI PCs ramp?

John Pitzer:

Srini, do you have a follow-up?

David Zinsner:

Yes. On Altera, and this is not unprecedented when you see a massive work down of inventory, of course, that significantly impacts the revenue. But as that normalizes, then you start shipping to end consumption. So it's actually a pretty easy lift to get to the $2 billion mark once we're through the inventory digestion period. So I think we have high confidence on that.

David Zinsner:

And then on NEX, of course, that business also has gone through its own inventory adjustment. So we have good confidence around that reversing, which will help drive strength. And then some of the products that are more tailored to the AI space, of course, we'll see like, at NEX, for example, we'll see strength through the year. And so that should drive good revenue growth through the year as well.

Operator:

Our next question comes from the line of Vivek Arya from Bank of America.

Patrick Gelsinger:

Yes. Thanks, Vivek. And we spoke at our Vision event about use cases like RAG, retrievable augmented generation, where the LLMs might run on an accelerator, but all of the real-time data, all of the databases, all of the embedding is running on the CPU. So you're seeing all of these data environments, which are already running on Xeon and x86 being augmented with AI capabilities to feed an LLM. And I believe this whole area of RAG becomes one of the primary use cases for enterprise AI. And if you think about it, an LLM might be trained with 1-, 2-year old data, right? But many of the business processes and environment are real time, right?

John Pitzer:

Vivek, do you have a quick follow-up?

David Zinsner:

Yes. Good question. The operating losses will pick up. We roughly were at like 2-, 4-ish in the first quarter. It will pick up in the second quarter, given the start-up costs are increasing and I would say, be roughly in that range for the remainder of the year. And then what I said before is we see that improving then going into '25. And Pat's given me the order, he wants to see every quarter some improvement in the operating loss ultimately to get to breakeven midway through the point between now and 2030. And I think that is very achievable. Sorry, Vivek, what was the second question?

Operator:

No, we've moved on.

Operator:

Our next question comes from the line of Matt Ramsay from Cowen.

Patrick Gelsinger:

Yes. Thanks, Matt. And largely, those decisions are made when the product decisions are made. So there's limited flexibility to move them around. And if you pick a process node for a certain tile, generally, that's the process node that it's on. So there's limited flexibility there. And many of those decisions, as we've highlighted before, Matt were literally made years ago, right? And those choices were made.

John Pitzer:

Matt, do you have a quick follow-up?

Patrick Gelsinger:

Yes. Maybe 3 different points there. The first one is for inferencing, you need a whole lot less software compatibility, right? And as the market is more focused on inferencing going forward, if you can run the models, right, in the context of the databases and the other, so that portends and that's why we're seeing the strength that we're seeing right now, Matt, in these use cases. And clearly, some of the software compatibility issues of a GPU have led to the training environments that have been challenging for us. But now as customers get much more focused on enterprise use cases, inferencing TCO, we're finding a lot of strength in the offerings that we have. And as we've matured a number of customers now, we've worked through many of those use cases and getting quite a lot of acceptance of the software stack that we have with Gaudi 2 and 3.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Intel Corporation's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations. Please go ahead.

Pat Gelsinger:

Thank you, John, and good afternoon, everyone. Q4 was the culmination of a year of tremendous progress towards our IDM 2.0 transformation. We consistently executed on our plan to reestablish process leadership, further build out our capacity and foundry plans, greatly improved product execution and began to execute on our mission to bring AI everywhere across our product segments. We delivered solid Q4 results exceeding expectations for the fourth quarter in a row. Revenue was at the higher end of our guidance, and we had strong EPS upside as a result of our ongoing relentless focus on driving operating leverage and expense management, including comfortably meeting our $3 billion cost savings commitment for fiscal year '23. 2023 was definitely a year when we did what we said we would do and more. We intend to make 2024 another such year. And when we look out over the next 12 months, we are confident that we can continue to drive considerable progress on our IDM 2.0 journey. As we look into Q1, our core business, including client server and edge products continues to perform well and is tracking to the lower end of seasonal. However, discrete headwinds, including Mobileye, PSG and business exits, among others, are impacting overall revenue, leading to a lower Q1 guide. Importantly, we see this as temporary, and we expect sequential and year-on-year growth in both revenue and EPS for each quarter of fiscal year '24. Momentum and excitement around new products and businesses remain strong as we head into the year and will grow stronger as the year progresses. We could not be prouder of the execution across our process technology roadmap in 2023 and we became the world's first high-volume manufacturer of logic devices using EUV, both the U.S. and Europe as we aggressively ramped Core Ultra on Intel 4 in both Oregon and Ireland. Intel 3 achieved manufacturing readiness in Q4 as committed with solid performance in year progression. Our two lead vehicles in Intel 3 are on track, and we look forward to launching Sierra Forest in first half '24 followed shortly thereafter by Granite Rapids. Sierra Forest has final samples at customers and the production stepping of Granite Rapids is running ahead of schedule well into power-on validation and very healthy. We are even more excited about breaking into the Angstrom era with Intel 20A and Intel 18A. We are first in the industry to have incorporated both gate-all-around and backside power delivery in a single process node, the latter unexpected two years ahead of our competition. Arrow Lake, our lead Intel 20A vehicle will launch this year. Intel 18A is expected to achieve manufacturing readiness in second half '24, completing our five nodes in four year journey and bringing us back to process leadership. I am pleased to say that Clearwater Forest, our first Intel 18A part for servers has already gone into fab and Panther Lake for clients will be heading into Fab shortly. As we complete our goal of five nodes in four years, we are not satisfied nor are we finished. We have begun installation of the industry's first high NA EUV tool in our most advanced technology development site in Oregon aimed at addressing challenges beyond 18A. We remain focused on being good stewards of Moore's Law and ensuring a continuous node migration path over the next decade and beyond. Third-party engagements with IFS continue to validate our progress on process technology. We launched IFS with a long-term view of delivering the world's first system foundry that brings together a secure and sustainable supply chain with the best of Intel and our ecosystem. While our ambitions will not materialize overnight, we made tremendous progress in both Q4 and fiscal year '23 towards our goal of becoming the second largest external foundry by 2030. The rapid adoption of AI by all industries is proving to be a significant tailwind for IFS as high-performance compute, an area where we have considerable wafer and packaging know-how and IP is now one of the largest, fastest-growing segments of the semiconductor market. We made major strides in building our foundry ecosystem in 2023 with now over 40 strategic agreements across EDA design services, IP, cloud and U.S. military aerospace and government. Critical agreements with ARM and Synopsys continue to gain momentum. We delivered the Intel 18A 0.9 PDK and broadened its availability in Q4. We expanded the RAMP-C program significantly and just this quarter signed a major foundry contract with the United States Government and Department of Defense. We are also very pleased to have completed a major agreement with United Microelectronics, or UMC, to develop a 12-nanometer process platform targeting high-growth markets, including mobile, communication infrastructure and networking. This expands both Intel and UMC's foundry process portfolios and customer access to a broader and more resilient supply leveraging our Arizona site. This agreement builds upon and furthers our long and deep relationships with the vibrant Taiwan ecosystem. This also meaningfully extends the production life of our installed capacity and improves our returns on investments, similar to the announcement last quarter of our Tower Semiconductor partnership at the 65-nanometer node with our New Mexico site. Our success with IFS will be measured by customer commitments and revenue. We have taped out more than 75 ecosystem and customer test chips. IFS already has more than 50 test chips in the pipeline across 2024 and 2025, 75% of which are on Intel 18A. During CES, we welcomed the Valens Semiconductor to the growing list of foundry customers as they announced they would use IFS to fabricate their MIPI A-PHY chipsets using our advanced technology. In addition to the 3 Intel 18A customers we disclosed in Q3, we won a key design win with a significant high-performance computing customer. This customer was particularly motivated by our unique leading-edge manufacturing capabilities and U.S. capacity. We came into 2023 committing to one 18A foundry customer. We executed on four inclusive of a meaningful prepay and our momentum continues to grow. Our advanced packaging business is proving to be yet another important advantage for IFS, a faster on-ramp to broader foundry relationships. During the quarter, we captured three additional advanced packaging design wins, bringing the total to five in 2023, with the majority of revenue starting in 2025. To support our growing demand, just yesterday, we opened Fab 9 in New Mexico, marking a milestone for high-volume 3D advanced packaging manufacturing. The momentum in advanced packaging is very strong and is another facet of our foundry strategy, which is clearly benefiting from the surge of interest in AI. With leadership technology and available capacity, our opportunity set continues to grow. In total, across wafer and advanced packaging, our lifetime deal value for IFS is now over $10 billion, more than doubling from the $4 billion we provided in our last update. Supporting our growing momentum in IFS is our global manufacturing footprint we are the only semiconductor company with that scale and sustainable manufacturing in every major region of the world providing ourselves and our foundry customers resilient access to the right capacity in the right regions at the right time. All of our expansion projects in the U.S., EU and Asia are progressing on schedule, and our chips applications in the U.S. and EU are progressing well. Finally, we are thrilled to be hosting our first Foundry Day, IFS Direct Connect on February 21 in San Jose where we will have the opportunity to showcase the breadth of our ecosystem as well as begin to talk about our process roadmap beyond Intel 18A, next-generation packaging and our full foundry vision. We hope to see many of you there. Intel continues its mission to bring AI everywhere. We see the AI workload as a key driver of the $1 trillion semiconductor TAM by 2030. And given our foundry and product offerings, we're the only company able to participate in 100% of the TAM for AI Silicon logic. We have already discussed how our 50-year heritage and high-performance computing transistors and our advanced packaging positions IFS to benefit from the accelerating move to AI. Within our product portfolio, we are the only company with the products, IP and ecosystem reach to empower customers to seamlessly integrate and effectively run AI in all their applications from the cloud through the network, into the enterprise client and edge. For the developer working with multitrillion parameter frontier models in the cloud, Gaudi and our suite of AI accelerators provides a powerful combination of performance, competitive ML perf benchmarks and leadership TCO. As AI proliferates and the world moves towards more AI integrated application, there's a market shift toward local inferencing and smaller, more nimble models. It's a nod to both the necessity of data privacy and an answer to cloud-based inferencing cost and round trip latency. With AI accelerated Xeon for enterprise, Core Ultra ushering in the AI PC era and OpenVINO enabling developers seamless and versatile support for a range of clients and edge silicon, we are bringing AI to where the data is being generated and used rather than requiring it in the cloud. Our expansive footprint spanning cloud and enterprise servers to volume clients and ubiquitous edge devices positions us well to enable the AI continuum across all our market segments. In Q4, our server business experienced solid sequential growth, consistent with market share, which we believe was flat with Q3 levels. Since launching 4th Gen Xeon in early 2023, we have shipped more than 2.5 million units with approximately 1/3 of all 4th Gen demand driven by AI. With our 5th Gen Xeon launch, we enable up to 42% higher AI inference performance compared to the industry-leading 4th Gen Xeon. 5th Gen Xeon has reached general availability at Alibaba is entering public and private previews with several CSPs and is on track to ship with OEMs next month. More importantly, our improved execution is strengthening our product portfolio with Gen 4 and Gen 5 Xeon ramping well, Sierra Forest and Granite Rapids coming soon and Clearwater Forest already going into the fab. Momentum is building and positioning us well to win back share in the data center. Our Gaudi 2 AI accelerators continue to demonstrate price performance leadership compared to the most popular GPUs. In a recent blog published by Databricks, Gaudi 2 was shown to clearly deliver the best training and inference performance per dollar based on public cloud pricing. We're building on this momentum with Gaudi 3, which is on track to launch this year and is expected to deliver performance leadership with 4x the processing power and double the networking bandwidth for greater scale out performance. Gaudi 3 is now in the lab, powered on and showing great health and performance and Falcon Shores is also well underway. Our accelerator pipeline for 2024 grew double digits sequentially in Q4 and is now well above $2 billion and growing. We recently increased our supply for both Gaudi 2 and Gaudi 3 to support the growing customer demand and we expect meaningful revenue acceleration throughout the year. As we announced last quarter, we are now operating PSG as a standalone business beginning on January 1. Our intent is to bring in private capital this year to create an eventual path to an IPO over the coming years. As we outlined on our Q3 call, PSG is in the midst of an industry-wide cyclical correction for FPGAs, which we expect to last through the first half of '24. Despite the financial correction, operational momentum is strong and PSG executed its most ambitious FPGA roadmap, delivering 21 new product releases in 2023 and executing supply assurance agreements valued by our customers. Finally, even as we congratulate Sandra Rivera, the new CEO of PSG, I am extremely pleased to welcome Justin Hotard as Executive Vice President and General Manager of DCAI. Justin joined us from Hewlett Packard Enterprise, where he was Executive Vice President and General Manager of High Performance Computing AI and Labs. He will play a key role in helping customers accelerate their businesses with our Xeon processor family, delivering on our commitments to customers and partners by increasing our GPU and accelerator footprint and supporting our mission to bring AI everywhere. Moving to client. CCG performed very well in Q4, posting the third consecutive quarter of double-digit sequential growth. Demand reflected a normalized inventory environment of sustained strength in gaming and commercial with our highest end SKUs exceeding Q3 records by 20%. The 2023 consumption TAM was roughly 270 million units consistent with our views entering the year, and we expect the PC TAM up low single digits year-on-year in 2024, in line with third-party estimates. Our share position is strong, and our product portfolio for 2024 and beyond and ecosystem work will continue to drive industry-leading performance and experiences. In Q4, we ushered in the age of the AI PC with the launch of Intel Core Ultra. Representing our largest architectural shift in decades, the Core Ultra is the most AI-capable and power-efficient client processor with dedicated acceleration capabilities across the CPU, GPU and Neural Processing Unit or NPU. Ultra is the centerpiece of the AI PC, systems that are capable of natively running popular $10 billion parameter models and drive superior performance on key AI-enhanced applications like Zoom, Adobe and Microsoft. We expect to ship approximately 40 million AI PCs in 2024 alone with more than 230 designs from ultrathin PCs to handheld gaming devices to be delivered this year from OEM partners, Acer, Asus, Dell, HP, Lenovo, LG, MSI, Samsung Electronics and others. The Core Ultra platform delivers leadership AI performance today with our next-generation platforms launching later this year, Lunar Lake and Arrow Lake tripling our AI performance. In 2025 with Panther Lake, we will grow AI performance up to an additional 2x. NEX is well positioned to benefit from the proliferation of AI workloads on the edge where our market-leading hardware and software assets provides improved latency, reliability and cost. OpenVINO adoption grew by 60% sequentially in Q4 and today is a core software layer for AI inferencing on the edge, on the PC and in the data center. NEX is also driving the shift of AI networking in the cloud from proprietary technologies to open Ethernet-based approaches in partnership with a broader industry ecosystem. NEX Q4 results beat our internal forecast and the division is poised for solid growth in 2024 across edge network and ethnic products more skewed to the second half. Yet another growing market opportunity for us is automotive. While Mobileye is experiencing a sharp inventory correction in Q1, we are encouraged by their improving forecast throughout 2024 and more importantly, the recent announcement at CES that they were awarded a series of production design wins by a major Western automaker across the company's three key platforms

John Pitzer:

We will now transition to the Q&A portion of our call. As a reminder, we ask each of you to ask one question and a brief follow-up where applicable. With that, Jonathan, can we please take the first question?

Ross Seymore:

Hi guys. Thanks for letting me ask a question. I have a near-term one and then for my follow-up would be a longer-term one. So the near-term one is on the demand picture. Dave, you were helpful in breaking up kind of the non-core impacts in the first quarter versus the core, but the low end of seasonality is a little bit of a surprise given that cyclical pressures seem to have been abating and some of the market share trends should have been going in your favor, at least also not worsening. So can you just talk a little bit about why you're at the low end of seasonality in the first quarter for your core businesses and what gives you confidence in super seasonality thereafter?

David Zinsner:

And what's the long-term question, Ross?

Pat Gelsinger:

Yes, thank you. I'll do that and ask Dave for pile on both of those a little bit. But with respect to the manufacturing, I'll just say, hey, we look at this every single day and we're scrutinizing carefully our progress on 18A. And obviously the great news that we just described those Clearwater Forest taping out, that gives us a lot of confidence that 18A is healthy. That's a major product for us. Panther Lake following that shortly. We've also had our fourth customer this quarter. Some of the IP providers are giving us very strong affirmation on the competitiveness of the process technology. And particularly, we're just way ahead on backside power. And that's not even, everybody in the industry is recognizing that. And many of the customers who are looking at it are seeing substantial gains, not just in power performance, but in area savings as well. So overall, we feel very confident that our roadmap is strong in the process technology side. We do use external foundries and obviously that grew as we were dealing with some of our own challenges for process competitiveness. And as we create more and more focus in the business, more wafers will come in internal to the Intel factory network. But long-term, we're going to continue to use external foundries to complement, manage our capital requirements. And to make sure that our teams always are building the best products in the industry and using the best technologies to accomplish that. So overall, we feel super good with our strategy. You'll see more use of our own factory network, even as we leverage external foundries where appropriate.

John Pitzer:

Thanks, Ross. Jonathan, can we have the next question, please.

Timothy Arcuri:

Thanks a lot, Dave. I had a question about gross margin. It was obviously much, much better in December, and the March guidance is actually pretty good. So does this include the sale of any previously written down inventory and maybe help us get a clean margin number? Is this March number pretty clean that we can carry that incremental forward through the year?

John Pitzer:

Tim, do you have a follow- up question?

David Zinsner:

Yes. Well, maybe step back a little bit on the 60%. I mean, it will be driven by a number of factors, one of which is just revenue. Revenue growing on a largely fixed cost business is going to help gross margins. Obviously, we have optimism around how we can drive the growth of the business. The second, as you point out, is loadings. And we are managing our capital spend and our investment with an eye on loadings to make sure that we keep those in a good place. Obviously, last year, we had some underloadings to deal with. But as we kind of break out of that and start to move into the next year, I think we'll start to see some improvements there. Third, as we get, as Pat was talking about, to leadership in terms of nodes and products, ultimately across the entire product portfolio, that's going to help out on margins. It's going to help out from a cost structure perspective, but also better performing products are just going to yield better pricing and so forth, better profitability. And then lastly, we've got this internal foundry model that Pat mentioned, and I mentioned in the prepared remarks that we think is going to deliver tons of savings for the company. I think every week that Pat and I spend on this. Somebody brings up another big rock that they found of savings they can identify, because they were looking at the business in an entirely different way than they're used to looking at it. The product groups are now hyper-focused on test times and how many - and what sort of hot lots they do and how much sample activity they use. The factories now, as you point out, very, very hyper-focused on loadings and making sure they're properly thinking about their capital investments associated with the loadings. So, we're way more focused in terms of steppings and so forth. So, I think we'll get, like I said in a call a couple of quarters ago, $4 billion to $5 billion of savings from this internal foundry model ultimately. And so that's another big step function that I think gets us to the 60% gross margin.

John Pitzer:

Thanks, Tim. Jonathan, can we have the next question, please?

Joseph Moore:

Great. Thank you. I wonder if you could talk about the data center decline in Q1, how much of that is a function of the weakness in FPGAs that you've talked to already and then just any sense of what the cloud and server environment is like in the first quarter?

John Pitzer:

Joe, do you have a follow-up question?

Pat Gelsinger:

Yes, thank you. And I would love to talk for hours about Sierra Forest and Granite Rapids. I am super excited about those products, both of them on Intel 3. And if I build on the last question from Tim about factory loadings, hi, we are driving hard to accelerate those products into the marketplace, and they're really the drivers of Intel 3 capacity. The mix between them, obviously, this is our first, I'll say, volume mainstream offering for a high core count. I sort of view this as the cloud guys just one VMs at scale or just one containers at scale. That's what Sierra Forest is about, is sort of that bulk workload. And it doesn't have some of the performance capabilities, peak capabilities, feature capabilities that Granite Rapids has. I expect the bulk of the market to stay on Granite Rapids type products, the P-core products, certainly in '24 and '25. But we do see a pretty steady rise in the use of Sierra Forest. And then as we move to Clearwater Forest in '25, a very compelling product. We do see a pretty healthy split between those for the cloud and data center customers. I think most of the enterprise customers will stay with the P-core products that they will have. And it really is Sierra Forest, Clearwater Forest, and successors being sort of that bulk mainstream cloud offering that's very focused on TCO. So with that, we feel super good about our product portfolio, P-cores, E-cores, really allowing us to stretch the offerings to the highest performance with high core count and to the best TCO. And with that, this is a portfolio that will allow us to regain share in the core data center market.

Operator:

Certainly. One moment for our next question. And our next question comes from the line of Ben Reitzes from Melius Research. Your question, please.

David Zinsner:

Yes. Yes, to be clear, the way I was looking at gross margins is on a year-over-year basis on the 60% fall-through. So you should take the full year gross margins that we had in '23, which were roughly 43.5%. And think about this 60% fall-through based on the 43.6% gross margins. I think when you do that, we obviously start off at a level that's better on a year-over-year basis, but obviously down on quarter-to-quarter basis. And so, you should expect generally improving dynamics through the year. The only challenge will be this quarter-to-quarter always has volatility to it. So there could be quarters in which we get less ship through of previously reserved products. Sometimes it's more. And so and kind of avoiding trying to pinpoint every quarter, because of the difficulty around pinpointing that, but we feel very confident around the 60% fall-through.

Ben Reitzes:

Yes, thanks, John. Could you talk a little bit more about the client market? There was - you mentioned that corporate, you said some strength and Dell had said there was some weakness. And heading into the first quarter, can you talk about the revenues on client and what makes you so confident that it's really going to pick up? Thanks.

John Pitzer:

Thanks, Ben. Jonathan, can we have the next question, please?

Vivek Arora:

Thanks for taking my question. But I'm curious, now that we are a year into the generative AI deployments, what's your view on how cloud customers are thinking about the CapEx between traditional and AI servers? Because when we look at the revenue growth across your GPU competitors, they seem to be capturing nearly all of the incremental CapEx and in some cases, even more than right, just the CapEx at the public cloud company. So does that really leave much room for your CPU business to grow right beyond just the seasonal variations? So just how are you looking at the AI market overall? And what part of that is Intel really able to capture when we just look at how much is being or needing to be dedicated to your GPU competitors?

John Pitzer:

Vivek, do you have a follow-up question?

Pat Gelsinger:

Yes. And the two things in the Q4 to Q1 numbers on IFS, one is the - I'll say the natural ending of our traditional packaging volume. So that affects Q4 as we go into Q1. And obviously our focus there isn't doing I'll say traditional packaging. You know, that's best supplied by OSAT vendors, but we were in a unique position to help our customers as we went through the COVID cycle. All of our packaging focus going forward, is advanced packaging where our technology is differentiated, the margins are good. And as you saw, we just announced the New Mexico facility, as the first major advanced manufacturing facility on U.S. soil. A lot of excitement from that from customers across the world. Also, we had our foundry equipment business, which was another factor Q4 to Q1, very consistent. With the profile that you might've heard from people like ASML, right? As they saw the quarter-to-quarter implications on the equipment business. So I'll say Q4 to Q1, all explainable in those contexts. The business we're winning 18A foundry customers, Intel 3 packaging, it takes quarters for that to materialize and for wafer customers' years. And that's why we said lifetime deal value is probably the best metric that we can give you to help you understand the nature of that business as it's growing. And as I said, we saw a big uptick from our prior update to this one. Obviously we need to, as your question suggests, get to a much bigger number. And that's exactly what we're going to do. We're now well underway. We're seeing healthy growth in lifetime deal value. We'll be giving you periodic updates on it as a good metric of seeing how rapidly that business is growing for us. And I've emphasized that number is just external foundry, right? Our internal business is what's going to be driving the factory build out. And that really gives us the scale to then start adding these additional external customers to it. Those deals, as we say, they could be a year or two, or they could be multiple years in length. There'll be a varying contract length associated with them. And we just want to give some visibility, transparency to the business and a rapidly growing lifetime deal value is a good way for us to give you some characterization of that business outlook. Finally, I want to see you on February 21. We're going to hold a big industry ecosystem event, our IFS direct connect and meeting with the ecosystem, our customers, but we're inviting analysts to listen in to the great conversations we're going to have and the disclosures that we'll be giving there.

Operator:

Certainly. One moment for our final question for today. And our final question for today comes from the line of C.J. Muse from Cantor Fitzgerald. Your question, please.

Pat Gelsinger:

Very good. So let me characterize a little bit more carefully, because we've been trying to carefully manage the risk that we're taking on. So first was the move into EUV. We began that with Intel 4 and Intel 3. And those, as we said, are high volume manufacturing underway done. So, we sort of took the risk of EUV off the table there. Backside power, right, we ran an internal node, something we didn't disclose to external foundry customers. But we ran, many, many wafers using Intel 3, with backside power to go de-risk backside power, before we put it into Intel 20A and Intel 18A. So, we had a major step to de-risk backside power. And then of course, gate all around the transistor. So 18A brings those two together, backside power and the gate all around transistor. But I'll tell you, as we've been going through the development process. Backside power on 18A has been elegant, beautiful, high yield, very clean in its introduction into the process. And really the focus has been on the new transistor structure with gate all around. As customers are taking advantage of that now, as they're starting to look at that, they're really seeing great benefits from backside power. In some cases, almost as much performance benefit and significant area benefit from that. And gate all around transistors making good progress are 0.9 PDK that we delivered in Q4. And we'll be having the 1.0 PDK in Q2 on track. And as I said, Clearwater Forest is the first product. And it's now in fab on 18A, a huge milestone for us, both on the product side, as well as on the process side. High-NA, the next generation of EUV is not part of 18A, right? That will be part of the next major node. We'll talk more about that at the Intel Foundry Day, as we said on February 21, but we're not introducing that as a risk factor into 18A. You know, it's the EUV tools that are in production today that we've already de-risked as part of the Intel 4 and Intel 3. So, we think we've done a very careful management of risk. And we look at this all the time as we're rebuilding our momentum. And as I said, overall, we are confident five nodes in four years. This was audacious. It's been superbly executed, and we are on track to deliver it and get back to process, technology, leadership for both our products, as well as to establish a major foundry opportunity for the industry. Rebuilding Western supply chains, the momentum we're seeing in our whole factory network. You know, this is really incredible, the progress, and I couldn't be proud of our team for getting it done. So with that, you know, let me say thank you for joining us on the call as always. We appreciate the opportunity that we have to update you on a strong Q4, beating on top and bottom line, finishing an incredible year in 2023. And we're just excited about the momentum we see across the business for both our products, our business and financial execution, the manufacturing technology, foundry design wins really across the board. Our say-do ratio has been extremely high, and we appreciate the interest. And as I said, we look forward to the opportunity to give you some more updates as part of Foundry Direct Connect, February 21 in San Jose. And I hope to see many of you there as we lay out an exciting update to the industry, and it'll be a great day for us. Thank you so much for joining us.

Operator:

Thank you for standing by, and welcome to Intel Corporation’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Mr. John Pitzer, Corporate Vice President of Investor Relations. Please go ahead.

Pat Gelsinger:

Thank you, John, and good afternoon, everyone. Before we begin, given our significant and now almost 50-year presence in Israel, we are deeply saddened by the recent attacks and their impact on the region. Our utmost priority is the safety and welfare of our people in Israel and their families. But I also want to recognize the resilience of our teams as they have kept our operations running and our factory expansion progressing. Our thoughts are with all of those affected by the war, and I am praying for a swift return to peace. Turning to our results, we delivered an outstanding Q3, beating expectations for the third consecutive quarter. Revenue was above the high-end of our guidance and EPS benefited from both strong operating leverage and expense discipline. More important than our standout financial performance were the key operational milestones we achieved in the quarter across process and products, Intel Foundry Services, and our strategy to bring AI everywhere. Simply put, this quarter demonstrates the meaningful progress we have made towards our IDM 2.0 transformation. The foundation of our strategy is reestablishing transistor power and performance leadership. While many thought our ambitions were a bit audacious when we began our five nodes and four-year journey roughly 2.5-years ago, we have increasing line of sight towards achieving our goal. Intel 7 is done with nearly 150 million units in aggregate of Alder Lake, Raptor Lake, and Sapphire Rapids already in the market. In addition, Emerald Rapids has achieved product release and began shipping this month. In Q3, we began initial shipments of Meteor Lake on Intel 4, which we are now aggressively ramping on the most productive fleet of EUV tools in the industry, providing us with a greater than 20% capital efficiency advantage, compared to when EUV tools were first launched. High volume EUV manufacturing is well underway in Oregon and more recently in Ireland. Our FAB 34 in Ireland represents the first high volume EUV production in Europe, underscoring our commitment to establish geographically diverse and resilient supply. We are the only leading-edge semiconductor manufacturer at scale in every major region of the globe. Our Intel 3 process is tracking to be manufacturing ready by year-end, supporting our first two Intel 3 products, Sierra Forest and Granite Rapids. In fact, our production stepping of Sierra Forest is already out of fab, and what we expect to be the production stepping of Granite Rapids has already taped in and is in the fab now. We are particularly excited by our move into the Angstrom era with Intel 20A and Intel 18A. Adding to our accelerating adoption of EUV are two key new innovations, RibbonFET and PowerVIA, representing the first fundamental change to the transistor and process architecture since we commercialized FinFET in 2012. I have been studying SEM diagrams for almost 40-years. RibbonFET and PowerVIA are true works of art, the most exquisite transistors ever created. We expect to achieve manufacturing readiness on Intel 20A in the first-half of 2024. Arrow Lake, our lead product on 20A, is already running Windows and demonstrating excellent functionality. Even more significant, we hit a critical milestone on Intel 18A with the 0.9 release of the PDK with imminent availability to external customers. In simple terms, the invention phase of RibbonFET and PowerVIA is now complete, and we are racing towards production-ready, industry-leading process technology. Our first products on Intel 18A will go into fab on schedule in Q1 ‘24 with Clearwater Forest for servers, Panther Lake for clients, and of course a growing number of IFS test chips. We expect to achieve manufacturing readiness for Intel 18A in second-half 24, completing our incredible five nodes and four years journey on or ahead of schedule. While Intel 18A reestablishes transistor leadership, we are racing to increase that lead. We announced that innovation are plans to lead the industry in a move to glass substrate for high density, performance, and unique optical capabilities. We also announced our plans to begin installation of the world's first high NA EUV tool for commercial use by the end of the year to continue our modernizations and infrastructure expansions of our Gordon Moore Park in Oregon, home of our technology development team. Moore's Law continues to be the foundational driver of semiconductor technology and economics, which, in turn, fuels broader innovation in every industry across the globe. We remain committed to be good stewards of Moore's Law and drive advancements until we have exhausted every element on the periodic table. Importantly, our progress on process technology is now being well validated by third parties. We have made great progress with early IFS customers this quarter, which we expect to only accelerate with the release of the 0.9 PDK for Intel 18A. A major customer committed to Intel 18A and Intel 3, which includes a meaningful prepayment that expedites and expands our capacity corridor for this customer. The customer is seeing particularly good power, performance and area efficiency in their design. This opportunity is very significant and highlights our full system's foundry capabilities and high-performance computing, big die designs, leadership performance and area efficient transistors, advanced packaging and systems expertise. In addition, we are extremely pleased to announce today that we have signed with two additional 18A customers. Both are particularly focused in areas of high-performance compute and benefiting from power performance per unit silicon area. We have also made substantial progress with our next major customer and are expecting to conclude commercial contract negotiations before year-end. Finally, we were also very happy to expand our growing foundry ecosystem by completing our strategic partnership with Synopsys in Q3 to include IP for Intel 3 and Intel 18A for both Intel internal and external foundry customers. With the rise of AI and high-performance computing applications, our advanced packaging business is proving to be yet another unique advantage. We have seen a surge of interest in our advanced packaging from most leading AI chip companies. With capacity corridors quickly available, this is proving to be a significant accelerant and on-ramp for Intel foundry customers. During the quarter, we were awarded two customer AI designs for our advanced packaging and with an additional six customers in active negotiations, we expect several more awards by year-end. We have also established an important business relationship with Tower Semiconductor, utilizing our manufacturing assets in New Mexico, along with Tower investing capital expenditures of roughly $300 million for its use in this facility. This represents an important step in our foundry strategy, improving cash flows by utilizing our manufacturing assets over a significantly longer period of time. Finally, we have submitted all four of our major project proposals in Arizona, New Mexico, Ohio, and Oregon, representing over $100 billion of U.S. manufacturing and research investments to the CHIPS Program Office and are working closely with them as they review these proposals. We look forward to providing a deeper update on our foundry business during our planned IFS industry event in Q1 of 2024. We are on a mission to bring AI everywhere. We see the AI workload as a key driver of the $1 trillion semiconductor TAM by 2030. We are empowering the market to seamlessly integrate and effectively run AI in all their applications. For the developer working with multitrillion parameter frontier models in the cloud, Gaudi and our suite of AI accelerators provides a powerful combination of performance, competitive MLPerf benchmarks and a very cost-efficient TCO. However, as the world moves towards more AI-integrated applications, there's a market shift towards local inferencing. It's a nod to both the necessity of data privacy and an answer to cloud-based inference cost. With AI accelerated Xeon for enterprise, Core Ultra launching the AIPC generation and OpenVINO enabling developers seamless and versatile support for a range of client and edge silicon, we are bringing AI to where the data is being generated and used rather than forcing it into the cloud. Our expansive footprint spanning cloud and enterprise servers to volume clients and ubiquitous edge devices positions us well to enable the AI continuum across all our market segments. The AI continuum enables AI everywhere. DCAI exceeded our forecast this quarter with server revenue up modestly sequentially. We continue to see a strong ramp of our 4th Gen Xeon processor with the world's top 10 CSPs now in general availability and improving strength from MNCs. During the quarter, we shipped our 1 millionth 4th Gen Xeon unit and are on track to surpass 2 million units next month. 4th Gen Xeon includes powerful accelerators, demonstrating best-in-class CPU performance for AI, security and networking workloads. Our AI-enhanced Xeons are primed for model inferencing, enabling seamless infusion of AI into existing workloads. This was visible this quarter with over one-third of 4th Gen Xeon shipments directly related to AI applications. We are the clear leader in AI CPU results as seen in MLCommons benchmarks today, and our road map provides significant further improvements with Granite Rapids expected to deliver an additional 2 times to 3 times AI performance on top of our industry-leading 4th Gen Xeon. We continue to make excellent progress with our Xeon road map. Our 5th Gen Xeon processor code-named Emerald Rapids is in production and ramping to customers and will officially launch on December 14 in New York City. Sierra Forest, our first E-core Xeon is on track for first-half '24 with customers well into their validation process. Sierra Forest will feature up to 288 E-cores targeting next-generation cloud-native workloads, delivering even more price performance and power efficiency for our customers. Granite Rapids, which shortly follows Sierra Forest, is also well into our validation cycle with customers. While the industry has seen some wallet share shifts between CPU and accelerators over the last several quarters, as well as some inventory burn in the server market, we see signs of normalization as we enter Q4 driving modest sequential TAM growth. Across most customers, we expect to exit the year at healthy inventory levels, and we see growth in compute cores returning to more normal historical rates off the depressed 2023. More importantly, our successful road map execution is strengthening our product portfolio with Gen 4 and Gen 5 Xeon, Sierra Forest and Granite Rapids positioning us well to win back share in the data center. In addition, we expect to capture a growing portion of the accelerator market in 2024 with our suite of AI accelerators led by Gaudi, which is setting leadership benchmark results with third parties like MLCommons and Hugging Face. We are pleased with the customer momentum we are seeing from our accelerator portfolio and Gaudi in particular, and we have nearly doubled our pipeline over the last 90 days. As we look to 2024, like many others, we now are focused on having enough supply to meet our growing demand. Dell is partnering with us to deliver Gaudi for cloud and enterprise customers with its next-generation power edge systems featuring Xeon and Gaudi AI accelerators to support AI workloads ranging from large-scale training to inferencing at the edge. Together with Stability.ai, we are building one of the world's largest AI supercomputers entirely on 4th Gen Xeon processors and 4,000 Intel Gaudi2 AI accelerators. Our Gaudi road map remains on track with Gaudi3 out of the fab, now in packaging and expected to launch next year. And in 2025, Falcon Shores brings our GPU and Gaudi capabilities into a single product. Moving to the client. CCG delivered another strong quarter, exceeding expectations for the third consecutive quarter, driven by strength in commercial and consumer gaming SKUs where we are delivering leadership performance. As we expected, customers completed their inventory burn in the first-half of the year, driving solid sequential growth, which we expect will continue into Q4. We expect full-year 2023 PC consumption to be in line with our Q1 expectations of approximately 270 million units. In the near-term, we expect Windows 10 end-of-service to be a tailwind, and we remain positive on the long-term outlook for PC TAM returning to plus or minus 300 million units. Intel continues to be a pioneer in the industry as we ushered in the era of the AIPC in Q3 when we released the Intel Core Ultra processor code-named Meteor Lake. Built on Intel 4, the Intel Core Ultra has been shipping to customers for several weeks and will officially launch on December 14 alongside our 5th Gen Xeon. The Ultra represents the first client chiplet design enabled by Foveros Advanced 3D packaging technology, delivering improved power efficiency and graphics performance. It is also the first Intel client processor to feature our integrated neural processing unit, or NPU, that enables dedicated low-power compute for AI workloads. Next year, we will deliver Arrow Lake as well as Lunar Lake, which offers our next-gen NPU, ultra-low power mobility and breakthrough performance per watt. Panther Lake, our 2025 client offering, heads into the fab in Q1 '24 on Intel 18A. The arrival of the AIPC represents an inflection point in the PC industry, not seen since we first introduced Centrino in 2003. Centrino was so successful because of our time-to-market advantage, our embrace of an open ecosystem, strong OEM partnerships, our performance silicon and our developer scale. Not only are these same advantages in place today, they are even stronger as we enter the age of the AIPC. We are catalyzing this moment with our AIPC acceleration program with over 100 ISVs already participating, providing access to Intel's deep bench of engineering talent for targeted software optimization, core development tools and go-to-market opportunities. We are encouraged and motivated by our partners and competitors who see the tremendous growth potential of the PC market. NEX is also seeing early signs of the benefits from growing AI use cases. Our ethnic and IPU businesses are well suited to support the high I/O bandwidth required by AI workloads in the data center with growth expected to accelerate for both in 2024. Additionally, at the edge, as part of Intel's focus on every aspect of the AI continuum, NEX launched OpenVINO 2023.1, the latest version of the AI inferencing and deployment run time of choice for developers on client and edge platforms, with AI.io and Fit Match demonstrating how they use OpenVINO to accelerate their applications at our innovation conference. We have leadership developer software tool chains that have seen a doubling of developer engagements this year. While NEX entered their inventory correction after client in DCAI, Q3 results beat our internal forecast and grew sequentially. We see continued signs of stabilization heading into Q4. Finally, our Smart Capital strategy underpins our relentless drive for efficiency and our commitment to be great allocators of our owners' capital while consistently looking for innovative ways to unlock value for all our stakeholders. We remain on track to reducing costs by $3 billion in 2023, and we continue to see significant incremental opportunities for operational improvement as we execute on our internal foundry model. In addition, in Q3, we made the decision to divest the pluggable module portion of our silicon photonics business, allowing us to focus on the higher-value component business and optical I/O solutions to enable AI infrastructure scaling. This marks the tenth business we have exited in the last 2.5 years, generating $1.8 billion in annual savings and a testament to our efforts to optimize our portfolio and drive long-term value creation. Mobileye's solid Q3 and Q4 outlook continue to underscore the benefits of increased autonomy afforded by our initial public offering last year. In addition, we added TSMC as a minority investor in our IMS nano fabrication business in Q3. And earlier this month, we announced our plans to operate PSG as a stand-alone business beginning January 1. Similar to Mobileye and IMS, this decision gives PSG the mandate, focus and resources to better capitalize on their growth opportunities. We plan to report PSG results as a stand-alone segment in Q1, to bring in private investors in 2024 and to create a path to an initial public offering over the next two to three years. In summary, we continue to deliver tangible progress 2.5 years into our transformation journey. We are on track with five nodes in four years. We are hitting or beating all our product road map milestones. We are establishing ourselves as a global at-scale systems foundry for both wafer processing and advanced packaging. We are unlocking new growth opportunities fueled by AI. And we are driving financial discipline and operational efficiencies as we continue to unlock value for our shareholders. While we are encouraged by our progress to date, we know we have much more work in front of us as we continue to relentlessly drive forward with our strategy, maintain our execution momentum and deliver our commitments to our customers. I'd like to personally thank the Intel family for all their efforts. With that, let me turn it over to Dave to go through our results in more detail and provide guidance for Q4.

John Pitzer:

Thank you, Dave. We will now transition to the Q&A portion of our call. [Operator Instructions] With that, Jonathan, can we go to our first caller?

Timothy Arcuri:

Thanks a lot. Dave, I just wanted to see if you can clear up some of the confusion on gross margin that sort of came out of the innovation event. You're now coming out of the year at 46.5% but you did roughly 43% for the year. And I think at that event, you said next year is going to be up but probably not a couple of hundred basis points. So did you mean off of the Q4 run rate or do you mean off of the 43% for the year? And can you kind of shape that for us throughout the year?

John Pitzer:

Tim, do you have a quick follow-up?

Pat Gelsinger:

Yes. And first, I'd say we're -- come to a different conclusion than what you might have heard from them. We feel that our five nodes in four years, the leadership position that we expect with Intel 18A, this is a remarkable set of work. And as you heard me say in my formal comments, we think of 18A as a work of art. This is the finest transistor, right? And we've invented the last 30-years of transistors. This is the best one that's ever been built, right? And that and PowerVia, we feel very confident that we are on track to the leadership position that we described. And as we've also said, hey, we're well underway on the things after that. And things like high-NA, the next generation of EUV or advanced packaging with glass, all of these are now being backed up and reinforced by their customer commitments. Three 18A customers now making commitments, the prepay customer I spoke about earlier, two additional customers, partners, we announced the ARM relationship in April, and they're now seeing very positive results on power performance area from 18A. And as we think about the relationship with TSMC, hey, this is a great company and one that we partner with, one that we are a competitor to, one that we're a customer of. We collaborate with them. As you saw, they became an investor in the IMS business this quarter as well. And as a customer of those, we're very happy with how they're supporting us and our products as we're raising many of these products forward to there, a critical supplier to us as we're a critical supplier to them. This is one of the most critical relationships in the industry. I spent a lot of time personally on it. We're very confident in our road map. And this is really an exceptional quarter for five nodes in four years and getting back to process leadership. We are well on our way to doing exactly what we said we would.

Operator:

Certainly. One moment for our next question. And our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.

Pat Gelsinger:

Yes. Thank you, Ross. And overall, I think what you're seeing is the industry is excited around the AIPC. And as I declared this generation of AIPC at our Innovation Conference a couple of months ago, we're seeing that materialize and customers, competitors seeing excitement around that. ARM and Windows client alternatives, generally, they've been relegated to pretty insignificant roles in the PC business. And we take all competition seriously. But I think history as our guide here, we don't see these potentially being all that significant overall. Our momentum is strong. We have a strong road map, Meteor Lake launching this AIPC generation December 14. Arrow Lake, Lunar Lake, we've already demonstrated the next-generation product at Lunar Lake, which has significant improvements in performance and capabilities. We'll be signing Panther Lake, the next generation in the fab in Q1 and Intel 18A. We announced our AI Acceleration program, which already has over 100 ISVs part of it. We'll have -- we expect in the next two years over 100 million x86 million AI-enhanced PCs in the marketplace. This is just an extraordinary amount of volume. The ecosystem benefits that, that brings into the marketplace. When thinking about other alternative architectures like ARM, we also say, wow, what a great opportunity for our foundry business. And given the results I referenced before, we see that as a unique opportunity that we have to participate in the full success of the ARM ecosystem or whatever market segments that may be as an accelerant to our foundry offerings, which are now becoming, we think, very significant around the ARM ecosystem with our foundry packaging and 18A wafer capabilities as well.

Ross Seymore:

Yes, I do. One for Dave. The OpEx side of things, you guys did great in the third quarter. You talked about it going up in the fourth quarter, but I still think the full-year is ahead of what you originally had targeted. How do we think about next year's OpEx just conceptually? I know you said you're going to have $3 billion in total cost savings this year, $8 billion to $10 billion longer term. What are the puts and takes on OpEx as we look into 2024?

John Pitzer:

Perfect. Thank you, Ross. Jonathan, can we have the next question, please?

Joe Moore:

Great. Thank you. I think you talked about the Gaudi pipeline doubling in the last 90-days, so I guess you're nearing kind of $2 billion of visibility there. Can you talk to that a little bit, how much of that is training versus inference?

John Pitzer:

Joe, do you have a follow-up?

Pat Gelsinger:

Yes. Thanks, Joe. And I do think there's a lot of interest in that. On the export controls, as you look at them and read them, they're very much aimed at the high-end training and these accelerator, the high-end accelerators on where they are aimed. Now obviously, some of that was for us as well in China. But we also, as I said, in the first part of your question, we saw a worldwide demand for our activities there. And overall, we're now supply constrained on Gaudi and racing to catch up to that supply worldwide. Of course, we're studying those -- the new BIS released rules carefully. We're working with BIS. We're in the 60-day comment period with BIS so we're actively working with them. We do believe that we'll have plenty of opportunity in China continuing to deploy our products there broadly even as we comply and work with BIS specifically around the regulations that they're putting in place, particularly around high-end accelerators and AI training. So overall, we feel and have included that as part of our overall guidance for the fourth quarter. We feel good about the momentum that we have for AI everywhere, and we'll, of course, be engaging with our customers, the governments and as we build out our road map taking all of that into consideration.

Operator:

Certainly. One moment for our next question. And our next question comes from the line of Ben Reitzes from Melius Research. Your question, please.

Pat Gelsinger:

Yes. Thanks, Ben. Happy to unpack that a little bit more. So we announced back at the Deutsche Bank conference that we had our first major prepay customer for that. That effort has continued to go very well since that point in time, and the relationship is expanding with that customer. But we also added two more customers this quarter as well, so now we have 3 committed external customers on Intel 18A. At the beginning of the year, I promised you one. Here we are in the third quarter, we have three, and I hope to finish at least the fourth before the end of the year. Also with 18A, this PDK milestone, and if you're inside of the industry, hitting PDK 0.9 is a really critical milestone. As I said in my formal comments, this is when the invention phase is done. And now we're into the productization phase, ramping yields, refining performance and getting the process capabilities ready for manufacturing. So a critical milestone which we also say now as we release that to external customers, now a lot of them can start looking at 18A, and we start fanning out the engagements that we have in the industry. So a critical milestone on 18A. But the other thing that we saw this quarter, which was a little bit unexpected was this huge surge in interest for AI customers and Intel's advanced packaging technology. And this is the 1 that probably we didn't even quite realize. We always knew that Intel's packaging technology was the best in the industry, but the amount of interest that we've seen. So we completed two additional customers, so three 18A wafer customers, two additional packaging customers, and we have a pipeline that we're in active negotiations with six additional packaging customers as well. And I think about this as the fast on-ramp to the Intel Foundry Services. And a wafer customer's multiple billion dollar customer. A packaging customer is hundreds of millions of dollars. And that billions of dollars takes two to three years to materialize. The wafer customers takes two to three quarters to materialize, right, in the packaging. So this is a much faster way for us to build out that business. And we're going to start to see those packaging customers start to materialize for us in revenue next year. And you add to that the Synopsys partnership, the ARM momentum, the Tower agreement, this was really the flywheel of momentum has now begun for the Intel Foundry Services business. It really is putting points up across the board for that business, and super happy with the amount of energy that we're now seeing across the industry for the foundry business. This was a great quarter for foundry at Intel.

Ben Reitzes:

Yes. Going to switch gears to PCs, your comments there. You've talked about inventories normalizing. I just wanted to hear a little bit more detail on your confidence in that. Are you -- do you have confidence that the inventory builds are matching demand? And how do you see that playing out next year? It sounds like you think the TAM will grow back to 300 million, so just wanted some comments on that.

David Zinsner:

I'd just add one other thing. When we track the linearity of shipments, linearity was really, really good in the third quarter, and it's off to a really good start for the fourth quarter. And generally, when you see really steady shipment across the entire quarter, that's a good sign that you kind of balanced out the inventory and you're really just kind of shipping in what's shipping out.

Operator:

Certainly, one moment for our next question. And our next question comes from the line of Ambrish Srivastava from BMO. Your question, please.

Pat Gelsinger:

Yes, and there's a couple of things to unpack there. Just our views of the quarter, we would have expected that we lost some market share. That was based on competitive losses from last year even that are just rolling through our customers. That said, we did a bit better than we thought we would in the quarter. We are ramping Sapphire Rapids, which has a higher ASP more rapidly than we would have expected also as we go to the higher core count versions, that drives up the per socket ASP more aggressively. So overall, we definitely feel those competitive pressures. And as I say, we're working for issues that began years ago. But we're also combining that with Sapphire Rapids, Emerald Rapids, Gen 5, the road map for Sierra Forest and Granite Rapids which have much higher core counts, which will drive higher ASPs as well. So all of that put together, we do feel like we're on a very solid trajectory for the business overall. We will see ASPs continue to rise. The road map is very healthy as we go forward. And I feel like the market and our customers are starting to feel that competitiveness come back to our business here and looking forward to the benefits that a stronger Intel road map will offer to them and their businesses.

Ambrish Srivastava:

I did. I have a follow-up. Intel showing pretty steady execution and I can't say that in the last several years, we haven't seen that. But just coming back to the long-term model that Dave you were talking about, can you just help us understand what are the parameters around that revenue, mix of the business? Because you will have an IFS which would be dilutive to gross margin, potentially not to operating margin. But what's the right way to think about that 60-40 in terms of the business mix and even size of the business?

John Pitzer:

Thank you, Ambrish. Johnathan, can we have the next question, please.

Aaron Rakers:

Yes, thanks for taking the question and also congrats on the execution in the quarter. Kind of going back to the prior question, just thinking about the trajectory of the ASP expansion in the Data Center segment. How do I look at that and kind of think about what the normalizing operating profit might look like in DCAI as you guys look out over time? I know that you turned profitable this quarter. I'm just trying to think about -- understand how you guys are thinking about the path of profitability in that segment.

Pat Gelsinger:

Yes. And as Dave and I think about the 60-40 model that we're driving to long term, we think about the Data Center business being above that for it, where some of the more volume-oriented businesses like client might be a little bit below that. But taken together, that's how we're driving the business. And overall, as we said, we see a lot of margin expansion potential across Data Center, Client, Networking and Foundry as we get back to process leadership and build that business up. I'd also emphasize that as we build our foundry capacity, we build more capacity in our factory network for our internal and external customers. That's a tide that lifts all boats for us because it improves the profitability not just the foundry but the competitiveness and the profitability of our product businesses as well. So overall, we feel like this is a really important milestone for us this quarter, seeing not just great financial results but the operational results were even better than that, which is what led me to say, hey, this was an outstanding quarter for us overall.

Aaron Rakers:

Yes, I do, and thanks for the detail there. As a quick follow-up, just kind of thinking about the gross margin line. I'm curious, Dave, I know last quarter, I think it was, I want to say it was $220-or-so million factory underload impact in gross margin. It sounds like you had a reversal of inventory reserve and gross margin this quarter. Are we done with the factory underload or what was that number? And how are you thinking about that embedded in the gross margin guide?

Aaron Rakers:

Thank you.

Operator:

Certainly, one moment for our final question. And our final question for today comes from the line of Matt Ramsay from TD Cowen. Your question please.

Pat Gelsinger:

Yes. And hey, as one of the earliest companies in Israel now, almost 50 years that we're in country, I appreciate deeply. These are the Intel team. This is people that I consider friends personally as well. That said, the resilience of the Intel team is remarkable. And despite all of these challenges, we'll say they're not missing a single commitment. They're performing extremely well. We continue to deliver the products that they're working on and continuing to drive the factory operations and our factory expansions that we have there. That said, one of the benefits of Intel's multi-geo supply chain that we uniquely have in the industry is resilient. And Intel 7 is running a factory there in Israel. We also have two other locations that we run Intel 7. We're making sure that we have the resilience of our supply chain for all of those products so that we can be very assured, even as we're highly confident in the capabilities of our Intel Israel team to continue to perform despite the atrocities, we're also confident that we have a resilience in our core business model that gives us flexibility to assure supply and continued operation across the globe regardless of what issue you may have in Asia, Americas, Europe, Middle East, we are well positioned to deliver that for our customers across all of our operations.

Matt Ramsay:

Yes, I do. As my follow-up, one of the things that I keep getting asked about a ton is the CapEx swing that's happened towards gen AI infrastructure. And I guess the way that I've been kind of phrasing the question is the video killed the radio star question, right? Is this the death of CPU growth in the data center? And I don't think it is, to be clear, but there's some out there to do. So Pat, you made some comments in your script and then some other answers about return to normalcy on data center CPU from a growth perspective. Maybe you can give a few day points or antidotes that might support that.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Intel Corporation’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Mr. John Pitzer, Corporate Vice President of Investor Relations.

Pat Gelsinger:

Thank you, John, and good afternoon, everyone. Our strong second quarter results exceeded expectations on both the top and bottom line, demonstrating continued financial improvement and confirmation of our strategy in the marketplace. Effective execution across our process and product road maps is rebuilding customer confidence in Intel. Strength in client and data center and our efforts to drive efficiencies and cost savings across the organization all contributed to the upside in the quarter and a return to profitability. We remain committed to delivering on our strategic road map, achieving our long-term goals and maximizing shareholder value. In Q2, we began to see real benefits from our accelerating AI opportunity. We believe we are in a unique position to drive the best possible TCO for our customers at every node on the AI continuum. Our strategy is to democratize AI, scaling it and making it ubiquitous across the full continuum of workloads and usage models. We are championing an open ecosystem with a full suite of silicon and software IP to drive AI from cloud to enterprise, network, edge and client across data prep, training and inference in both discrete and integrated solutions. As we have previously outlined, AI is 1 of our 5 superpowers along with pervasive connectivity, ubiquitous compute, cloud to edge infrastructure and sensing, underpinning a $1 trillion semi industry by 2030. Intel Foundry Services, or IFS, positions us to further capitalize on the AI market opportunity as well as the growing need for a secure, diversified and resilient global supply chain. IFS is a significant accelerant to our IDM 2.0 strategy, and every day of geopolitical tension reinforces the correctness of our strategy. IFS expands our scale, accelerates our ramps at the leading edge and creates long tails at the trailing edge. More importantly for our customers, it provides choice, leading edge capacity outside of Asia and at 18A and beyond, what we believe will deliver leadership performance. We are executing well on our Intel 18A as a key foundry offering and continue to make substantial progress against our strategy. In addition, in July, we announced that Boeing and Northrop Grumman will join the RAMP-C program along with IBM, Microsoft and NVIDIA. The Rapid Assurance Microelectronics Prototypes-Commercial or RAMP-C, is a program created by the U.S. Department of Defense in 2021 to assure domestic access to next-generation semiconductors, specifically by establishing and demonstrating a U.S.-based foundry ecosystem to develop and fabricate chips on Intel 18A. RAMP-C continues to build on recent customer and partner announcements by IFS, including MediaTek, ARM and a leading cloud edge and data center solutions provider. We also made good progress on two significant 18A opportunities this quarter. We are strategically investing in manufacturing capacity to further advance our IDM 2.0 strategy and overarching foundry ambitions while adhering to our Smart Capital strategy. In Q2, we announced an expanded investment to build two leading-edge semiconductor facilities in Germany as well as plans for a new assembling and test facility in Poland. The building out of Silicon Junction in Magdeburg is an important part of our go-forward strategy. And with our investment in Poland and the Ireland sites, we already operate at scale in the region. We are encouraged to see the passage of the EU Chips bill supporting our building out an unrivaled capacity corridor in Europe. In addition, a year after being signed into law, we submitted our first application for U.S. CHIPS funding for the on-track construction of our fab expansion in Arizona, working closely with the U.S. Department of Commerce. It all starts with our process and product road maps, and I am pleased to report that all our programs are on or ahead of schedule. We remain on track to 5 nodes in 4 years and to regain transistor performance and power performance leadership by 2025. Looking specifically at each node, Intel 7 is done and with the second half launch of Meteor Lake, Intel 4, our first EUV node is essentially complete with production ramping. For the remaining 3 nodes, I would highlight Intel 3 met defect density and performance milestones in Q2, released PDK 1.1 and is on track for overall yield and performance targets. We will launch Sierra Forest in first half ‘24 with Granite Rapids following shortly thereafter, our lead vehicles for Intel 3. On Intel 20A, our first node using both RibbonFET and PowerVia, Arrow Lake, a volume client product is currently running its first stepping in the fab. In Q2, we announced that we will be the first to implement backside power delivery in silicon 2-plus years ahead of the industry, enabling power savings, area efficiency and performance gains for increased compute demands ideal for use cases like AI, CPUs and graphics. In addition, backside power improves ease of design, a major benefit not only for our own products but even more so for our foundry customers. On Intel 18A, we continue to run internal and external test chips and remain on track to being manufacturing-ready in the second half of 2024. Just this week, we were pleased to have announced an agreement with Ericsson to partner broadly on their next-generation optimized 5G infrastructure. Reinforcing customer confidence in our road map, Ericsson will be utilizing Intel’s 18A process technology for its future custom 5G SoC offerings. Moving to products. Our client business exceeded expectations and gained share yet again in Q2 as the group executed well, seeing a modest recovery in the consumer and education segments as well as strength in premium segments where we have leadership performance. We have worked closely with our customers to manage client CPU inventory down to healthy levels. As we continue to execute against our strategic initiatives, we see a sustained recovery in the second half of the year as inventory has normalized. Importantly, we see the AI PC as a critical inflection point for the PC market over the coming years that will rival the importance of Centrino and Wi-Fi in the early 2000s. And we believe that Intel is very well positioned to capitalize on the emerging growth opportunity. In addition, we remain positive on the long-term outlook for PCs as household density is stable to increasing across most regions and usage remains above pre-pandemic levels. Building on strong demand for our 13th Gen Intel processor family, Meteor Lake is ramping well in anticipation of a Q3 PRQ and will maintain and extend our performance leadership in share gains over the last 4 quarters. Meteor Lake will be a key inflection point in our client processor road map as the first PC platform built on Intel 4, our first EUV node and the first client chiplet design enabled by Foveros advanced 3D packaging technology, delivering improved power, efficiency and graphics performance. Meteor Lake will also feature a dedicated AI engine, Intel AI Boost. With AI Boost, our integrated neural VPU, enabling dedicated low-power compute for AI workloads, we will bring AI use cases to life through key experience as people will want a need for hybrid work, productivity, sensing, security and creator capabilities, many of which were previewed at Microsoft’s Build 2023 Conference. Finally, while making the decision to end direct investment in our Next Unit of Computing or NUC business, this well-regarded brand will continue to scale effectively with our recently announced ASUS partnership. In the data center, our 4th Gen Xeon Scalable processor is showing strong customer demand despite the mixed overall market environment. I am pleased to say that we are poised to ship our 1 millionth 4th Gen Xeon unit in the coming days. This quarter, we also announced the general availability of 4th Gen Cloud Instances by Google Cloud. We also saw great progress with 4th Gen AI acceleration capabilities, and we now estimate more than 25% of Xeon data center shipments are targeted for AI workloads. Also in Q2, we saw a third-party validation from MLCommons when they published MLPerf training performance benchmark data showing that 4th Gen Xeon and Habana Gaudi2 are two strong open alternatives in the AI market that compete on both performance and price versus the competition. End-to-end AI-infused applications like DeepMind’s AlphaFold and algorithm areas such as Graph Neural Networks show our 4th Gen Xeon outperforming other alternatives, including the best published GPU results. Our strengthening positioning within the AI market was reinforced by our recent announcement of our collaboration with Boston Consulting Group to deliver enterprise-grade, secure and responsible generative AI, leveraging our Gaudi and 4th Gen Xeon offerings to unlock business value while maintaining high levels of security and data privacy. Our data center CPU road map continues to get stronger and remains on or incrementally ahead of schedule with Emerald Rapids, our 5th Gen Xeon Scalable set to launch in Q4 of ‘23. Sierra Forest, our lead vehicle for Intel 3 will launch in the first half of ‘24. Granite Rapids will follow shortly thereafter. For both Sierra Forest and Granite Rapids, volume validation with customers is progressing ahead of schedule. Multiple Sierra Forest customers have powered on their boards and silicon is hitting all power and performance targets. Clearwater Forest, the follow-on to Sierra Forest, will come to market in 2025 and be manufactured on Intel 18A. While we performed ahead of expectations, the Q2 consumption TAM for servers remained soft on persistent weakness across all segments but particularly in the enterprise and rest of world where the recovery is taking longer than expected across the entire industry. We see the server CPU inventory digestion persisting in the second half, additionally, impacted by the near-term wallet share focus on AI accelerators rather than general purpose compute in the cloud. We expect Q3 server CPUs to modestly decline sequentially before recovering in Q4. Longer term, we see AI as TAM expansive to server CPUs and more importantly, we see our accelerated product portfolio is well positioned to gain share in 2024 and beyond. The surging demand for AI products and services is expanding the pipeline of business engagements for our accelerator products, which includes our Gaudi Flex and Max product lines. Our pipeline of opportunities through 2024 is rapidly increasing and is now over $1 billion and continuing to expand with Gaudi driving the lion’s share. The value of our AI products is demonstrated by the public instances of Gaudi at AWS and the new commitments to our Gaudi product line from leading AI companies such as Hugging Face and Stability AI in addition to emerging AI leaders, including Indian Institute of Technology, Madras, Pravartak [ph] and Genesis Cloud. In addition to building near-term momentum with our family of accelerators, we continue to make key advancements in next-generation technologies, which present significant opportunities for Intel. In Q2, we shipped our test chip, Tunnel Falls, a 12-cubit silicon-based quantum chip which uniquely leverages decades of transistor design and manufacturing investments and expertise. Tunnel Falls fabrication achieved 95% yield rate with voltage uniformity similar to chips manufactured under the more usual CMOS process, with a single 300-millimeter wafer providing 24,000 quantum dot test chips. We strongly believe our silicon approach is the only path to true cost-effective commercialization of quantum computing, a silicon-based cubit approach is 1 million times smaller than alternative approaches. Turning to PSG, NEX and Mobileye, demand trends are relatively stronger across our broad-based markets like industrial, auto and infrastructure. Although as anticipated, NEX did see a Q2 inventory correction, which we expect to continue into Q3. In contrast, PSG, IFS and Mobileye continue on a solid growth trajectory, and we see the collection of these businesses in total growing year-on-year in calendar year ‘23, much better than third-party expectations for a mid-single-digit decline in the semiconductor market, excluding memory. Looking specifically at our Programmable Solutions Group, we delivered record results for a third consecutive quarter. In Q2, we announced the Intel Agilex 7 with the R-Tile chiplet is shipping production qualified devices in volume to help customers accelerate workloads with seamless integration and the highest bandwidth processor interfaces. We have now PRQed 11 of the 15 new products we expected to bring to market in calendar year ‘23. For NEX, during Q2, Intel, Ericsson and HPE successfully demonstrated the industry’s first vRAN solution running on the 4th Gen Intel Xeon Scalable processor with Intel vRAN Boost. In addition, we will enhance the collaboration we announced at Mobile World Congress to accelerate industry-scale open RAN, utilizing standard Intel Xeon-based platforms as telcos transform to a foundation of programmable, software-defined infrastructure. Mobileye continued to generate strong profitability in Q2 and demonstrated impressive traction with their advanced product portfolio by announcing a supervision eyes-on hands-off design win with Porsche and the mobility-as-a-service collaboration with Volkswagen Group that will soon begin testing in Austin, Texas. We continue to drive technical and commercial engagement with them, co-developing leading FMCW, LiDAR products based on Intel silicon photonics technology and partnering to drive the software-defined automobile vision that integrates Mobileye’s ADAS technology with Intel’s Cockpit offerings. Additionally, in the second quarter, we executed the secondary offering that generated meaningful proceeds as we continue to optimize our value creation efforts. In addition to executing on our process and product road maps during the quarter, we remain on track to achieve our goal of reducing costs by $3 billion in 2023 and $8 billion to $10 billion exiting 2025. As mentioned during our internal foundry webinar, our new operating model establishes a separate P&L for our manufacturing group, inclusive of IFS and TD, which enables us to facilitate and accelerate our efforts to drive best-in-class cost structure, derisk our technology for external foundry customers and fundamentally changes incentives to drive incremental efficiencies. We have already identified numerous gains in efficiency, including factory loading, test and sort time reduction, packaging cost improvements, litho field utilization improvements, reductions in staffing, expedites and many more. It is important to underscore the inherent sustained value creation due to the tight connection between our business units and TD, manufacturing and IFS. Finally, as we continue to optimize our portfolio, we agreed to sell a minority stake in our IMS Nanofabrication business to Bain Capital who brings a long history of partnering with companies to drive growth and value creation. IMS has created a significant market position with multi-beam mask writing tools that are critical to the semiconductor ecosystem for enabling EUV technology and is already providing benefit on our 5 nodes, 4 years efforts. Further, this capability becomes even more critical with the adoption of high NA EUV in the second half of the decade. As we continue to keep Moore’s Law alive and very well, IMS is a hidden gem within Intel, and the business’s growth will be exposed and accelerated through this transaction. While we still have work to do, we continue to advance our IDM 2.0 strategy. 5 nodes in 4 years remains well on track, our product execution and road map is progressing well. We continue to build out our foundry business, and we are seeing early signs of success as we work to truly democratize AI from cloud to enterprise, network, edge and client. We also saw strong momentum on our financial discipline and cost savings as we return to profitability, are executing our internal foundry model by 2024, and are leveraging our Smart Capital strategy to effectively and efficiently position us for the future. With that, I will turn it over to Dave.

John Pitzer:

Thank you, Dave. We will now transition to the Q&A portion of our earnings presentation. As a reminder, we would ask each of you to ask one question with a brief follow-up question where appropriate. With that, Jonathan, can we have the first caller please?

Ross Seymore:

Hi, guys. Thanks for letting me ask a question. Congrats on the strong results. I wanted to focus, Pat, on the data center, the DCAI side of things. Strong upside in the quarter but it sounds like there’s still some mix trends going forward. So, I guess a two-part question. Can you talk about what drove the upside and where the concern is going forward? And part of that concern, that crowding out potential that you just discussed with, accelerators versus CPUs, how is that playing out and when do you expect it to end?

John Pitzer:

Ross, do you have a quick follow-up?

David Zinsner:

Yes. Good question, Ross. So in the second quarter, just to repeat what I said in the prepared remarks, that was largely a function of revenue. We had obviously beat revenue significantly and we got a good fall-through, given the fixed cost nature of our business. And so that really was what helped us really outperform significantly on the gross margin side in the second quarter. In the third quarter, we do, obviously, at the midpoint, see revenue growth sequentially. And so that will be helpful in terms of gross margin improvement. We expect, again, pretty good fall-through as we get that incremental revenue. We’re also going to see underloadings come down, I would say, modestly come down for two reasons

Joe Moore:

Dave, I think you said in your prepared remarks that data center pricing was up 17% year-on-year and that Sapphire Rapids was a factor there. Can you just talk to that? And kind of obviously, Sapphire Rapids is going to get bigger. Can you talk about what you expect to see with platform cost in DCAI?

John Pitzer:

Joe, do you have a follow-up question?

Pat Gelsinger:

Yes. And as we said, Joe, -- thanks for the question. As we said in the prepared remarks, we do expect to be seeing the TAM down in Q3, somewhat driven by all of it. It’s a little bit of data center digestion for the cloud guys, a bit of enterprise, so weakness, and some of that is more inventory. And the China market, I think, has been well reported, hasn’t come back as strongly as people would have expected overall. And then the last factor was one of the first question from Ross around the pressure from accelerator spend being stronger. So, I think those four somewhat together, right, are leading to a bit of weakness, at least through Q3. That said, our overall position is strengthening and we’re seeing our products improve, right? We’re seeing the benefits of the AI capabilities and our Gen 4 and beyond products improving. We’re also starting to see some of the use cases like Graph Neural Networks, Google’s AlphaFold showing best results on CPUs as well, which is increasingly gaining momentum in the industry as people look for different aspects of data preparation, data processing, different innovations in AI. So all of that taken together, we feel optimistic about the long-term opportunities that we have in data center, and of course, the strengthening accelerator road map of Gaudi2, Gaudi3, Falcon Shores being now well executed. Also, our first wafers are in hand for Gaudi3. So, we see a lot of long-term optimism even as near term, we’re working through some of the challenging environments of the market not being as strong as we would have hoped.

C.J. Muse:

I guess, first question, in your prepared remarks, you talked about AI being a TAM expander for servers. And I guess, I was hoping you could elaborate on that, given the productivity gains through acceleration, would love to hear why you think that will grow units, and particularly, if you could bifurcate your commentary across both training and inference.

John Pitzer:

C.J., do you have a follow-up question?

Pat Gelsinger:

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

Timothy Arcuri:

First, Dave, I had one for you. If I look at the third-party contributions, they were down a little bit, which was a little bit of a surprise. But you did say that the Arizona fab is on track. Can you sort of talk about that? And I know last quarter, you said gross CapEx would be first half weighted and the offsets would be back half weighted. Is that still the case?

Pat Gelsinger:

Yes. And just maybe to pile on to that a bit, obviously, getting EU Chips Act approved, we’re excited about that for the Germany and Poland projects, which are -- will go for formal DG comp approval. We’re also very happy, we submitted our first proposal, the on-track Arizona facility, but we’ll have 3 more proposals going in for U.S. CHIPS Act this quarter. And so we’re now at pace for those. So everything there is feeling exactly as we said it would and super happy with the great engagement, both in Europe as well as with the U.S. Department of Commerce as we’re working on those application processes.

Timothy Arcuri:

I do. Yes, Pat. So, you talked about an accelerated pipeline of more than $1 billion. And I think Sandra has been recently implying that you could do over $1 billion in Gaudi next year. So, the question is, is that the commitment? And then also at the Data Center Day, you had talked about merging the GPU and the Gaudi road maps into Falcon Shores but that’s not going to come out until 2025. So, the question really there is wondering where that leaves customers in terms of their commitment to your road map, given those changes.

Operator:

And our next question comes from the line of Ben Reitzes from Melius Research.

Pat Gelsinger:

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

Ben Reitzes:

Yes. I wanted to double click on your sequential guidance in the client business. There’s some concerns out there with investors that there was some demand pull-in, in the second quarter, given some comments from some others. And just wanted to talk about your confidence for sequential growth in that business based on what you’re seeing and if there was any more color there.

David Zinsner:

I’d just add, normally over the last few quarters, you’ve seen us identify in the 10-Q strategic sales that we’ve made where we’ve negotiated kind of attractive deals which have accelerated demand, let’s call it. When you look at our 10-Q, which will either be filed late tonight or early tomorrow, you’ll see that we don’t have a number in there for this quarter, which is an indication of how little we did in terms of strategic purchases. So to your question of did we pull in demand, I think that’ll probably give you a pretty good assessment of that.

Srini Pajjuri:

Pat, I have a question on AI as it relates to custom silicon. It’s great to see that you announced a customer for 18A on custom silicon. But there’s a huge demand, it seems like, for custom silicon on the AI front. I think some of your hyperscale customers are already successfully using custom silicon for -- as an AI accelerator. So, I’m just curious what your strategy for that market is. Is that a focus area for you? If so, do you have any engagements with customers right now?

John Pitzer:

Srini, do you have a follow-up question?

David Zinsner:

Okay. So, let me just take a moment just to give the team credit on the second quarter in terms of working capital because we brought inventory down by $1 billion. Our days sales outstanding on the AR front is down to 24 days, which is exceptional. So, a lot of what you saw in terms of the improving free cash flow from Q1 to Q2 was working capital. So, I think the team has done an outstanding job just really focusing on all the elements that drive free cash flow. Our expectation is still by the end of the year to get to breakeven free cash flow. There’s no reason why we shouldn’t achieve that. Obviously, the net CapEx might be a little different this year than we thought coming into the year. But as we talked about, there’s just a focus on free cash flow, the improved outlook in terms of the business. We think we can get to breakeven by the end of the year. As it relates to pre-PRQ reserves in the fourth quarter, we’re likely to have some, but it should be a pretty good quarter-over-quarter improvement from the third quarter, which was obviously a good quarter-over-quarter improvement from the second quarter.

Operator:

Certainly. And our final question for today then comes from the line of Aaron Rakers from Wells Fargo.

David Zinsner:

Yes, they were largely as expected, although it was off of a lower revenue number. So, the absolute dollars were as expected. They had a little bit of less of an impact, given the revenue was higher. And both of those numbers, like I said, will be lower in the third quarter.

Aaron Rakers:

I do, just real quickly on just kind of the AI narrative. We talked about Gaudi a lot in the pipeline build-out. I’m curious as you look forward, as part of that pipeline, Pat, do you expect to see deployment in some of the hyperscale cloud guys and competing against directly some of the large competitors on the GPU front with Gaudi in cloud?

Pat Gelsinger:

So with that, let me just wrap up our time together today. Thank you. We’re grateful that you would join us today, and we’re thankful that we have the opportunity to update you on our business. And simply put, it was a very good quarter. We exceeded expectations on top line, on bottom line. We raised guidance and we look forward to the continue opportunities that we have of accelerating our business and seeing the margin improvement that comes in the second half of the year. But even more important to me was the operational improvements that we saw, a good fiscal discipline, cost saving discipline and best of all, the progress that we’ve made, right, on our execution, our process execution, product execution, the transformational journey that we’re in. And I just want to say a big thank you to my team for having a very good quarter that we could tell you about today. We look forward to talking to you more, particularly at our Innovation in September. We’ll be hosting an investor Q&A track and we hope to see many, if not all of you there. It will be a great time. Thank you.

Operator:

Thank you for standing by, and welcome to Intel Corporation's First Quarter 2023 Earnings Conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations. Please go ahead, sir.

Pat Gelsinger:

Thank you, John, and good afternoon, everyone. We delivered solid first-quarter results on both the top- and bottom-line. Upside was driven by better-than-expected revenue and very disciplined expense management across our organization. The latter is not easy and I want to thank the entire Intel team as we thoughtfully execute on cost reductions and efficiency improvements that support the investments critical to drive our strategy. Q1 results demonstrate the progress we are making to advance our transformation and the IDM 2.0 strategy. We still have more work to do as we reestablish process, product and cost leadership, but we continue to provide proof points each quarter and we remain committed to delivering long-term value for all our shareholders. Consistent with prior quarters, I'd like to focus my comments in three areas

John Pitzer:

Thank you, Dave. We will now move into the Q&A portion of our call. [Operator Instructions] With that, Jonathan, can we please take the first question?

TimothyArcuri:

Thanks a lot. Dave, I wonder if you can go through the gross margin walk kind of through the rest of the year. There's a lot of moving parts. I know you have the underutilization of 300 basis points. And it sounds like you also have another 200 basis points you highlighted from these pre-PRQ costs. So you're sort of normalized at 43 ex those two things, but there's a couple of offsets, too. You got puts and takes around higher die costs from these new products like Meteor and Sapphire. So can you sort of give us a walk in terms of what the puts and takes are when you move past June? Thanks.

John Pitzer:

Tim, do you have a follow-up?

Pat Gelsinger:

Yes, it's a great question, Tim. And what I'd highlight is that Sapphire and Emerald Gen 4 and Gen 5 are the same platform. So from the customer's perspective, they get to leverage those platform investments in a substantial way. Similarly, as we go into next year with Sierra Forest and Granite Rapids, that's once again the same platform. And Clearwater Forest, the following year that we disclosed in the data center webinar for '25, also goes into that same platform. So essentially, even though it's five products that we've discussed, that's two platforms. And that ability to leverage that platform across a broader market space is very warmly received by our customers. And obviously, as we're working through this period to get back to solid leadership, we're getting increasing momentum from our customers. And as I highlighted, in my prepared remarks, this was a good quarter for our data center business, a very healthy road map. We did better than we forecast in Q1 market share on track for the Sapphire Rapids ramp. And overall, being able to see these new use cases for AI inferencing in the platform, being able to deploy the increasing security capabilities that we disclosed, all of these are very unique feature capabilities that are both differentiating as well as value add for our customers that helps them to see the value in the underlying platforms that we're delivering. So a very good quarter. Thanks for the question, Tim.

Operator:

Certainly. Our next question comes from the line of C.J. Muse from Evercore ISI. Your question please.

Pat Gelsinger:

Yes. So I'll start on that, and Dave can jump in. Generally, we think that we undersold into the market by about 20% in Q1, and that continues in Q2. And overall, we said a 270 million unit sell-through TAM for the year. That equates -- it was essentially equivalent to the 240 million or 250 million units sell-in TAM that you might have seen from some of the industry analysts. So overall, we think first half, we end the first half with a very healthy inventory position by our OEMs and by the channel. That positions us very well for natural improvement in a stronger second half as we're now selling, I'll say, in at the same rate of selling out in the marketplace in a normally stronger back half of the year. Overall, this is just going to be a positive every quarter as we go through the year. We're seeing strong momentum from our customers for our road map. And as Dave indicated, we're already starting to build inventory for the Meteor Lake launch later in the year, which is another strong indication. Dave, if you want to comment on the inventory comment?

John Pitzer:

C.J., do you have a follow-up question?

Pat Gelsinger:

Yes. And I'd say, generally, the feedback is, wow, right? You guys are delivering at the front end of your scheduled windows that you gave us with a very high-quality product, and they're now into their, what we call, the volume validation phase of their platforms. So where they're receiving enough samples that they can start to do broad validation of the platform. That validation cycle is very critical for us because it informs us of when we're ready to move forward with the production stepping of those parts in both the software and the firmware of the platform. We're seeing very good response on both the first E-core part with Sierra Forest as well as the next-generation P-core part with Granite Rapids. So overall, I'd just say we feel super good that we're getting such a warm response from customers. And this positions us very well as they're rebuilding their confidence in Intel. And this -- you've heard me talk before, C.J., that we have to rebuild our customers' confidence and the performance that we're seeing, not just on Sapphire Rapids, Emerald Rapids Gen 5, but next year's products and the very strong position for the E-core products going into 2025 with Clearwater Forest has been a strong uptick in their belief that Intel's execution machine is back for their data center products of the future.

Operator:

Certainly. And our next question comes from the line of Ross Seymore from Deutsche Bank. Your question please.

Pat Gelsinger:

Yes. Thank you. And clearly, there was a down quarter for enterprise and for cloud. We do see that affecting the first -- at least the first half of the year. That said, we're encouraged by some of the comments that you've heard and that you refer to for the overall market. We do see that our position is improving. As I indicated in Q1, we saw a better-than-forecast market segment share. We also saw some green shoots for the first time in China. And we're encouraged by that market starting to show some positive characteristics. We'd also say that some of that strength in data center is driven by AI. And we're seeing a very positive response to Gaudi 2 and seeing our pipeline growing very rapidly for that product line. We also saw that as a driver of the early strong ramp for Gen 4 Sapphire Rapids. Those taken together, we are -- we do believe that's an important trend. But we also, as you said, in my prepared remarks, we see that we need to make AI and that is a critical use case broadly available. And that's what we refer to as democratizing AI, where those super high-end machines are uneconomical for most environments, and we have to enable the broad deployment of inferencing, being able to use AI. And that's an area where, particularly our core Xeon product line, has particular strengths well above prior generations and competitive alternatives and one that we expect to be an area of strength for us long-term.

Ross Seymore:

I do. I just wanted to go back and revisit the gross margin side so one for Dave. The underutilization charges, is there some trigger point at which, revenue-wise, I guess, we should expect that to go away because, obviously, that's the 300 basis point headwind, two quarters in a row of that? And then the pre-PRQ side of things, given the frequency of new product introductions that was alluded to in a prior question, it doesn't seem like those would necessarily go away that fast, or if they do for a quarter or two, they would come back. So can you just walk us through some of the puts and takes on those underutilization charges and pre-PRQ please?

John Pitzer:

Thanks Ross. Jonathan, can we have next question please?

Matthew Ramsay:

Yes, thank you very much. Good afternoon guys. Pat, I wanted to - the first question I wanted to ask is on sort of the node roadmap. You guys have made some good progress there, and we're working through some end market and near-term product dynamics, but focusing on the five nodes in four years. I know there's, some internal nodes that are being developed as well around backside power via and also gate all around? So maybe you could give a little bit of an update as to how those roadmaps are going on those two pieces of technology individually? And I guess the second part of the question, if you do succeed in getting to node parity and the node leadership as you described, can you talk about a path to cost parity for internal and external potential customers on 18A? Thanks.

John Pitzer:

Matt, do you have a quick follow-up?

Pat Gelsinger:

Yes. And while we're not speaking a lot about that next-generation product, that would be the introduction of the next-generation platform at that point would be when we move to the next platform, which will change package architecture, power delivery architecture, memory channel, key steps in memory scalability with our CXL technology. So that will be a big step in terms of the platform architecture at that point. And I'll just say, every aspect of our roadmap is getting well received by our customers for both enterprise, but also and critically for cloud customers as well.

Operator:

Certainly. Our next question comes from the line of Pierre Ferragu from New Street Research. Your question please.

David Zinsner:

Yes, Pierre, how are you?

David Zinsner:

Yes. So I'll take some of it, and then you...

David Zinsner:

Maybe like at a high level, Pierre, maybe the way to think about it is, look, one element of getting to the appropriate cost structure to deliver the margins is getting our process technology to be competitive. And that's really at 18A where we intersect that. So we make improvements along the way, but that's really where we make the meaningful improvement to get there from a process perspective. Now the challenge is all along the way, there's this kind of start-up costs that we have to deal with, which is hundreds of basis points of headwind for us that we have, by virtue of the fact that we're stacked on stacked. The five nodes in four years that Pat is driving is the right strategy, but it does create headwinds on the cost side. So that - we've got to work our way through that, but once we're on the other side of five nodes in four years, we have a competitive process technology from a cost perspective. We've gotten ourselves this, let's say, significantly higher startup costs that we are incurring behind us as well. And then as you point out, you have the benefits of the scale of revenue that we would expect. And then lastly, you have, as Pat was talking about, this whole notion of the internal foundry model, which just drives a lot of attention on cost and where we think we're going to get a lot of that $8 billion to $10 billion of savings exiting 2025. So I think, the way I look at it at least is that we put forth a model for gross margins. We changed the depreciation, which incrementally raises that target. And there's nothing that's going on at the company that would suggest that we're off pace from that. We think we are going to achieve that. The timing is obviously a function somewhat of the market. But other than that, we feel like we're on a great path to have those margins.

John Pitzer:

Pierre, do you have a quick follow-up question?

Pat Gelsinger:

Yes. I think it's a fair commentary that we're only starting to see good positive proof points in the industry. So I think that's a fair critique, Pierre. But I'd point back to the announcement of the Hugging Face, which is the most popular sort of like the GitHub of the AI world. Very positive proof point this quarter, stable diffusion, right, another in Stability AI, important forces also my comments around a rapidly growing pipeline. Obviously, you can't measure that, but I'll tell you, we have many opportunities that we're now engaging in globally. You'll also see us taking more aggressive steps with our dev cloud presenting this as a developer environment for the market. So I think we have a lot of work to do here to show up in a meaningful way. But we think the Gaudi 2 strategy has now started to gain quite a lot of interest in the market. As I said in my prepared remarks, Gaudi 3 has now taped out, which will be the next step-up. Also, we're describing the customers our 2025 platform, the Falcon Shores product, which is another step-up. That also brings together the full offering of our HPC and AI into a single platform offering. Customers are responding very well to the, I'll say, the alignment and simplification of our roadmap in HPC and AI coming together. So overall, we feel like we're now starting to show up in this space, but we have a lot of work to do to land meaningful revenue customers in this area. And I'm hopeful that we'll be able to put some clear proof points that you can start to see in the marketplace in the near future.

Operator:

Certainly. Our next question comes from the line of Vivek Arya from Bank of America. Your question please.

David Zinsner:

Yes. I think what Pat said is, we thought things would be modestly better in the second half of the year. And that, combined with the fact that pre-PRQ reserves reverse themselves, we'll probably see some better utilization levels. That's what gives us the confidence of comfortably in the 40s, and we're not providing any specific revenue guidance on the second half?

John Pitzer:

Vivek, do you have a follow-up?

Pat Gelsinger:

Yes. And a couple of things here, Vivek. One is the announcement that we did with Arm this quarter around IFS, it was a strong ecosystem statement for our foundry offerings and one that was focused around the mobile platform, but we do expect that we'll have a broader play over time as the announcement indicated that it's first focused on mobile, where Arm has proven considerable strength across the market. I'd also say that we think of the market and the future of four architectures matter. Arm, RISC-V, x86, right, you're playing a critical role and the role of accelerators in GPU, right? And we'll be participating across all of those, whether that's through foundry or through our product offerings. I've continued to view that if we are doing a great job with our road map that the role of Arm in the data center will be limited, right? And particularly with the E-core product line that we've laid now laid out with Sierra Forest, Clearwater Forest and strong products coming thereafter, we believe that we now deliver power performance TCO benefit at x86. Migrating software stacks in the data center is a lot of work, right? And if I give customers an easy path with x86 and E-core solutions with superior TCO alternatives, that will do very well. So with that, that's our primary play. At the same time, our foundry play will become one, come all. We will manufacture, right, any of the RISC-V arm, x86 and GPU alternatives for the industry through our superior capabilities in our foundry offerings over time. We view this as an industry play of great significance and one that we're committed to competing for leadership wafers across every architecture, every segment of the industry.

Operator:

Certainly. And our final question for today comes from the line of Joseph Moore from Morgan Stanley. Your question please.

David Zinsner:

Yes. Gross would be north of $20 million. We think, as I mentioned, that we can keep net CapEx intensity in kind of the low 30s as a percent of revenue, which is kind of within our model actually a little bit better than what we modeled during the capital-intensive phase of our transformation. As it relates to kind of the split, we are probably -- certainly, there's a lot of CapEx going to equipment. There's a lot of CapEx going to shells. We're probably a little bit more biased towards shell investment right now. We had been in the past behind, and that caught us. And these are obviously the very long lead time type investments. And so you want to be -- make sure you have a shell when you need it. And so we have biased ourselves to do that and to make the investments that are appropriate in that regard. And as you point out, as I said, it's largely around our own needs. We are making some modest investments on the foundry side right now as we start to get -- gain traction on the customer front. And as we get more customers, we'll ramp that investment as appropriate.

Joseph Moore:

I do, yes. In terms of -- in terms of the sort of capital offsets that you've got another 20% to 30%, is there the opportunity for that number to be better? For example, with the CHIPS Act, as the grant money starts to get dispersed? Or you've talked about additional yield with deals like Brookfield? Like I guess are you contemplating within that number potential future improvement? Or does that number get better if we start to see benefit from those things?

Pat Gelsinger:

Yes. And I would just add on top of that, this is something we're working. We're engaging right now with the Department of Commerce and working through our grant applications in that area. We have modeled a certain level in the guidelines that Dave said. Obviously, we're going to be working to do better than that in this regard. And fundamentally, the CHIPS Act is all about making U.S. manufacturing competitive in the world. And that's the focus that we have and the intent of Congress as was laid out, and we hope to get those done as quickly as possible. We also had a major milestone with the EU CHIPS Act passing Parliament last week, and we continue to work on that front. And obviously, skip an investment tax credit. We're working to make our capital intensity and efficiency to be a great opportunity for us to bring shareholder returns in a meaningful way.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Intel Corporation's Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations. Please go ahead, sir.

Pat Gelsinger:

Thank you, John, and good afternoon, everyone. Q4 revenue came in at the low end of guide and was impacted by persistent macro headwinds, which began in Q2 and underscored a 2022 characterized by unprecedented volatility, which will continue in the near term. We made meaningful progress on several fronts in calendar year 2022, notwithstanding all the challenges, but we readily admit our results and our Q1 guidance are below what we expect of ourselves. We are working diligently to address the challenges brought on by current demand trends and remain confident in our long-term plans and trajectory. Accordingly, we are even more aggressively executing on the cost measures we described in Q3, even as we keep the investments critical to our long-term transformation intact with a clear eye of making the right capital allocation decision to drive the most long-term value. Today, I'd like to address three areas. One, our view on the macro and the markets in which we participate; two, the operational progress we made in 2022; three, as we enter the New Year outlining the commitments we are making to all our stakeholders. First, on the macro. We expect macro weakness to persist at least through the first half of the year with the possibility of second half improvements. However, given the uncertainty in the current environment, we are not going to provide revenue guidance beyond Q1. Dave will provide guidelines for capital spending, depreciation and adjusted free cash flow in his prepared comments. Having said that, let me give you additional color regarding our view of our markets in 2023. To various degrees, all our markets are being impacted by macro uncertainty, rising interest rates, geopolitical tensions in Europe and COVID impacts in Asia, especially in China. In the PC market, we saw a further deterioration as we ended calendar year 2022. In Q3, we provided an estimate for the calendar year 2023 PC consumption TAM of 270 million to 295 million units. Given continued uncertainty and demand signals we see in Q1, we expect the lower end of that range is a more likely outcome. Near term, the PC ecosystem continues to deplete inventory. For all of calendar year 2022, our sell-in was roughly 10% below consumption with Q4 under shipping meaningfully higher than full year, and Q1 expected to grow again to represent the most significant inventory digestion in our data set. While we know this dynamic will need to reverse, predicting one is difficult. Importantly, PC usage data remains strong, reinforcing that use cases brought on by COVID are persistent even as the economy has reopened. And as we highlighted in our recent PC webinar, strong usage and installed base, which is roughly 10% higher than pre-COVID levels and what we see as a conservative refresh rate supports a longer term PC TAM of 300 million units plus or minus, post this period of adjustment. We intend to capitalize on this TAM through a strong pipeline of innovation and based on the growing strength of our product portfolio, customers are increasingly betting on Intel. We grew share in the second half of 2022, and we expect that positive momentum to continue in 2023. We remain clear eyed on managing to near-term weakness in PCs but we also see the enduring and increasing value PCs have in our daily lives. In the server market, the overall consumption TAM grew modestly in calendar year 2022, albeit at diminishing rates as the year progressed. Inventory burn drove server CPU shipments down mid-single digits year-on-year in calendar year 2022 with hyperscale up, offset by declines in enterprise and Rest of World. Our share in calendar year 2022 was in line with our subdued expectations, and our revenue volatility was a function of TAM, especially given our outsized exposure to enterprise and China. We expect Q1 server consumption TAM to decline both sequentially and year-over-year at an accelerated rate with first half 2023 server consumption TAM down year-on-year before returning to growth in the second half. While all segments have weakened, enterprise and rest of world, especially China, continues to be weaker than hyperscale. However, we'd highlight that the correction in enterprise and rest of the world, where we have stronger positions are further along than hyperscale. Lastly, in our broad-based markets like industrial, auto and infrastructure, demand trends throughout calendar year 2022 were strong but not completely immune to the macro volatility. Strong demand in these markets was mirrored by strong Q4 and record calendar year 2022 revenue in NEX, PSG, IFS and Mobileye. We see calendar year 2023 as another growth year for us in these areas even though the absolute rate is difficult to predict today. This is in contrast to the semi market ex-memory, which third parties expect to decline low to mid-single digits. We entered 2023 with a view that much of the macro uncertainty of the last year is likely to persist, especially in the first half of the year. As such, we are laser focused on executing to our $3 billion in calendar year 2023 cost savings that we committed on our Q3 earnings call. We are making tough decisions to rightsize the organization and we further sharpened our business focus within our BUs by rationalizing product road maps and investments. NEX continues to do well and is a core part of our strategic transformation, but we will end future investments in our network switching product line, while still fully supporting existing products and customers. Since my return, we have exited seven businesses, providing in excess of $1.5 billion in savings. We are also well underway to integrating AXG into CCG and DCAI, respectively, to drive a more effective go-to-market capability, accelerating the scale of these businesses while further reducing costs. While it was important to focus on what we are doing to address the current macro uncertainty, it is also important to highlight that despite disappointing financial results, calendar year 2022 did see considerable progress towards our transformation. We remain fully committed to executing to our strategy to deliver leadership products, anchored on open and secure platforms, powered by at-scale manufacturing and supercharged by our people. Success starts with our people and execution follows culture. In calendar year 2022, we took important strides to rebuild the leadership team, promoting from within and adding fresh perspectives from the outside. This includes the Board of Directors, with the addition of Lip-Bu Tan and Barbara Novick, both of whom have already made significant contributions and the appointment of Frank Yeary as Chair. In addition, a year ago, we reestablished OKRs to drive accountability and transparency across the organization, and we reintroduced TikTok 2 to establish a rigorous methodology of design and product development. Both are key spark plugs to our execution engine. Rebuilding the culture has begun to show benefits in manufacturing and design. Our progress against our TV road map continue to improve throughout calendar year 2022 and every quarter, our confidence grows. We are at/or ahead of our goal of 5 nodes in four years. Intel 7 is now in high-volume manufacturing for both client and server. On Intel 4, we are ready today for manufacturing, and we look forward to the Meteor Lake ramp in second half of the year. Intel 3 continues to show great health and is on track. Intel 4 and 3 are our first nodes deploying EUV, and will represent a major step forward in terms of transistor performance per watt and density. On Intel 20A and Intel 18A, the first nodes to benefit from RibbonFETs and PowerVia, internal test chips and those of a major potential foundry customer have taped out with the silicon running in the fab. We continue to be on track to regain transistor performance and power performance leadership by 2025. Progress in [TD] (ph) continues to be validated by our IFS pipeline. I am happy that we were able to add a leading cloud edge and data center solutions provider as a leading edge customer for Intel 3 including prior customers such as MediaTek, we now have lifetime deal value of greater than $4 billion for IFS. We also have an active pipeline engagements with seven out of the 10 largest foundry customers coupled with consistent pipeline growth to include 43 potential customers and ecosystem partner test chips. Additionally, we continue to make progress on Intel 18A, and I've already shared the engineering release of PDK0.5 with our lead customers and expect to have the final production release in the next few weeks. In addition, we are working hard to complete the Tower acquisition, which will further amplify our momentum as our foundry business becomes even more compelling to customers. On the product front, the PRQ of Sapphire Rapids in Q3 and the formal introduction of our fourth gen Xeon scalable CPU and Xeon CPU MAX series better known to many of you as Sapphire Rapids and Sapphire Rapids HBM, respectively, on January 10 was a great milestone. It was particularly satisfying to host a customer-centered event, including testimonials from Dell, Google Cloud, HPE, Lenovo, Microsoft Azure and NVIDIA, among many others. We are thrilled to be ramping production to meet a strong backlog of demand, and we are on track to ship 1 million units by midyear. In addition, as part of AXG moves into DCAI, it is noteworthy that our Intel Flex series optimized for and showing clear leadership in media stream density and visual quality is now shifting initial deployments with large CSPs and MNCs, enabling large-scale cloud gaming and media delivery deployments. Our DCAI road map only improves from here. Emerald Rapids is sampling and has completed power on with top OEM and CSP customers, and it remains on track to launch in the second half of 2023. Granite Rapids, our next performance core addition to the Xeon portfolio is on track to launch in 2024, running multiple operating systems across many different configurations. Further, our first efficient core product, Sierra Forest is also on track for 2024. Lastly, it is appropriate to continue to highlight PSG for its standout performance delivering record Q4 revenue up 42% year-on-year. We are planning to have a more fulsome look at our progress in DCAI at our next investor webinar later in Q1. Stay tuned for the invitation. In CCG, we continue to build on our market share momentum across the PC stack by focusing on delivering leadership products with our broad open ecosystem. I'm particularly pleased that our clear performance leadership at the high end drove record client ASPs in the quarter. In Q4, the 13th Gen Intel Core desktop processor family, codename, Raptor Lake, became available, starting with the desktop K processors and the Intel Z790 chipset. In partnership with ASUS, we officially set a new world record for overclocking, pushing the 13th Gen Intel Core past the 9 gigahertz barrier for the first time ever. Hands down, we provide desktop enthusiasts and gamers with the best processors and features for overclocking in the PC industry. We also introduced our notebook Raptor Lake family at CES, including the world's fastest notebook CPU and the first 24 cores. We look forward to ramping the more than 300 mobile design wins we have already secured in the first half of 2023. Meteor Lake, our first disaggregated CPU built on Intel 4, remains on track for the second half of the year. And with Meteor Lake progressing well, it's now appropriate to look forward to Lunar Lake, which is on track for production readiness in 2024, having taped out its first silicon. Lunar Lake is optimized for ultra-low power performance, which will enable more of our PC partners to create ultra-thin and light systems for mobile users. In addition, as we outlined on our webinar, we are excited by the strength of the Evo brand. The introduction of Unison for leadership multi-device experience as we ramp the more than 60 design wins and the uniqueness of vPro in the enterprise market, helping our customers drive an almost 200% return on investment by deploying vPro platforms to their end users. Lastly, as consumer graphics reintegrate into CCG, enthusiasm for our latest Alchemist-based discrete graphics products continue to build and we expect volume ramp throughout the year. Turning to NEX and Mobileye. Both businesses have performed well in Q4 and calendar year 2022, partially insulated by some of the market forces impacting PCs and server. NEX hit the key product milestones with Mount Evans, Raptor Lake P&S, and Alder Lake N and Sapphire Rapids to drive a second consecutive year of double-digit year-on-year growth in calendar year 2022. We expect market share gains and outperformance to continue in 2023. Mobileye increased revenue by almost 60% year-on-year in Q4 and is on a solid growth path for calendar year 2023. Calendar year 2022 design wins, including supervision, are projected to generate future revenue of approximately $6.7 billion across 64 million units. In addition, our manufacturing organization performed well throughout calendar year 2022. Starting the year, navigating the worst supply-constrained environment in over 20 years, only to have to pivot in Q2 to respond to rapidly changing demand signals, which are now driving near-term under-loading in our factory network. More importantly, we continue to push forward with the next phase of IBM 2.0 creating an internal foundry, evolving our systems business practices and culture to establish a leadership cost structure. This new approach is already gaining momentum internally. As a reminder, the internal foundry model will place our BUs in a similar economic footing as external IFS customers, and will allow our manufacturing group and BUs to be more agile, make better decisions and uncover efficiency and cost savings. We have identified nine different subcategories for operational improvement that our teams will aggressively pursue. In addition to establishing better incentives, this new approach will provide transparency on our financial execution, allowing us to better benchmark ourselves against other foundries and drive to best-in-class performance. We'll also provide improved transparency to our owners as we expect to share full internal foundry P&L in calendar year 2024. Ultimately, allowing you to better judge how we are allocating your capital and creating value. We expect additional efficiencies as we implement our internal foundry model, which is a key element to accomplish our $8 billion to $10 billion of cost savings exiting 2025, as we outlined on our last call. I want to remind everyone that, we are on a multi-year journey. We remain focused on the things that are within our control as we navigate short-term headwinds, while executing to our long-term strategy. While I remain sober that, we have a long way to achieve our financial expectations, I am pleased with the transformation progress that we are making. I can tell you, in addition to obviously focusing on the day-to-day running of the company we continue to examine numerous additional value-creating initiatives for 2023 as we always do. We will update you as we move along on any we deem appropriate. Rest assured, we remain committed to creating value for our owners and to delivering the long-term strategic road map we laid out at the beginning of this journey, and we are confident in our ability to do so. We will, one, deliver on five nodes in four years, achieving process performance parity in 2024 and unquestioned leadership by 2025 with Intel 18A. Two, execute on an aggressive Sapphire Rapids ramp, introduce Emerald Rapids in second half 2023 and Granite Rapids and Sierra Forest in 2024. Three, ramp Meteor Lake in second half 2023 and PRQ Lunar Lake in 2024, and four, expand our IFS customer base to include large design wins on Intel 16, Intel 3 and 18A this year. We also need to improve our cost structure and drive operational efficiency. On this front, we will, one, return to profitability and deliver the benefits of our calendar year 2023, 2024 and 2025 efforts to reduce costs and drive efficiencies. Two, execute on our internal foundry P&L by 2024. And three, expand on the use of our smart capital strategy to leverage multiple pools of capital, including SCIPs and Chips in the US and Europe to balance our long-term capacity aspirations with near-term realities. Before I turn it over to Dave, I'm going to close by saying, we take our commitments to all our stakeholders extremely seriously and ultimately, we strive to create value for each of them. For our customers, it is rebuilding our execution engine to provide a predictable cadence of best-in-class products to support their ambitions. For our employees is to provide them with the opportunity to develop and bring to market world-changing technologies. It is what inspires each of us inside of the company. For our external owners is to make thoughtful, deliberate decisions around capital allocation, which drives the highest return on investment we make with your capital. Our ambitions are equaled by our passion, and our efforts across manufacturing, design, products and foundry are well on their way to driving our transformation and creating the flywheel, which is IBM 2.0.

John Pitzer:

Thank you, Dave. We will now move into the Q&A portion of our call. As a reminder, we ask each caller to ask one question and a brief follow-up question where applicable. With that, Jonathan, can we please take the first caller?

Ross Seymore:

Hi guys. Thanks for let me ask a question. I guess, Dave, to hit on some of the revenue questions or items you just said, do you expect the first quarter to be the bottom in absolute dollars through the year? And any color between the segments? It seems like it's exceedingly a CCG problem right now in the quarter, or is it broader than that?

Pat Gelsinger:

No.

Pat Gelsinger:

Yeah. And clearly, as we look at Q1, affected by macro significant inventory adjustments, and that's affecting clearly clients but also data center as well. And we do see that year-on-year, quarter-on-quarter data center to be down as well. And we think that's a macro statement across all segments across cloud, enterprise, government and uniquely China. Part of our more positive expectation for the second half of the year is clearly from our customers and what we've heard from them but also with expected some level of recovery from China as well. So overall, clearly, a major inventory correction cycle and coming after back-to-school and how do they refresh our customers clearly wanting to take more aggressive steps as they adjust. But that inventory adjustment is well below their sell-out rates. So for that, we do believe that we will see recovery as they have made those inventory adjustments, and we'll see the business be stronger as we go through the year.

Ross Seymore:

I do. Quickly, Dave, I want to pivot to the gross margin side of things, excluding the change in the depreciable life side of the equation, I know revenue is the biggest headwind right now. But you had talked at the Investor Day last year about a 51% to 53% gross margin range and you want to operate within those bands. What does it take to get back to that? Is there a revenue level? Do you have to be above $17 billion, $18 billion? Are there offsets, any framework you can give to give investors confidence that we never thought we'd see a three handle on your gross margin. And so we really want to know what it's going to take to get back to a five handle. And if that's significantly changed from the last framework that you provided us?

John Pitzer:

Thank you, Ross. Jonathan, can we have the next question, please?

Vivek Arya:

Thanks for taking my question. I'm curious, how many weeks of PC microprocessor inventory is still in the channel? I'm trying to understand, whether the demand assumptions are not what they should be, right, or is it the supply assumptions? So when you say that, the consumption this year will be $270 million, right, which is the low end. How do we know that for sure? What if the consumption rate is much lower than that? So just how many weeks of PC microprocessor inventory is there? And do you think Q1 is that clearing quarter, or you think even in Q2, you could be shipping below consumption levels?

John Pitzer:

Vivek, do you have a follow-up question?

Pat Gelsinger:

Yes. Thank you. And I think the most important thing is what we just did with Sapphire Rapids, right? Our customers were anxious for a great product from Intel. Obviously, we would have liked it to be earlier, as we had initially estimated, but we are now shipping a very high-quality product with significant areas of leadership in areas like AI performance, power performance, security feature function, high-performance computing workflows that are 5x the competition and features in areas like confidential computing and security that are quite differentiated from anything in the marketplace. Obviously, share shift, right, particularly in the data center space, these designs were one a year ago, right, or two years ago. And so it takes some amount of time. And against that, we're seeing a very strong outlook for Sapphire Rapids ramp through the year, as I said, 1 million units in the middle of the year, so very strong demand from our customers. And the other thing, as we've indicated, is have we rewon our customers' confidence that they could bet on our road map. And Emerald Rapids, looking very healthy for later this year. Granite Rapids and Sierra Forest looking very healthy for next year. And all of those, I believe, are rebuilding our customers' confidence. And I believe with that, given the massive incumbency that Intel has, and I would just emphasize that even though we have seen the share shift in recent sell-in, the installed base is Intel, right? There's an enormous on some -- many of the cloud customers, 95-plus percent of their installed base is Intel that gives us a very strong incumbency that we get to renew as we rebuild our customers' confidence. So as you put all of those things together, yes, we realize that we stumble, right? We lost share. We lost momentum. We think that stabilizes this year, and we're going to be building a road map that allows us to regain leadership for the long term in this critical market.

Operator:

Certainly. Our next question comes from the line of Timothy Arcuri from UBS. Your question, please.

David Zinsner:

Yes. So let me see if I can -- obviously, we're trying to avoid guiding beyond the first quarter given the murkiness. I would just say we are very focused on the appropriate level of investment necessary for the long-term strategy of IDM 2.0, while being very thoughtful around how much CapEx we spend to manage our free cash flow. I think Smart Capital offsets will be pretty healthy this year, much better than last year. Partly, that's because we'll be fully along with SCIPs 1 with our partnership with Brookfield. We are expecting grant incentives to be a part of this year's Smart Capital offsets. And so those -- and then lastly, we do have already in place, the investment tax credit, which could have some benefit to us this year. So certainly, Smart Capital will be healthy, but we are being very prudent around our gross capital spend through the year. And we'll -- as we kind of progress through the year, we'll see how things develop, and we'll -- you can expect us to manage it accordingly. I think most importantly, we -- we did not expect to be at this revenue level, obviously, for 2023 when we talked about this, net CapEx intensity of 35%. And yet we still maintain the discipline to stay at or below that 35% for the year. And I think that's what investors should take away from that message.

John Pitzer:

Tim, do you have follow-up?

David Zinsner:

Yes. I think clearly, revenue is going to be the most significant driver of gross margins. We're a high fixed cost model. So we suffer the consequence of that, obviously, when revenue is declining, but we also get the benefit when revenue is expanding. And so what will -- what is currently a headwind does turn to a tailwind as the business recovers. The second most significant impact we have is the underload charges. So that's 400 basis points or so this quarter. And we'll make a determination as to what loading makes sense for the second quarter as we get closer to the second quarter. But we're doing this to be appropriate in terms of our management of cash flow. But again, as business conditions adjust, we will start loading the fab at a higher rate, and that will improve gross margins. I think beyond that, it really is around a lot of the cost initiatives we have underway. It's the $3 billion for 2023, and it's the $8 billion to $10 billion improvement over the course of the next few years that really will help drive the costs and drive the gross margins beyond just revenue and loadings.

Operator:

Certainly. And our next question comes from the line of C.J. Muse from Evercore ISI. Your question please.

Pat Gelsinger:

Yeah. Thanks, C.J. I'll start and ask Dave to jump in. We think about the capital budget with two lenses in mind, right? One is the strategic lens. Am I going to get back to leadership at 20A and 18A? Yes, am I going to make the capital investments required to do that? Absolutely. To some degree, do we scrub those? Could we look hard at those? Where can we save tens or hundreds of millions of dollars on those? Yes, we will. But we're not going to diminish from the capital required for strategic leadership for the long-term. So strategic capital, largely unchanged. The second bucket, of course, I'll just call it, capacity capital, right, and adjusting to the near-term ebb and flows of the business requirement. And, obviously, in this macro environment, that's been adjusted meaningfully downward and we're finding everywhere we can to squeeze our existing capacity more effectively to be more aggressive in terms of how we work with our equipment suppliers in those areas and doing everything we can to minimize the capital that's required for capacity driven requirements as well. And that's where the larger trade-offs have been. And, of course, in a business as large as ours, we have labs and buildings and everything else. We are scrubbing those like crazy as you would want us to. Dave, what else would you add?

John Pitzer:

C.J., do you have a follow-up?

David Zinsner:

Well, 2023, we were thinking was a breakeven free cash flow year for us back at the Analyst Day last February. Obviously, in the first half of this year, we're going to be below that model. But as we look into the back half of the year, we would expect to approach the model in 2023. And of course, 2024 is a bit away from where we are right now, but this is the thing that we spend a lot of time on. I would tell you one thing, if you look at our free cash flow for 2022, we came in roughly around minus $4 billion. If you remember in the quarter before, we forecasted that we would be somewhere between minus $2 billion and minus $4 billion. We were actually assuming a higher level of capital offsets, which is still coming, but pushed into 2023. And yet we still hit the high end of that range. And the way we did it was through working capital initiatives. So this is a big part of our strategy around managing free cash flow, is more attention to working capital. It's something that I think in the past may not have been a big focus here, but is a very big focus here. It's how we -- how our shipments are managed in terms of linearity, how we manage payments, how we manage our inventory. The fact that we're taking underload does affect the gross margins, but it also improves our cash flow, because we're spending less on variable costs. So these are areas that we think can be pretty beneficial to us and be a tailwind for us in terms of free cash flow as we progress through the year.

Operator:

Certainly. And our next question comes from the line of Matt Ramsay from Cowen. Your question, please.

David Zinsner:

Yes. Well, obviously, we announced a $0.365 dividend for the first quarter. That was consistent with the last quarter's dividend. I'd just say the Board, management, we take a very disciplined approach to the capital allocation strategy, and we're going to remain committed to being very prudent around how we allocate capital for the owners. And we are committed to maintaining a competitive dividend.

Matt Ramsay:

Yes. Thanks, guys. Thanks, John. I guess, as my follow-up question, guys, I wanted to dig into the DCAI business a little bit. And that you guys talked about, I think, the PSG or Altera being up, I don't know, 40-odd percent year-over-year, which, if you just kind of rough math, it means that the core cloud plus enterprise server business is down 40%, something like that. And so, maybe, Pat, could you walk us through what -- is that roughly right in terms of math and just where your -- how you see share loss versus ASP versus weakness in the markets in China and enterprise? Just how do you break that down for us, what operationally is happening in the server share space? Thank you.

John Pitzer:

Thanks, Matt. Jonathan, can we have the next question, please.

Toshiya Hari:

Hi, good afternoon. Thanks so much for taking the question. Pat, I was hoping you could talk a little bit about the demand environment in DCAI across cloud, enterprise and perhaps your comms customers. I think in your prepared remarks, you talked about the inventory correction in enterprise being ahead of cloud. So do those comments kind of imply that going forward, cloud could -- the demand there could moderate or decline as we progress through the year, or if you can expand on that, that would be helpful. Thank you.

John Pitzer:

Toshiya, do you have a follow-up?

Pat Gelsinger:

Yeah. And I'll just say here without being too specific and some of these things are under evaluation, discussion with customers and the best way to handle it. We're doing a thorough analysis across the portfolio. And I would say we are looking at every aspect of the portfolio, where we're getting good returns, where we're not. And we're making decision after decision to optimize the portfolio. And as you say, we haven't been hesitant to make those decisions inside the back. And we have a few more that we're looking carefully at. But we're also looking at every area of the business. Dave suggested in his comments, hey, can we do a better job with our line? Could we do a better job with our building assets? We've also discussed as part of the internal foundry model that we're making major steps to improve our automation and ERP efficiency to run the company more. Some of our people actions. We've been very scrutinizing and benchmarking ourselves against best-in-class in every aspect of how we run the business. So one-by-one, we're saying we're going to be world-class as measured by benchmarks in these areas and all the business areas that we're in, we believe they're strategically important and yielding good results with our shareholders' investments.

Operator:

Certainly. Then our final question for today comes from the line of Joseph Moore from Morgan Stanley.

Pat Gelsinger:

Yeah. Thanks, Joe. And you are touching on a very important issue, the memory. And obviously, the memory pricing for DDR4 has collapsed, right, and making that pricing gap versus DDR5 very visible currently. That said, customers don't buy these platforms on memory prices. They buy them on TCO, right? The total cost of the operations that they get for the performance as they put them into operations. So memory price is one piece of that. But I'd also say DDR prices are expected to decline as we go through DDR5 price and the gap to DDR4 is widely forecast to decline, and that gap will diminish as we go through the year. However, right, you contrast that to the significant performance capability. And in some areas like AI, we're seeing five to 6x performance benefits. And when you put that into a TCO calculation, it's overwhelmingly positive. Security is not measured on TCO. It's measured on absolute statements of security and confidential computing. So overall, we are driving this ramp very aggressively through the year. We have strong demand of customers. We're ramping our factories quickly. And we do believe that we'll have a strong ramp of the Sapphire Rapids platform as we go through the year.

Joseph Moore:

Yeah. I also just wanted to touch on, I mean, you mentioned the migration of the AXG business into DCAI and CCG. Is that -- is there a change there in any of the priorities, or is it just a restructuring of where those businesses reside?

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Intel's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, John Pitzer, Corporate Vice President of Investor Relations. Please go ahead, sir.

Patrick Gelsinger:

Thank you, John, and good afternoon, everyone. Despite growing economic headwinds, Q3 revenue was flat sequentially and only modestly below the midpoint of our guidance. In June, we were one of the first companies to highlight an abrupt and pronounced slowdown in demand, which has brought and beyond our initial expectations and is now having an industry-wide impact across the electronic supply chain. We are adjusting our Q4 outlook, and we are planning for the economic uncertainty to persist into 2023. While we are not satisfied with our results, we remain laser-focused on controlling what we can, and we are pleased that our PC share stabilized in Q2 and is now showing meaningful [Audio Gap] improvement in Q3. Our service share, while not where we want it to be, is tracking in line with our expectations, and we are encouraged by good execution in the quarter against our product roadmap. In addition, we are intensifying our cost reduction and efficiency efforts, and we are aggressively moving into the next phase of IDM 2.0 geared to unlocking the full potential of the IDM advantage. This afternoon, I will focus my comments in three areas

John Pitzer:

Thank you, Dave. As move into the Q&A session, we would ask each participant ask one question, and where appropriate, a brief follow up question.

Ross Seymore :

You mentioned, both Dave and Pat, many times about the macroeconomic weakness, likely persisting into next year. So if you're willing to talk a little bit about the puts and takes in the market. You talked about the PC market being down about 5%, Pat. But overall, from your segments, where do you see either market headwinds or tailwinds or individual Intel-specific areas for market share gains or still challenges into 2023?

John Pitzer:

Ross, do you have a brief follow-up?

Patrick Gelsinger :

Yes. And we'd say we saw no -- if we go to the areas, we're just entering in the AXG business and IFS. So everything there is gaining share -- in the NEX business, we saw our businesses entirely driven by the macro. And our market share seems to have no real shift whatsoever, and we continue to be a grower in that segment. in and PC, we had very market share gains this quarter, very strong product lines, so we think we're well positioned. And in data center, we grew slower than the market. And as the product line gets stronger, we will be in a position to regain share, regain ASP, obviously, ramp the Sapphire Rapids. But we still see ourselves not in a position that we're gaining share yet and expect that will be the case for a couple of more quarters.

Timothy Arcuri :

I had a question on the internal foundry. It seems sort of like the first step in basically splitting the company into an external foundry and a fabless company. Can you sort of play that out? Is that the idea? And sort of how does this create value? I guess, I mean, obviously, if you look at GlobalFoundries' market cap, that's like 30% of your market cap. But how does it play out functionally, how it creates value?

John Pitzer:

Tim, do you have a brief follow-up?

David Zinsner :

Yes. I mean we expect to manage in the near term, while we're in this investment phase to kind of a neutral free cash flow over the course of 23', 24 combined. Obviously, our long-term goal is to is actually significantly improve cash flow, and we still feel like the model we gave at Investor Day is the right model that we can generate 20% free cash flow, as a percent of revenue. And obviously, this year, I think we showed very good discipline on the CapEx side. We brought our CapEx -- I think when we started the year, we thought CapEx would be in the $27 billion range on a net basis. We've adjusted that down to $21 billion. But we still preserved what Pat thought was the most important things to invest in to make sure that we're ready to go as we launch new nodes, as we bring out the IFS business and gain more customer traction in that space. And then next year, the real protection on the cash flow now will be around these spending reductions. We have $3 billion of spending reductions we're going out to achieve in '23. No guidance yet on CapEx, but I would just say the model in the near term was to run essentially at 35% of revenue. And as Pat, I think, even mentioned on the investor -- at the Investor Day, we will manage to the model, and that's quite important to us. So we think we can manage both aspects of this protect cash flow, be smart around spending, but continue to operate our strategy and our roadmap to get to leadership on process and product, to bring out these emerging businesses like the foundry business and like graphics.

Vivek Arya :

Pat, isn't it risky to plan for a $270 million to $290 million PC TAM. Then clearly, the market seems to be reverting back to pre-pandemic levels of 260 million or so. And since that time before the pandemic, one large customer has moved away from x86, and there have been share shift. So what is the TAM next year is more like 250 to 260? What impact will it have on your cost and fab loading assumptions?

John Pitzer:

Vivek, do you have a quick follow-on?

Patrick Gelsinger :

Yes. Our belief is that we ship below consumption levels. So in other words, inventory levels at the OEM and in the channels decreased over the last quarter. They didn't decrease as far as we were originally predicting. So, consumption was a little bit weaker, but we still saw inventories systematically going down across the various routes to market throughout the quarter. We expect them to continue to go down next quarter at both the OEMs and at the channel level. And the numbers I gave on the TAM model would be our consumption models for next year, which are below the consumption models of this year. So, a somewhat smaller number for next year but not dramatically different as we already said. So overall, I think we're getting to a better point of supply-demand equilibrium where we were way behind on demand and supply for many, many quarters in a row. Clearly, the last couple of quarters have been adjusting of inventory levels and we think that we're going to be in a better supply-demand balance situation as we go into next year.

Pierre Ferragu :

I'd love to talk a bit about like the very ambitious like efficiency plan you heard you've announced. And first, I'd like to understand the timing of it. The performance of Intel has been challenged in the last six months. Should we read that as a very reactive plan and you're basically… [Technical Difficulty]

David Zinsner :

Okay. I can answer that. Just make sure we're live.

David Zinsner :

Okay. Thank you. So thanks for the question, Pierre. Yes. So keep in mind, as we look at this $8 billion to $10 billion of efficiency gains that we're talking about, we're actually making a pretty meaningful down pain on those efficiency gains in 2023. We expect to get $3 billion of savings from -- versus '22 in '23. And keep in mind, actually, we have some fixed expenses that come on next year. So the cash savings is actually more like $5 billion of savings next year. Now as it relates to the 8 billion to 10 billion, we think as we exit the 2025 period will roughly be in that $8 billion to $12 billion -- or $8 billion to $10 billion range. And as Pat kind of walked through, we just think we've already identified a lot of different efficiencies that will get us to this $8 billion. But also, as we start to manage the business in this internal foundry model, we think we'll find and cover a lot more opportunities to drive efficiency and savings. So we'll update you as we progress over the course of the next three years and let you know how we're doing in terms of our progress, but we have very good line of sight on the first $3 billion and pretty good line of sight on the full $8 million to $10 million.

Joseph Moore :

I want to come back to the internal foundry model again. Can you talk about -- it's very clear how it makes your foundry business better. From the standpoint of the CPU business back when you guys were on top in process, there was a pretty clear indication that it was the alignment of the device business with the fab that was kind of creating this really good outcome. Is there any trade-off that you make with this from the standpoint, looking at it from the standpoint of the microprocessor part of the business?

David Zinsner :

I would just add that we have six business units today. We measure them separately, but they actually do a very good job. In a lot of cases, they need to pull together to engage with customers, to develop products and so forth. And so I think we have a pretty good process and culture within Intel, where we can strike the right balance between creating some transparency and accountability for the internal foundry business, but also make sure that they're aligned to the overall Intel goals.

Joseph Moore :

Yes, I do. That's very helpful. In terms of the accounting in 2024 around this internal foundry structure, is the goal there to sort of have a transfer price between the foundry business and the rest of it, that kind of reflects the market price? Or just how -- it seems like the accounting of how you're going to determine where the profits could get tricky. [` Ends]

Patrick Gelsinger :

And just to add on to that a little bit, Joe. Here, this is a case where our internal processes and systems were optimized for IDM 1.0, right? We weren't having to say what is a sustainable wafer price that we should be designing against. And we were having a wafer cost view, right, which early in a process life is very high, right? And then it gets to mature, and how do design teams pick the right choice when you have such variability, whereas the foundry model gives a much more predictable wafer pricing that then enables a more efficient business unit model to pick the right technology choices to deliver the best products. So that's just one example that we're finding that we're not making the best decisions today, and this will allow us to hold the manufacturing teams to be entirely accountable. You've given a price hit the defects, you hit the cost structures associated with it and the business units, you have a wafer cost and go build the best product against that and ramp it like crazy in the industry. And obviously, presenting those with clarity will help you as the Street understand the progress we're making to accomplish that.

C.J. Muse :

And one more question on your Intel foundry strategy. It makes perfect sense to me around the discipline and cost that you're looking to achieve here. But if I'm a business unit head, and you've been pretty clear that you're playing catch up five node migrations over the next four years. If I'm a business unit head over the next two years, why would I not outsource completely? So I guess what are the guardrails to ensure that you're keeping capacity internally until you achieve the goals that you set out for 2025?

John Pitzer:

C.J., do you have a quick follow-up?

David Zinsner :

Yes. Good question, C.J. So obviously, in this investment phase where we're catching up on node transitions, what we do, we will have a higher CapEx intensity, this 35%. But we do expect, as we get out of this phase, to be back down to a more normalized level of about 25% CapEx intensity. So there definitely will be an evolution and adjustment. And that's one of the key components of allowing us to kick up our free cash flow to this 20% of revenue level that is ultimately the model.

Operator:

Our next question comes from the line of Mark Lipacis from Jefferies.

Patrick Gelsinger :

Well, there's a lot packed into that question. And I would just say, I mean, I generally said that, hey, we see this industry being a consolidating industry over time, particularly on the manufacturing side because of the extreme capital intensity, but also the incredible R&D costs, right? If you think -- if you want to have a world-class technology development team, all you have to do is spend $5 billion a year in R& D and do that for 30 years, right? Now you're okay. Now you're world class, right? And these are just extraordinary long-term investments that you have to build up and operate this way. And against that, I've consistently said I expect that there will be further consolidations in the industry going forward. Now what shape those will take, what the timing of those will be, what will be the trigger points that would position such moves, and as you said, there's many factors associated with that in terms of regulatory, legal, financial steps associated with it. But fundamentally, economics 101, right, would say you will see further consolidations into the future, and we believe that will be the case. And we would expect to be a consolidator in that process over time.

Matthew Ramsay :

Pat, I wanted to ask a question about the server road map. We've got some, I think, relief from some of the commentary for cloud CapEx during this earnings season in the last three days and particularly from Meta last night, but the rest of the big guys as well. But on the flip side, there's some rumblings that maybe there's a couple of more months before Sapphire Rapids might ramp in big volumes. So I'm just -- maybe if you could help and level set us on the timing of big cloud volume of Sapphire Rapids and how that now dovetails in with the timing. It seems like you're keeping for Emerald Rapids in late '23.

John Pitzer:

Matt, do you have a quick follow-on?

Patrick Gelsinger :

Yes. Thank you. And on 20A and 18A, they go to RibbonFET, as you say. And Intel has driven every major transistor, right, in the volume production for the last 35 years. So the idea that we're the ones who are going to drive this major new transistor structure into production is something that we're pretty committed to be a driver for 20A, as you said, on track, on schedule. We expect 20A will primarily be an internal node, not one that we have a lot of external foundry customers for the external foundry chipset or tape-outs are largely associated with 18A. And a very typical process for a foundry customer will be "give me a test chip of my circuits on your process." and that's exactly what we take out. The first one this quarter. We'll have several more in the pipeline. So now we're taking out not only our test chips for 18A, but our foundry customer test chips for 18A, and that's a pretty critical milestone when they see the results of the silicon for them making a volume decision for a foundry customer. So we're exactly on the time line that I described earlier for those tape-outs and those decisions. So as they start to see the silicon results, which we think are going to be very promising we think that will be a key step to them making major foundry decisions. And overall, this just affirms our five nodes in four years. We're making the investments. We're seeing good progress to get back to process technology leadership, which for Intel is a tide that raises all boats in the company. It makes our products better. It establishes our new business areas, positions us in a very profound way for foundry [Technical Difficulty] Economic environment. Macro, very challenged, but we're happy with the execution progress we made even though we're not happy with the reported results. And we know we have a lot more work to do there. It was also thrilling to participate with the Mobileye IPO in a tough market with very good results. We're prepared for the economic headwinds. We're making the necessary adjustments structurally as well as through our cost model to go through them. And we remain fully committed to being a value generator for our shareholders for the long term as we execute our 2.0. We believe that, that will be a great result for our owners for the long term.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good

Operator:

Good day, and thank you for standing by. Welcome to the Second Quarter 2022 Intel Corporation Earnings Conference Call. [Operator instructions] Please be advised that today’s conference is being recorded. I will now hand the conference over to your speakers today, John Pitzer, Corporate Vice President of Investor Relations at Intel. Please go ahead.

Pat Gelsinger:

Thank you, John, and good afternoon, everyone. While we continue to make solid progress on our strategy, Q2 results were disappointing, below the standards we have set for the company and below the commitments we have made to you, our shareholders. The sudden and rapid decline in economic activity was the largest driver of the shortfall, but Q2 also reflected our own execution issues in areas like product design, DCAI, and the ramp of AXG offerings. We have an obligation to remain vigilant and to respond to the changing business conditions while not losing sight of our long-term goals and opportunities. We will look to do both by adjusting and refocusing our spending levels in the near term, at the same time, as we accelerate the deployment of our smart capital strategy and improve product execution. Collectively, these actions will begin to show dividends in the second half of the year, allowing us to return gross margins to our target range by Q4 and maintain our initial free cash flow outlook for 2022. While still early in our journey, we remain laser-focused on executing to our strategy to deliver leadership products anchored on open and secure platforms, powered by at scale manufacturing and supercharged by our people. The current economic backdrop only strengthens our result and we are embracing this environment to accelerate our transformation. For example, regaining our leadership begins with Moore’s Law and the capacity to deliver it at scale. Over the last 18 months, we’ve taken the right steps to establish a strong footing for our TD roadmap. We are well into the ramp of Intel 7 now shipping in excess of 35 million units. Intel 4 is ready for volume production in second half of this year and Intel 3, 20A and 18A are all at or ahead of schedule. We’ve received additional strong third-party validation for TD, IFS and our manufacturing group just this week when we announced MediaTek as our next major foundry customer, a great example of our One Intel culture. I want to congratulate our teams on what we expect to be many announcements as we execute to become an, at scale, leading edge, geographically diversified systems foundry. But we must also be clear-eyed as we look into the second half. We are planning for volatility as the world adjusts to the end of a two-plus-year pandemic and the unprecedented stimulus governments used to fight it. Across the economy, supply chain issues have both limited the ability to meet demand in some areas and driven inventory well above normal levels in others. We are prepared to manage through a slowdown typical of the normal cycles the semiconductor industry has experienced over the last 50 years. While the depth and duration are still difficult to predict, we have a proven track record of being able to adjust and succeed in any environment. Let me address some of the specific actions we are taking. First, we further sharpened our focus in Q2 selling our drone business and making the difficult decision to wind down our efforts in Optane, as we embrace CXL, a standard which Intel Corporation pioneered. These add to actions last year in NAND and the sale of McAfee. In total, we have now exited six businesses since my return providing roughly $1.5 billion for investments aligned with our IDM 2.0 strategy. We are also lowering core expenses in calendar year 2022, and will look to take additional actions in the second half of the year, which Dave will address later. Importantly, expense discipline is not impacting the strategy and we remain firmly on track to achieve process performance parity in 2024 and unquestioned leadership in 2025. This goal is our true North Star. Second, our ability to invest aggressively and fulfill our commitment to a strong and growing dividend is anchored by the progress we are making in deploying our smart capital strategy. We are thrilled to see the bipartisan vote in the Congress this week and expect CHIPS Act to be on the President’s best shortly. We have been integrally involved in moving this groundbreaking legislation forward. This progress, combined with the strong momentum in Europe, will reshape our industry and bring us toward a geographically balanced, resilient supply chain that we are uniquely positioned to enable and benefit from. Access to mission aligned pools of capital supports the accelerated pursuit of our strategy and will enable our torrid pace. Third, I rejoined Intel to re-energize and re-establish a culture of execution and innovation. With process technology and capacity expansion, both now trending very well, we have the critical foundation we need for improved product execution. We have rebuilt our leadership team now fully assembled for the first time. And together, we have reestablished OKRs throughout the organization to drive common purpose and importantly, a system of accountability. In the coming months, we will begin to share more with the investment community on the next evolution of our TikTok model to drive consistent and predictable cadence of process and design innovation. As we look beyond the near-term, the semiconductor industry continues to be at the beginning of a new structural growth phase, driven by four superpowers

John Pitzer:

All right. Thank you, Dave. Moving on now to the Q&A as is our normal practice, we would ask each participant to ask just one question. Operator, please go ahead and introduce our first caller.

C.J. Muse:

Yes. Good afternoon. Thank you for taking the question. I guess for my question your implied guidance calls for roughly 12% sequential growth into December. Would love to hear what gives you confidence that inventory correction and the supply chain issues will be behind you? And as part of that do you think a PC TAM of down 10% is conservative enough or is that something where there might be further risk ahead? Thanks so much.

Dave Zinsner:

And in fourth quarter, we also see that some of the new business unit areas, right, are started to contribute more significantly as well. On the PC TAM, before we were above the market and with our down revision, we’re now exactly in line with the market. We were over 350 million units before, now market ranges are 310 to 325. Our range is consistent with that, C.J. So we don’t see ourself ahead of the market like we were before, we were more optimistic. Now we’re firmly in line with the market. Clearly, the market has shifted heavily on the consumer side, but the remains strength on the enterprise side, which also gives us confidence. So in addition to the strength of the product roadmap, which Dave said, we also see the enterprise market remaining very healthy and our position and the higher price points and the enterprise, these are good markets for us. And as we’re on the back of Alder Lake over 35 million units, Raptor Lake ramping, we’re just coming into a great cycle of the overall business. We’d also say that the PC is strong as that work from home, school from home device usage numbers are up significantly for the time that people use their PCs. We also have a strong replacement cycle in front of us. We now have over 600 million PCs that are over four years old. We’re definitely seeing that roll through the enterprise markets, again where we have stronger market share and better ASPs. So all that taken together, we think we’ve ranged it and that’s consistent with the financial guidance that we’ve given you for the rest of the year.

Operator:

We have a question from Vivek Arya from Bank of America. Your line is open.

Pat Gelsinger:

Yes. Thanks, Vivek. I think that officially is actually two questions, but anyway, I’ll – we’ll take them both. On the market side, we’ll say we were well into the quarter and we saw the market characteristics change quite suddenly, right, and that resulted in both the sell-through and the marketplace, but also these significant inventory adjustments. We worked with our customers on those inventory adjustments. And as we said, these are like once in 10-year kind of inventory adjustments, because the customers were working through the quarter, catching up to demand that was short for years, right? And all of a sudden as we saw that shifting, they took quite significant adjustments to their inventory positions. And we wanted to be in a position that we had some thoughtful view of what the market was for the future. So that’s the reason that brought us to today. We think that we’ve given you a clear view of where the market is coming into the future. The DCAI point, as I said in my formal comments, we were disappointed. Some of that was driven by the macro; it was also match set issues that we’ve been struggling with as well. And Ethernet components, power supply components, et cetera have been challenged. But as we also said, we had some of our own unique execution issues and we kept the quality bar high on Sapphire Rapids and thus we did another stepping, which was a forecast, which put some inventory and reserve issues in front of us as opposed to high ASP new product revenue. So some of those things were unique issues to us that we were addressing. That said, we do feel like the progress in the data center, right, is clear in front of us. We have – Emerald is looking very good. We’ll be powering on Sapphire or Sierra Forest and Granite Rapids shortly. All of that taken together, we feel our competitive position is improving. We also see that we know where the market share is and wins like we announced with AWS and Meta, we are going to focus on every socket, every workload, every customer quite aggressively on both AWS and Meta. These were substantial wins for us this quarter and we’re hoped to be announcing several others like that as we go forward. We’re also bringing new capabilities as we sort of said in our formal comments. The size of our footprint here is underappreciated, and we’re going to be focusing on really benefiting from that and bringing new capabilities against that enormous footprint with capabilities like Granulate and our Amber security service, things that allow us to bring more value to our customers as well as harvest more revenue from that enormous installed base. So all of that taken together, we feel like we are owning up to the challenges that we had in data center, but have a clear view of how we write this business for the future and are well underway and doing exactly that.

Vivek Arya:

Thank you.

Matt Ramsay:

Yes. Thank you very much for taking the question. Good afternoon. I guess Pat, I wanted to follow-up a little bit on the prior question in the server business, particularly on the roadmap you guys just mentioned, some reserves we need to take for Sapphire and the timelines have been pushed out. So I guess the questions are

Operator:

Our next question comes from Srini Pajjuri with SMBC Nikko.

Dave Zinsner:

Okay. So yes, you’re right, Sapphire Rapids, we reserve the production inventory before it has gone what we call PRQ. So it’s the quality metric. And so we reserve all the product and since the main, as path of the main SKUs have not at this point reached PRQ, we continue to reserve them once they do, which we expect later this year then we stop first of all, reserving the production inventory. And then likelihood is some of this will also sell. And so, we’ll be able to recover some portion of that reserve likely as we progress through the end of this year and next year. On CCG and DCAI, I think, the inventory correction in CCG was definitely more pronounced. And so you get this, the benefit of the shipping back to the consumption level is more pronounced when things recover. That’s number one. We also will see more pricing improvement in CCGs and DCAI both, we are adjusting pricing, but the pricing is more significant in CCG. And so, that also gives CCG a lift in the later part of the year.

Dave Zinsner:

Next question.

Joseph Moore:

Great, thank you. I wonder if you could talk about the capital spending cuts. Can you give us a sense for, does that affect shells versus wait for fab equipment? And is there sort of any opportunity cost to that? And then to the extent that – does that change to your comments about the overall trajectory over the next few years? Do you still expect CapEx to be rising from here?

Joseph Moore:

Just the trajectory. I know you had talked about capital spending generally rising from here, but you also talked about guardrails, can you just talk about the trade-offs of your business being slower versus not looking for forecast, but how you’re thinking about the long-term spending program?

Pat Gelsinger:

Yes. And as Dave is alluding to the passage today by the house of the CHIPS Act following the Senate Passage on Tuesday, this is historic legislation. Literally since World War II, there might not have been a more important piece of industrial policy that’s came forward through Congress. So we are thrilled by that. And then also something that we pointed to, and we’ve been very active and I’ve been very active. This is great for the semiconductor industry. This is beneficial to Intel. This was one of the pieces of the smart capital program as we described back an Investor Day. And now seeing this come across the line will clearly be part of that ability for us to invest aggressively in the strategy that we described to you. We see this as an accelerant to our strategy and something that will give us the capacity to both meet our product needs as well as our Foundry customer needs as well. This is powerful and something that we are thrilled to have come across the line just today. We look forward to this being on the President’s desk in the next couple of days and signed into law. This was a historic moment for the semiconductor industry. And I hope everybody on the line just realizes how significant the passage of this was for semiconductors, for technology, for long-term research, this was huge. We were thrilled to be a part of it.

Operator:

Our next question comes from Harlan Sur with J.P. Morgan. Your line is open.

Pat Gelsinger:

Yes. Thank you, Harlan. And if I would just to step back slightly, right, I view the recovery, rebuilding in three different chapters. One was TD and manufacturing…

Pat Gelsinger:

…best transistors capacity. Second design and products. We have to deliver the products that we say to our customers. And if they ask for it Monday at noon, Monday at 11:59, it is there right in the volumes you say, at the performance levels, power levels, et cetera. And the third chapter is building growth, right. And establishing the new products, the new product lines for growth and obviously, we’ve laid the foundations for all three. As TD and manufacturing are now making good progress. The focus really is get the product and design execution superb again, right. And I point back to that sort of tick–tock discipline that we had in the past, that was a key part of what we’re doing, and that’s exactly what we have underway, rebuilding that kind of product disciplined execution. Clearly the Sapphire Rapids miss that we had, we’re raising the quality bars for that. We weren’t shipping at the quality levels, the security levels that we needed to in the past going clearly we shouldn’t have had that bug in the product in the first place. So that caused another stepping for the volume release. Our software release on our discrete graphics, right, was clearly underperforming. We thought that we would be able to leverage the integrated graphics software stack. And it was wholly inadequate for the performance levels, gaming compatibility, et cetera, that we needed. So we’re not hitting our 4 million unit goal in the discrete graphics space, even as we’re now catching up and getting better software releases. We also – I’ll say the timelines for our products as we’ve committed them to customers, hey, we don’t think we’re competitive with the best-in-class in the industry. Our design timelines, we have to get them better. And we’re focused on doing that. And that’s for some of the longer roadmap term items where we have to be best-in-class in our design cycles, design costs, power envelopes, architectural leadership, things that you would expect from Intel in the past, and we’re rebuilding those muscles for the future. So those would be the two examples we point to specifically that we’re visible this quarter, but we just don’t have a lot more work to do. And as I said, it takes these are three, four-year long projects. These were many of them were underway. We’re putting in place these disciplines now. And the products that are being launched with this entirely new methodology and alignment, well, they don’t come out for a couple more years. So we’re still working through that inventory of designs that were in process, a lot of work to do, a lot of rebuilding and that’s where a lot of my attention is being focused on. And maybe now that I spend a little bit less time in Washington, right, this is the focus for us as a team is getting that execution to be superb once again.

John Pitzer:

Next question, please operator.

Randy Abrams:

Yes. Thank you. A multi-part question. If you could talk in IFS similar on the MediaTek announcement, the products scope, and potentially expand that to advanced products or reference design cooperation. Also want to task a bit more of the CHIPS Act, how it changes your approach to the business. And for David, if the capital offsets assume some of the U.S. benefits and how it could impact the tax rate?

Dave Zinsner:

And then just on your question, we have not assumed any CHIPS Act money in 2022. Our expectation is there’ll be a process and that process will take us into 2023 before we start receiving money from CHIPS. So not assumed in 2022, although, we’re assuming that we will see some in 2023. As you point out, the CHIPS Act or the bill that was passed is a combination of grant money and in tax credits, I think it’s a little early to determine exactly how all that is administered and makes its way into the – our P&L. So we’ll table that until that becomes clearer to us exactly how things shake out and we’ll give you more color once we have a better assessment of that.

Operator:

Our next question comes from Stacy Rasgon with Bernstein. Your line is open.

Pat Gelsinger:

Yes. We said in the prepared remarks that it’s later than we were expecting Sapphire Rapids, it’s ramping later. We have some SKUs out, which is good, but the main SKUs are not out. And they happen later in the year. And of course, they’ll contribute way more significantly to next year than they’re going to contribute to this year. We do see an opportunity in the client space, given our Alder Lake position for pricing increases that are really passing on inflation. And we know customers understand that obviously our competitive position is not as strong in the DCI business. And so there are opportunities to adjust pricing, but not across the board, so that is impacting us a bit.

Pat Gelsinger:

I think there’s some ramps this year and then mostly at ramps next year. Yes.

John Pitzer:

Thanks, Stacy. Operator, we have time for one more question, please.

William Stein:

Great. Thanks for taking my question. It relates to that last topic of the timeliness of delivery of new products. So while Sapphire Rapids is delayed, sounds like something on the order half the year. Pat, in the press release, it noted that the later nodes are still on track or ahead of track, I think was the language. As outsiders, what can we look to sort of judge and determine whether Intel is continuing to be on pace as we progress through the quarters, aside from just the sort of summary statements and the press release. Is there some other metric you could disclose of there some way we can better understand whether Intel is getting back on track and keeping these commitments to deliver these products as you’ve scheduled it. Thank you.

Operator:

This concludes today’s conference call. Thank you for participation. You may now disconnect.

Operator:

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.

Pat Gelsinger:

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.

Tony Balow:

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

Ross Seymore:

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?

Operator:

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

Operator:

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

Pat Gelsinger :

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.

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?

Operator:

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

Pat Gelsinger :

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?

Operator:

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

David Zinsner:

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.

Operator:

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

Pat Gelsinger :

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.

Vivek Arya:

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?

Ross Seymore:

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].

MattRamsay:

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.

David Zinsner:

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.

Timothy Arcuri:

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?

David Zinsner:

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.

Tristan Gerra:

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?

Tony Balow:

Okay. Last question?

Srini Pajjuri:

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?

Tony Balow:

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

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2021 Intel Corp. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker for today, Tony Balow, Vice President, Investor Relations. You may begin.

Pat Gelsinger:

Thank you, Tony, and good afternoon, everyone. First, let me say welcome to Dave, who is joining us for his first earnings call. Many of you know Dave well and know his track record of successfully driving shareholder value. We're very excited to have him join our team. I also want to take a moment to thank George for his many contributions during the critical period in the company's transformation. Everyone here at Intel wishes him all the best in his future endeavors as he begins his planned retirement in May. Q4 was a tremendous finish to a transformational year where we beat expectations on both the top and bottom line. We exceeded our guidance for the quarter by over $1 billion on the top line, finishing with our best quarter and our best full year revenue ever. We had a record quarter for DCG, where we grew 20% year-on-year and where we continue to be the partner of choice for cloud and data center customers. We expect that our Xeon shipments in December alone exceeded the total server CPU shipments by any single competitor for all of 2021. We had a record year for our client business. And in Q4, we outperformed our plan and delivered another $10 billion quarter, highlighting again that the PC is more essential than ever. Continuing our momentum as the market leader in ADAS and AV solutions, Mobileye grew more than 40% year-on-year in 2021, delivering a 14th consecutive year of revenue growth. And finally, IOTG had another $1 billion quarter to cap a record year as the need for compute at the edge continues to grow. Supporting these record results, our manufacturing network continued its superb execution throughout the year. As an IDM, we were able to rapidly adjust to support customers' mix changes, often with a normal lead time, and manufactured more than 2 million wafers. We broke ground on 2 new fabs in Arizona 3 months ahead of schedule as part of the largest overall manufacturing expansion in Intel's history and all while managing a challenging COVID environment and focusing on the safety of our employees, suppliers and partners. We also took several in a series of key steps to shape our business. To begin with, we've recently completed the first close of the sale of our NAND business on time, a critical step in optimizing our portfolio in line with our new strategy. Second, we began unfolding our plan to find innovative ways to sustainably unlock shareholder value with the announcement of our intent to take Mobileye public in 2022. Third, just last week, we announced our new manufacturing site in Ohio, which will support our future growth and advances our plan to create a more geographically balanced, resilient supply chain. While there is a lot left to do, we're building momentum, and we intend to continue our laser focus on execution, innovation and growing the business. Finally, Q4 was a sacred moment for the entire technology industry as we led the 50th anniversary celebration of the Intel 4004, the chip that changed the world. Microprocessor technology sparked by the Intel 4004 allows us to stay connected during the pandemic. It has opened up new ways to work and learn. It has removed geographical boundaries and changed almost every aspect of our lives. We are committed to accelerate this impact for the next 50 years as the insatiable need for compute that started with the 4004 continues to drive the value of Moore's Law. At IEDM, we outlined a long-term path toward more than 10x density improvement in packaging and a 30% to 50% area improvement in transistor scaling. As the steward of Moore's Law, we remain committed to keeping it alive for the next decade and beyond. Looking across the industry, 2021 was dominated by 2 recurring themes, unprecedented demand and ecosystem supply constraints. The strong demand we saw throughout 2021 continued in Q4, and markets remained robust across all our businesses. We expect this trend to continue as the digitization of everything, driven by the 4 superpowers of AI, pervasive connectivity, ubiquitous compute and cloud-to-edge infrastructure leads to an era of sustainable growth. 2021 marked the best year in a decade for the PC industry, with third parties reporting a growth rate of approximately 15%, driven by higher PC density, shorter replacement cycles and increased market penetration. In Q4, we also saw the strong recovery in the channel as increased supply led to a record sell-through for Intel, and we started to see inventories return to pre-pandemic levels. The data center market was strong across all geographies in Q4, led by the enterprise where the market continued to recover from COVID lows. We expect the data center, network and edge markets to continue to have robust growth as hyperscalers lay out multiyear cloud CapEx investment plans. The ongoing need for data privacy and security drives additional edge and on-prem deployments. 5G network and edge build-outs are scaling and workloads like AI continue to expand. This unprecedented demand continues to be tempered by supply chain constraints as shortages in substrates, components and foundry silicon has limited our customers' ability to ship finished systems. Across the industry, this was most acutely felt in the client market, particularly in notebooks, but constraints have widely impacted other markets, including automotive, the Internet of Things and the data center. As we predicted, these ecosystem constraints are expected to persist through 2022 and into 2023, with incremental improvements over this period. The industry will continue to see challenges in a variety of areas, including specialty and overall foundry shortages, substrates as well as third-party silicon. While constraints will remain, our IDM2.0 strategy affords us a superior position to navigate this environment. With control over our manufacturing network and supply chain, we are able to react to rapid changes in demand that help solve challenges for our customers, suppliers and partners. Equally important as an IDM, we remain more resilient to foundry price increases as only a minority of our volume is produced by third parties. Turning from the ecosystem to Intel. We made incredible progress over the last year improving our execution in technology development, manufacturing and product leadership. With unprecedented transparency, we laid out an ambitious path to deliver 5 process nodes in 4 years and regain process performance parity by 2024 and unquestioned leadership by 2025. We are shipping Intel 7 in volume today. And as I was able to say last quarter and can reaffirm today, we remain on or ahead of schedule for Intel 4, 3, 20A and 18A against the time lines we laid out in July. Our manufacturing execution continued to improve. And in Q4, as we ship a record number of servers and we have more than a 30% year-on-year reduction in 10-nanometer wafer costs, we had record quarterly increase in our substrate capacity with our vendors, and we accelerated our pace of innovation with a record number of PDK releases and new product introductions in our factories. Finally, as part of our strategy to use both internal and external manufacturing, we signed multiple long-term supply agreements ranging from foundry partners to substrates to equipment suppliers that will support the growth of our business for years to come. In particular, we announced the deepening of our ASML partnership and our leadership position with the second generation of EUV High-NA. In client, we had another $10 billion quarter, and 2021 was our 6th straight year of revenue growth. We feel great about our position within the sustainably larger client market, and we had an all-time record shipments with customers like Dell. We have a great product lineup starting with Tiger Lake, which has now shipped over 100 million units, making it the fastest-ramping notebook in our history. We are extending our leadership position further with products like our 12th generation Alder Lake, the fastest client processor ever, which is now shipping to over 140 customers in 30 countries around the world. As our first performance hybrid product, it features the highest-performance CPU core Intel has ever built as well as the efficient cores optimized for power. It leads the industry transition on DDR5 and PCIe 5 to enhance gaming and creator experiences. The Alder Lake family will scale across every PC segment from ultra-thin and light laptops to enthusiast desktops, where we've now set new overclocking records to mobile gaming, where the Core i9-12900HK, the world's best mobile gaming processor, is up to 40% faster than the prior generation. Following on the success of Alder Lake, we will continue to build momentum later this year when we expect to introduce Raptor Lake, which is already booted in our labs. In addition to leadership products, we are also driving platform innovations. And at CES, we unveiled our third-gen EVO platform. This new generation includes features like intelligent collaboration to optimize remote work and learning experiences as well as Thunderbolt 4 and WiFi 6E. With no legacy Wi-Fi interference, WiFi 6E will enable incredible performance with low latency, the biggest WiFi advancement in 20 years. We are further reinvigorating the PC ecosystem with technologies like Screenovate, which provides a seamless multi-device and screen-sharing experience, which will begin rolling out on select Intel Evo platforms starting later this year. Driven by the strong product and platform lineup, we feel confident in our ability to compete and drive growth going forward. Our Data Center Group had its best quarter ever as customers continued rebuilding their confidence in choosing Intel. Enabled by our IDM advantage, Ice Lake servers shipped more than 1 million units, equal to the amount we had shipped in the prior 3 quarters combined. All of our OEMs are currently shipping systems, and all of our major cloud customers have announced instances, including our third instance with Amazon Web Services. Going forward, our road map only gets better, and we expect to ship initial SKUs of Sapphire Rapids to select customers in Q1. Sapphire Rapids will offer significant performance improvements across a range of workloads, including AI, where we are targeting up to 30x total gain for Xeon. This demonstrates that a general-purpose CPU with built-in AI acceleration can solve even more customer use cases that once necessitated GPU acceleration. Customers remain excited about Sapphire Rapids, and it has been chosen, along with HPE, to power the new Kestrel supercomputer, built for the U.S. Department of Energy's National Renewable Energy Laboratory, Kestrel will accelerate discovery of renewable power. Once completed in 2023, Kestrel will have more than 5x greater capability than NREL's existing system with approximately 44 petaflops of peak performance. Beyond the core data center, we continue to build on our leadership position from the network to the edge with our comprehensive portfolio of hardware and software solutions. We are leading the transformation of the network where Xeon and FlexRAN software are used in almost all DRAM commercial deployments. We are driving AI inferencing adoption at the edge with our OpenVINO software and partners like BMW Group and Samsung in the factory and medical environments. And we are extending the IPU ecosystem and accelerating the creation of fully programmable network by collaborating on new FPGA-based IPU solutions with Inspur, Ruijie Networks and Silicom. In our discrete and accelerated graphics business, we are starting the year very quickly. Alchemist, the first product in our Intel Arc Discrete Graphics lineup, is now shipping to customers with more than 50 new mobile and desktop designs, including with Acer, Asus, Dell, HP, Lenovo, Samsung and others. Our Arc family of products will scale from mainstream up to the performance graphics segment and will be available in the market later this quarter. In high-performance computing, our Ponte Vecchio GPU is already sampling to customers. With 100 billion transistors, Ponte Vecchio has our highest compute density ever and along with Sapphire Rapids will power the 2 exaflop Aurora supercomputer at Argonne National Laboratory. There are over 100 HPC applications running on Ponte Vecchio, which, enabled by 1 API, provides a unified and open programming model across CPU and GPU. We are working with numerous partners and customers, including Atos, Dell, HPE, Lenovo, Quanta and Supermicro to deploy our HPC-tuned CPUs and GPUs in their latest systems. Our IFS business continues to see strong and enthusiastic customer support. We have a strong pipeline of potential customers and IP development with the ecosystem is progressing well. We are shipping for revenue on our packaging solutions, and we continue to expect customer test chips in our factories on our Intel 16 process this year. Innovations like RibbonFET and PowerVia are proving to be very attractive features to potential customers, and the Intel 18A design kit has now been released to 3 RAMP-C customers. Overall, we are ahead of where I thought we'd be, and I am thrilled with the progress of our IFS team. In mobility, Mobileye continues to be an industry leader in both ADAS and AV, and we recently hit a significant milestone shipping our 100th million IQ SoC. At CES, we gave a glimpse of the future with the EyeQ Ultra, which will do the work of 10 EyeQ 5 SoCs in a single package and was designed to deliver the optimum power and performance for a fully self-driving vehicle. In Q4, we also introduced our first autonomous on-demand service in Paris in collaboration with the RATP Group. Paris is the latest in a list of locations where Mobileye is piloting autonomous vehicle test fleets, including New York, Munich, Detroit, Tokyo, Israel and China. Looking ahead, we still expect to launch commercial robotaxi services in Munich and Tel Aviv in 2022. As we announced in December, we are working to take Mobileye public to unlock shareholder value. We are making good progress, and we'll share more as we go through the year. You'll hear a lot more about how we are rearchitecting our business for growth as part of our upcoming Investor Day. We will lay out details on how we are leveraging our core strengths to accelerate our plans and how we are uniquely positioned to create value. We'll give you the proof points you should expect to see in 2022 that show that we are on track for our long-term plan, all backed up by the transparency and accountability that our new reportable segments will provide. Let me close by saying again that Q4 was an incredibly strong finish to a great 2021. And I believe that, with growing markets, our strong product road map and our increasingly solid execution, 2022 will only be better. In fact, just in the past 24 hours, we were pleased to see the ruling from the General Court in Europe and their decision to overturn the EUR 1.1 billion fine. The semiconductor industry has never been more competitive than it is today, and we look forward to continuing to invest and grow in Europe. At the same time, here in the U.S., we were very excited to see the progress on the CHIPS Act with the House introducing their version of the bill yesterday. The President and other members of the administration have been clear on the importance of this transformational investment, and it's encouraging to see the strong bipartisan and bicameral support as we continue to work together to address the long-term impacts of the semiconductor shortage, restore U.S. leadership in this critical industry and rebalance the global supply chain. With that, let me turn it over to Dave.

George Davis:

Thanks, Dave. I want to close my final earnings call with sincere thanks to our Intel employees who amaze me every day and for the privilege to have served as your CFO. And I could not be more delighted that Dave is taking over, knowing all the incredible strengths he brings to the role. Thanks all.

Tony Balow:

All right. Thank you, Dave. Moving on now to the Q&A. As is our normal practice, we would that ask each participant ask only one question. Operator, please go ahead and introduce our first caller.

John Pitzer:

Congratulations on the results. Pat, it's great to see a second quarter of year-over-year growth in DCG and an acceleration over the calendar third quarter. But if you look underneath the covers, there's sort of 2 stories at play. Enterprises coming back extremely strong. But if you look at the cloud part of the business, I think this is the 5th consecutive quarter of year-over-year declines. And so I guess there's 2 parts to my question. One, when do you see a return to year-over-year growth in cloud? And two, to the extent that the investment community has a bias that everything eventually ends up in the cloud, what is kind of your long-term view of the sustainability of this enterprise demand?

Operator:

Our next question comes from the line of Ross Seymore with Deutsche Bank.

Pat Gelsinger:

Yes. Thank you. And 2021 was really good, if not great year, for the PC. And I think most of the forecasts now are coming in estimating about 15% growth last year. As we're seeing IDC, Canalys, modest growth in the market next year. So as you've heard me -- and I think this matches exactly what Sacha said yesterday -- we'll just say a structurally larger market for us for next year and a couple of percent growth in that. So we see that we will be able to have continued growth in our client business. And obviously, with a stronger and stronger product line, we see ourselves in a very good position for our client market share. Now the inventory position is one where we have just been at historically low inventories for an extended period of time, just racing to catch up with demand. And so we would say that some of this is just getting to inventory levels that are even approaching what we consider normal for a business of this size and one that's managing these still significant supply constraints at different areas, power controllers, display led controllers, other aspects of substrates and different component pieces. So a lot of these challenges have really led to, I'll just say, supply issues throughout the customer base. So as we go to next year, we hope to see some of those starting to moderate and turn to a more normal behavior in the industry, in particular, the channel inventory levels, the ones that were essentially zero, right, for almost all of the year. And now we're starting to see just a little bit of build back in that area, which particularly, for our channel and distribution partners, sort of for the first time, giving them something to sell for the whole year. So a lot of response positively there. Overall, we still see that the PC is now becoming this essential part in an increasingly work from home, learn from home environment; Windows 11, a strong upgrade cycle being introduced by that. So a lot of good tailwinds and a great product line. It's going to be a great year for us in the client space.

Joseph Moore:

Great. I wonder if you could talk about the capital spending a little bit. And again, I don't want to tread on material you're going to cover at the Analyst Day. But the footprint in Ohio, the various comments that you've made about not being able to foresee having too much capacity in the next couple of years, as you think about that, how much of that is your existing x86 business versus foundry and other opportunities? And any sense for the capital spending you felt through this year, how much of that is going to be buildings versus equipment?

David Zinsner:

Yes. First of all, thanks, Pat. And I just did want to say thanks for joining the call, and I'm really happy to be part of Intel. We have an exciting opportunity in front of us, and I couldn't be more excited to be a part of IDM 2.0. I think there's a lot of opportunity to create a lot of shareholder value. In fact, one of the areas we're doing that right now is increasing the dividend 5%. So it's great to -- my first quarter dividend raise…. On the CapEx -- on the CapEx front, Joe, obviously, as Pat mentioned, we'll give you a lot more granularity in terms of '22 and beyond in terms of CapEx. But if you look back at the 2021 CapEx split, it was roughly 60% equipment, 40% space build-out. So that's at least the ratio last year. Of course, it might evolve over time, but it gives you kind of a rough magnitude of the numbers.

Stacy Rasgon:

I wanted to dig into your inventory comments again. So I know you're talking -- you're saying you're building inventories, but your PC volumes were down 18% year-over-year. The PC market wasn't down 18% year-over-year. So it doesn't feel like you're building inventory. If anything, it feels like inventory is bleeding out. So for your parts only. So how do we square that circle? What's going on there?

George Davis:

Yes. Maybe I'll just comment a little bit on it. When we do a year-over-year comparison, obviously, Q4 of last year was a huge quarter for CCG, particularly with the consumer and entry SKUs. And so what we've seen really starting with the second half, in particular, for 2021, is a rotation out of the consumer and entry area into the, what we call, our big core notebooks and our desktop, which desktop had really dropped off. And now we're seeing kind of a strong recovery there. So we -- if we think a little bit about the growth of CCG year-over-year, we certainly look to be growing lower than the TAM. But if you take into account the fact that we -- you look at our exit of modem and our exit of Home Gateway and the impact that, that had on a year-over-year comparison, that's about 6 points of growth. And then the customer's decision to go vertical on -- a large customer decided to go vertical, that's about another 6 points. So the overall growth, the pattern is a little different because of the mix year-over-year. But the growth relative to the TAM, when you take into account these changes, is much more in line with the overall growth of the industry.

Harlan Sur:

On Intel Foundry Services, it appears that the team is off to a good start. It looks like a lot of good early engagements. If I'm a potential IFS customer and I start my design today, realistically, right, I'm not expecting my chip design to be ready for manufacturing conservatively for at least 2 years because that's just how long the design cycle times are for these leading-edge chips. And it seems consistent with your prior commentary on IFS customers more focused on your 20 and 18A nodes which is kind of 2024, 2025 timeframe. So if I think about the real big CapEx outlay to support IFS, my assumption is that it's probably not until 2024 or maybe even 2025 timeframe. Is that kind of the right way to think about it that most of the CapEx spend for IFS is probably 2 to 3 years' delay and more of the CapEx spend over the next 2, 3 years is to support growth of the core compute businesses?

Operator:

Our next question comes from the line of Vivek Arya with Bank of America.

David Zinsner:

Okay. Let me start, and Pat can certainly provide us color around pricing. So you're right that we are going to provide a lot more details around the year at the Investor Day and give you actually some perspective over the longer term. But I think I can help you think through a little bit about the trend based on the following commentary. So in our third quarter earnings call that Pat and George were representing Intel, we said that we had to make investments, both in terms of newer process technologies and the start-up costs associated with that and we needed to ramp 10-nanometer. And that was going to put pressure on gross margins. And they create -- they presented a range of somewhere between 51% and 53% was the gross margin level that we would need to operate at while we were getting ourselves caught up from a technology perspective. So we're in that range for their guidance, the 52%. And we feel very good about 51% to 53% range for the year. So that's -- so when you look at this number, it can bounce around a little bit. But the 51% to 53% range we've given, we feel real confidence around for the time being. Now after that, as we get back to a leadership position in terms of technology and in terms of products, of course, there's absolutely opportunity to improve upon that. And we will, I think, provide you good evidence of that at the Investor Day in February. So that should give you some incentive to come.

Operator:

Our next question comes from the line of Chris Danely with Citi.

Pat Gelsinger:

Thank you for the question. The Mobileye spinout, things are progressing smoothly. We'll give updates on that as appropriate as we go out over time. But -- and as we said, it will be a partial spin, so we still see continuing and substantive value creation for Mobileye having a high relationship with Intel. So we'll be updating on that as things progress there. I won't say that's the last one that we'll consider for such moves. We see this as a formula for value creation that may have other areas that could benefit from such approaches from the Intel family as we look to the future. And we said this is a model for value creation that we think is a powerful one and one that we'll be exercising in the industry, but we have no other specifics to talk about at this time. But keep showing up, we're going to have lots of good things to talk about.

Timothy Arcuri:

Pat, I had a question about how you think about DCG and your server share. And obviously, Sapphire Rapids is going to be a lot more competitive. But Gen was also going to be ramping kind of right on top of it. So -- is there kind of a line in the sand that you think of that you won't let share go below X percentage? Can you just talk big picture about how you think about market share in server? Is there a threshold over which you'd use price to get more competitive?

Operator:

Our next question comes from the line of Matt Ramsay with Cowen.

Pat Gelsinger:

Do you want to start that, Dave?

Pat Gelsinger:

Yes. And I'd say, over time, we absolutely expect that we're going to improve the operating margin of this business again. And we haven't ramped the new node for 5 years in our data center business. And that's something that -- it's an embarrassing thing to say on the one hand. And obviously, as a result, we've been in an area that we shouldn't have had operating margins that high in this business. It's just been that we've been running on very mature nodes well past the time that a normal cycle should be. And now we're aggressively ramping 10. We're also starting to ramp the cost of 7 and 4 as well. So all of these taken together, I think, you're seeing a very unusual period in the gross margins and operating margins of this business. We fully expect that this is a very healthy business for us long term. And as we're going through the cycle of new process technologies, investments in the business, nothing here is surprising to us. And you can expect that over the long term this is a great business for Intel as we ramp leadership process technologies with unquestioned leadership products, we're going to do well here.

Srinivas Pajjuri:

Dave, a question on gross margins, actually a clarification. If I take your, I guess, the fourth then add back the Federal charge, and then you're guiding to 52% for Q1, that's roughly 5 to 6 points of drop. So I'm just wondering what are some of the puts and takes that impacting, if there are any -- I mean I see the headwinds that you talked about, but I'm wondering if there are any tailwinds or mix-related impacts as well.

Operator:

Our final question comes from the line of Ambrish Srivastava with BMO.

Pat Gelsinger:

Well, thank you for that question. It's one I hoped would be raised in the call. So thank you for that. And I'll just say overall, I mean, it was just a fabulous day in Ohio, right? The enthusiasm we've gotten. And as I said at the event, we're -- we help put silicon into Silicon Valley. We established the Silicon Forest in Oregon, the Silicon Desert in Arizona and now the Silicon Heartland. And the enthusiasm we've gotten from the leadership there, the governor, the congressional leaders and being able for this farm kit from Pennsylvania to stand on stage in the White House and say now it's my pleasure to introduce the President of the United States of America, just surreal. So just a fabulous day for Intel, our nation and our industry. Obviously, with the CHIPS Act going on the floor of the House, we're highly encouraged. And I spoke to Speaker Pelosi at length on this subject just yesterday as there you expect it will be debated on the floor next week. And hopefully, following what we expect will be passage in the House, a reconciliation process. So I'd say everybody is now more optimistic on this coming across the line in the near future. Now obviously, I think we and others have viewed the passage of this as an accelerant for our investment plans. And as I've said very clearly, hey, we're going to build a site in Ohio. It could either be small or it could be big and fast. And with the passage of the CHIPS Act, it's going to be bigger, and we're going to build it out faster as a result. And we think that's good for our company. Even more important, it's good for our nation as we rebuild a resilient, globally balanced supply chain. And the events of just yesterday, getting the bill on the House floor, I think, is a very, very good sign for all that will get us across the line. But even more so, right, we see acts in Europe that are gaining momentum as well in the EU CHIPS Act as well. And we've been quite involved in that domain, and we hope to see our expansion plans accelerate in Europe as well. So overall, all of these things will simply benefit the industry, but it certainly will accelerate our investment plans as it makes us more competitive globally to be for our products, but even more so for our foundry business as well. So thank you for that question.

Tony Balow:

Thank you, Pat. Thank you, Dave and George. Operator, can you please close the call?

Operator:

Thank you for standing by, and welcome to the Q3 2021 Intel Corporation Earnings Conference. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your host Vice President and Director of Investor Relations, Tony Balow. Please go ahead.

Pat Gelsinger :

Thank you, Tony. And good afternoon, everyone. Q3 was a solid quarter where we navigated a challenging supply environment to deliver year-over-year growth on the top line while beating expectations on gross margin and EPS. We had record third quarter revenue in DCG and Mobileye, while IOTG had an all-time record as it continued its recovery from COVID slowdowns. Our focus on execution continued as we delivered on our initial IDM 2.0 commitments. We broke ground on new fabs, shared our accelerated path to regain process performance leadership, and made our most dramatic architecture announcements in the decade. We also announced major customer wins across every part of our business, including in the data center with AWS and Google, new EVO designs and client, and exciting Mobileye partnerships with ZEEKR and Sixt SE. The demand for semiconductors remains strong, and our factories performed exceptionally well in a highly dynamic environment, where matched sets post huge challenges for our customers, and overall, industry supply remained very constrained. The resilience of our factory network was on display, delivering considerable upside and reacting to rapid demand shifts, reinforcing the unique and strategic value of IDM 2.0. While we're still in the early stages of our journey, we are getting better every day. It is clear that we have to move even faster, be even more nimble, and invest now to achieve our goals of undisputed leadership down the road. I can see the enormous potential that lies ahead, and I couldn't be prouder of the Intel team and the progress that we're making. Let me begin with what we're seeing in the market. Demand remained strong across all of our segments and I continue to believe that we're just starting a cycle of sustained growth, which we are well-positioned to capture. The digitization of everything accelerated by the four superpowers of AI, pervasive connectivity, cloud to edge infrastructure, and ubiquitous compute are driving the sustained need for more semiconductors and the market is expected to double to $1 trillion by 2030. In that time frame, the market for leading-edge nodes will rise to be over 50% of the total, while the market for leading edge foundry services, will grow at twice the rate of the semi-industry overall. We are one of the few companies with both the technical and financial resources to win in a market that is increasingly leading-edge and challenged by the extreme physics of rejuvenated and continuing Moore's Law. PC demand remains very strong. And we believe that 2021 TAM will grow double-digits even as ecosystems shortages constrain our customers’ ability to shift finished systems. Dell, HP, Lenovo, along with other OEMs and ecosystem partners agree that PCs are now a structurally larger and sustainably growing market. As we head into 2022, we expect the ecosystem supply situation to gradually improve and the PC market will continue to grow as tailwinds from WIN 11, hybrid work models, a larger installed base and compelling new platforms drive PC density, shorter replacement cycles, and penetration of new markets. Against this backdrop, our products have strong momentum driven by compelling platforms including 30 new EVO Tiger Lake designs for 13 of our OEMs. Tiger Lake has shipped more than 70 million units this year, making it our fastest ramping notebook ever. We are raising the bar again with Alder Lake, our first performance hybrid architecture products, which I'm pleased to say began shipping in Q3 on Intel 7 and will start to launch next week at Innovation. The Alder Lake family will offer customers significant advantages across a range of workloads including gaming, content creation, and AI acceleration. Alder Lake will scale from ultra-mobile to desktop and will go to market across our range of segments, form factors, and power envelopes faster than any new architecture in Intel's history. Turning to the data center. New and existing workloads continued to move to the Cloud; security, and privacy requirements are driving enterprise deployments, and the 5G build-out is powering networking. I remain confident about the long-term of the data center, despite regulatory changes in China and short-term ecosystem supply constraints, impacting some customers. Customers continue to choose Intel for the data center needs. And our 3rd Gen scalable Xeon processor Ice Lake has shipped over a million units since launching in April, and we expect to ship over 1 million units again in Q4 alone. All of our OEMs are currently shipping systems and we expect all our major cloud customers to have announcements by the end of the year. This includes Google as well as AWS, who have already launched their highest performing Xeon EC2 instances ever, a tremendous milestone resulting from our close collaboration of almost 15 years. Looking ahead, customers remain very excited by Sapphire Rapids, which we expect to have in production in Q1. Sapphire Rapids sets the standard for next-generation data center processors. It was recently selected by the U.S. Department of Energy to power compute intensive modeling supporting their stockpile stewardship program. In core and mobile networks Intel is powering the transformation to virtualize Cloud-native deployments. 50% of new core network deployments are now running on off-the-shelf servers. And we expect that to increase to over 80% by 2024. The next-generation transformation is the virtualization of the radio access network known as VRAM. We're working with service providers globally to enable this transition, including Verizon, Rakuten, Dish Network, and others. Today, nearly all early commercial deployments are running on Xeon and our FlexRAN software reference architecture. We see tremendous opportunity in DRAM and in Q3 we announced the collaboration with Juniper Networks to accelerate future deployments. Overall, we expect global VRAM base station deployments to move from hundreds to hundreds of thousands and eventually millions with private 5G over the next several years. Finally, Edge compute needs continue to grow and our IOTG business had an all-time quarterly record in Q3. In mobility, the market for automotive silicon is expected to more than double to a $115 billion by the end of the decade as AVs begin to move from the garage to the streets. Mobileye is helping to lead this change, and we recently announced that we will begin offering driverless robo-taxi service starting next year in collaboration with Sixt SE. From PC to data center to the network, to the edge, Q3 was full of examples of the increasing need for semiconductors and where customers continue to choose Intel. Since my return, we've not only laid out our roadmap for success, but more importantly, we've already started executing at what I like to say is a torrid pace. Back in March, when we unveiled our powerful new IDM 2.0 strategy, I outlined our course for a new era of innovation at Intel, where I committed to (1) Expand our internal and external manufacturing to address unprecedented global demand for semiconductors. (2) open our doors to be a world-class foundry. (3) regain process leadership. (4) deliver leadership products in every category in which we compete. We are driving progress in every area, so let me talk through each one starting with how we are expanding our manufacturing capacity and our foundry business. Our factories are executing superbly and construction is on or ahead of schedule across all major sites. Last month, we broke ground on our two new fabs in Arizona, three months ahead of schedule. As we expand capacity we're using a smart capital approach so that we can adjust quickly to opportunities in the market and to gain share while managing our margin structure and capital spending. There are three elements to smart capital. First, we're focused on aggressively building our shelf, which are the smaller portion of the overall cost of a fab, but have the longest lead time. Having available shelf space gives us flexibility in how and when we bring additional capacity online. Second, we will make effective use of external foundries, leveraging some of their unique capabilities to ensure we're delivering leadership products. We are already one of the largest foundry customers and in this quarter we announce the key products such as Meteor Lake and Ponte Vecchio will leverage third-parties for some of their tiles. Finally, we expect our plans to benefit from investments from governments who understand that a healthy semiconductor industry is vital to their economic well-being and national security. With bipartisan support in both houses, we're hopeful that chips act will be passed by the end of this year, allowing us to accelerate decisions for our next U.S. site. This will also enable a more level playing field with our competitors who enjoy significant support from their governments. We've also seen considerable interest in the EU with the European Chips Act, and the process to select our next site in Europe is proceeding rapidly. Intel remains the only global company committed to building a leading edge foundry in the U.S. and Europe for customers around the world. Together, IDM 2.0 with smart capital uniquely positions for an enormous and unique market opportunity, including our foundry ambitions. IFS will enable Intel to grow faster, expand monetization of our process and packaging capabilities, leverage our design IPs more broadly, and provide sustainable, superior cash flows from our assets. Since March, we have shipped our first IFS packaging units for revenue. Engage with well over a hundred potential customers, including several large customers, who are working with us on our leading-edge Intel 18A. And we have multiple customers planning test trips on Intel 16 that will be in our factories early next year. We also had a significant win with the U.S. government, which selected Intel to provide commercial foundry services in the first ramp of its ramp C program. We're proud of this achievement and the confidence the U.S. government has in us, to deliver them a trusted foundry capability. In July, at our Intel accelerated event, the team and I shared the most detailed roadmap we've ever provided for process and packaging technology. A roadmap that brings us to performance parity in 24 and clear leadership in 25. I am happy to share that Intel 7, Intel 4, Intel 3, Intel 20A, and Intel 18A are all on or ahead of the timelines we set out in July. For example, on Intel 4, we said we had taped out our compute tile for Meteor Lake. In this quarter, it came out of the fab and powered up, and within 30 minutes, with outstanding performance, right where we expected it to be. All told, this is one of the best lead product startups we have seen in recent memory, which speaks to the health of the process. In fact, we are using a pre-production release of the Intel 4 in our newest neuromorphic computing chip, Loihi 2. Finally, on the product front, we are intent on delivering leadership products in every category in which we compete. In August at our architecture day, we started delivering on that promises, we made five major architecture announcements, our most dramatic updates in the last decade. We introduced hybrid computing with two new generations of X86 core, enabling power-efficient designs that our performance for the most demanding workloads. We unveiled our Intel ark brand for discrete graphic, starting with our outcome, this product, which will be on shelf in one of next year. We continued our central role in the evolving datacenter landscape with Mount Heavens. Our first asic based infrastructure Processing Unit or IPU, developed in close collaboration with a major cloud provider, our IPUs enable superior security capabilities and let our cloud customers move infrastructure task off the CPU, thereby allowing them to rent 100% of their CPU capacity to their customers. We also gave additional detail on Sapphire Rapids and its compelling AI and accelerator capabilities. And last, but not least, we opened the curtain on Ponte Vecchio. With our highest ever compute density, the 100 billion transistor device delivers industry-leading slots to accelerate AI, HPC, and advanced analytic workloads. Early pumps of Ecu silicone is already demonstrating leadership performance, setting an industry record in both inference and training throughput on popular AI benchmarks. Next week at our Intel Innovation event, we will take the next step forward, with the renewed commitment to developers and a host of new tools, technology, and product announcements. Announcements that really underscore how we are rapidly bringing the geek back. As I have said, we are repositioning the Company for long-term growth, and we are analyzed in the investment plans required to achieve our goals and provide attractive long-term results for our shareholders. It is abundantly clear to us that we must invest in our future right now, to accelerate past the rest of the industry and regain unquestioned leadership in what we do. Our investment plan is aligned with our IDM 2.0 strategy to rapidly build our manufacturing capacity in response to the expanding market, grow our share, and to accelerate innovation, enabling Intel to leap ahead with new businesses and capabilities in the future. The recent reorganization around these businesses, along with the new leadership we have added, is already having an impact. However, our CFO, George Davis, recently advised us that he has decided to retire in the first half of next year. We are very grateful to George for his dedicated service, and the leadership with the Company, and he will be working with us for a smooth transition. We are currently engaged in a search for George's successor, and he is helping us with the process. I naturally want to give his successor an opportunity to participate in optimizing our long-range plan. We would not want to hold a critical Investor Day without the new CFO being in place. As such, we have decided to move our event to February 17th of next year. This has the added benefit of hopefully being a more in-person event, while giving us a better view of the government investments from which we expect to benefit. We have made this decision for very practical reasons of George's retirement. The Company is running well. We are confident in our process, technology, and product roadmaps. Our business is healthy and our markets remain strong. And above all, we are executing on our plan. Given the new timing of our Investor Day, I do want to take this opportunity to paint the general picture of what our plan looks like and George will share a few more details in a few minutes. We have a huge opportunity with new businesses in graphics, networking, foundry, and mobility. All large and growing segments. When combined with the continued expansion of our current client and datacenter markets, we cannot, and will not, miss this opportunity. Investing now will enable us to reposition the Company to deliver double-digit revenue growth as these investments pay off. While these investments will pressure free cash flow in the short-term, our operating cash flow will remain strong, reflecting the high quality of our business. And we've remained committed to a healthy and growing dividend. As with free cash flow, our gross margins will be below current levels for the next 2-3 years before recovering, but will remain comfortably above 50% as we continue to exercise financial prudence. We have the utmost confidence that our investment plans will ensure the Company's long-term success and deliver attractive returns for our shareholders. I look forward to sharing the details with you in Q1 and I am confident you will agree. Before I turn it over to George, let me finish by saying that when I came to the Company, I had three goals for the year

Tony Balow :

Alright. Thank you, George. Moving on now to the Q&A. As is our normal practice, we would ask each participant to ask just one question. Operator, please go ahead and introduce the first caller.

Joseph Moore:

Great. Thank you. I'm wondering if you could talk about the gross margins next year. What is the -- you talked about investment in 10-nanometer, but you took those ramps this year, is it the simultaneous ramp of 10, and then startup cost of 7 that pulls that down? And why wouldn't you recover from that in subsequent years as you mature deals thereafter? And I also wanted to ask just as a follow-up, does the accounting change with the numbers have been lower, if not for the change to take stock compensation out of the numbers?

George Davis:

Sure, happy to. The -- we're announcing the accounting change in 2022 just to give people a heads up. It’s -- we think it's a pretty modest impact on gross margin. So it works within the range that we've given for the next couple of years. Obviously, we guided the next 2 to 3 years, not 2022. And so Pat did a good job of laying out what are the key drivers there. And the changes that we're doing on the accounting side are really -- we're out of alignment with the industry on stock-based comp. And we're also I think like you probably we just assume not see these large adjustments in a quarter that are for ICAP related activities. And so we're taking that out of non-GAAP as well. Quite frankly, with those two combined, it was net accretive with those two together over the last couple of years. But we think it's the time to make these change. And we think it's consistent with what the industry has done.

Operator:

Our next question comes from the line of Ross Seymore of Deutsche Bank. Your line is open.

Pat Gelsinger :

Well, thank you. And as we look at these markets, we see clearly the client business with CCG. We don't expect that to be a double-digit grower. We do expect growth coming from the client business. And even IDC now is agreeing with us on growth next year. We do see the opportunity for us to be a share gainer, as well as gaining more of the bill of materials of the clients as well. But our expectations there are modest in the growth of the client business. Clearly, the datacenter business, we do expect to see stronger growth and as our products gets stronger and as we've noted with Sapphire Rapids next year and the roadmap over 23, 24 and 25, We do see ourselves in a position that we’ll be gaining leadership, which allows us to have pricing margin improvements in that product line, and datacenter is growing. But it isn't just the datacenter; it's also these 4 new business areas that we've laid out. And next to datacenter, the networking business, we have a very strong position already, but also the ability to reach into the network and the large growth that we see in the edge where Intel is very uniquely positioned. And the edge market as the 5G becomes an open RAN platform, also, the edge deployments, SmartFactory, smart cities, we're very well-positioned, and we expect to see substantial growth there. In the graphics area, we have a good business today in the Integrated graphics, but the opportunity for us to reach into this large and rapidly growing GPU business, discrete graphics business, high performance computing, we’re extraordinarily well positioned to be able to satisfy what we see almost as insatiable demand in that area. And then of course the mobility business, we're already well underway with our Mobileye business. Very unique technology position. Another great quarter from that team. And then finally, the great synergies we get from leveraging our core manufacturing assets as well as our process technology innovations. And as we noted in the formal comments, over half of the technology industry is going to be leading edge, right, in the second half of this decade. Very few companies can do that, and we're finding great interest for our foundry business to be able to satisfy those. So if you think about the growth in the core business plus these major new business areas, and we've done a lot of modeling against this and really built a very robust plan to go execute it, we feel very confident in the double-digit CAGR that we described. We're excited about it. The teams are leaning into it. And even better than that, our customers are excited about it. And with that customer enthusiasm, I'm very confident in what we've described here. We are leaning in. Now's the time to make it happen. And we're making the investments to realize that today.

Operator:

Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is open.

Pat Gelsinger :

Yeah. Thank you. Great question, John. And there's a -- first will be that the revenue impacts and the investment impacts of foundry, are fairly modest in the next couple of years. They don't add that much to the top line. They don't detract that much from the bottom line as we're really building that business now. It's really in the later years where you are going to start to see the revenue impact really start to matter. This is very typical of the foundry business. Takes a couple of years for a customer to pick a foundry, move a design, start to ramp it into the industry. So it really has minimal impact for the next couple of years and then it will start to really deliver in years four and five, and then the second half of the decade more significantly. With respect to margin, we expect that we are in our foundry business having very similar margin structures to the leader in this business today. And we see that as a good business. Maybe a little bit lower margin than our best product margins today, but still would allow us to comfortably be above 50% as I said in the long-term guidance that we laid out. This is a great market for us to be reaching into. It allows us to leverage the R&D investments that we have and process technology to more markets. Many of our AFP blocks, as we open up the X86 architecture for increasing innovation we get to leverage enormous amounts of R&D for new monetization opportunities. Also, we're leveraging our smart capital strategy, where we build shelves and we start that process early. That allows us to get those investments in the ground to start building some of that IFF capacity. But it also allows us to have capacity for increased market share gains and leveraging the balance between our internal and our foundry customers as well. And to leverage government investments we expect will be driven substantially to benefit the IFS business. So when we take all of that together, unique technology position, more flexible and leverage capital positions, unique IP benefits that we bring to it, we're seeing great interest from our foundry customers already. We're seeing that on mature nodes like our Intel 16, but very much from some of the largest customers in the industry with our leading-edge technologies where we're getting a lot of excitement to be on the best transistors that are available on the planet with the manufacturing capacity that we can bring. We see this as a great compliment to our business, and so far, things are going even better than I would've thought when I announced this business early in the year.

Operator:

Next question comes from Stacy Rasgon of Bernstein Research. Please go ahead.

Pat Gelsinger :

A couple of things Stacy. First, the mix of products in the quarter were more weighted towards what I would call our ACC products down from a fee stand point from our XCC and that part of that is coming out of the lower cloud than we expected.

Stacy Rasgon:

Enterprise is up 70%. Shouldn't the mix have gotten much better? What impact was competition or anything else here? It seems like there has to be something else going on, it can't just be mix.

Pat Gelsinger :

But the ASP s of any individual product line, we're still very in line with our normal ASPs for those individual products, Stacy. So overall, we just say it was a mix discussion this quarter. It wasn't an ASP discussion at that level, even though, you average those together, and you get different effects. Also, as we said for the data-center business, we did have some unique issues in China this quarter, which led to some different behavior in that business. Some of the regulatory issues there. So overall, not where we would have expected the data-center to be for the quarter, but still a very strong performance. And we're happy with the growth that we're seeing in that business. And as we've indicated, the momentum of Ice Lake is growing. Sapphire Rapids, great interest in that product. So we're seeing that the overall competitiveness and the growth of that business area's looking very good for us for the future, we're excited about it and everything is going as we would have hoped for that business.

Pat Gelsinger :

They -- as you might have seen, there's been some regulatory questions around gaming in China. And all of the Cloud vendors are adjusting their offerings to meet that new regulatory environment, so we expect it's a quarter or 2 for them to digest what they would look like. We do expect that market to recover going forward. And as you're probably aware, we have uniquely high market share in the Chinese Cloud market. So as it recovers, we expect a nice recovery in that business area for us and we expect that there will be a return to normalcy next year in that area of our business.

Pat Gelsinger :

Yeah.

Operator:

Our next question comes from Timothy Arcuri of UBS. Your line is open.

George Davis:

Yeah. For sure. First off, I think part of the reason for spending this amount of CapEx is to catch up with the capacity shortfalls that we've had. And also to build in more flexibility. These things all support higher revenue over time, which helps absorb some of the depreciation. That being said, it will be growing. No question. Our depreciation impact will be growing over the next couple of years. The impact of o-cost, which is all the Investment that is going on outside of depreciation in the note acceleration that Pat has been talking to, that has a big impact, particularly over the next few years because of the number of nodes that are being worked in parallel. So we think that gets better coming out of this period. And we've had a pretty reasonable assumption inside of our gross margin estimates for how much unit cost are going up, and then how much of that you can recover in ASP. So there's no big missing element. I think it's -- we expect to -- as we've said, we expect to grow into our investment, and we expect the investment in node compression takes less of a toll as we come out of this period.

Timothy Arcuri:

Thank you, Pat.

C.J. Muse :

Yeah. Good afternoon. Thanks for taking the question. I guess a question on CapEx. So you've outlined a higher number for calendar '22, but as I think about and contemplate higher intensity at the bleeding edge nodes, it would appear that that would really be for Intel only. So should we be thinking about a step-up above and beyond that level, as you build out capacity for IFS over time? And then, second quick question around that. Are you making any changes to how you're accounting for depreciation of lifetime on equipment or buildings, or any anything like that, as part of the accounting changes that you've outlined tonight? Thank you.

George Davis:

Yeah. And C.J., the accounting changes that we're talking about. Number 1, are to increase transparency into the business by breaking out the segments the way Pat has been describing the segments of the markets that we're going to be addressing. The other changes are really just to align with the industry. So when people look at our non-GAAP numbers, they are going to see the same basis for that as most of our peers. And so no accounting changes that we're talking about that relate to how we treat depreciation of assets.

Operator:

Thank you. Our next question comes from Blayne Curtis of Barclays. Please go ahead.

Pat Gelsinger :

Look, on Q4, gross margin is pretty much the way we saw it when we talked about it last quarter, when we are guiding for the rest of the year. The Intel Federal impact is a one quarter impact. And so it does not carry forward. We're -- to the extent that you want to think about 22 gross margin, I think again,

Pat Gelsinger :

And overall, as we've said, we feel confident in these numbers. We're giving a lot more transparency. We're taking the opportunity to give you more understanding of our business. We're electing to do that earlier in the process than we might otherwise because we're making these decisions, were choosing to give you a lot more understanding of the business. We're confident in these growth outlooks as well. These are exciting new market categories, right? That we are leaning into. They are large market categories. And it's not just that they are large categories, right? They reinforce each other. The stronger am in networking, the stronger I am in data-center. The stronger I am in client, the stronger I am in graphics. The stronger I am on my process technology, the stronger I am in my foundry business. Every one of these is building on each other and creating synergy value. And overall, right, as we move to leadership in these areas that we are well on track on doing that. We feel quite confident that growth rate, the margin profiles, it will of course, take the opportunity. At our Analyst Day to dig into the business areas quite a bit more. And we're going to help you understand those. We're going to give you segment reporting that helps you see those and be able to get transparency and accountability through it. But overall, we believe we are laying out a pretty exciting path that the management team, Board of Directors, and our customers are really leaning back into us to say, yes, this is Intel. We're excited for the future. Now is the time.

Pat Gelsinger :

Next question.

Pierre Ferragu:

Thanks for taking my question. And George,[Indiscernible] next step. I wonder what your life is going to look like not answering every day questions about Intel

Pat Gelsinger :

Overall, we expect that we'll be in a position to gain market share in our existing markets as we're making these capital investments. We've been woefully short of capacity for a number of years. This is great opportunity in the industry. And as everybody in every industry anywhere in the world realizes, semiconductors are hot. We need more of these so we're building the capacity to satisfy that. In the near-term capacity is destiny. Building more capacity enables us to gain more market share. And we think we can do that as our products get stronger with very favorable pricing conditions as well. And for instance, in the client business Alder Lake goes in production, they will be talking more about that next week. A tremendous product that will be a great market share gainer, as well as a pricing leader, right? As well as structured across the segments that allows us to gain share across multiple segments of the client marketplace. Also, I'd point out that these 4 areas, these 4 new growth businesses; we're very small in those businesses today. These have massive growth potential for us large, favorable markets that are looking for leadership, logic, capabilities, that Intel is uniquely positioned to supply into the industry. And overall, clearly the near-term as we've lain out with great transparency, some of the margin impacts in the near-term, but these are great investments. Great investments in large, growing, favorable markets that very few companies have even the opportunity to participate in. And we bring such massive assets to them, that we believe that we're going to be well-positioned to gain leadership positions across networking, accelerated computing, and graphics, in the autonomous vehicle category, in the foundry business. And you combine that with share gaining positions and client to data-center. This is a tremendous period of time. We're seizing the opportunity. Carpe Diem.

Pat Gelsinger :

Very good. Last question.

Matt Ramsay:

Thank you very much, guys. Good afternoon. I wanted to ask a couple of questions on the data-center business. One on product and one on the results. On the product, I think, you guys reiterated that Sapphire would be shipping in Q1. Pat, I wondered if you might give some commentary on when you expect to see some legit volume ramps of Sapphire and has that timing moved? The second part of the question is on the results. It looks like the Cloud segment was down 20% year-over-year off of a plus 15 last year. So I don't know by my math, we're down say mid to high singles from Q3 Cloud levels 2 years ago pre -COVID, and CapEx has been pretty strong since. So you guys called out China, but there's some other things going on with market share. Maybe you could address those and talk about how we reverse some of that share loss? Thanks.

Tony Balow :

Alright, thank you. Got it. Thank you all for joining us today. Operator, could you please close the call?

Operator:

Thank you for standing by, and welcome to the Intel Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [ Operator instructions]. As a reminder, today's program is being recorded. And now, I would like to introduce your host for today's program, Tony Balow, Head of Investor Relations. Please go ahead, sir.