Intel Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 Intel Core Learning Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I will now like to turn the conference over to your speaker for today, Tommy Bailo, Vice President, Investor Relations. You may begin.

Thank you, Operator. Welcome to Intel's fourth quarter earnings conference call. By now, you should have received a copy of our earnings release and the earnings presentation. If you have not received both documents, they are available on our investor website, INPC.com. The earnings presentation is also available in the webcast window for those joining us online. I'm joined today by our CEO, Pat Gelsinger, and our new CFO, Dave Zinza. Also joining us is our prior CFO, George Davis. In a moment, we'll have brief remarks from Pat and Dave, followed by Q&A. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, it does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. A brief reminder that this quarter, we have provided both GAAP and non-GAAP financial measures. Today, we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentation and earnings release, available on INPC.com, include both the full GAAP and non-GAAP reconciliations. In today's call, we will be discussing both the Q4 2021 and the four-year 2021 results, providing forward-looking guidance for Q1-22. We will be providing guidance for four-year 22 at our investor day on February 17. With that, let me hand it over to Pat.

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 four-year revenue ever. We had a record quarter for DCG where we grew 20% -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% -on-year in 2021, delivering a 14th consecutive year of revenue growth. And finally, IoTG had another billion-dollar 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 within normal lead time, and manufacture more than two million wafers. We broke ground on two new fabs in Arizona three 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 recently completed the first close of the sale of our NAMM 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 less to do, we are building momentum and 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 -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 two 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 four superpowers of AI, pervasive connectivity, ubiquitous compute, and -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 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 multi-year 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 boundary 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 IDM 2.0 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 and 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 and technology development, manufacturing, and product leadership. With unprecedented transparency, we laid out an ambitious path to deliver five process nodes in four 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 timelines we laid out in July. Our manufacturing execution continued to improve, and in Q4, as we shipped a record number of servers, we had more than a 30% -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 our 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 in 2021 with our sixth straight year of revenue growth. We feel great about our position within the sustainably larger client market, and we have 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 PCIe5 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 lamps. 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 Wi-Fi 6E. With no legacy Wi-Fi interference, Wi-Fi 6E will enable incredible performance with low latency, the biggest Wi-Fi advancement in 20 years. We are further reinvigorating the PC ecosystem with technologies like -O-Date, 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 and choosing Intel. Enabled by our IDM Advantage, Ice Lake Server shipped more than 1 million units, equal to the amount we had shipped in the prior three quarters combined. All of our OVMs are currently shipping systems, and all of our major cloud customers have announced instances, including our third instance for Amazon Web Services. Going forward, our roadmap only gets better, and we expect to shift 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, once completed in 2023, Kestrel will have more than five times 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, whereas Eon and FlexRAN software are used in almost all DRAN commercial deployments. We are driving AI-infrancing 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 networks by collaborating on new FPGA-based IPU solutions with InSper, RUJI Networks, and Silicon. In our discrete and accelerated graphics business, we are starting the year very quickly. Alchemist, the first product in our InSol 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 Poncevecchio GPU is already sampling to customers. With 100 billion transistors, Poncevecchio has our highest compute density ever and, along with Sapphire Rapids, will power the two Exoflop Aurora supercomputer at Argonne National Laboratory. There are over 100 HPC applications running on Poncevecchio, which, enabled by one API, provides a unified and open programming model across CPU and GPU. We are working with numerous partners and customers, including Atos, Dell, HP, 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 shifting for revenue on our packaging solutions, and we continue to expect customer test ships in our factories on our Intel 16 process this year. Innovations like Ribbentech and PowerVear are proving to be very attractive features to potential customers, and the Intel 18a design kit has now been released to three RAMC 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 shifting our 100 million IQ SoC. At CES, we gave a glimpse of the future with the IQ Ultra, which will do the work of 10 IQ5 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 the 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 robo-taxi 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 re-architecting 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 a 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 roadmap, 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 1.1 billion euro 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 impact 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. Thanks, Pat, and good afternoon, everyone. First, let me say how happy I am to be part of Intel. It's a really exciting time, and I'm looking forward to the opportunity to support Intel's transformation and plans for growth. I think we have a great opportunity to drive compelling returns to shareholder value, which all starts with the plans that we will lay out for you at Investor Day in February. Q4 was a record quarter, delivering a -than-expected finish to another record year. Both CCG and IoTG achieved record quarters, with CCG, IoTG, and Mobileye delivering full-year record revenue. Q4 revenue was $19.5 billion, exceeding our guidance by $1.2 billion. The revenue beat was broad-based, led by -than-expected enterprise and government demand in data center, desktop PC strength, and -than-expected notebook demand. Growth margin for the quarter was 55.4%, exceeding our guidance by 190 basis points due to strong flow-through on higher revenue. Q4 ETS was $1.09, 19 cents above our guide due to strong operational performance. For full year 2021, we achieved record revenue of $74.7 billion, up $1.2 billion from our previous guidance, and up 2% -over-year. 2021 gross margin was 57.7%, and ETS was $5.47, up 37 cents -over-year. We generated $11.3 billion of free cash flow in 2021, approximately $1 billion lower than prior expectations, as higher net income was offset by Q4 working capital fluctuations. Now turning to our business units, CCG delivered record annual revenue, its sixth straight year of revenue growth, up 1% -over-year, and up 6% when excluding the modem and connected home divestitures. For the quarter, revenue was $10.1 billion, up 5% sequentially on strong commercial demand. Platform ASPs were up 15% -over-year on a richer mix, driven by strong demand for our highest performing platforms and industry-wide constraints, leading our customers to prioritize limited components to higher-end systems. Operating profit was down 3% -over-year on increased spending to further strengthen our product and platform mobile. The data center group delivered a record $7.3 billion in revenue for Q4, up 12% sequentially, and up 20% -over-year on strong enterprise and government demand. Full year revenue was down 1% due to a -than-expected recovery earlier in the year, as well as competitive pressure, partially offset by stronger enterprise and government and communications service provider demand. Platform ASPs were up 3% sequentially and 4% -over-year on improved mix to our highest performing products. Operating profit in Q4 was down 17% -over-year, primarily due to the previously disclosed Intel Federal-related one-time charge and 10-millimeter product ramp. Full year operating profit was down due to lower revenue, with an increased mix of 10-millimeter products, Intel 4 startup charges, and increased investment in our product load gap. IoTG achieved record Q4 and full year revenue. Q4 revenue was $1.1 billion, up 36% -over-year on broad-based strengths led by the industrial and retail segments. Full year revenue was $4 billion, up 33% -over-year, as the business saw a strong recovery from COVID-related impacts. Operating profit for the year was $1 billion, up 110% -over-year. TSC delivered $484 million in Q4 revenue, up 15% -over-year, and up slightly -over-quarter, as industry-wide supply constraints continue to severely limit revenue growth. Full year revenue was $1.9 billion, up 4% -over-year. Operating profit was $51 million, up 19% -over-year. If not for the external supply constraints, we believe the TSC business would have delivered over $500 million in additional revenue in 2021. Mobileye reported Q4 revenue of $356 million, and $1.4 billion for full year, up 43% -over-year. Full year operating profit was $460 million, up 91% -over-year. Before moving on to Q1 guidance, I want to briefly discuss changes to our non-GAAP reporting beginning in 2022 that we touched on in our Q3 earnings. First, in an effort to more closely align with our semiconductor peers and allow for more consistent comparability between periods, we'll be removing stock-based compensation and all gains and losses related to our ICAP portfolio from our non-GAAP results. Despite this change, we'll continue to closely evaluate stock-based compensation to ensure we're in line with industry benchmarks and optimize ICAP investments to advance our strategy and maximize ROI. Second, we're modifying our segment reporting to align with our revised organizational structure and business strategy. Moving forward, we will report results under the following business units. Client computing, which includes our historical TCG business plus workstation revenue. Data center and artificial intelligence, which includes our data center CPU products plus our PSG business. Networking and edge, which includes our IoTG business plus our networking focused products previously included in DCG. Accelerated computing and graphics, which includes all discrete graphics products. Mobileye, which is unchanged from our prior segmentation. And Intel Foundry Services, which includes revenue from our wafer and packaging offerings. This new reporting structure enabled transparent accountability relative to how well we are managing and executing against the six business units that will be further communicated at Investor Day in February. Moving to our Q1 outlook. We continue to see strong demand across all our businesses and note that Q1 includes the impact of an additional 14th week. We expect results to be tempered by continued industry-wide component constraints, normal seasonality, and TC Notebook inventory burn as OEMs work through inventory imbalances created by ecosystem constraints that have limited their ability to shift systems in certain segments. We expect Q1 revenue of $18.3 billion, down 1% year over year, but up 2% when adjusting for an approximately $600 million one-time corporate revenue item recognized in Q1-21. As we signaled in our Q3 call, gross margin will be impacted by our 10-nanometer product ramp and increased process technology investments. The aforementioned one-time corporate revenue item in Q1-21 will also impact the -on-year compare. We are forecasting gross margin of 52%, ETS of approximately $0.80, and a tax rate of approximately 15%. Note that we will provide full year 2022 guidance and more details on our long-term financial model as part of our Investor Day on February 17. We hope to see you there in person for a full day of presentations and Q&A sessions with our most senior leaders. Finally, I want to thank George for his three years at Intel, delivering outstanding results and making many of the changes necessary to begin our transition to a closed company. And now I'll let you hand it off to George to say a few words.

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. Thanks, George. With that, let me turn the call back over to Tony to get to your questions. All right. Thank you, Dave. Moving on now to the Q

&A, as is our normal practice, we would ask that each participant ask only one question. Operator, please go ahead and introduce our first caller.

Thank you. Ladies and gentlemen, to ask the question, please press father and one meter telephone. To withdraw your question, press the pound key. Again, next to cell one to ask the question. Our first question comes from the line of John Hicks, sir, with credit, Chris. Your line is open.

Yeah, good afternoon, guys. Congratulations on all of these results, and thanks for letting me ask the question. Pat, it's great to see a second quarter of -over-year growth in DCG and an acceleration over the calendar third quarter. But if you look underneath the cover, there's sort of two stories at play. The enterprise is coming back extremely strong. But you look at the cloud part of the business, I think this is the fifth consecutive quarter of -over-year decline. So I guess there's two parts to my question. One, when do you see a return to -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 your long-term view of the sustainability of this enterprise demand?

Yeah, hey, thanks, John, and thanks for the comments on the great finish through a great year. So as we look at the DCG business here, we just say we started out behind early in the year, you know, digestion. And we've sort of been catching up and building momentum in the cloud piece of that business all year long. And we do see that momentum carrying into next year. So that creates some of the -on-year quarterly compares that you described. You know, E&G, really a tremendous second half and a really strong Q4 for that business where we have higher market share and have seen just a great environment. You know, what we're hearing from our customers is that the momentum in E&G continues in the next year with very strong backlog positions. And it would have been even stronger had it not been for other supply constraints and match sets that we see. You know, and as you may have heard me talk about before, we don't see everything going to the cloud. You know, we see this balance of on-prem and cloud-based delivery. And cloud continues to grow, you know, faster than on-prem, but workloads continue to grow on-prem. Also, we expect to see an acceleration of edge-based. And I spoke about this at our Innovation Conference where the big story is we get out two or three years from now is going to be accelerating edge growth. And that's an area that Intel has a very strong position in the edge, very high market share, leadership platforms in 5G and inference and AI. So overall, we expect to see a very balanced across our portfolio. We do see strength to see growth in our cloud business next year, continued sustainability of E&G. But the real story over the next couple of years, we see an explosive edge growth.

Thank you. Thank you. Our next question comes from Alana Blasby-More with Ditcher Bank. Your line is open.

Hi, guys. Thanks for asking a question. Congrats on the strong end of the year and thank you to George and congrats to Dave. So with all that out of the way, Pat, I want to talk about the PC market. I know you've been one of the more optimistic folks on that. And the fourth quarter results showed a little bit of evidence as to why you're optimistic. But you also talked about some interesting inventory dynamics in there where channel inventory was rising. Can you talk a little bit about your expectations for this year? Again, not frontrunning the analyst day too much. But the expectations for both for the year and a little bit more on how you reconcile inventory rising with shortages still persisting.

Yeah, thank you. And, you know, 2021 was a really good, if not great year for the PC. I think most forecasts now are coming in estimating about 15 percent growth last year. You know, as we're seeing IDC, Canalys, you know, modest growth in the market next year. So as you've heard me, and I think this matches exactly what Sasha said yesterday, you know, we'll just say a structurally larger market for us for next year. And a couple 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, you know, the inventory position is one where, you know, we have just been at historically low inventories for an extended period of time, just racing the 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, you know, power controllers, you know, display-lit controllers, other aspects of substrates and different component pieces. So a lot of these challenges, you know, have really led to, you know, 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, you know, in particular the channel inventory levels, you know, the ones that were, you know, essentially zero, right, you know, 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 is sort of for the first time giving them something to sell for the whole year. So a lot of response positively there. You know, and overall, you know, we still see that the PC is now becoming this essential part and 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.

Thank you. Our next question comes from a lot of Joe Moore with Morgan Family.

Great. Thank you.

I'm curious to talk about the capital spending a little bit. And again, I don't want to set on the story you're going to cover at the analyst day, but, you know, the footprint in Ohio, the various comments that you've made about, you know, 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, you know, here existing XMU6 business versus foundry and other opportunities? And, you know, any sense for the capital spending you talked to this year, how much of that is going to be buildings versus equipment?

Yeah, thanks, Joe. And, you know, I'll kick it off and ask Dave to comment as well. You know, overall, you know, we would just say that, you know, supply constraints, you know, we just have a lot of catching up to do in building out the capital footprint. And some of that is catching up. Some of that's building for, you know, the new process technologies, five of those in four years. But it also is leveraging the smart cap strategy that we've laid out where, you know, boy, I lust for having a free shell today that we could be ramping into. We simply have to build some more shell capacity. And then we'll be determining, you know, where is the best use and how to fill that as we start to build out those shells. Everything that we've described, our Arizona build out, our Ohio build out, you know, we do expect that that will be satisfying both our internal products as well as creating capacity corridors for our foundry business as well. At Analyst Day, we'll be shaping that with more clarity. And Dave will be giving updates on a number of the capital aspects, that's the foundry, for foundry as well as for internal capacity there. So, Dave, what else do you want to add?

Yeah, 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 dividends by 5%. So it's great to have my first quarter of the dividend raise. On the capex front, Joe, you know, 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 buildout. So that's at least the ratio last year. Of course, you know, it might evolve over time, but, you know, it gives you kind of a rough magnitude of the numbers. Great. Thank you.

Thank you. Our next question comes from the line of Stacey Rastaw with Bernstein Research. Your line is open.

Hi, guys. Thanks for taking my question. I wanted to dig into your inventory comments again. So I know you're talking, you're saying you're building inventory. 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. It's anything that feels like inventory is bleeding out. So for your part, so how do I square that circle? What's going on there?

You want to address that, Dave or George?

Yeah, maybe I'll just comment a little bit on it. You know, 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 skews. 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 B-core notebook and our desktop, which desktop had really dropped off. And now we're seeing kind of a strong recovery there. So 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 look at our exit of modem and our exit of home gateway and the impact that had on a year over year comparison, that's about six points of growth. And then the customer's decision to go vertical on a large customer that says vertical, that's about another six 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.

Okay, thank you.

Thank you. Our next question comes from the line of Harry and Sir with J.B. Morgan. Your line is open.

Hi, good afternoon. Thanks for taking my question. So on general foundry services, you know, it appears that the team is off to a good start. Looks like a lot of good early engagements. If I'm a potential ISS customer and I start my design today realistically right, I'm not expecting my shift design to be ready for manufacturing conservatively for at least two years because that's just how long the design cycle times are for these leading edge shifts. And it seems consistent with your prior commentary on ISS 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 out there to support ISS, 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 ISS is probably two to three years away and more of the capex spend over the next two, three years is to support growth of the core compute businesses?

Yeah, you know, your comment sort of dimensionalized it almost right. You know, the key thing to augment what you said is that to be able to put the capital in place in 2024, 2025, you have to be building the shells in 2022, 2023. So that's what we've and why, for instance, the Ohio announcement, we said, hey, we are building shells so that we can sell it with our products and with foundry customers as well. But clearly when we get to Intel 3 as well as Intel 18A ramps for foundry customers, those capital investments, most of that being back and loaded, right, when you're putting equipment in place, really ramp up in 2024, 2025, but we've got to start building the shell capacity for those in 2022 and 2023. Your other comments, you know, we do expect some of the Intel 16 customers that some of those products will start ramping next year. You know, so we do expect some of those design starts that are already underway today to start giving us some revenues for our foundry offerings on Intel 16 and 23. We would expect Intel 3 to start contributing in 24 and Intel 18A in 25 and beyond. So it's sort of that nice ramp. But we've also said, hey, we already have packaging customers and those revenues have already started in Q4 this year. And obviously some of the services, you know, some of these are paid for services as well. So those will start contributing even before then. But overall, you know, the world wants more capacity. The world is looking for leading edge foundry capabilities. We've seen very strong interest from many different sectors. And I'll just say, you know, across, you know, whether it's, you know, leading edge, high performance computing, mobile customers, industrial customers, and clearly automotive customers, a very broad swath of customers who are interested in the Intel foundry services and great momentum that we're seeing.

Thank you.

Thank you. Our next question comes from the line of Bhavik Haryal with Bank of America.

Thanks for taking my question and thank you to George and welcome today. I actually had a near and longer term question on the gross margins. So in the near term, I'm wondering, the 52%, how does this kind of evolve through the year? I know you're not, you know, trying to give a specific number right now, but what are the puts and takes and kind of the key drivers? Is this the floor or ceiling or kind of the average that you should be thinking about? And then long term, how do we reconcile that your main competitor who is kind of just fabulous is pretty much at the same gross margins without having to spend any of the capex that Intel plans to spend? You know, when can Intel start using the pricing power in the markets where you have very large incumbency? Thank you.

Okay. Let me start and, you know, Pat can certainly provide us cover 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 startup costs associated with that and we needed to ramp 10 nanometer and that was going to put pressure on gross margins. And they presented a range of somewhere between 51 and 53 percent was the gross margin level that we were going to operate at while we were getting ourselves caught up from a technology perspective. So we're in that range for the guidance of 52 percent and we feel very good about 51 to 53 percent range for the year. So that's, so when you look at this number, you know, it can bounce around a little bit, but the 51 to 53 percent 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, you know, I think provide these good evidence of that at the investor day in February. So I should give you some incentive to come.

And, you know, a couple of comments on the longer term margin picture. You know, as you said, you know, leadership products, when we get to process leadership, right, and the nice cadence for those process technologies, those will become nicely accelerant. So we said that we will see our margins recover in the latter part of the five year window that we gave guidance on in our last earnings call. So we do see those as contributors and we'll see our margins rise over time as a result. Additionally, we do expect our long term margins to be a composite of our foundry business, which will be on the lower end of the margin range that we'll operate the company in. And combining that with the higher end of our leadership products as those occur. So, you know, we'll be giving a better characterization of that at our investor meeting as well. You know, further we'd say, you know, over time we think we have a structurally superior margin model for our business where I think everybody's seeing acute inflation in foundry costs and others in the industry where our factory network will give us a lot more opportunities to, you know, create a more balanced cost structure that others in the industry will not be able to accomplish. So overall we see, you know, great margin outlook, great cash flow, and free cash flow opportunities over the horizon. And we'll characterize those much more carefully as part of our investor meeting. But, you know, we see the advantages of our business model over anybody else in the industry to be quite substantial for supply, for margin creation, for cash flow generation. And all of these will come together in a very powerful way. Thank

you. Thank you. Our next question comes from the line of Chris Denly, Rick City. The line is open.

Hey, thanks guys. So you're spinning out Mobileye to maximize shareholder value, which I think everybody likes. Have you given any thought or is there any possibility of spinning out Altera to maximize shareholder value as well?

You know, thanks for the question. You know, the Mobileye spin out, you know, things are progressing smoothly. We'll, you know, give updates on that as appropriate as we go out over time. But, you know, 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. You know, 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. Thanks.

Thank you. Our next question comes from the line of Timothy Alcury with UBS. Your line is open.

Thanks a lot. Pat, I have a question about how you think about ECG and your server share. And, you know, obviously, Sapphire Rapids is going to be a lot more competitive. But, you know, Gena 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 and server? Is there a threshold over which you use price to get more competitive?

Yeah, thank you. And, you know, overall, we do see that the product line is getting more competitive. Sapphire Rapids will be a stronger product. So we're already seeing that the product line is getting more competitive with Ice Lake. And our Q4 numbers on Ice Lake were very good. And we see the Q4 equaled all of the shipments of the first three quarters of the year. So Ice Lake is an improvement. Sapphire Rapids gets better. We do expect that there's going to be a bit of to and fro with the competitive alternatives where they'll deliver a product, we'll deliver the next product. And as you've heard me say, we are on a path to sustained, unquestioned leadership. And in this area, it's going to take us a few generations until we're unquestionably in a leadership position. But we believe our product teams, our packaging teams, and our process technologies, our factory capacity, all of these give us the tools to create leadership products. And then we combine that with our platform leadership and our software technologies, we have a path to unquestioned leadership over time. Obviously, we believe we're going to have a superior cost structure, as we've already touched on, given that many of our server products come from our factories. So we're going to be in a better margin and cost position and capacity. So we think we have a lot of tools to address market share over time. And we're going to dimensionalize the business a bit more as part of our analyst day coming up. Thank you,

Pat. Thank you. Our next question comes from the line of Matt Ramsey with COWIN. Your line is open.

Thank you very much. Good afternoon, guys. Just following up on the data center group, the revenue is very strong. Like the operating margin, I think, was down 10 points year over year. And I wanted to dig into that a little bit. The slides and the release mention an Intel federal charge, if you guys could quantify that. But the bigger part of the question is now with the Ice Lake ramp, there's a lot more volume in DCG that's going on to the 10 nanometer node. And my question, Pat, is do we need to evolve the product sets where we get to granite rapids and we get off of 10 nanometer before we see margin improvement in DCG? Or is there going to Sapphire Rapids in a tiled approach with smaller tiles while still on 10? Is that enough for the margins to recover?

Thanks.

Do you want to start that, Dave? Yeah. I'll start. Okay. Yeah. So, I mean, just in the strict walk of the operating margins of the DCG business, so it's some of the things I talked about in terms of the aggregate story around gross margins. You know, there's the ramp of 10 nanometer for the data center space. There's higher startup costs associated with due process technology, so that's certainly driving it. We also had a one-time charge in our ENG business for a federal charge that also negatively impacted the operating margins. And then lastly, you know, as we talked about, we are continuing to ramp up our investment in terms of product technology in R&D, and so we have some increased op-ex investment that also drove it. But all of this is, you know, kind of executing to the plan that Pat laid out a quarter or so ago, and so this is all part of, you know, where we wanted to be at this point to drive the future of the company. Yeah.

And I'd say over time, you know, we absolutely expect that we're going to improve the operating margin of this business again. And, you know, we haven't ramped the new node for five years in our data center business. And, you know, that's something that, you know, it's an embarrassing thing to say on the one hand, and obviously, you know, 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, you know, 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, you know, 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 this cycle of new process technologies, investments in the business, you know, 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.

Thank you. Our next question comes from the line of Serene Pajuri with SNMBC. Nico, your line is open.

Thank you. David, question on gross margins, actually a clarification. If I take your, I guess, the fourth quarter result, 55%, and then add back the federal charge, and then your value to 52% for Q1, that's roughly five to six points of drop. So I'm just wondering what are some of the puts and takes, does that impact, and is there 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. Thank you.

Yes, sir. So definitely the federal charge not refuting itself in the first quarter is certainly helpful. And there are a couple of mixed benefits that we're seeing. But the charges associated with ramping 10 nanometer, particularly in the data center space, and the startup costs on Intel 4 are predominantly what's driving the reduced gross margins. But again, it's exactly where we thought we would be in the first fiscal quarter. I mean, this is the number that we were planning to drive the business to, and ultimately the ROI on all the investments we're making that drive headwinds in the gross margins for the first quarter, you know, will turn around and drive a very good ROI down the road. Thank you.

Thank you. Our final question comes from the line with Enbridge. Sarah Vastica with BMO. The line is open.

Hi, thank you. I just wanted to check in on the expansion plan that you have. How much of that is dependent on the trip act passing and also from other incentives? And I asked that because I was listening to your presentation, I guess, early in the week at the Ohio site. And you did make a comment there urging attendees to make sure that they weigh in to the extent that they can to get the ship back past. So I just was wondering how much of that of the expansion plan is dependent on the act here as well as in Europe from government incentives? Thank you.

Well, thank you for that question. It's what I hoped would be raised in the call. So thank you for that. You know, and I'll just say overall, I mean, it was just a fabulous day in Ohio, right? You know, the enthusiasm we've gotten. And as I said at the event, you know, we're established, we helped put silicon in the 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 is from the leadership there, the governor, the congressional leaders, and being able, you know, for this farm kid 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. You know, just surreal. So, you know, just a fabulous day for Intel, our nation, and our industry. Obviously, with the CHIPS Act going on the floor at the House, we're highly encouraged. And I spoke to Speaker Pelosi at length on this subject just yesterday. 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. And so I say everybody is now more optimistic on this coming across the line in the near future. Now, obviously, you know, I think we and others have viewed the passage of this as an accelerant for our investment plans. And, you know, as I said very clearly, hey, we're going to build a site in Ohio that 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 is 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 this 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 founder business as well. So thank you for that question. And with that, let me again, I do want to say thank you to Dave joining us for the first time. George, thank you again for your support for the years that you've contributed in this critical period of the company. And I do want to remind you of the strategies.

We're

going to build the team, improve the execution. As we look back on 2021, we've made tremendous progress across all areas that we've laid out. We still do have a lot of work to do, but we're focused, energized, and momentum is building. And I look forward to sharing our progress with you as we continue on this amazing journey. And Invest Today is coming up. We're going to lay out the strategy. We've got a lot to say. And this is a great business. We've finished a great year. Thank you all for joining us today.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.