Intel Corporation

and welcome to Intel's third quarter 2022 earnings 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 a question during this session, you'll need to press star 1-1 on your cell phone. 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.

Thank you, Operator. By now, you should have received a copy of the Q3 earnings release and earnings presentation, both of which are available on our investor website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I'm joined today by our CEO, Pat Gelsinger, and our CFO, David Zinsner. In a moment, we will hear brief comments from both, followed by a Q&A session. Before we begin, please note that today's discussion contains forward-looking statements based on the environment as we currently see it. As such, it does involve risk and uncertainties. Our press release provides more information on the specific risk factors that could cause actual results to differ materially. We have also provided both GAAP and non-GAAP financial measures this quarter, and we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings release and earnings presentation include full GAAP and non-GAAP reconciliations. With that, let me turn things over to Pat.

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 it 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 improvement in Q3. Our server 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. One, the key trends and dynamics that shape Q3 and are informing our outlook. The progress we are making on IBM 2.0, including our momentum on process and product roadmaps and our recent announcement that we are implementing an internal foundry model. And three, the actions underway to drive cost savings and efficiency gains aimed at accelerating our transformation. Specific to trends we are seeing, along with further deterioration in consumer PC demand in Q3, enterprise demand has begun to slow. We expect PC units to decline mid to high teens to approximately 295 million units in calendar year 22. Our own Q3 results reflect a strong product portfolio with Raptor Lake building on Alder Lake's momentum, as well as working closely with customers to optimize their inventory, our market share, and business objectives. We are still shipping below PC consumption, and the inventory correction continued in Q3, but not as quickly as we forecasted. Importantly, however, PC usage remains strong, demonstrating the increased utility and value of the PC and ultimately supporting a TAM well above pre-pandemic levels. We are targeting a calendar year 23 PC unit TAM of between 270 and 295 million units with a strong brand and product line driving additional share, especially at premium ASPs. The data center TAM is holding up better, although enterprise and China continue to show signs of weakness as do some, but not all cloud customers. Across our infrastructure and industrial exposed businesses, NEX demand was very solid, though not immune from the weakening economy. PSG continues to be a true standout with record Q3 revenue up over 25% year over year. PSG backlog is robust and it continues to be an area where we are supply chain limited. Despite the challenging business environment, we made solid progress toward our long-term transformation in Q3, and we remain fully committed to using the macro uncertainty to accelerate our efforts. Each quarter, our confidence grows in achieving our goal of five nodes in four years. On Intel 4, we are progressing towards a high-volume manufacturing that will tape out the production stepping of MeteorLink in Q4. The first stepping of Granite Rapids is out of the fab, yielding well with Intel 3 continuing to progress on schedule. Intel 4 and 3 are our first nodes deploying the UV and will represent a major step forward in terms of transistor performance per watt and density. On Intel 20A and 18A, the first nodes to benefit from ribbon FETs and Power Via are first internal test chips and those of a major potential foundry customer have taped out with silicon running in the fab. We continue to be on track to regain transistor performance and power performance leadership by 2025. IFS is a major beneficiary of our TD progress. We are excited to welcome NVIDIA to the RAMPC program, which enables both commercial foundry customers and the U.S. Department of Defense to take advantage of Intel's at-scale investments in leading-edge technologies. Since Q2, IFS has expanded engagements to 7 out of 10 largest Foundry customers, coupled with consistent pipeline growth to include 35 customer test chips. In addition, IFS increased qualified opportunities by $1 billion to over $7 billion in deal value, all before we welcomed the tower team with the expected completion of the merger in Q1 23. On the product front, we had a busy quarter. Within client, as mentioned earlier, we added to the strong Alder Lake momentum with the launch of Raptor Lake Desktop in Q3, driving a more than a 40% improvement in multi-thread performance, unquestioned leadership in gaming, six gigahertz out of the box, and record setting overclocking. We currently have over 500 OEM design wins. We launched Intel Unison to deliver best in industry multi-device user experience. In addition, we saw meaningful development progress across multiple OEM designs on Intel 4-based Meteor Lake with volume ramps in 2023. We now have all elements of the AXG portfolio in production with A770, giving our discrete graphics efforts a strong boost. The Flex family is building a strong pipeline of data center use cases, and Ponte Vecchio is now production for HPC offerings and production blades deployed for lead customers. Combined with Sapphire Rapids and Sapphire Rapids HBM, PVC is the basis for strong traction with HPC customers like Argonne National Laboratory and Germany's Leibniz Supercomputing Center. CSPs and telcos alike continue to move to software-based 5G, VRAN, and O-RAN deployments. We announced Sapphire Rapids EE with VRAN boost for inline acceleration of 5G and network workloads. Edge and AI are proving a powerful combination for us with OpenVINO momentum building with customers like Chipotle, and we launched the Intel Getty computer vision software platform for rapid AI training with early customers such as Brabant, Royal Brompton, and Harefield Hospitals. Further evidence of our AI portfolio taking shape was seen by Red Hat announcing support for Gaudi, Converge.io, and OpenVINO. Inspur announced Gaudi 2 with Sapphire Rapids for advanced AI use cases. Amazon will be accelerating large transform models with Gaudi instances in EC2. This was also a very strong quarter for DCAI execution. Sapphire Rapids volume SKUs have now PRQed with a high-quality leadership product and a very strong volume ramp expected. Google gave the first preview of its C3 instances showing Sapphire Rapids capabilities, as well as our leadership IPU, the E3200 or Mount Evans. We also saw strong milestones in the next three generations of server products. Emerald Rapids is showing good progress and is on track for calendar year 23. Granite Rapids is very healthy, running multiple operating systems across many configurations. And with Sierra Forest, our first E-Core product providing world-class performance per watt are both solidly on track for 24. It's obvious, but worth stating, our strategy is only as good as our execution. We have been taking aggressive action to rebuild our execution engine, driving execution excellence across our people, design, and development and operations. In Q1, I discussed our return to OKRs and their importance to our culture. Last quarter, I touched upon the next evolution of our TikTok model, or TikTok 2, as a disciplined approach to consistent, predictable product execution. This quarter, I wanted to spend a bit of time on operational excellence and discuss our recently announced IDM 2.0 Acceleration Office, or IAO, ushering in the next phase of our IDM 2.0 strategy. During the first phase of IDM 2.0, we aggressively focused on making the needed investments to approve our TD roadmap to regain transistor leadership and to ensure we have at-scale manufacturing capacity by building ahead on shells. Improvements in both areas now enables us to move forward with our next set of priorities, evolving our systems, business practices, and culture to embrace an internal foundry model and establish a leadership cost structure. This means we will create what I like to call a new and clean API for the company by establishing consistent processes, systems, and guardrails between our manufacturing teams and our business units. This will place our BUs on the same 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 already identified nine different subcategories for operational improvement that our teams will aggressively pursue. For example, product teams will be heavily incented to drive to high-quality A0 steppings as they see the full costs of steppings, validation cycles, hot lots, and capacity changes. Factories will move to rigorous capacity loading cycles, transparency of costs for loading changes, and efficiency of capital utilization, structural and variable wafer costs. 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. It will also provide improved transparency to our owners as we expect to share full internal foundry P&L in calendar year 24, ultimately allowing you to better judge how we are creating value and allocating your capital. A key benefit of IDM 2.0 is to unlock our full financial potential by capturing multiple profit pools not available to any one of our peers across architecture, design, wafer manufacturing, advanced packaging, supply chain, and software. These pools were only partially by long-term margin targets we established at Investor Day in February. Simple math would suggest there is meaningful upside to those targets as we execute and exploit the margin stacking potential IDM 2.0 provides. Best in class semiconductor companies achieve gross margin in the 60s and operating margins in the 40s. And we aim to be best in class. This next phase of IDM 2.0 is a significant evolution in how we think and operate as a company. But just as we optimize to drive outside returns in the IDM 1.0 era, We will optimize to achieve best-in-class returns in the IDM 2.0 era. It's what engineers do, and we have the best engineers on the planet. Complementing and augmenting these efforts will be an intensified focus to reduce costs and drive efficiencies in everything we do. As we stated during Q2 earnings, we have an obligation to our owners to be good stewards of your capital. We are responding to the current environment by taking aggressive actions to reduce costs across COGs and OpEx, while mindfully protecting the investments needed to accelerate our transformation and ensure we are well positioned for long-term market growth. In addition to reducing near-term costs, we have also identified structural cost reductions and efficiency drivers, which Dave will outline a bit later. In aggregate, our efforts should drive $3 billion in annual savings in the near term and $8 to $10 billion by the end of 2025. Not captured in these estimates are the startup costs to support five nodes in four years, which will begin to subside beyond calendar year 26, adding an additional $2 billion in COG savings. Inclusive in our efforts will be steps to optimize our headcount. These are difficult decisions affecting our loyal Intel family, but we need to balance increased investment in areas like leadership and TD product and capacity in Ohio and Germany with efficiency measures elsewhere as we drive to have best-in-class structures. We will also continue to use our smart capital approach to support and inform our capital spending aspirations, aggressively building ahead on shelves while aligning equipment purchases and installs with customer demand. We continue to see SCIPS, like our partnership with Brookfield, as an innovative financial structure to more closely align fab build out costs with fab output returns. Likewise, we see US and EU chips as vital to enable us to establish a geographically diverse and secure supply chain for the semiconductor industry. We are confident in re-accelerating free cash flow growth and driving industry-leading free cash flow margins once we get through this period of economic uncertainty affecting the entire industry and our own elevated investments to accelerate our transformation. Lastly, I was particularly pleased to join the Mobileye team earlier this week in New York to witness firsthand the successful completion of their IPO, especially in a difficult market. We believe that this will help unlock, mobilize full operational and financial potential and is an additional avenue to create value for our owners. We remain committed to optimizing our value creation efforts through portfolio honing, reallocation of resources to higher returns, higher growth businesses, M&A, and where applicable divestitures. Before turning it over to Dave, I want to close by saying I continue to be heartened and impressed by the dedication and commitment of all of our employees, by far the most important owners of this great company. They are passionately committed, like me, to reestablish Intel as a dominant driver of innovation and by the opportunity to improve the lives of everyone on the planet. It was also rewarding to see that same drive and dedication in the faces of our broader developer community at Intel Innovation, the rebirth of Intel IDF in September. We are the building blocks and enabler of their vision and aspirations, and it is our commitment to them to be great partners and collaborators. Our ambitions are equal by our passions, and our efforts across manufacturing, design, products, and foundry are well on their way to driving our transformation and creating the flywheel, which is IDM 2.0.

Thanks, Pat, and good afternoon, everyone. We had a solid third quarter despite the macroeconomic headwinds impacting the semiconductor industry. We expect these headwinds to persist and as a result, we're lowering our expectations for the fourth quarter. We will continue to be laser focused on the things that we can control and use economic uncertainty to accelerate our transformation and drive cost cutting and efficiency gains. Moving to Q3 results. Revenue was $15.3 billion flat sequentially and only modestly below the midpoint of our guide. Q3 revenue benefited from CCG strength offset by declining TAMs in DCAI and NEX. Gross margin for the quarter was 46% below our guide, but largely in line relative to lower Q3 revenue. Q3 gross margin increased 100 basis points sequentially on lower inventory reserves. EPS was 59 cents, 24 cents above our guide, largely on lower than forecasted taxes. Adjusting for the lower tax rate, EPS would have been 37 cents, 2 cents above our guide on better expense management. Operational cash flow for the quarter was $1 billion. net capex for the quarter was $7.3 billion, resulting in an adjusted free cash flow of negative $6.3 billion. And we paid dividends of $1.5 billion. Our balance sheet remains strong with cash balances of $23 billion, modest leverage and a strong investment grade credit profile. Turning to our business unit results, CCG revenue, was $8.1 billion, up 6% sequentially, driven by higher ASPs on better mix and also benefiting from our efforts to work with customers to maximize our share position ahead of Q4 price increases. CCG revenue was down 17% year-over-year as customers continue to reduce inventory and we continue to undership demand. Demand weakness year over year was most pronounced in the consumer, education, and small-medium business markets. Operating profit was $1.7 billion, up $570 million sequentially, and down 54% year over year on lower revenue, increased 10 nanometer and Intel 7 mix, and increased spending to further strengthen our product roadmap. DCAI revenue was $4.2 billion, down 27% year-over-year on TAM reductions and continued competitive pressures, even as market share continues to track in line with our expectations. Operating profit was $17 million, below expectations and down significantly year-over-year. Profitability was impacted by lower revenue, higher advanced node startup costs, and higher product costs on transition to 10 nanometers. We also continue to invest aggressively in the product roadmap. NEX revenue was $2.3 billion, up 14% year-over-year on increased demand for 5G, Ethernet, and Edge products, partially offset by lower network Xeon demand. In Crew 3, we started to see macro-driven demand softness and customer inventory management impact NEX. Operating profit was $75 million, down 85% year-over-year due to the impact of softer demand on inventory valuation and increased roadmap investment. AXG revenue was $185 million, up 8% year-over-year on the ramp of our block scale products. Operating loss was $378 million, $129 million better sequentially, but $156 million worse than year over year due to softer demand and product readiness impacting inventory evaluation, as well as increased investment to deliver the visual, super compute, and custom accelerated graphics roadmaps. Mobileye revenue was $450 million up $124 million from Q3 2021 primarily driven by higher demand for IQ products. Operating income was $142 million up $15 million from Q3 2021 primarily due to higher revenue. IFS revenue was $171 million, down 2% year-over-year, driven by automotive weakness with customers citing third-party component shortages, partially offset by growth in core foundry and IMS businesses. Operating loss was $103 million versus an operating loss of $44 million in Q3 21 on increased spending to enable our foundry growth strategy. Turning to Q4 guidance. Given the deteriorating macro environment and based on input from our customers, we're now guiding Q4 revenue in a range of $14 billion to $15 billion, with sequential decline driven by lower CCG revenue as customers reduce inventory, lower NEXTAM, and continued DCAI headwinds. We're forecasting gross margin of 45%, a tax rate of 14%, and EPS of 20 cents at the midpoint of revenue guidance. For Q4 adjusted free cash flow, we expect to see a meaningful sequential increase driven by working capital improvements and a $2 billion reduction in net capex, adjusting for a lower demand environment. These benefits will be partially offset by lower revenue, and as a result, we're reducing our full year adjusted free cash flow guidance to negative two to negative four billion dollars. There is also a possibility that a portion of expected capital offsets could move from Q4 to Q1, shifting the cash flow benefit into next year. Consistent with our short-term financial model discussed at our investor day in February, our continued intent is to manage adjusted free cash flow at approximately break even as we go through this period of accelerated and elevated investments supported by our smart capital approach and the multiple pools of capital available to finance our strategy. Now turning to our long-term outlook and the changes we're making to transform the business. Beyond Q4, there's a high degree of macroeconomic uncertainty, and it appears that the current challenging market environment will extend well into 2023 with the potential for a global recession. Further, as I discussed in Q2 earnings, it's imperative that we drive to world-class product costs and operational efficiency to achieve our long-term financial model. As Pat detailed earlier, to accelerate this transformation, we're forming the IEM 2.0 Acceleration Office and doubling down on our efforts to reduce costs and find efficiencies across the organization. We'll start with a focus on driving $3 billion of cost reduction in 2023, one-third in cost of sales and two-thirds in operating expenses. Note that our Q3 results include gap restructuring charges of $664 million that reflect initial efforts to right-size our business and deliver these savings. In Q4, we expect to have additional restructuring charges of similar magnitude as we further rationalize our 2023 financial plan. Longer term, We will execute on continued structural cost savings and efficiency gains, which we expect to drive 8 to 10Billion dollars in annual savings by the end of 2025 split roughly two thirds and cost of sales. And one third in operating expense, these savings will be realized through multiple initiatives to optimize the business, including portfolio cuts. right-sizing of our support organizations, more stringent cost controls in all aspects of our spending, and improved sales and marketing efficiency. As Pat outlined, also critical to driving this transformation is the implementation of our internal foundry operating model, dramatically increasing financial accountability and transparency, enabling all organizations to drive to world-class product cost and efficiency benchmarks. In addition, As we emerge from five nodes in four years and slow our technology development cadence, we expect an additional approximately 200 basis points of gross margin after 2026. We expect these efforts to provide potential upside to the financial targets we provided at the February investor day. This will be a multi-year journey, but as Pat said earlier, best-in-class semiconductor companies have a financial profile that includes gross margins in the 60s and operating margins in the 40s, and we aim to be best in class. In the short term, we will continue to manage to the OpEx net capital intensity and adjusted free cash flow guardrails established and drive back to a gross margin percentage range of 51 to 53% once economic conditions improve and revenue growth returns. In closing, we remain committed to the strategy and financial model communicated at Investor Day. the compelling long-term financial opportunity of strong revenue growth across our six business units and free cash flow at 20% of revenue remains. And I believe this downturn represents an opportunity to more quickly make the transformation necessary to achieve these goals. With that, let me turn it back over to John and get to your questions.

Thank you, Dave. As we move into the Q&A session, we would ask that each participant ask one question and, where appropriate, a brief follow-up question. Operator, please go ahead and introduce the first caller.

Certainly. And as a reminder, if you have a question at this time, please press star 1-1. Our first question comes from the line of Ross Seymour from Deutsche Bank. Your question, please.

Hi, guys. Thanks for letting me ask a question. 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?

Yeah, thank you, Ross. I'll start off on that. Like we said, it's just the macroeconomic, unpredictable, tough market outlook. And inside of that, it's just hard to see any points of good news on the horizon. Inflation in the U.S., the situation in Europe with energy and the war, and in Asia. So against that backdrop, we're still looking to have you know economic headwinds as we go into next year and with that in mind obviously lowering our guide for a q4 you know as we think about it at the industry level you know obviously some of that helps to accelerate you know some of the rebalancing of the supply chain and some of that will help our business like lowering of you know ddr and memory costs will decrease the premiums on ddr5 and make sapphire rapids a more compelling platform Other areas we still have rebalancing of the supply chain in front of us on some of the older nodes. When we look at our business units, you know, the PC, more critical device than ever. And, you know, as Satya talked about yesterday on his earnings call, you know, 20% more active devices usage increasing. That said, you know, we do expect that the TAM, as I indicated in my formal comments, is going to be a bit lower next year. We've given a range aligned with the industry. For servers, we have seen the slowdown in enterprise and to a lesser degree in the cloud market, decreasing the TAM outlook there. We do, in our modeling, look at that as we're building our capacity, obviously our cost. Efforts have been very specific to give us flexibility for lowering the structural rate cost, even as we stay true to the strategic investments that we're making and driving our transformation and disciplined cost modeling more quickly. So it really is. you know, a challenging environment, unpredictable environment, and we're staying true to the strategy, making cost adjustments, and trying to balance market outlooks as we gain share, right, in some segments, and we fight for share in other segments. And, you know, I was very pleased with how the team executed in, you know, improving our execution in an environment that really was quite tough. Thank you.

Ross, do you have a brief follow-up?

Just following on to that last part that you said, Pat, about some of the areas of share gains or share losses, where do you think those will be most acute in both directions, the good and the bad?

Yeah, and we'd say, you know, we saw no, you know, if we go to the areas, you know, we're just entering in the AXG business and IFS. So, everything there is gaining share. In the NEX business, we saw our business as entirely driven by the macro. And, you know, our market share seemed to have no real, you know, shift whatsoever, you know, and we continue to be a grower in that segment. In PC, we had very market share gains this quarter. Very strong product line, 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 the position that we're gaining share yet and expect that will be the case for a couple more quarters.

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

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

Thanks a lot. Pat, 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 fabulous 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 Global Foundry's market cap, that's like 30% of your market cap. But How does it play out functionally, how it creates value?

Yeah, you know, we definitely view that there are efficiencies for us to gain as we go to this internal foundry model, where we see numerous areas in the company that were not as rigorous as we need to be. You know, in factory loadings, where we make lots of change in factory loadings and we would run the factories more efficiently. you know, our steppings are, you know, aren't accountable, right, you know, through cost modeling back to the business units and thus, you know, driving the high quality A0 steppings and, you know, stepping changes being fully reflected internally and the cost of those will make us more efficient. You know, leveraging third party IP more aggressively will make us more efficient. And the combination of that, you know, is a big piece of why we're stepping to this internal foundry model. and we expect that we're going to start giving more financial transparency that way so that you can start to see the benefits and the margin stacking you know being realized of both being a product company as well as a fab foundry company and that's what we're out to get with the you know structure that we're laying out that said we think that this tight coupling of the idm 2.0 model you know is a powerful value generator for us at least in three areas One, the technology benefits that we get to have a rapid pace of technology innovation and co-optimization between product and process. Second is the cash flows and balance sheet benefits that we get by having these internal to be able to drive the large investments required in the manufacturing networks. And third is in the supply chain efficiency and flexibility of being able to balance across the foundry and business unit structure. So these three areas for us are ones that we see that tight coupling, bringing long-term meaningful value generation you know, to the company and to our shareholders. But we're going to do it against the backdrop that we are going to be benchmarking ourselves, you know, against the best in class in each area. And that transparency, right, will provide more visibility to you, our shareholders, but also drive our teams internally. And, you know, an engineering manufacturing team, when they see benchmarks that you're holding up against them, it just unleashes energy into the future. And that's the excitement that we're working to create with this internal foundry model. And as we've launched it this quarter, we're already starting to see the roots of that permeate through our teams.

Tim, do you have a brief follow-up?

I do, just quickly. I guess just to follow up on that. So what's the line in the sand, Dave? I guess It's a question more on cash flow. What is the line in the sand? I think before you said that 2024 was going to be free cash flow neutral. Is that still the line in the sand where whatever you have to do, you'll do? You'll cut CapEx as much as you can to be free cash flow neutral in 2024. Is that still the free cash flow line in the sand?

Yeah, 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. You know, obviously, you know, our long-term goal is to 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. Uh, 20% free cash flows, a percent of percent of revenue and obviously this year, I think we showed very good discipline on the side. We brought our capex. I think when we started the year, we thought capex would be in the 27Billion dollar range on an F 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. 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 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.

Tim, thank you for the question. Jonathan, can we have the next question, please?

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

Thanks for taking my question. Pat, isn't it risky to plan for a 270 to 290 million PC TAM? And 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 shifts. So what if the TAM next year is more like 250 to 260? What impact will it have on your cost and fab loading assumptions? Thank you.

Yeah, so first, you know, the premise of the question, you know, we clearly over a number of quarters, you know, we're above market forecasts. You know, that range that I described is exactly in line with the various, you know, forecasts, our OEM feedback, the feedback from key software providers as well. So I'd say our range is now aligned with that industry range. Second point being that range is larger than and well above pre-pandemic levels at that point. You know, it is a structurally larger market. You know, there's lots of units out there waiting to be replaced that are aging in the footprint, you know, clear markets that are yet to have the PC penetration. So we feel quite comfortable. You know, and as I noted in the earlier question, PC usage is high as seen by Microsoft and their metrics. And our product line is positioned to gain share. So somewhat independent of the size of the TAM, we have a great product line. And our product line is also, and our brand is well-suited with the higher margin segments of the market that have been more resilient to the market effects. Low-end consumers where you've seen the biggest issues. And our product line is very strong. Alder Lake, Raptor Lake, stunning numbers that we're getting and well on track with Meteor Lake. All of that said, obviously, you have to make some assumptions as you build a factory network. And the range that we gave has a lot of room inside of it. And as we're demonstrating by the near-term cost cutting that Dave described, we're trying to build flexibility into our factory network, even as we adjust The cost structure, which is largely a fixed cost structure. And obviously, as we're ramping into the next generation products, we're building into our Intel four and three product lines and the costs associated with that, even as we balance both the near term and the strategic products. So we feel like we're well-positioned to manage in thick or thin. And against that, with a strong product line, we believe we're a share gainer in this industry, and we're going to be quite aggressive to accomplish exactly that.

Vivek, do you have a quick follow-on? Yes.

Thanks, John. So maybe, Pat, just following on to that, do you think you are shipping to demand on the PC side, or do you still think there is channels? because as we head into Q1, that is often a seasonally softer period. But again, compares are very different this year. So I was just hoping to get your perspective on what the supply-demand balance is in the PC market as it exists kind of real-time. Thank you.

Yeah, our belief is, is that we shift below consumption levels. So our, 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 inventory systematically going down across the various routes. you know 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 in the TAM model would be our consumption models for next year which are below the consumption models of this year so you know a somewhat a smaller number for next year but not dramatically different as we already said so overall I think we're getting to better points of supply demand equilibrium where, you know, we were way behind on demand, you know, on 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 ballot situation as we go into next year.

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

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

Thank you for the name. Thanks for taking my question. I'd love to talk a bit about, like, the very ambitious, you know, like, efficiency plan you've announced. And first, I'd like to understand, you know, 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.

Are you still on?

Operator, I think we lost pyramid. I can answer as long as we're still on.

Okay. Just make sure we're alive.

Yes, you are. Okay. Thank you.

So, thanks for the question, Pierre. Yeah. So keep in mind, as we look at this 8 to 10Billion of efficiency gains that we're talking about. We're actually making a pretty meaningful down payment 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. Now, as it relates to the 8 to 10, we think as we exit the 2025 period, we'll roughly be in that 8 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 uncover 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 to $10 billion.

Jonathan, can we go to the next question, please?

Certainly. Our next question comes from the line of Joseph Moore from Morgan Stanley. Your question, please.

Great, thank you. 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.

Yeah, thanks, Joe. And I'll start on that one. You know, the simple answer is our job is to keep that one Intel synergy. And, you know, when I describe the three value vectors that I'm expecting to continue to really leverage around this technology collaboration, you know, co-optimization of the microprocessor, you know, with the process technology is one that's high on that list. And we've made a lot of actually quite a lot of progress since I've been back. you know when driving that we're really seeing the benefits of that and for instance you know the great health that we described on granite rapids as an example of that the momentum that we're seeing from meteor lake you know a clear example so you know i do believe that we're well underway at keeping that you know rich cycle of technical collaboration and co-optimization but there's been many of these areas that i described that there hasn't been this intense accountability you know steppings were done too easily you know and without the quality a stepping and some of that you know came through you know our stumbles as you went with 14 and 10 nanometers but we lost the discipline of the understanding of what steppings cost and not just in the fab but also in the validation cycle so we have to bring much more accountability and transparency Also, we expedited all the time. Well, expedites are a good thing when you're bringing a new product to marketplace, but they also create fab inefficiencies. And the results of that are we're not being accountable for the fab efficiencies. Otherwise, our margins would be remarkably higher than they are today. So, to me, it's really maintaining the good things, and the three I described, you know, the technology benefits, balance sheet capital, and the supply chain, while driving a lot more transparency, automation, efficiency. And, you know, the result will be, I believe, is a much better intel for the long term, not just for the external Foundry customers, as you suggest, but for my internal customers as well.

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 for the internal foundry business, but also make sure that they're aligned to the overall Intel goals.

Joe, do you have a quick follow-up?

Yeah, I do, and thank you for that. That was 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.

Yeah, it's a good question. That's pretty much what we're thinking. I mean, we will have our own foundry business, so we'll have a good sense, I think, of the market. And so that's how we will approach it. I would say in 23, it's going to be a somewhat light touch. We'll do this through mostly kind of spreadsheet-oriented analytics. Eventually, and Pat's been pretty vocal on this, we want to create more automation, systemization of everything that we're doing between the foundry and the product. So over time, this will get more robust, and ergo, we'll be able to drive more accountability, I think, as we progress through 2021.

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

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

Certainly. Our next question comes from the line of CJ Muse from Evercore ISI. Your question, please.

Yeah, good afternoon. Thank you for taking the question. And one more question on your Intel foundry strategy. You know, 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 know, you're keeping capacity internally until you, you know, achieve the goals that you've set out for 2025.

Yeah, you know, maybe three different perspectives on that, CJ. Obviously, most of the design decisions, you know, that are being made by my product teams now are 25, 26, 27 decisions when we're back to process leadership. And they're seeing that progress day to day. And just as I said, hey, if you want to design the best product, have the best transistor. So they're with the capability to look now at the Intel leadership process technologies as they make those decisions. Also, you know, secondly, you know, this, as I described, this is a tight binding and we're going to maintain that tight binding of optimization and co-optimization for relationships that are decades old, you know, between our teams, but bringing in a new discipline to the boundary between them. And the 3rd answer is, we already use external foundries. This is a process that's already pretty well established and we're using a range of external foundries. Our design teams over the last 5 years or so have learned how to use external foundries. And in fact, as they're interacting now with my internal foundry. many of those learnings on expectations of PDKs, design tools, IP libraries are driving the expectations for what is required to be a good internal foundry, which will make my internal foundry a better external foundry as well. So I see this as a very regenerative cycle as we unleash these energies. And, you know, ultimately, I'm the CEO across both, and we'll be making good decisions to hold both of them accountable, even as we clarify the interfaces and the efficiencies between them.

CJ, do you have a quick follow-up?

Yeah, thanks, John. I guess, Dave, as you think about the strategy, how does it change capital intensity for the business, you know, not into 23, but perhaps say over the next five years? Is it still that 35% type of number, or how should we be thinking about it? Thank you.

Yeah, good, good question. So, obviously, in this investments phase, where we're catching up on no transition. So forth. We do, we will have a higher capacity to 35%, but we do expect as we get out of this phase to be back down to a more normalized level of about 25% capacity. So, there definitely will be an evolution and adjustment. And that's 1 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.

Yeah, and also just piling onto that, we always look at that through the lens of our smart capital strategy. You know, where, you know, clearly we're, you know, viewing both the gross capex, but more importantly, the net capex from your perspective, you know, and how we access other pools of capital to be able to build that out, you know, in a very financially prudent way. And those other approaches, EU, U.S. CHIPS Act, ITC, SCIP, you know, give us a lot of flexibility combined with the shell first strategy approach. to be able to, you know, make sure we're spending the capital, the more expensive equipment capital, you know, more timed with the market demand clarity.

Thank you, CJ. Jonathan, can we have the next caller, please?

Certainly. Our next question comes from the line. Mark Lipassos from Jefferies. Your question, please. Hi.

Thanks for taking my question. Pat, maybe for you, despite all the consolidation in the industry and the growth that that Intel has seen and the larger foundries have seen, the capital intensity continued to seem to have moved higher, notwithstanding your hope or expectations that it's going to come back down again. So, you know, given the high levels, you could make the argument that the industry actually needs even more consolidation than it has already seen at the level of the, you know, some of the biggest players in the industry. Can you share your thoughts on how you think about the potential for this large-scale, this kind of large-scale M&A or maybe joint ventures amongst the class of the leading edge players? Or are there issues like FTC-related or national security-related that just means that thinking about that kind of consolidation or joint ventures across borders is something that just takes it off the table? And maybe it's a different analysis for consolidation versus joint ventures. Thank you.

Well, there's a lot packed into that question. And I would just say, you know, 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. 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. Now you're okay, now you're world-class. And this is 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. you know, in terms of regulatory, legal, you know, financial steps associated with it. But fundamentally, you know, 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.

Mark, do you have a quick follow-on?

No, that was good. Thank you, Jonathan.

Thanks for that answer, Pat.

Perfect. Jonathan, I think we've got time for one last question.

Certainly. And our final question for today comes from the line of Matt Ramsey from Cowen. Your question, please.

Thank you very much, John, for squeezing me in. Pat, I wanted to ask a question about the server roadmap. 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 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. Thanks.

Yeah, thank you. And, you know, as I indicated, Sapphire Rapids is now PRQ'd and the ramp is underway. You know, we are ramping the product as we speak. Strong customer demand. We expect this will be our fastest ever Xeon to a million units. And we're going to push that quite aggressively. And the factories are ramping up as we speak. Obviously, this is good news for that business competitively. You know, a big ASP uptick as well on the product. So lots of good things come. Also, we had a particularly good quarter on the execution front, not just Sapphire Rapids PRQ, but great health on Granite Rapids, Emerald Rapids looking very good, Sierra Forest. So the next three generation products are all making very good milestones. And I really feel like the worst of our execution is behind us. And we're really starting to see some enthusiasm, momentum, excitement building in those teams as they turn the corner. on these products. We do think, as I said in the formal, that the market is softer on the enterprise side and somewhat on the cloud side, as you reinforced by some of the other comments from others. That said, as we ramp these products, it's all about having the best product to gain share, to gain ASP, to improve the margins of the business. And we now feel like our portfolio was taking shape to accomplish exactly that. And we're going to be aggressive. We're going to fight for every socket. This is a game where we have to reestablish ourselves in the marketplace. And now we're starting to have the product line to do that. And that's exactly what you'll see. In addition to that, we're also building out our software assets to have an increased value proposition. And one of those is, for instance, with Sapphire Rapids. is the market improvements in AI, but even more importantly, in security. And with our security services and capabilities, very differentiated areas like confidential computing are gaining quite a lot of interest in the industry for not just enterprise, but cloud customers as well. So, a lot of things going on there, but overall, we feel like our momentum is being reestablished in this critical, critical area of our business, and one that we know has a lot of attention from you all in the community.

Matt, do you have a quick follow-on?

Yeah, John, thank you, and thanks for that, Pat. One thing that piqued my interest, Pat, in your prepared script was there's a lot of discussion of the five nodes in four years, and halfway through that transition period, is 20A with ribbon set or gate all around. So you guys are going to need to go through that jump. Your competition is as well. And you mentioned, I think, some tape outs of your own stuff, but also some tape outs of potential external foundry customers on 20A that seemed, I don't know, from the language used, kind of meaningful. So if you could give us a A status report there on sort of the gate all around rivet pet progress you see versus competition and. Yeah, is this external customer really significant? Thank you.

Yeah, thank you. And, you know, on 28 and 18, they go to ribbon set, as you say, and, you know, Intel has driven every major transistor right into 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 you know 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 taped out the first one uh this quarter we'll have several more uh in the pipeline so now we're taping 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 those silicon for them making a volume decision for a foundry customer so we're exactly on the timelines that i described earlier you know for those tape outs and those decisions so you know as they start to see the silicon results which we think are going to be very promising you know we think that'll be a key step to them making major foundry decisions And overall, you know, it's just the firms are five nodes in four years. We're making the investments. We're seeing good progress, you know, 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. You know, it positions us in a very profound way for a founder. Yeah. We're seeing economic environment macro very challenged. 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. You know, it was also thrilling to participate with a mobile IPO in a tough market with very good results. You know, we're prepared for the economic headwinds. You know, we're making the necessary adjustments structurally as well as to our cost model to go through them. And we remain fully committed to being, you know, a value generator for our shareholders for the long term as we execute our 2.0. And we believe that that will be a great result for our owners for the long term. Thank you for joining us for the call today and look forward to our update next quarter.

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