Intel Corporation

You'll need to press star 1-1 on your telephone. If you wish to remove yourself from the queue, please press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. By now, you should have received a copy of the Q4 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 am 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 does contain forward-looking statements based on the environment as we currently see it. As such, it does involve risks and uncertainties. Our press release provides more information on the specific risk factors that could cause actual results to differ materially. We've 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 reconciliation. With that, let me turn things over to Pat.

Thank you, John, and good afternoon, everyone. Q4 revenue came in at the low end of guide and was impacted by persistent macro headwinds, which began in Q2 and underscored a 2022 characterized by unprecedented volatility, which will continue in the near term. We made meaningful progress on several fronts in calendar year 22, notwithstanding all the challenges, but we readily admit our results and our Q1 guidance are below what we expect of ourselves. we are working diligently to address the challenges brought on by current demand trends and remain confident in our long-term plans and trajectory. Accordingly, we are even more aggressively executing on the cost measures we described in Q3, even as we keep the investments critical to our long-term transformation intact with a clear eye of making the right capital allocation decision to drive the most long-term value. Today, I'd like to address three areas. One, Our view on the macro and the markets in which we participate. Two, the operational progress we made in 2022. Three, as we enter the new year, outlining the commitments we are making to all our stakeholders. First on the macro, we expect macro weakness to persist at least through the first half of the year with the possibility of second half improvements. However, given the uncertainty in the current environment, we are not going to provide revenue guidance beyond Q1. Dave will provide guidelines for capital spending, depreciation, and adjusted free cash flow in his prepared comments. Having said that, let me give you additional color regarding our view of our markets in 2023. To various degrees, all our markets are being impacted by macro uncertainty, rising interest rates, geopolitical tensions in Europe, and COVID impacts in Asia, especially in China. In the PC market, we saw further deterioration as we ended calendar year 22. In Q3, we provided an estimate for the calendar year 23 PC consumption TAM of 270 to 295 million units. Given continued uncertainty in demand signals we see in Q1, we expect the lower end of that range is a more likely outcome. Near term, the PC ecosystem continues to deplete inventory. For all of calendar year 22, our sell-in was roughly 10% below consumption, with Q4 undershipping meaningfully higher than full year. and Q1 expected to grow again to represent the most significant inventory digestion in our data set. While we know this dynamic will need to reverse, predicting when is difficult. Importantly, PC usage data remains strong, reinforcing that use cases brought on by COVID are persistent, even as the economy has reopened. And as we highlighted in our recent PC webinar, strong usage and installed base, which is roughly 10% higher than pre-COVID levels, And what we see as a conservative refresh rate supports a longer term PC TAM of 300 million units plus or minus post this period of adjustment. We intend to capitalize on this TAM through a strong pipeline of innovation and based on the growing strength of our product portfolio, customers are increasingly betting on Intel. We grew share in the second half of 22 and we expect that positive momentum to continue in 23. We've remained clear-eyed on managing to near-term weakness in PCs, but we also see the enduring and increasing value PCs have in our daily lives. In the server market, the overall consumption TAM grew modestly in calendar year 22, albeit at diminishing rates as the year progressed. Inventory burn drove server CPU shipments down mid-single digits year-on-year in calendar year 22, with hyperscale up, offset by declines in enterprise and rest of world. Our share in calendar year 22 was in line with our subdued expectations, and our revenue volatility was a function of TAM, especially given our outsized exposure to enterprise and China. We expect Q1 server consumption TAM to decline both sequentially and year over year at an accelerated rate, with first half 23 server consumption TAM down year and year before returning to growth in the second half. While all segments have weakened, enterprise and rest of the world, especially China, continues to be weaker than hyperscale. However, we'd highlight that the correction in enterprise and rest of the world, where we have stronger positions, are further along than hyperscale. Lastly, in our broad-based markets like industrial, auto, and infrastructure, demand trends throughout calendar year 22 were strong, but not completely immune to the macro volatility. Strong demand in these markets was mirrored by strong Q4 and record calendar year 22 revenue in NEX, PSG, IFS, and Mobileye. We see calendar year 23 as another growth year for us in these areas, even though the absolute rate is difficult to predict today. This is in contrast to the semi-market ex-memory, which third parties expect to decline low to mid-single digits. We entered 2023 with a view that much of the macro uncertainty of the last year is likely to persist, especially in the first half of the year. As such, we are laser focused on executing to our $3 billion in calendar year 23 cost savings that we committed on our Q3 earnings call. We are making tough decisions to right-size the organization, and we further sharpened our business focus within our VUs by rationalizing product roadmaps and investments. NEX continues to do well and is a core part of our strategic transformation, but we will end future investments on our network switching product line while still fully supporting existing products and customers. Since my return, we have exited seven businesses providing an excess of $1.5 billion in savings. We are also well underway to integrating AXG into CCG and DCAI respectively to drive a more effective go-to-market capability, accelerating the scale of these businesses and while further reducing costs. While it was important to focus on what we are doing to address the current macro uncertainty, it is also important to highlight that despite disappointing financial results, calendar year 22 did see considerable progress towards our transformation. We remain fully committed to executing to our strategy to deliver leadership products anchored on open and secure platforms, powered by at-scale manufacturing and supercharged by our people. Success starts with our people, and execution follows culture. In calendar year 22, we took important strides to rebuild the leadership team, promoting from within and adding fresh perspectives from the outside. This includes the board of directors with the addition of Liz Bhutan and Barbara Novick, both of whom have already made significant contributions, and the appointment of Frank Urias, chair. In addition, a year ago, we reestablished OKRs to drive accountability and transparency across the organization, and we reintroduced TikTok2 to establish a rigorous methodology of design and product development. Both are key spark plugs to our execution engine. Rebuilding the culture has begun to show benefits in manufacturing and design. Our progress against our TD roadmap continued to improve throughout calendar year 22, and every quarter, our confidence grows, We are at or ahead of our goal of five nodes in four years. Intel 7 is now in high volume manufacturing for both client and server. On Intel 4, we are ready today for manufacturing and we look forward to the Meteor Lake ramp in second half of the year. Intel 3 continues to show great health and is on track. Intel 4 and 3 are our first nodes deploying EUV and will represent a major step forward in terms of transistor performance per watt and density. On Intel 20A and Intel 18A, the first nodes to benefit from ribbon FET and power via internal test chips and those of a major potential foundry customer have taped out with the silicon running in the fab. We continue to be on track to regain transistor performance and power performance leadership by 2025. Progress in PD continues to be validated by our IFS pipeline. I am happy that we were able to add a leading cloud edge and data center solutions provider as a leading edge customer for Intel three, including prior customers, such as media tech. We now have lifetime deal value of greater than 4 billion for IFS. We also have an active pipeline engagements with seven out of the 10 largest foundry customers, coupled with consistent pipeline growth to include 43 potential customers and ecosystem partner test ships. Additionally, We continue to make progress on Intel 18A and have already shared the engineering release of PDK 0.5 with our lead customers and expect to have the final production released in the next few weeks. In addition, we are working hard to complete the tower acquisition, which will further amplify our momentum as our foundry business becomes even more compelling to customers. On the product front, the PRQ of Sapphire Rapids and Q3 and the formal introduction of our fourth-gen Xeon Scalable CPU and Xeon CPU Max series, better known to many of you as Sapphire Rapids and Sapphire Rapids HBM respectively, on January 10th was a great milestone. It was particularly satisfying to host a customer-centered event, including testimonials from Dell, Google Cloud, HPE, Lenovo, Microsoft Azure, and NVIDIA, among many others. We are thrilled to be ramping production to meet a strong backlog of demand, and we are on track to shift a million units by mid-year. In addition, as part of AXG moves into DCAI, it is noteworthy that our Intel Flex series, optimized for and showing clear leadership in media stream density and visual quality, is now shipping initial deployments with large CSPs and MNCs, enabling large-scale cloud gaming and media delivery deployments. Our DCAI roadmap only improves from here. Emerald Rapids is sampling and has completed power on with top OEM and CSP customers, and it remains on track to launch in the second half of 2023. Granite Rapids, our next performance core addition to the Xeon portfolio, is on track to launch in 2024, running multiple operating systems across many different configurations. Further, our first efficient core product, Sierra Forest, is also on track for 2024. Lastly, it is appropriate to continue to highlight PSG for its standout performance, delivering record Q4 revenue up 42% year on year. We are planning to have a more fulsome look at our progress in DCEI at our next investor webinar later in Q1. Stay tuned for the invitation. In CCG, we continue to build on our market share momentum across the PC stack by focusing on delivering leadership products with our broad open ecosystem. I'm particularly pleased that our clear performance leadership at the high end drove record client ASPs in the quarter. In Q4, the 13th gen Intel Core desktop processor family, codename Raptor Lake, became available, starting with the desktop K processors and the Intel Z790 chipset. In partnership with ASUS, we officially set a new world record for overclocking, pushing the 13th gen Intel Core past the 9 gigahertz barrier for the first time ever. Hands down, we provide desktop enthusiasts and gamers with the best processors and features for overclocking in the PC industry. We also introduced our notebook Raptor Lake family at CES, including the world's fastest notebook CPU and the first with 24 cores. We look forward to ramping the more than 300 mobile design wins we have already secured in the first half of 23. Meteor Lake, our first disaggregated CPU built on Intel 4, remains on track for the second half of the year. And with Meteor Lake progressing well, it's now appropriate to look forward to Lunar Lake, which is on track for production readiness in 2024, having taped out its first silicon. Lunar Lake is optimized for ultra-low power performance, which will enable more of our PC partners to create ultra-thin and light systems for mobile users. In addition, as we outlined on our webinar, we are excited by the strength of the EVO brand, the introduction of Unison for leadership multi-device experience as we ramp the more than 60 design wins, and the uniqueness of vPro in the enterprise market. helping our customers drive an almost 200% return on investment by deploying vPro platforms to their end users. Lastly, as consumer graphics reintegrates into CCG, enthusiasm for our latest Alchemist-based discrete graphics products continue to build, and we expect volume ramp throughout the year. Turning to NEX and Mobileye, both businesses have performed well in Q4 and calendar year 22, partially insulated by some of the market forces impacting PCs and server. NEX hit key product milestones with Mount Evans, Raptor Lake P&S, and Alder Lake N, and Sapphire Rapids to drive a second consecutive year of double-digit year-on-year growth in calendar year 22. We expect market share gains and outperformance to continue in 23. Mobileye increased revenue by almost 60% year-on-year in Q4 and is on a solid growth path for calendar year 23. Calendar year 22 design wins, including supervision, are projected to generate future revenue of approximately $6.7 billion across 64 million units. In addition, our manufacturing organization performed well throughout calendar year 22. Starting the year, navigating the worst supply constraint environment in over 20 years, only to have to pivot in Q2 to respond to rapidly changing demand signals, which are now driving near-term underloading in our factory network. More importantly, we continue to push forward with the next phase of IBM 2.0, creating an internal foundry, evolving our systems, business practices, and culture to establish a leadership cost structure. This new approach is already gaining momentum internally. As a reminder, the internal foundry model will place our BUs in a similar economic footing as external IFS customers and will allow our manufacturing group and BUs to be more agile, make better decisions, and uncover efficiency and cost savings. We have identified nine different subcategories for operational improvement that our teams will aggressively pursue. In addition to establishing better incentives, this new approach will provide transparency on our financial execution allowing us to better benchmark ourselves against other foundries and drive to best-in-class performance. 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 allocating your capital and creating value. We expect additional efficiencies as we implement our internal foundry model, which is a key element to accomplish our 8 to 10 billion of cost savings exiting 2025, as we outlined on our last call. I want to remind everyone that we are on a multi-year journey. We remain focused on the things that are within our control as we navigate short-term headwinds while executing to our long-term strategy. While I remain sober that we have a long way to achieve our financial expectations, I am pleased with the transformation progress that we are making. I can tell you, in addition to obviously focusing on the day-to-day running of the company, We continue to examine numerous additional value creating initiatives for 2023 as we always do. We will update you as we move along on any we deem appropriate. Rest assured, we remain committed to creating value for our owners and to delivering the long-term strategic roadmap we laid out at the beginning of this journey, and we are confident in our ability to do so. We will, One, deliver on five nodes in four years, achieving process performance parity in 2024 and unquestioned leadership by 2025 with Intel 18A. Two, execute on an aggressive Sapphire Rapids ramp. Introduce Emerald Rapids in second half 23 and Granite Rapids and Sierra Forest in 2024. Three, ramp Meteor Lake in second half 23 and PRQ Lunar Lake in 2024. And four, expand our IFS customer base to include large design wins on Intel 16, Intel 3, and 18A this year. We also need to improve our cost structure and drive operational efficiency. On this front, we will, one, return to profitability and deliver the benefits of our calendar year 23, 24, and 25 efforts to reduce costs and drive efficiencies. Two, execute on our internal foundry P&L by 2024. And three, expand on the use of our smart capital strategy to leverage multiple pools of capital including skips and chips in the U.S. and Europe to balance our long-term capacity aspirations with near-term realities. Before I turn it over to Dave, I'm going to close by saying we take our commitments to all our stakeholders extremely seriously and ultimately, we strive to create value for each of them. For our customers, it is rebuilding our execution engine to provide a predictable cadence of best-in-class products to support their ambitions. For employees, it is to provide them with the opportunity to develop and bring to market world-changing technologies. It is what inspires each of us inside of the company. For our external owners, it is to make thoughtful, deliberate decisions around capital allocation which drives the highest return on investment we make with your capital. 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.

Thank you, Pat, and good afternoon, everyone. We saw solid business execution in the fourth quarter, despite persistent macroeconomic headwinds impacting the semiconductor industry. As Pat indicated, we expect challenging macro conditions to continue through at least the first half of the year. As outlined last quarter, we'll continue to prioritize investments critical to our transformation, prudently and aggressively manage expenses near term and drive fundamental improvements in our cost structure longer term. We're executing well towards our $3 billion target in 2023 and eight to 10 billion exiting 25. Fourth quarter revenue was $14 billion landing at the low end of our range and down 8% sequentially. Revenue from DCAI and NEX were in line with expectations, while CCG was impacted by softening demand for PCs. Gross margin for the quarter was 44%, slightly better than we had expected for the low end of our revenue range. Q4 gross margins were impacted 220 basis points from factory under load charges, offsetting a sequential 170 basis point benefit from an insurance settlement. EPS for the quarter was 10 cents, 10 cents below our guide on lower revenue and increased inventory reserves. Operating cash flow for the quarter was $7.7 billion. Net capex was $4.6 billion, resulting in an adjusted free cash flow of $3.1 billion, and we paid dividends of $1.5 billion. We finished FY22 with revenue of $63.1 billion, gross margin of 47.3%, and EPS of $1.84. We generated $15.4 billion of cash from operations and an adjusted free cash flow of approximately negative $4 billion at the low end of the range we provided last quarter, despite approximately $3 billion of capital incentives that shifted from Q4 into 2023. When we spoke at Investor Day last February, we forecasted revenue of $76 billion and adjusted free cash flow of negative one to $2 billion for FY22. As macroeconomic conditions deteriorated at a rapid pace in second half of 22, we committed to optimizing the areas of the business within our control. Through reductions in spending and significant working capital improvements, we offset a $13 billion reduction to revenue expectations to come within $2 billion of our initial adjusted free cash flow guide, while still making the needed capital investments in support of our IDM 2.0 strategy and to position ourselves for long-term growth in a market expected to reach $1 trillion by 2030. Our balance sheet remains strong with cash and investment balances of more than $28 billion, modest leverage, and a strong investment grade profile. Moving to fourth quarter business unit results, CCG revenue was $6.6 billion, a decline of 36% year-over-year, as PC TAM deteriorated faster than expected due to macroeconomic headwinds. Customer inventory remains elevated beyond our previous expectations and will continue to burn into the first half of 23. CCG realized record CPU ASPs, up 11% year-over-year, as we continue to see relative strength in our premium segments, driven by leadership performance and attractive features of our EVO and vPro platforms. Q4 operating profit was $0.7 billion down year over year on lower revenue and increased Intel 7 product mix. DCAI revenue was $4.3 billion in Q4, up 2% sequentially with higher ASPs offsetting demand softness, and down 33% year over year, driven by TAM contraction and competitive pressure. DCAI operating profit for the fourth quarter was $371 million. While still unsatisfactory, profit was up more than $350 million sequentially on reduced factory costs. Operating profit was down substantially year over year, impacted by lower revenue, increased advanced node startup costs, and higher product costs. Within DCAI, PSG achieved record Q4 revenue, up 42% year over year, along with record full-year revenue up 29% year-over-year through increased ASPs, improved external supply, and strength in the infrastructure segment. PSG enters 2023 with still significant unfulfilled backlog. NEX quarterly revenue was $2.1 billion, down 1% year-over-year as declining global GDP impacted the edge business, offsetting growth in Xeon network CPUs and the ramp of our Mount Evans infrastructure processing unit. Despite second-half macro headwinds, NEX set another full-year record revenue at $8.9 billion, up 11% year-over-year and marking consecutive years of double-digit revenue growth. Operating profit was $58 million in the fourth quarter, down year-over-year on mixed shift to lower margin segments and higher factory startup costs. AXG achieved record quarterly revenue of $247 million, up 34% sequentially and up one point year over year, supported by the launch of Sapphire Rapids HBM. Operating loss was $441 million, down $63 million sequentially, with inventory valuations negatively impacted by softer demand, especially for crypto processors. Mobileye delivered another record revenue quarter of $565 million, up 26% sequentially, and growth of more than $200 million and 59% year over year. Full year revenue of $1.9 billion was also a record for Mobileye, growing 35% year over year. Fourth quarter operating income of $210 million represents 71% growth year over year. IFS achieved record quarterly revenue of $319 million, up 87% sequentially and 30% year over year on increased automotive shipments. Operating loss was $31 million, a $72 million improvement sequentially on higher revenue. We continue to reshape the company to drive to world-class product costs and operational efficiency. We remain committed to the $3 billion of 23 cost savings outlined on our Q3 earnings call while mindfully protecting the investments needed to accelerate our transformation and ensure we are well positioned for long-term market growth. Before turning to Q1 guidance, let me take a moment to discuss an accounting change that will impact our results beginning in the first quarter. Effective January 23, we increased the estimated useful life of certain production machinery and equipment from five years to eight years. This change better reflects the demonstrated economic value of our machinery, and equipment over time and is more aligned with the business model changes inherent to our IDM 2.0 strategy. The growth of the IFS steel pipeline will extend the life of manufacturing nodes beyond what was practical within IDM 1.0. Disaggregated CPU architecture allows performance and cost optimization for each chiplet, better leveraging older nodes. And we are optimizing our core business around more sustainable capacity corridors to improve equipment utilization and maximize ROIC. The change will be applied prospectively, beginning Q1 23. When compared to the estimated useful life in place as of the end of 22, we expect total depreciation expense in 23 to reduce by roughly $4.2 billion, an approximate $2.6 billion increase to gross profit, a $400 million decrease in R&D expense, and a $1.2 billion decrease in ending inventory values. This change will not be counted towards the $3 billion short-term or $8 to $10 billion long-term structural cost improvements we committed last quarter and is intended to provide the most accurate reflection of company financial results to our owners. Now turning to guidance. For Q1, we expect first quarter revenue of $10.5 billion to $11.5 billion. In addition to continued macro headwinds, We expect customers will burn inventory at a meaningfully faster pace than the prior few quarters in response to macro TAM softness impacting CCG, DCAI, NEX lines of business. We see potential for market conditions to improve faster than typical seasonality as third-party data shows macro headwinds easing in the second half of the year. While we're progressing toward a $3 billion spending reduction with significant austerity across the company, Given the fixed cost nature of our business, we expect the sequential revenue decline will result in negative operating margin in the first quarter. We're forecasting gross margin of 39%, a tax rate of 13%, and EPS of negative 15 cents at the midpoint of revenue guidance. Inclusive of $350 to $500 million of operating margin benefit from the useful life accounting change split approximately 75% to cost of sales and 25% to OPEX. Factory under load charges are projected to impact Q1 gross margin by 400 basis points. We continue to evaluate all investments and will remain laser focused on optimizing for ROI, adjusting for market conditions across operating expenses and capital assets. While we're not providing guidance beyond Q1, I'll touch on a few elements of our outlook. At Investor Day, we noted that during the investment phase of IDM 2.0 from 2022, through 2024, our model was to operate at approximately 35% net capital intensity. For FY23, despite the lower revenue level, we expect to be at or below the 35% model. Embedded in our assumptions are capital offsets of around 20 to 30% of growth CapEx, including our innovative SCIP partnership with Brookfield. We expect FY23 operating expenses of under $20 billion a roughly 10% year-over-year decline consistent with committed cost-cutting measures totaling $2 billion, adjusting for the depreciation change. Adjusted free cash flow will be below our investor day guide of approximately neutral in the first half of 23 and return back towards guardrails in second half 23. In closing, we remain committed to the strategy and long-term financial model we laid out at investor day last year. The opportunity for strong revenue growth across our business unit portfolio and free cash flow at 20% of revenue remains. While we're not satisfied with near term results, this market downturn represents an opportunity to accelerate the transformation necessary to achieve our long term goals. I look forward to providing updates on our transformation journey as the year progresses. With that, let me turn the call back over to John.

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

Certainly. And as a reminder, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. And 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. I guess, Dave, to hit on some of the revenue question or items you just said, do you expect the first quarter to be the bottom in absolute dollars through the year? And any color between the segments? It seems like it's exceedingly a CCG problem right now in the quarter, or is it broader than that?

Yes. So, you want to go first? Okay. So, let me, I'll start and Pat's going to add some color. So, On the $11 billion, we're expecting most of the business units to be down sequentially, double digits. We're not going to provide guidance for the rest of the year, but I did say that the first half is likely to be seeing these inventory corrections. The other thing I would just add is maybe color to kind of position the year is that we're expecting Q1 to be the most significant inventory decline at our customers that we've seen in recent history. So if you look back over the last four or five quarters of reductions, this will be meaningfully higher than all of those quarters. So obviously, that is impacting the Q1 out of

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

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

Yeah, good question. So obviously revenue is the most significant impact to gross margins. We obviously did not expect to be down at these levels. That said, it's a function of some significant inventory burn. It's not necessarily a reflection of, you know, the demand in the market. So, you know, obviously, we would expect that to cover at some point, which will be a significant lift to the gross margins. The other thing is, in the first quarter, we're going to have about a 400 basis point impact on our gross margins just from underloading because of the demand softness. And, you know, we would expect, you know, loadings to improve once we get past the inventory correction. we're currently experiencing. In addition to that, we have a number of initiatives underway to improve gross margins and we're well underway. When you look at the $3 billion reduction that we talked about for 23, a billion of that is in cost of sales and we're well underway on our way to getting that billion dollars. And then when you click it further into the eight to $10 billion that we want to hit by the end of 2025, you know, about 66% of that two thirds of that is cost of sales improvement. And we're getting a lot of that from our internal foundry model that, uh, that Pat mentioned, we're already seeing significant opportunities to be efficient, uh, more efficient between our business units and our factories. And, uh, you know, I think we'll have a lot of things to say over the, over the course of this year about areas that we see, uh, meaningful improvement. Also, you know, we have smart capital. that was modest in 22, it's going to be more significant in 23. And much of that smart capital does translate to a better cost structure for us that will help gross margins. So net of that, I feel very confident we will get back to 51 to 53% in the medium term. And in the long term, I feel very confident we will get back to 54 to 58. And I think Pat said it in the past, we aim to beat that range.

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

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

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

So overall, as we said, you know, we saw the range 270, 295. We believe the sell-through rate will be to the lower end of that. You know, the consumption that we saw in Q4 was well below that, and the consumption rate or the sell-in rate in Q1 is even more significantly, almost 2x more significant below the consumption rate. Obviously, you know, these are the macro effects that we can't predict, and that's what's taken us a little bit more to the low end of the range. But clearly, as we were working with our customers and channel partners, we've been monitoring very carefully the sellout that they've seen. So we're pretty comfortable with that range. Also, we would point to China and a very unique circumstance there as is well known. And we do expect that there'll be some level of economic recovery there. Particularly, we forecast into the second half of the year. And this is a topic that we continue to work closely with our customers. That said, overall, and as we updated. on our PC webinar, we do expect that the long-term market is in the 300 million unit range. So as we overcome this inventory adjustment cycle and some of this near-term economic, and I think as you heard from Microsoft, PC usage is up. The number of hours per PC continues to be up. The installed base has gone up. So all of those factors give us reasonable confidence that post this period of inventory correction, you know, that we'll have a very healthy 300 million unit plus or minus market that we're selling into.

Vivek, do you have a follow-up question? Yes, thank you, John, and thank you, Pat. Second question is on the data center. You know, historically, the semiconductor market likes incumbency, and there is only a share shift if and when the incumbent messes up. And right now, your competitor seems to be becoming a larger incumbent in a lot of cloud deployments, you know, doesn't seem to be messing up. Doesn't it make it harder to displace them? I'm just curious, Pat, what edge do you think Intel has to change this status quo of share shift in a cloud server? Do you think your design will get noticeably better? Is it architecture? Is it manufacturing? What helps you specifically to change this current momentum of share shift in cloud servers? specifically.

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

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

Certainly. Our next question comes from the line of Timothy O'Curry from UBS. Your question, please.

Thanks a lot. Dave, I had a question on CapEx. I know you don't want to guide for the full year, but you did say that 20% to 30% of the gross CapEx, whatever the number is this year, is going to be offsets. I know you don't have a lot of visibility on the chips money you're going to get, but it seems like best case, you know, Revenue is going to be in the mid-50s roughly. And if I take a little less than 35% of that, because you said that it's still going to be 35% or less that will be in that capex intensity, and I sort of divide the numbers, it implies a gross capex number something in the range of $20 billion, give or take. Can you sort of help us just handicap that number?

Yeah, so let me see if I can – obviously, we're trying to avoid – guiding beyond the first quarter, given the murkiness. I would just say we are very focused on the appropriate level of investment necessary for the long-term strategy of IDM 2.0, while being very thoughtful around how much CapEx we spend to manage our free cash flow. I think smart capital offsets will be pretty healthy this year, much better than Partly that's because we'll be fully along with SCIPS 1 with our partnership with Brookfield. We are expecting grant incentives to be a part of this year's smart capital offsets. And then lastly, we do have already in place the investment tax credit, which could have some benefit to us this year. They're certainly smart capital will be healthy, but we are being very prudent around our, you know, our gross capital spend through the year. And we'll, and, you know, as we kind of progress through the year, we'll, we'll see how things develop and we'll, you know, you can expect us to manage it accordingly. I think most importantly, you know, we weren't, we did not expect to be at this revenue level, obviously for 23, when we talked about this net capex intensity of 35%. And yet we still maintain the discipline to stay at or below that 35%. Uh, for the year, and I think that's what investors should should take away from that message.

Yeah. Also, I just add, you know, we do and Dave sort of implied it, but we do expect to do skip to this year as well, which is another source and also the credits. I mean, clearly there's motivation on the part of commerce to get that underway and the rules making in place in the near future and start to dispense funds this year. Also, I point to Europe as well. So, it's EU chips as well as U.S. chips. So, all of those efforts are part of smart capital for us. You know, we do believe that we'll have the capital necessary to, you know, meet both our near term, but more importantly, the strategic long-term investments. And that's what we say, you know, we're on track with IDM 2.0, we're on track with the capital, the builds that allow us to restore leadership in our process technology, as well as have the factory capacity to both deliver that for our products as well as for our foundry customers.

Tim, do you have a follow-up?

I do, John. Thanks. Yeah, Dave, can you just sort of walk through maybe some of the gross margin puts and takes? I know that, again, you don't want to guide for the full year, but can you just help us think about what some of the puts and takes might be? I mean, obviously, as volumes grow, that will help gross margin, but are there any other puts and takes that you would sort of call out for us? Thanks.

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

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

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

Thank you for taking the question. Another question on CapEx. I guess Bigger picture, can you kind of speak to your CapEx philosophy in a slower demand environment? Is it, you know, finding the right number to fit a free cash flow model, or are you looking at kind of your overall demand picture and saying, you know, we need X minus Y way for starts, and that's why, you know, we can spend less? We'd love to get a sense of how kind of the slowdown here is potentially changing or potentially not. you know, your strategy of spending? And if it's not, is it just simply, you know, delaying investments into 24 and 25? Thanks.

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

You took one of mine. Obviously, the OpEx area, yeah, is an area that we're really focused on. And Pat mentioned the lab piece, which is one of the areas that we have found efficiency. And I guess the last thing is that we have seen our capital offsets be higher than our original expectation. We were planning for probably a third of what we think we'll get in 2023 when we announced our smart capital initiative at the analyst day. So that's obviously coming in stronger. Of course, Pat already alluded to the fact that A lot of that is, you know, Skip has turned out to be a pretty powerful tool. And, you know, this will enable us to do a Skip 2 this year as well, which obviously helps.

CJ, do you have a follow-up?

I do a quick one. And, again, I know you don't want to guide the full year, but as you kind of look at different scenario analyses for 2023, how do you see kind of return to positive free cash flow playing out? Is that something that could come in the second half or – Or that's really a 24 event?

Well, 23, we were thinking, was kind of a break-even free cash flow year for us back at the analyst day last February. Obviously, in the first half of this year, we're going to be below that model. But as we look into the back half of the year, we would expect to approach the model in 23. And of course, 24 is a bit away from where we are right now. But this is the thing that we spent a lot of time on. I would tell you one thing. If you look at our free cash flow for 22, we came in roughly around minus $4 billion. If you remember in the quarter before, we forecasted that we would be somewhere between minus 2 and minus 4 billion. We were actually assuming a higher level capital offsets, which is still coming, but pushed into 23. And yet we still hit the high end of that range. And the way we did it was through working capital initiatives. So this is a big part of our strategy around managing free cash flow is more attention to working capital. It's something that I think in the past may not have been a big focus here, but is a very big focus here. It's how our shipments are managed in terms of linearity, how we manage payments, how we manage our inventory. The fact that we're taking under load does affect the gross margins, but it also improves our cash flow because we're spending less on variable and variable costs. So these are areas that we think can be pretty beneficial to us and be a tailwind for us in terms of free cash flow as we progress through the year.

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

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

Good afternoon, guys. Thank you. Dave, the The first question, I get it a lot, is just with the challenges that you just mentioned out of CJ's question on free cash flow. And I guess well done to you and your team of extracting as much cash as you did out of working capital in the quarter. But I get questions about the security of the dividend all the time. And maybe that's a board-level decision, but maybe you and Pat could address it a bit. The current levels of dividend, is that sort of a sacrosanct thing at Intel in your current operating plan? Are there discussions around it either way? Don't shoot the messenger. It's a question I get a ton.

Thanks. Yeah, well, obviously, we announced a 36.5% dividend for the first quarter. That was consistent with the last quarter's dividend. I'd just say, you know, the board management, we take a very disciplined approach to the capital allocation strategy and we're going to remain committed to being very prudent around how we allocate, how we allocate capital for the owners. And, you know, we are committed to maintaining a competitive dividend.

Matt, do you have a follow-up question?

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

Yeah, so PSG did have a very good quarter, has a very strong backlog, continues to grow. But I'd say the math that you suggest is quite incorrect, given the relative size of those businesses. So we'll happily offline talk a little bit more through that. That said, we grew less than the market last year and saw some share loss. We see that stabilizing this year. The key factor is better products. And we've just released that with Sapphire Rapids and getting great response. And our announcement event on January 10th was a customer-centric ramp this baby product line. We had strong participation from all of the CSPs, all of the OEMs, all of the ISVs and users. So it was seen as a very strong event. This year will be very much about ramping that, and we'll see the improvements in both market share position as well as ASPs as we ramp that product through the year. And, you know, the confidence in the roadmap, you know, and that'll be, you know, the determinant, you know, okay, you have a better product now, great. You know, customers are building an uninstalled base. But do we have confidence in your long term? So I'd say we reestablished a very credible roadmap. You'll see lots of news coming from us this year as we start delivering on samples, et cetera, of the next generation of products. as well as the continued ramp of Sapphire Rapids with highly differentiated features and capabilities. So we feel like we've put the worst behind us, right? And we're now coming back to the front foot in this business area. And I'll say in a very customer-centric, ISV-centric way that delivers our customers the use cases that they need in their business.

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

Certainly. One moment for our next question. And our next question comes from the line of Tushy Ahari from Goldman Sachs. Your question, please.

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

Great. Great. Thank you, sir. The, you know, what we said, you know, clearly that, you know, we did see demand softening through the year and data center overall, you know, that's a market statement. Obviously, we have more exposure to enterprise and China, which we believe we can our position a little bit more in the year. But we're seeing those same characteristics now with the cloud providers as well. So, we, we see all of them, you know, weaker in the first half of the year. We are, I'll say, a touch optimistic that China will come back and enterprise will come back more rapidly than the cloud. And with our stronger exposure in those segments, we believe that is a potential good news for us as we go through the year relative to competition. The networking space is one where we have very sustained leadership and strength. And areas like VRAN and ORAN are ones that our platform is dramatically better than competitors. And with that strong market share through the year, we also expect some level of softening there in those in the networking area, but not as much as some of the other segments that we would have. First half of the year, we expect to be down year on year, and the second half of the year to returning to growth. So inventory adjustments, a weaker market in first half, recovery in the second half of the year is what we expect overall. And obviously, you know, the relative position we believe that we have is stabilizing, and the markets that we're stronger in, we're optimistic that they'll come back a little bit stronger as we go through the year.

So, Shea, do you have a follow-up? I do. Thanks, John. Pat, you also talked about your focus and commitment toward value creation. You mentioned how you guys are pulling future investments from the switching business. As you look across your portfolio as of today, I think to your point, you've done quite a lot since coming back. Where is the incremental opportunity as you think about improving the portfolio going forward and creating value? Thank you.

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

Thanks, Rashid. Jonathan, we have time for one last question, please.

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

Great, thank you. I wonder if you could talk about the reception you're seeing with Sapphire Rapids, and in particular, it seems like it's a really good chip, but I think the price at the platform level is getting more expensive. DDR5 is more expensive. What's it like right now migrating to a more expensive platform in an environment where budgets are under pressure? Does that change the ramp relative to other CPUs that you have?

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

Joe, do you have a quick follow-up?

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

Yeah, it's a restructuring of where the businesses reside. And as we move past this, I'll say launch phase of those products. And we're now into the scale phase of those product lines. And for instance, discrete graphics, you know, driving the attach rate and channel motions with our enormous client business. and the data center bringing a broader portfolio across HPC, our Flex product line, the AI capabilities that we have that we're uniquely delivering through data center. So all of this is about its efficiency and scale of those business areas. And we've been having numerous discussions with our customers about these changes, and they've been very well received. And I'd say all the products that we launched out of AXG You know, the Flex product line, the Discrete Graphics product line, the Max products line, all of those products are continuing forward. And we believe all of those will have strong ramps in their volumes, revenues, and market impact as we go through the year. So, with that, let me just wrap up our time together. You know, first, thank you. We're grateful for you joining us today, the opportunity that you've given us to update you on our business. And clearly the financials aren't what we would hope for. But we're also pleased with the execution progress we made. And as a result, we're confident in the strategic outlook that we have for our business. The macro is difficult. It was difficult in Q4. We expect it to remain difficult as we go through the first half of the year. But we're laser focused on controlling the things that we can. And every aspect of our execution, cost management, and transformation is in our hands. And we are well underway in executing against those paths. So with that, we look forward to seeing many of you throughout the quarter, updating you on our progress next quarter. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.