Intel Corporation

Thank you for standing by, and welcome to Intel Corporation's third quarter 2024 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 telephone. If your question has been answered and you'd like to remove yourself from the queue, simply 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, Investor Relations. Please go ahead, sir.

Thank you, Jonathan. By now, you should have received a copy of the Q3 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. 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, and as such, are subject to various risks and uncertainties. It also contains reference to non-GAAP and segment financial measures that we believe provide useful information to our investors. Our earnings release, Most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP and segment financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Pat.

Thank you, John, and good afternoon, everyone. I appreciate you joining us today. We delivered Q3 revenue above the midpoint of our guidance, and we made significant progress on our cost reduction plan. That said, Q3 profitability was negatively impacted by the charges we referenced on our Q2 call. This reflects the aggressive actions we are taking to lower our costs, improve our efficiency, and enhance our market competitiveness. Dave will go into these charges in detail shortly. Operationally, Q3 results exceeded our expectations as we achieved key milestones across Intel Foundry and Intel products. Underlying trends in the business are improving at a measured pace and our outlook for Q4 is modestly above current consensus. Overall, our stepped up focus on efficiency and execution across the business is having a positive impact. We have a lot more ahead and we are acting with urgency to deliver on our priorities. We need to fight for every inch and execute better than ever before, and our teams are embracing this mindset as we build a leaner, more profitable Intel. Now, let me provide more detail, starting with an update on our cost reduction plan that we announced three months ago. First, we completed the vast majority of our headcount actions during Q3, and we are on track to our greater than 15% workforce reduction before the end of the year. These were hard. but necessary changes that are reducing complexity and making us a leaner, faster, and more agile company. Second, we have reduced our capital expenditures by over 20% relative to the plan we had entering the year. We are now well positioned with our shell ahead strategy to react quickly to market demand. With our transition to EUV now complete and the launch of Intel 18A on the horizon, we have a more normal cadence of node development at Intel 14A and beyond. In addition, our teams are maniacally focused on improving fab productivity, allowing us to produce more with less over time. Third, we have begun to simplify and streamline parts of our portfolio to unlock efficiencies and create value. We are reestablishing product portfolio leadership by narrowing our focus on fewer projects with the top priority being to maximize the value of our x86 franchise across the client, edge, and data center markets. As part of our portfolio simplification, we will move our edge business into CCG and refocus our NEX portfolio on networking and telco. We will also integrate our software business into our core business units to foster more integrated solutions that address our customers' most difficult challenges. We are evaluating other portfolio actions, which we will communicate when appropriate, and we plan to provide new segment reporting that reflects these portfolio shifts in Q1 of 2025. Related to our cost and efficiency actions, the restructuring charges we took in Q3 were significant and necessary to right-size the company as we reduced spending by over 10 billion in 2025. There was also a sizable impairment mostly related to Intel 7 equipment and space, reflecting excess COVID era spending that we have concluded cannot migrate to more advanced nodes now that we have fully transitioned to EUV processing. From a broader financial perspective, the actions we took in Q3 go a long way towards delivering the 2025 financial commitments we outlined last quarter. Specifically, we plan to reduce non-product cost of sales by $1 billion, lower OpEx to $17.5 billion, and drive gross and net CapEx to between $20 to $23 billion and $12 to $14 billion, respectively. We expect adjusted free cash flow to be positive next year, and we will focus on decreasing leverage and improving liquidity. Let me go into greater detail on the business, starting with Intel products. We continue to focus on our core x86 franchise and the ecosystems we have developed over 40 plus years of investing. They are a tangible source of value and differentiation for Intel, our partners, and our collective customers, and help to cement the x86 architecture as uniquely positioned to meet customer demands going forward. We are taking steps to supercharge and further unlock the value of our x86 franchise. We intend to drive new levels of customization, compatibility and scalability needed to meet current and future demands of next generation computing. And we see this unlocking a range of meaningful opportunities across all our businesses. I am particularly excited about our recent announcement with AMD to create the x86 Ecosystem Advisory Group. We are bringing together leaders from across the ecosystem to help shape the future of x86 with a focus on simplifying software development, ensuring interoperability and interface consistency across vendors, and equipping developers with standardized architectural tools and guidelines. Broadcom, Dell, Google, HPE, HP Inc, Lenovo, Meta, Microsoft, Oracle, Red Hat have signed on as founding members, as have industry luminaries, Linus Torvalds and Tim Sweeney. Turning to our product segments, in CCG, we continue to lead the AI PC category. In September at IFA, we launched our Intel Core Ultra 200V series processors, formerly named LunarLate. This is the most efficient family of x86 processors ever created, setting a new standard for mobile AI performance and significantly outperforming competitor platforms. LunarLate's combination of superior performance at comparable and competitive battery life positions us well to continue to define and lead the AIPC category. We also continue to nurture the most robust AIPC ecosystem in the industry with more than 100 ISVs, 300 applications, and 500 AI models powered by Core Ultra. And we remain on track to ship more than 100 million AIPCs accumulative by the end of 2025. Next up is Arrow Lake, which launched earlier this month and brings the power of the AI PC to the desktop, delivering a huge leap in performance per watt and bringing an NPU to enthusiast desktop and entry workstation platforms for the first time. All of this is paving the way toward the launch of Panther Lake in the second half of 2025. Panther Lake will be our first client CPU on Intel AT&A, a more performant and cost competitive process that will allow us to bring more wafers home and improve overall profitability. Overall, we are making good progress in CCG. Our share position is strong with a product roadmap and ecosystem that is increasingly setting us apart from our competition. especially in the enterprise market as customers continue to see increasing value from our vPro solutions. Turning to DCAI, our focus is squarely on delivering powerful AI systems that provide enterprise customers with greater choice and flexibility, optimal performance per one, and lower total cost of ownership. And this quarter's launches significantly enhance our market competitiveness, even as we recognize we have more work to do. We launched our latest Xeon 6 product, codenamed Granite Rapids, which doubles the performance of the prior gen with increased core counts, memory bandwidth, and embedded AI acceleration. The new Xeon 6 is tailor-made to handle compute intensive workloads with exceptional efficiency from edge to data center and cloud environments. This solidifies our position as the head node of choice in AI servers. Greater than 70% of of CPU-rated servers are already using Intel Xeon as the host CPU. And we have a significant opportunity to build on this as we continue re-establishing Xeon's competitive strength and market leadership. This quarter, we also launched our Gaudi 3 AI accelerator, which delivers twice the networking bandwidth and 1.5x the memory bandwidth of its predecessor for large language model efficiency. While the Gaudi 3 benchmarks have been impressive and we are pleased by our recent collaboration with IBM to deploy Gaudi 3 as a service on IBM Cloud, the overall uptake of Gaudi has been slower than we anticipated as adoption rates were impacted by the product transition from Gaudi 2 to Gaudi 3 and software ease of use. As a result, we will not achieve our target of $500 million in revenue for Gaudi in 2024. That said, taking a longer-term view, We remain encouraged by the market available to us. There is clear need for solutions with superior TCO based on open standards, and we are continuing to enhance the Gaudi value proposition. In NEX, we announced last month that we will be focusing the business on networking and telco as part of our efforts to simplify our portfolio, drive productivity, and enhance our market position. We will move our edge business into CCG, which creates a meaningful opportunity to more efficiently leverage our core client business and extend our leadership to a wide range of vertical edge solutions, especially as AI on the edge accelerates. As a simpler, more focused NEX, we are better positioned to gain profitable share in the most attractive markets in networking, We continue to further open source Ethernet solutions for connectivity through our Ultra Accelerator Link and Ultra Ethernet Consortium. Let me now turn to Intel Foundry. A key part of our strategy is returning to process leadership through disciplined execution of our roadmap. Intel 18A, our fifth node in four years, is healthy and continues to progress well at this stage in the development process. Our lead vehicles for Intel 18A, Panther Lake, and Clearwater Forest have met early 18A milestones ahead of next year's launches. In addition, we have seen good traction with the release of our 1.0 PDK last quarter and the material increase in the engagements and the number of RFQs we are actively quoting. While we will not win them all, we are confident in our head-to-head position based on feedback from potential customers. Most recently, as announced, we are finalizing a multi-year, multi-billion dollar commitment by AWS to expand our existing partnership to include a new custom Xeon 6 chip on Intel 3 and a new AI Fabric chip on Intel 18A. Beyond AWS, we added two additional 18A wafer design wins this quarter from compute-centric companies, and our pipeline of potential wafer designs has grown nicely over the quarter. Given our leadership and advanced packaging capabilities, we also added multiple back-end design wins this quarter. We were also awarded an additional $3 billion in direct funding under the Secure Enclave program to produce leading-edge semiconductors for the U.S. government. We are proud to be the U.S. government's partner of choice to fortify the domestic semiconductor supply chain and ensure the U.S. maintains its leadership in advanced manufacturing, microelectronic systems, and process technology. Moving forward, as we shared last month, we are creating clearer separation for Intel Foundry by establishing the business as an independent subsidiary. This is important to our external Foundry customers and will give us future flexibility to evaluate independent sources of funding and optimize the capital structure of Intel Foundry and Intel products. We are in the process of forming a fiduciary board for the new Foundry subsidiary, which will include independent directors with deep semiconductor experience. In our all other category, our number one priority is to unlock shareholder value. For Altera, revenue increased 14% sequentially and operating profit turned positive in Q3. We also announced the introduction of our new mid-range and small form factor products, Agilex 5 and Agilex 3, to serve broad market customers and segments. With an increasingly competitive roadmap, the business is well positioned to show continued top and bottom line improvements. Consistent with what we have said previously, We remain focused on selling a stake in Altera on a path to its IPO in the coming years. To that end, we have begun discussions with potential investors and expect to conclude in early 2025. For Mobileye, the company continues to be a leader in the development and deployment of advanced driver assistance systems. And by providing Mobileye with separation and autonomy, we have enhanced its ability to capitalize on growth opportunities and accelerate its path to creating even greater value. The company recently hosted an AI event, laying out a comprehensive strategy for camera-centric compound AI systems, providing a full range of autonomous driving solutions. Wrapping up, our Q3 results reflect heightened focus, discipline, and execution you can expect moving forward. We are rigorously managing our costs and improving our profitability to create long-term shareholder value. We are carefully managing our cash to strengthen our balance sheet and improve our liquidity. And we are staying closely connected with customers and partners as we innovate to meet their most challenging needs. Q3 also reflected some very difficult decisions we made to right-size the business, and I want to recognize the hard work of our employees. We put some points on the board over the past few months, but we are far from satisfied. We view every quarter as a new opportunity to up our game and continue to execute well, and that is our mindset entering Q4. With that, I will now turn it over to Dave.

Thank you, Pat, and good afternoon, everyone. Third quarter revenue was $13.3 billion, up 4% sequentially and in the upper half of the range we provided in August. Intel products and Intel Foundry both delivered sequential revenue growth, even as we navigated an inventory drawdown in clients. Turning to non-GAAP gross margin, as you know, last quarter, we guided gross margins of 38% but indicated that we expected incremental costs associated with our spending reduction plan, and some of those costs would likely impact non-GAAP gross margin. We recognized approximately $3 billion of non-cash impairment and accelerated depreciation charges, primarily for Intel 7, which are above and beyond our quarter-to-quarter asset adjustments, driving our non-GAAP gross margin down to 18% and EPS to a loss of 46 cents. This $3 billion charge reduced non-GAAP gross margin by approximately 2,300 basis points and EPS by approximately 61 cents per share. Beyond those impairment charges, we also were impacted by 15.6 billion of charges that are excluded from our non-GAAP results. These charges have three main components. First, we impaired our deferred tax asset balance by nearly $10 billion. which was triggered by cumulative gap-based losses over the last three years. Second, a $2.6 billion goodwill impairment related to Mobileye, which shows up in our consolidated earnings. And lastly, is $2.2 billion associated with the severance of approximately 15% of our employees aligned with our plan to reduce operating expenses to $17.5 billion and take out $1 billion of other costs of sales next year. This last charge is the only charge with a cash impact. The tax asset impairment charge will not affect cash taxes going forward, and full details are in the 10Q, which will be available tomorrow. Q3 operating cash flow was $4.1 billion, up approximately $1.8 billion sequentially on better working capital. We had growth capex of $6.5 billion in the quarter, resulting in adjusted free cash flow of negative $2.7 billion. We expect the principal cash cost associated with the restructuring charges to land in Q4-24. We have $24.1 billion of cash in short-term investments, paid down $2.8 billion of debt in the quarter, and remain focused on delevering next year as cash from operations continues to improve. Moving to segment results, Intel products revenue was $12.2 billion, up 3% sequentially. CCG revenue was down 1% quarter over quarter as customers worked down their inventory as expected. DCAI revenue was up 10% sequentially as demand for traditional servers improved. Revenue for NEX was up double digits sequentially as elements of this business start to recover off a cyclical bottom. Q3 operating profit for Intel products was $3.3 billion, 27% of revenue, and up $400 million quarter over quarter on higher revenue and reduced operating expenses. Operating income was negatively impacted by a $300 million write-down of accelerator inventory due to reduced revenue expectations. Intel Foundry delivered revenue of $4.4 billion up slightly sequentially driven by increased wafer mix of Intel 4.3. Foundry operating loss of $5.8 billion was down sequentially materially driven by the $3 billion impairment charges I discussed earlier. We expect losses to continue at approximately the same rate in Q4 minus this impairment charge. Next year, as we move to nodes with a better cost structure and realize the savings associated with the restructuring actions, we expect operating losses to improve significantly. Additionally, we're intensely focused on driving improved returns on our roughly $80 billion of tangible book value, most of which is associated with Intel Boundary. Mobileye reported revenue of $485 million and maintained full year guidance for revenue and adjusted operating income. Q3 revenue was down 8% year over year, primarily driven by a more than 50% reduction in shipments to China, where comparisons will become easier as the exposure is now significantly smaller. Cash generation was quite strong as operating cash flow was well above operating income. Altera delivered revenue of $412 million, up 14% sequentially, consistent with guidance to support improved lead times by our distribution partners. Operating margins increased sequentially by 900 basis points on better gross margins and spending discipline. For Q4, we expect high single-digit sequential revenue growth as we work with our distribution partners to prepare for the cutover to Altera independent warehouse operations. Overall, billings remain below consumption as end customers continue to work down inventory tied to previous supply constraints. We anticipate inventory normalization will continue through the first half of next year. Now turning to our Q4 guidance. We successfully worked down client-customer inventory levels in Q3 in line with our expectations, and despite continued client-customer inventory reductions in Q4, CCG should grow towards the higher end of seasonal, often abnormal Q3. Revenue is expected to be flat sequentially across DCAI and NEX businesses in aggregate. Based on these factors, we expect revenue of $13.3 to $14.3 billion in the fourth quarter. At the midpoint of $13.8 billion, we expect gross margin of approximately 39.5%, with a tax rate of 13% and EPS of 12 cents, all on a non-GAAP basis. On a GAAP basis, as we continue to execute on our cost actions and portfolio decisions, we expect additional restructuring charges in Q4. We continue to size the business to support trendline revenue growth of 3% to 5% annually, with the ability to scale up to 7% to 9% as demand dictates. We anticipate that our 2024 gross and net capital investments will be approximately $25 billion and $11 billion, respectively. Our expectation is for adjusted free cash flow to be negative in 2024 due to the restructuring charges disclosed today and the uncertainty around the timing of capital offsets as we approach year end. With OpEx of approximately $17.5 billion and gross and net CapEx of $20 to $23 billion and $12 to $14 billion respectively, we expect to achieve positive adjusted free cash flow. Before I close, let me take a moment to remind you of a couple items as you model 2025 and that today's restructuring and impairment charges are in service to achieve this financial model. First, We are positive on the growing market adoption of the AIPC and our strong product positioning. As our mix of outsourced products and CCG grows in calendar year 2025, and we ramp Intel 18A to support Panther Lake, gross margin expansion could be muted, particularly in the second half. We expect gross margin fall through to significantly improve in 2026, driven by the vastly improved cost structure of Intel 18A, the return of tiles to a meaningfully underutilized Intel foundry, and operational efficiencies. Second, the estimated $700 million on a GAAP basis of non-controlled income from Mobileye, Altera, IMS, and the portion of the skips earned by our partners is expected to be heavily weighted to the second half of 2025 and will continue to grow in future years with the ramping of wafer outs at our skip fabs in Arizona and Ireland. In closing, our profitability remains well below the standards we've set and recognize there's much more work to be done to improve the efficiency of the business. We're encouraged by the progress we've made this quarter to right-size the spending, and our process and product execution, combined with the strong external customer traction in the quarter, give us confidence our strategy will deliver compelling shareholder returns. I'll now turn it back over to John to start the Q&A.

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

Certainly. And our first question for today comes from the line of Ross Seymour from Deutsche Bank. Your question, please.

Hi, guys. Thanks for letting me ask a question, and congrats on the solid results. Pat, I want to talk about the 18A transition. Can you just talk about what are the metrics we're going to be able to see externally on this to give people confidence in the ability to ramp it? You've said it's healthy. You've talked about new design wins. But when are some of the true metrics going to come, either internally or perhaps even more importantly, externally, as your Intel foundry revenue from an external customer base grows?

Yeah, thanks, Ross. And obviously, this was a good quarter on the progress that we had. Three new customers, Amazon, which we were public on a few weeks ago, Panther Lake, and Clearwater Forest internally. Two new external customers added to that, so solid progress on it. Clearly, next year, there's not a lot of financial benefit from it because we're only ramping late in the year. Thus, we'll be giving more qualitative metrics on progress as we go through the year, Ross. We'll continue to update, give LDV updates, lifetime deal value for foundry updates as we go through the year. Clearly, as we get more customers, we'll be updating on that progress. It has much larger impacts on 26 financials as we ramp and bring wafers home, as well as move into the better margin structure that we'll have on Panther Lake with 18A and across the product line. So we'll be giving clarity in that way, but it will be hard to tie it to specific financials next year. But this is super important for us, for our foundry business, for the industry. So we'll be giving plenty of color as we proceed.

Ross, do you have a follow-up question, please?

Yeah, I do. One for Dave on the gross margin side of things. Just somewhat chronologically, X the charges, it looked like you were about a 41% gross margin in the third quarter. I know that's not where you want to be overall, but that's much better than you guided. So what was the cause of the upside there? Why is it going down in the fourth quarter? And what are the big picture puts and takes that you were alluding to about the gross margin leverage or lack thereof, especially as we get into the second half of next year?

Yeah, good question. Okay, so I would say the third quarter surprise was really associated with better sell-through of previously reserved inventory. I think that was the thing that upsided us the most in the third quarter. As we look into the fourth quarter, we'll have that, you know, better sell-through won't repeat itself. So that will be a fundamental driver of why the gross margins kind of slipped down, you know, absent the impairment charge. And additionally, we're going to have more startup costs in the fourth quarter associated with 18A than we did in the third quarter. So that's going to put a little pressure on the gross margins. But I do think the 39.5% guide at the midpoint for the fourth quarter is a pretty clean guide. It has less kind of noise around it than some of the previous quarters. So I think it's a good kind of metric to kind of start to inform how uh 25 will look in terms of gross margins we're not going to provide guidance yet on 25 it's it's still early um i would say you know the puts and takes of it are for sure as pat indicated we're all in on aipc and in particular we're all on on lunar lake which is our next generation product you know as you know lunar lake has the memory in the package you know that affects the gross margins and i think it's going to weigh down uh the gross margins on the product side of the business um you know for us in 25. now As you know, Panther Lake's the next one. The margins get better just at the product level, but they also include more mix of wafers internally, which also helps the foundry business. So as we get more volume ramping in 26 in Panther Lake, that's going to be helpful for gross margins. On the foundry side, we will see improvement next year. You won't see it because we don't report it at that level, but we will see gross margin improvement on the foundry side as we step into 25, partly because of the reductions we talked about. As we talked about, we're going to reduce our spending by more than $10 billion. A billion of it is directly in cost of sales associated with the Intel foundry business getting more efficient in terms of their spend. Additionally, we're just going to be mixing more to EUV wafers. EUV wafers have a better pricing dynamic. They have a better cost structure on a relative basis. So we see improvement there. I've been pleased with just the new model of managing the Foundry business with a P&L. I've seen all kinds of better decision-making going on, both at Foundry and at the product side, just to optimize their cost structure in a better way, and that should help as well. Longer term, I just think as we continually improve our product portfolio, both in Foundry and products, that usually commands a better margin profile and will also Longer term, be a tailwind, but not yet, I think, something that shows up meaningfully in 2025.

I would just add that, as we indicated on our last quarter earnings call, as we go through this restructuring phase, we're in the next phase of our transformation. With that, we're much more focused on the sustainable business model results, shareholder return, financial disciplines. The first phase was very much about getting back in the game. getting process in place, getting shell ahead in place, getting our products competitive. So I think overall, Ross, we're going to be much more focused on it. Those are the tough actions we've taken this quarter on getting our cost base where we need to be. And overall, the operating margin, the gross margins of the company, overall cost base, CapEx investment, they're just getting a lot more attention from us as we go forward.

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

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

Thanks a lot. Pat, I think you mentioned at a conference maybe in September that defect density on 18A is, you said, sub 0.4, I think. Can you just talk about how that translates to yields? Is that sort of a good enough number to translate into high volume and And what sort of number for, say, defect density does a customer want to see when they're looking at your foundry?

Yeah, and defect density, it's a complex conversation, Tim, because big die sizes have lower percent yields, right, even at the same defect density. So it's very variable depending on the particular die size of the product. So When we said the D0 of less than 0.4, that was a healthy yield number at this phase of the process development. That's not yet a high-volume production yield level, but we're not at that phase of the process development yet for 18A. So it's a number that says we're at where we'd want to be at this point in the process development lifecycle. Clearly, as you bring it to high-volume production, which we'll be doing in the second half of next year, we have to be markably lower than that in terms of defect density. But we believe that we see all the signs, the signals, and we're managing this very carefully to accomplish that as we get to next year. Similarly, as we look at today's Intel 3, we're accomplishing the defect densities with the maturity levels that we'd expect on that. But again, yield in the process technology is something you're never done with. You hit key milestones on quality, yield, and then you go into high volume production and you continue to work on that going forward. I'd also emphasize that the Arizona ramp is important for us as we move to 18A, you know, and that comes online in volume in the second half of next year, you know, and that's all on track as well as we have tool move-ins, you know, EUV tools and qualification now, first wafers coming out of the volume fab in Arizona in Q1 of next year. So overall, you know, we're progressing well, and we'll be giving you updates as we proceed.

Tim, do you have a follow-up question?

I do, yeah. I have a question on... Panther Lake, Pat. So I know that it's coming back in-house, but we do still hear that most tiles are still being outsourced. Can you speak to that? Is that a change or was that always the plan? And I guess when you look at Nova Lake on the desktop side, is it still being dual track, meaning that there is still an option that it could be outsourced or is it guaranteed to be brought back in-house? Thanks.

Yeah, thank you. Panther Lake, you know, some tiles will be external, but the majority of the millimeter square in the package are back internal. It's more 70 plus percent of the silicon area is back in house. So the majority of Panther Lake wafer capacity by a good margin is coming back inside for Intel. You know, Nova Lake, you know, we definitely have some SKUs that we're looking at continuing to leverage externally, but the large majority of Nova Lake and more of the additional tiles have come back in-house as well. So we still have some flexibility in the Nova Lake product, but the large majority of that is committed to the Intel product or Intel foundry. So overall, we are absolutely executing on the bringing wafers home strategy that we've laid out. That said, TSMC has been a great partner. Clearly, Lunar Lake has demonstrated the strength of that partnership. and one that we'll use selectively in our product lines for the future. But a large percentage of wafers coming home, that meaningfully fills our factories, that also meaningfully improves the margin structure of Intel and Intel products.

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

Certainly. Our next question comes from the line of CJ Muse from Cantor Fitzgerald. Your question, please.

Good afternoon. Thanks for taking the question. I wanted to follow on that last question. In terms of the optionality in terms of securing leading edge capacity, obviously you're all in on 18A, but if that were to get delayed, you know, what do you have in terms of negotiating capabilities in terms of securing capacity in 26, 27? And on the other hand, if 18A proves to be more successful, you know, how are you thinking about timeframe of being more aggressive in terms of adding capacity in Arizona?

Yeah, thank you, CJ. I'll say, you know, we have optionality in the product portfolio that way. We have more resilience in our supply chain than, you know, competition does as a result. So we feel quite good about that. You know, we continue to, you know, really value the relationship, right, with TSMC. And our product portfolio is set up very nicely. With respect to 18A capacity, given our shell ahead strategy and the investments that we've made over the last several years, we have a lot of flexibility to scale up if market conditions require for our products, but also if market conditions require for our foundry customers as well. And given the margin stacking nature that we uniquely are able to benefit from, every wafer we bring home adds to the margin structure of Intel in a meaningful way. So we really are setting ourselves up very nicely for the future. And as we make progress on 18A, 18AP, 14A, You know, an aggressive roadmap, advanced packaging, which is uniquely based on Intel technologies and finding more momentum in our product line, but also in our Foundry customers. You know, we really are starting to see the benefits of the long-term strategy that we've put in place with Intel products, with Intel Foundry.

CJ, do you have a follow-up question?

I do. You know, following the Better the Consensus Guide for Q4 guidelines, Could you give us an early read on how you're thinking about seasonality into Q1?

Yeah, so we're not going to provide CJ guidance for Q1. Let's work on Q4, and we can update you in January. The average seasonality for Q1 is in the 8% to 10% range, and we'll give you more color as we get into next quarter's earnings, whether we are going to be seasonal or see things differently than that.

Yeah, and I'll say, overall, it's hard to say. We have geopolitical factors and other things that the world is looking at, and I don't think we have any wisdom beyond that at this point. We're clearly trying to manage the business to a cost structure that we're very comfortable with. But as we indicated by the last question, CJ, we have a lot of flexibility to scale up if necessary, or we have the opportunity to do that as well. And, you know, overall, there's quite a bit of uncertainty, I think, in the marketplace. So our strategy positions as well to deal with those overall uncertainties that we don't control, but we're very committed to control what we can directly do.

Thank you, TJ. 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. For the first one, I wanted to go back to 2025 and how we should kind of conceptually look at it. I think at one point in the trend line of 3% to 5% growth top line, is that how we should think about sales? And then on the gross margin side, Dave, you said that, you know, muted expansion. I don't know if I look at your Q4 of 39.5. Is that sort of what you imply here? for 2025. And I ask that because I think at some other point you also mentioned headwinds in the second half of 2025. So that got me confused as to whether it could dip below these levels. I know you're not giving 2025 outlook, but you did give a trendline number and you did kind of give us the 39.5% metric. So any color would be very useful.

So on revenue growth, again, we're not going to for 2025, I'd say just that we are managing the business in terms of how we're investing in the business to a 3% to 5% growth rate next year, but, you know, over time in our minds. And, you know, if things turn out to be better, then that's, you know, that's good fall through to us from a profitability perspective. I wasn't suggesting that, you know, you take the 39.5% and you move it, you know, every quarter. Clearly every quarter is going to have some unique aspects to it. Only that 39.5 was a quarter in which it was clean, and it was a good proxy to start the calculation for the full year of 2025. You're right, yes, we do see more headwind in the second half versus the first half, given Lunar Lake becoming a more meaningful part of the volume over time for 2025. Again, that starts to improve in the following year as Panther Lake becomes more and more meaningful. part of the volume for the client business in 2026.

Vivek, do you have a follow-up question, please?

Yes. Thank you, John. So maybe one for Pat. Pat, what does the future look like for Intel's data center if there is no competitive AI product? You know, is just being CPU-centric good enough? You know, at what point does the CPU get commoditized by custom chips or replaced with ARM-based products? What is Intel's AI strategy right now?

Yeah, thank you, Vivek. Maybe three different perspectives just to highlight. Number one is the CPU plays an increasing role in data center AI compute. And even in cloud-based environments today, head nodes are an area of strength. for Intel Xeon already, as I reflected in my comments. As you go into enterprise AI, we expect it plays a more prominent role. Databases, embeddings, refinement are much more attuned to CPU workloads. And our strategy there is CPU plus accelerator or CPU plus Gaudi. So we see the enterprise use cases having a very long history life associated with them going forward. Second, as I said, Gaudi 3, good product. And seeing good early interest from customers. We mentioned the IBM win, but a good pipeline of activities there. So Xeon plus Accelerator in that regard. And as we launch this quarter, we also have the x86 ecosystem advisory. We are breathing life into the x86 architecture, and we're seeing extraordinary interest from the industry, from luminaries, and how we build on that momentum. So we definitely want to be very front-footed with x86 for a full range of use cases, but also the AI use cases as well. And the industry is quite interested in joining us, participating and expanding the world's greatest architecture of all time, The most industry influence, the broadest number of ISVs and applications, and continuing that momentum forward.

Thank you, Vivek. Jonathan, do we have the next question, please?

Certainly. And our next question comes from the line of Aaron Rakers from Wells Fargo. Your question, please.

Yeah, thanks for taking the question. I appreciate it. Two questions, if I can, as well. So first on the foundry business, as you guys ramp that, we start to focus on the ramp of 18A. Looking forward, given the pipeline of the design wins that you guys have talked about, I'm curious, how large is your external piece of that call at $4.4 billion revenue in this most recent quarter? I think it was about $77 million last quarter. And how do we think about the pace of that kind of inflecting higher as we look out into 2025, 2026? I'm just curious how you would define success in that external business.

So overall, the external foundry business will be a modest portion of the foundry business for the next couple of years. The foundry revenues will be dominated by the internal products as we've been building that portfolio for many years. So we'll ramp as we go through the rest of the decade. We said our financial objectives by the end of the decade are $15 billion plus of external foundry revenue. We'll be giving periodic updates on LDV, lifetime deal value of external Foundry customers as we go forward, and indicators like we did this quarter of new design wins, new customers coming online. But the reported numbers for Intel Foundry will be substantially dominated by the Intel products for the next couple of years. That said, we saw a nice growth. quarter on quarter in the external foundry business. And we did break profitable for the advanced packaging portion of that business in Q3. So we are seeing nice growth characteristics, nice business characteristics, and we'll be giving more updates as we go forward. Dave, anything to add on that?

No, I mean, other than it was up a bit this quarter, but still dominated by internal business within the Intel foundry business.

Aaron, do you have a follow-up question?

Yeah, I do. Thanks. Real quickly on the server side of the business, kind of off the prior question, I guess, you know, there's a continual discussion or debate of, like, Intel's positioning as far as stabilizing or recapturing share position in x86 service. I'm curious, you know, as we think about Granite Rapids, we think about, you know, Clearwater Forest and Diamond Rapids. How do you characterize your ability to kind of your views of recapturing share in that server CPU market? Thank you.

Yeah, thank you, Aaron. And I'd say our goal is stabilize our position and grow from that position. And this was a solid quarter for our execution. Clearly, Xeon 6, Granite Rapids, and Sierra Forest now fully shipping and available are important milestones. Obviously, the AWS deal was a very nice deal because it reinforces Xeon, but also our expanding role of customization. So I'll say, you know, the first order of business is hold share and then regain share. You know, the strength that we've seen for Xeon is this AI head nodes, these AI use cases. We have very good performance on Granite Rapids for AI use cases. You know, and as we look to the future, you know, getting just more competitive on basic power performance per core and fighting for a share there is clearly the strength. initiatives that we have underway you know clear water forest powered on right showing health of 18a diamond rapids will shortly go into fab so the road map is uh in good solid shape uh as well so i'd say overall you know we feel uh that is a good pathway and if i add to the last question as well for ai i'd also emphasize that you know all the energy has been in training And all of that associated with cloud-based training. But training is creating the weather model, not using it. And increasingly, I think every analyst is putting more and more attention to how do we use those models? How do we inference against them? How do we retrain for our localized data? How do we complement that with RAG and database embeddings? And all of those are areas that are much more CPU-centric. So the strength of our CPU and its unique power in some of these AI use cases as well is something we see the market coming more toward us and the strength that we've traditionally had.

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

Certainly. And our next question comes from the line of Srini Bajeri from Raymond James. Your question, please.

Thank you. Pat, I have a question on the foundry side, in particular the packaging business you have. I know there's a lot of skepticism about AT&A, but I think you guys have pretty good packaging technology, and it's proven, I believe, if I look at EMEA, Benfavros, et cetera. So my question is, given the tightness in the packaging industry right now, I would have thought we would see more interest in your packaging services. So I'm just curious as to why We are not seeing that. Is it because it's, I guess, you know, there must be some nuances of using, you know, your packaging with TSM wafers. I'm just curious as to why we are not seeing more interest.

Well, I'd say we do see significant interest in this area. And, you know, moving your supply chains, though, is complicated and takes qualification time. And many of these designs were first designed on CoWAS, and now they're looking at Foboros. And then they're looking at the unique technologies that we have like EMIB as well. So we actually see very good momentum in that area. Now, those aren't as revenue producing as wafer designs, so they're not nearly as as large in size, but the pipeline of activities is very strong, and the quarter-and-quarter improvements we saw were largely driven by advanced packaging. Most of the external revenue that we'll see, which will be nicely up year-on-year as we go with the 25 in the external foundry, will be advanced packaging, and we also see healthy margins for that technology as well. So moving supply chains, always hard and slow, but the progress that we've seen already, the design wins that we already include in our LDV, and then the pipeline of additional designs that we're engaging in, all of us give us great optimism that this becomes a foundational piece of our foundry business for the long term. And as I noted in an earlier comment, we did see our advanced packaging now as a profitable business, a standalone by itself as well.

Srini, do you have a follow-up question?

Yes, I do. Thank you. I guess a question on the gross margin side, Dave. I guess, you know, there are two issues impacting your PC gross margins. One, the wafer outsourcing, and the other, you said, you know, packaging of the memory. I'm just curious, you know, how much of an impact that memory packaging is having on your gross margin? I suppose that helps your ASPs, but I guess it hurts your gross margin percent. So just curious to know how much of an impact that's having And then maybe, you know, for Pat, you know, architecturally, why do we need to, I guess, you know, combine memory in one package? And is this something that's, you know, going to be ongoing or is it just a one-off with, I guess, Lunar and Meteor Lake? Thank you.

Yeah. And just to be clear, it's exclusive to Lunar Lake, but not Meteor Lake. And it's having a pretty meaningful impact, a significant impact on Lunar Lake's gross margins. And, you know, originally we were like a third the volume in terms of our expectations next year. on Lunar Lake when we recognized how important the AIPC market would be and how good this part was competitively, we pushed the volume significantly up. And so that has put some reasonable pressure on the gross margins for the total company.

Yeah. And maybe architecturally, the second half of that question, Lunar Lake was initially designed to be a niche product that we wanted to achieve highest performance and great battery life capability. And then AIPC occurred. And with AIPC, it went from being a niche product to a pretty high volume product. Now, relatively speaking, we're not talking about 50, 100 million units, but a meaningful portion of our total mix from a relatively small piece of it as well. So as that shift occurred, obviously this became a bigger margin implication, both for Lunar Lake and for the company But we were very pleased to have the option to scale Lunar Lake in higher volume because of the momentum energy around the AIPC category. That said, a volume product in a volume industry like the PC industry, you don't want to have volume memory going through that channel. It's not a good way to run the business. So it really is for us a one-off with Lunar Lake. That will not be the case with Panther Lake, Nova Lake, and its successors. as well. We'll build it in a more traditional way with memory off-package and the CPU, GPU, NPU, and IO capabilities in the package. But volume memory will be off-package in the roadmap going forward, and we won't have this kind of impact that we're dealing with for 25 in the margin structure, specifically around Lunar Lake. But again, it's a great product, and we're happy that we have it in the portfolio, and we've scaled it commensurate with the enthusiasm of the AIPC category.

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

Certainly. Our next question comes from the line of Chris Casso from Wolf Research. Your question, please.

Yes, thank you. Good evening. I guess the first question is on both CapEx and OpEx as you go through next year, and I think you were very clear about, you know, what the plans are and what the resulting free cash flow is. I guess, Dave, the question is how much flex, you know, may be in those numbers You know, I guess as you go through 25 and 26 as well, given the fact that you do have to invest in new technology nodes, you know, how much flex is there for, you know, changes in market conditions? Also recognize that you don't have very much revenue growth in the plan for that as well.

Yeah, I think on the $17.5 billion for OPEX, that's a pretty firm plan. I mean, obviously, we can make some adjustments here or there if necessary, but we think we right-size the investments to invest in the most important areas that Pat and the team want to pursue. And so that I would say is relatively firm. Maybe there's just a little bit of variability there that we can make adjustments as we kind of progress through the year. The CapEx, there are three components to CapEx. There is what we're going to invest for the process, advancing the process. There's investment associated with this shell ahead, and there's investments associated with capacity. You know, we're always going to make those investments to advance the process. That will always be the case. Shell ahead, we will, but we have largely caught up, I think, you know, and so now we're going to be more measured, I think, as we look to, you know, increasing our shell capacity. And then capacity itself then becomes the flesh, you know, the tooling out of shells. And we're, you know, kind of modulating that based on what we see in terms of demand and, of course, managing it. relative to cash flow. So there obviously is flexibility there as we progress through the year and into the following year. And, you know, our goal is to generate free cash flow, to generate adjusted free cash flow next year and there and onward. So, you know, we'll be managing CapEx, net CapEx accordingly. I guess the one other variable to the net CapEx would be, you know, any of the offsets. And of course, you know, we're aggressively pursuing offsets some of which we know will already show up next year. Skip will be a component of our offsets next year. We're also going to start to see some more meaningful impact from the investment tax credit next year, which we have already baked into the forecast.

The thing I would just add a little bit to that, Chris, would be that now that we've gotten an EUV fleet into our CapEx base, we have a lot more flexibility across that fleet. largely the CapEx used for Intel 3, 18A, and 14A, highly leveraged across it. So we're much more building to overall capacity requirements and not this very rapid five nodes, four years, get back to a modern fleet of capability. Obviously, the other point to add to that is, now that we have finished this five nodes, four years, we're progressing to a more normal cadence of new technologies as opposed to this racing through capital. So that will also give us additional flexibility. And I'll say largely with the singular exception of hyena euv you know the equipment bases are almost entirely the same across the 14a node as well and even at hyena you know we've built flexibility into the td development that we have optionality to include or not include that as a central part of it so we've built a lot of you know capacity now we're going to leverage that capacity in much more efficient ways from both a overall high-volume manufacturing and a TD leverage going forward.

Chris, do you have a quick follow-on? I do, and I mean, it's a good segue in the next question, Pat, and it's, you know, I guess a question about your comments on Better Together, and if you could kind of explain the rationale of why you think that's the case. You know, obviously there's, you know, various opinions on that, and you know, if Intel would be willing or has looked at, you know, anything strategic beyond, you know, what the current plan is right now?

Yeah, and I'll just say, you know, we're very comfortable that moving to the subsidiary model, you know, as we outlined in the last earnings call, you know, gives us, I'll say, three things that we're aiming for, you know, greater operational, great integrity, right, as we create that clear separation, you know, the opportunity to be able to communicate that more clearly and definitively to our external customers, and then the potential to, you know, fund and manage the capital requirements of Foundry. You know, that said, the vast majority of volumes, you know, through the decade come from Intel products. The synergies of that co-development and customer zero aspect is very substantial as we see it. and the benefits that we get from the overall cash flows and managing the balance sheet of the company as we go forward are highly beneficial as well. So for all those reasons, our simple view is distinct, but better together.

Thanks, Chris. Jonathan, we've got time for one last question, please.

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

Great. Thank you. In your opening remarks, you talked about narrowing the product focus and prioritizing x86. Can you talk about, practically speaking, what happens there? Does that mean, are there areas that you're investing less in to focus more on x86? Is that a mindset shift, organizational shift? What do you mean by that?

Yeah, and there's a lot of details behind it, Joe, but I'll just maybe give a couple of quick examples. We, for instance, created complexity in the server product line, E-cores, P-cores, across different socket types And that complexity was maybe appropriate when the business was substantially larger and growing. At its current size, it puts too much complexity on our development, as well as our customers and OEM, how many SKUs they're developing. So we've taken steps to simplify the product line, have fewer SKUs to cover the marketplace, and we're focused on the efficiencies associated with that. Similarly, in the client product area, simplifying the roadmap, fewer SKUs to cover it. How are we handling graphics and how that is increasingly becoming large integrated graphics capabilities? So less need for discrete graphics in the market going forward. So simplifying the roadmap in those areas. And then the steps we took around our CCG and edge business areas. to be able to bring that together for better reach to the market, leveraging our core investments. So a variety of those, but many others, you know, behind that as we, you know, get ourselves, I'll say, you know, in fighting shape that allows us to leverage our investments, hit our $17.5 billion OPEX that Dave spoke about, and still have a, you know, a very solid growth in a more profitable way for the future.

Joe, do you have a quick follow-on? Yeah, I do. To the extent that you are kind of prioritizing the x86 leadership that you have, you know, does anything shift in the IDM 2.0 model? Is it that they referenced that the arm's length relationship with IFS is still going really well? Like, is that still a focus? You know, is there a benefit to, you know, if the focus is more on internal foundry versus excess to marrying those business more tightly? Just how do you think about that relationship?

Yeah. And, you know, clearly external foundry requires a different view of how you run and manage that business. But the wafers, the cash flows come from the internal business. So this subsidiary model is a key piece of how we're going to drive that cultural transformation, but still bring the success of an at-scale, leading-edge, Western-centered foundry model. That is an extraordinary asset for us, for the industry, and for the world. So we're very focused on making that successful. This has been an extraordinary journey to accomplish five nodes in four years and bring us from years behind to a leadership position in technology. And wow, it's just stunning to see what our TD teams have been able to accomplish there. But we're not done. We have a lot of work in front of us yet. We're well on our way to completing what will be one of the most seminal restructuring projects In the history, the steps that we took in our financial restructuring this quarter was very critical to be able to bring us to a point that we can say we have the capacity to and driving to long-term shareholder return. So maybe just as we wrap up, thank you, as always, for joining the call. We appreciate the opportunity to discuss our progress, the actions we've taken. Q3 was a good step. Now we need to finish the year strong and prepare for 2025. We're determined to get it right, and I look forward to the updates along the way. Thank you, and look forward to speaking to you all again soon.

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