Q3 2022 Intel Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Sure.
Thank you for standing by and welcome to Intel's third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your cell phone as a reminder, today's program is.
Recorded and now I'd like to introduce your host for today's program, John Pitzer Corporate Vice President of Investor Relations. Please go ahead Sir.
Thank you operator by now you Should've received a copy of the Q3 earnings release and earnings presentation, both of which are available on our investor website <unk> Dot com for.
For those joining us online today. The earnings presentation is also available in our webcast window.
And today by our CEO , Pat Gelsinger, and our CFO David <unk>.
In a moment, we will hear brief comments from both followed by a Q&A session.
Before we begin please note that today's discussion contains forward looking statements based on the environment as we currently see it as such it does involve risks and uncertainties.
Our press release provides more information on the specific risk factors that could cause actual results to differ materially.
We have also provided both GAAP and non-GAAP financial measures this quarter and we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings release and earnings presentation include full GAAP and non-GAAP reconciliations with that let me turn things over to Pat.
Thank you John and good afternoon, everyone. Despite growing economic headwinds Q3 revenue was flat sequentially and only modestly below the midpoint of our guidance in June we were one of the first companies to highlight an abrupt a pronounced slowdown in demand, which was brought up beyond our initial expectations and is now having an industry wide impact.
<unk> across the electronics supply chain.
We are adjusting our Q4 outlook and we are planning for the economic uncertainty to persist into 2023.
While we are not satisfied with our results we remain laser focused on controlling what we can and we are pleased that our PC share stabilized in Q2 and is now showing meaningful improvement in Q3, our server share while not where we wanted it to be is tracking in line with our expectations and we are encouraged by good execution in the quarter against our product roadmap.
In addition, we are intensifying our cost reduction and efficiency efforts and we are aggressively moving into the next phase of IBM to point out.
Geared to unlocking the full potential of the IBM advantage.
Afternoon, I will focus my comments on three areas one the key trends and dynamics that shape Q3 and are informing our outlook to the progress we are making on IBM to point out, including our momentum on process and product Roadmaps and our recent announcement that we are implementing an internal foundry model and three the actions underway to drive cost.
Savings and efficiency gains aimed at accelerating our transformation.
Specific to trends, we are seeing along with further deterioration in consumer PC demand in Q3 enterprise demand has begun to slow we expect PC units to decline mid to high teens to approximately 295 million units in calendar year 'twenty two.
Our own Q3 results reflect a strong product portfolio with Raptor like building on all the lakes momentum as well as working closely with customers to optimize their inventory our market share and business objectives. We are still shipping below PC consumption and the inventory correction continued in Q3, but not as quickly as we forecasted.
Importantly, however, PC usage remains strong demonstrating the increased utility and value of the PC and ultimately supporting a tam well above pre pandemic levels. We are targeting a calendar year 'twenty three PC unit Tam of between <unk> 70, and 295 million units with a strong brand and product.
And driving additional share, especially a premium asps.
The data center Tam is holding up better although enterprise in China continued to show signs of weakness as do some but not all cloud customers.
Across our infrastructure and industrial exposed businesses any X demand was very solid though not immune from the weakening economy PSG continues to be a true standout with record Q3 revenue up over 25% year over year PSG backlog is robust and it continues to be an area, where we are supply chain limited.
Yeah.
Despite the challenging business environment, we made solid progress toward our long term transformation in Q3, and we remain fully committed to using the macro uncertainty to accelerate our efforts each.
Each quarter, our confidence grows in achieving our goal of five nodes in four years, but until four we are progressing towards a high volume manufacturing and we will tape out the production stepping a meteor like in Q4 the.
First stepping of Grand Rapids is out of the fab, yielding well with Intel three continuing to progress on schedule.
Until four and three are our first loads deploying UV and will represent a major step forward in terms of transistor performance per watt and density on Intel 28, and <unk>. The first of those to benefit from ribbon Fettes empower via our first internal test chips and those are a major potential foundry customer have taped out with silicon.
Running in the fab.
We continue to be on track to regain transistor performance in power performance leadership by 2025.
<unk> is a major beneficiary of our TD progress we're excited to welcome Nvidia to the ramp C program, which enables both commercial foundry customers in the U S Department of defense to take advantage of Intel's at scale investments in leading edge technologies.
Since Q2, Iff's has expanded engagements to seven out of the 10 largest foundry customers coupled with consistent pipeline growth to include 35 customer test chips. In addition, iff's increased qualified opportunities by $1 billion to over $7 billion deal value.
All before we welcome the tower team with the expected completion of the merger in Q1 'twenty three.
On the product front, we had a busy quarter within client as mentioned earlier, we added to the strong alderley momentum with the launch of Raptor Lake desktop in Q3, driving a more than a 40% improvement in multi threat performance unquestioned leadership in gaming.
Gigahertz out of the box and record setting over clocking.
We currently have over 500 OEM design wins.
Until unison to deliver best in industry multi device user experience. In addition, we saw a meaningful development progress across multiple OEM designs on Intel four based media Lake with volume ramps in 2023.
We now have all elements of the <unk> portfolio of production with a 770, giving our discrete graphics efforts a strong boost the flex family is building a strong pipeline of data center use cases and pumps <unk> was now production of four HTC offerings and production blades deployed for lead customers.
Combined with Sapphire Rapids, Sapphire Rapids, HBM PVC is the basis for strong traction with HBC customers like Argonne National Laboratory in Germany, Leibniz Supercomputing Center.
<unk> and telcos alike continue to move to software based <unk> rebrand in ovarian deployments, we announced Sapphire Rapids E with <unk> boost for inline acceleration of <unk> network workloads.
Edge and AI are proving a powerful combination for us with open vino momentum building with customers like Chipotle, and we launched the Intel Getty computer vision software platform for rapid AI training with early customers, such as province, Royal Brompton and Harefield hospitals further evidence of our AI.
Portfolio, taking shape was seen by Red hat announcing support for goudy converged at Io and opened vino in.
<unk> announced goudy too with Sapphire Rapids for advanced AI use cases, Amazon will be accelerating large transform models with goudy instances in ECT.
This was also a very strong quarter for Dci execution Sapphire Rapids volume Skus have now peer acute with a high quality leadership product and a very strong volume ramp expected.
Google gave the first preview of it see three instead of showing Sapphire rapids capabilities as well as our leadership ICU, the 3200 or Mount evidence.
We also saw strong milestones in the next three generations of server products Emerald graph showing good progress and is on track for calendar year 'twenty three granite Rapids is very healthy running multiple operating systems across many configurations.
And with Sierra Forest, our first E core product, providing world class performance per watt or both solidly on track for 24.
It's obvious, but we're stating our strategy is only as good as our execution.
We have been taken aggressive action to rebuild our execution engine driving execution excellence across our people design and development and operations.
In Q1, I discussed are returned to okay ours and their importance to our culture.
Last quarter I touched upon the next evolution of our tick tock model or tech talk to as a disciplined approach to consistent predictable product execution.
This quarter I wanted to spend a bit of time on operational excellence and discuss our recently announced the IDM two point acceleration office or.
Oh.
<unk> in the next phase of our IBM two point of this strategy.
During the first phase of IBM to point out we aggressively focused on making the needed investments to approve our TD roadmap to regain transistor leadership and to ensure we have at scale manufacturing capacity by building ahead on shelves.
Improvements in both areas now enables us to move forward with our next set of priorities evolving our systems business practices and culture to embrace an internal foundry model and establish a leadership cost structure.
This means we will create what I'd like to call, a new and clean API for the company by establishing consistent processes systems and guardrails between our manufacturing teams and our business units. This will place or be used on the same economic footing as external iff's customers and will allow our manufacturing group and be used to be more.
Agile make better decisions and uncover efficiency and cost savings.
We have already identified nine different subcategories for operational improvement that our teams will aggressively pursue.
For example product teams will be heavily incentive to drive to high quality AC step because they see the full cost of stepping validation cycles hot lots and capacity changes.
<unk> factories will move to rigorous capacity loading cycles transparency of costs for loading changes and efficiency of capital utilization structural and variable wafer costs and.
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 and will also provide improved transparency to our owners as we expect to share full internal foundry P&L into calendar year 2000.
For ultimately, allowing us to better judge, how we're creating value and allocating your capital.
A key benefit of IBM to point out was to unlock our full financial potential by capturing multiple profit pools not available to any one of our peers across architecture design wafer manufacturing advanced packaging supply chain and software.
These pools were only partially.
Long term margin targets, we established at Investor Day in February .
Simple math would suggest there is meaningful upside to those targets as we execute and exploit the margin stacking potential IBM to point out provides best in class semiconductor companies achieve gross margin in the <unk> and operating margins in the 40% and we aim to be best in class. This next phase of IBM to <unk>.
A significant evolution in how we think and operate as a company, but just as we optimize to drive outside returns in the <unk> era, we will optimize to achieve best in class returns in the IBM to Arrow, It's what engineers do and we have the best engineers on the planet.
Complementing and augmenting these efforts will be an intensified focus to reduce costs and drive efficiencies in everything we do.
As we stated during Q2 earnings we have an obligation to our owners to be good stewards of your capital. We are responding to the current environment by taking aggressive actions to reduce costs across Cogs and opex, while mindfully protecting the investments needed to accelerate our transformation and ensure we are well positioned for long term market growth.
<unk>.
In addition to reducing near term costs. We have also identified structural cost reductions and efficiency drivers, which Dave will outline a bit later.
In aggregate our efforts should drive 3 billion in annual savings in the near term and 8% to 10 billion by the end of 2025 not captured in these estimates are the startup costs to support five nodes in four years, which will begin to subside beyond calendar year, 'twenty six adding an additional $2 billion in Cogs.
Savings inclusive and our efforts will be steps to optimize our head count.
These are difficult decisions affecting our loyal Intel family, but we need to balance increased investment in areas like leadership in TD product and capacity in Ohio in Germany with efficiency measures elsewhere as we drive to have best in class structure.
We will also continue to use our smart capital approach to support and inform our capital spending aspirations aggressively building ahead on shelves, while aligning equipment purchases and installs with customer demand.
We continue to see skips like our partnership with Brookfield.
Innovative financial structure to more closely align fab buildout costs with fab output returns Likewise, we see U S and EU chips is vital to enable us to establish a geographically diverse and secure supply chain for the semiconductor industry, we are confident and re accelerating free cash flow growth and driving.
Industry, leading free cash flow margins once you get through this period of economic uncertainty affecting the entire industry and our own elevated investments to accelerate our transformation.
Lastly, I was particularly pleased to join the mobile line team earlier. This week in New York to witness firsthand the successful completion of their IPO, especially in a difficult market.
We believe that this will help unlock mobilized full operational and financial potential and as an additional avenue to create value for our owners, we remain committed to optimizing our value creation efforts through portfolio honing reallocation of resources to higher returns higher growth businesses M&A than we are at.
Applicable divestitures.
Before turning it over to Dave I want to close by saying I continue to be heartened and impressed by the dedication and commitment of all of our employees by far the most important to owners of this great company. They are passionately committed like me to reestablish Intel as a dominant driver of innovation and by the opportunity to improve the lives.
Everyone on the planet.
It was also rewarding to see that same drive and dedication in the faces of our broader developer community at Intel innovation, the rebirth of Intel IVF in September .
We are the building blocks and enabler of their vision and aspirations and it is our commitment to them to be great partners and collaborators our ambitions are equal by our passion and our efforts across manufacturing design products and foundry are well on their way to driving our transformation and creating the flywheel which is.
IBM to point out.
Thanks, Pat and good afternoon, everyone. We had a solid third quarter, despite the macroeconomic headwinds impacting the semiconductor industry.
We expect these headwinds to persist and as a result, we're lowering our expectations for the fourth quarter.
We will continue to be laser focused on the things that we can control and use economic uncertainty to accelerate our transformation and drive cost cutting and efficiency gains.
Moving to Q3 results.
Revenue was $15 3 billion flat sequentially and only modestly below the midpoint of our guide.
Q3 revenue benefited from CCG strength offset by declining Tam in Dci and any X.
Gross margin for the quarter was 46% below our guide, but largely in line relative to lower Q3 revenue.
Q3, gross margin increased 100 basis points sequentially on lower inventory reserves.
EPS was <unk> 59.
24 cents above our guide largely on lower than forecasted taxes.
Adjusting for the lower tax rate.
<unk> would have been 37.
<unk> of our guide on better expense management.
Operational cash flow for the quarter was $1 billion.
Net capex for the quarter was $7 3 billion.
<unk> and an adjusted free cash flow of negative $6 3 billion.
And we paid dividends of $1 5 billion.
Our balance sheet remains strong with cash balances of $23 billion modest leverage and a strong investment grade credit profile.
Turning to our business unit results.
CCG revenue was $8 $1 billion.
Up 6% sequentially driven by higher Asps.
On better mix and also benefiting from our efforts to work with customers to maximize our share position ahead of Q4 price increases.
CCG revenue was down 17% year over year as customers continue to reduce inventory and we continue to under ship demand.
Demand weakness year over year was most pronounced in the consumer education and small medium business market.
Operating profit was $1 7 billion.
Up $570 million sequentially and down 54% year over year on lower revenue increased 10 nanometer and Intel seven mix and increased spending to further strengthen our product roadmap.
Dci revenue was $4 2 billion down.
<unk>, 27% year over year on Tam reductions and continued competitive pressures, even if market share continues to track in line with our expectations.
Operating profit was $17 million below expectation and down significantly year over year.
Profitability was impacted by lower revenue higher.
Higher advanced node startup cost and higher product costs on transition to 10 nanometers.
We also continue to invest aggressively in the product roadmap.
<unk> revenue was $2 3 billion.
Up 14% year over year on increased demand for <unk>, Ethernet and edge products, partially offset by lower network on demand.
In Q3, we started to see macro driven demand softness and customer inventory management impact any X.
Operating profit was $75 million down 85% year over year due to the impact of softer demand on inventory valuation and increased roadmap investment.
<unk> revenue was $185 million up 8% year over year on the ramp of our block scale products.
Operating loss was $378 million $129 million better sequentially, but $156 million worse than year over year due to softer demand and product readiness impacting inventory valuation as well as increased investment to deliver the visual supercomputer and custom accelerated graphics roadmap.
Yes.
Mobile AD revenue was $450 million up $124 million from Q3, 2021, primarily driven by higher demand for IQ products.
Operating income was $142 million up $15 million from Q3, 2021, primarily due to higher revenue.
<unk> revenue was $171 million down 2% year over year, driven by automotive weakness with customer, citing third party components shortages, partially offset by growth in core foundry and EMS businesses.
Operating loss was $103 million versus an operating loss of $44 million in Q3, 'twenty, one an increased spending to enable our foundry growth strategy.
Turning to Q4 guidance.
Given the deteriorating macro environment and based on input from our customers. We're now guiding Q4 revenue in a range of 14 billion to $15 billion.
The sequential decline driven by lower CCG revenue as customers reduce inventory lower any ex Tam and continued Dci headwinds.
Were forecasting gross margin of 45% a tax rate of 14% and EPS of <unk> 20.
At the midpoint of revenue guidance.
For Q4, adjusted free cash flow, we expect to see a meaningful sequential increase driven by working capital improvements and a $2 billion reduction in net capex adjusting for a lower demand environment.
These benefits will be partially offset by lower revenue and as a result, we're reducing our full year adjusted free cash flow guidance to negative two to negative four $1 billion.
There is also a possibility that a portion of expected capital offsets could move from Q4 to Q1 shifting to cash flow benefit into next year.
Consistent with our short term financial model discussed at our Investor Day in February our continued intent is to manage adjusted free cash flow at approximately breakeven as we go through this period of accelerated and elevated investments supported by our smart capital approach and the multiple pools of capital available to finance our strategy.
Now turning to our long term outlook and the changes, we're making to transform the business.
Beyond Q4, there is a high degree of macroeconomic uncertainty and it appears that the current challenging market environment, we will extend well into 2023 with the potential for a global recession.
Further as I discussed in Q2 earnings it is imperative that we drive for world class product cost and operational efficiency to achieve our long term financial model.
As Pat detailed earlier to accelerate this transformation, we're forming the IEM two point acceleration office and doubling down on our efforts to reduce costs and find efficiencies across the organization.
We will start with a focus on driving $3 billion of cost reduction in 2023, one third in cost of sales and two thirds in operating expenses.
Note that our Q3 results include GAAP restructuring charges of $664 million that reflect initial efforts to rightsize, our business and deliver these savings in.
In Q4, we expect to have additional restructuring charges of similar magnitude as we further rationalize our 2023 financial plan.
Longer term, we will execute on continued structural cost savings and efficiency gains, which we expect to drive $8 billion to $10 billion in annual savings by the end of 2025 split roughly two thirds in cost of sales and one third in operating expense.
These savings will be realized through multiple initiatives to optimize the business including portfolio cuts.
<unk> sizing up our support organizations more stringent cost controls in all aspects of our spending and improved sales and marketing efficiency.
Pat outlined also critical to driving this transformation is the implementation of our internal foundry operating model dramatically, increasing financial accountability and transparency, enabling all organizations to drive to world class product cost and efficiency benchmarks.
In addition, as we emerge from five nodes in four years and slow our technology development cadence, we expect an additional approximately 200 basis points of gross margin. After 2026, we expect these efforts to provide potential upside to the financial targets. We provided at the February Investor Day.
This will be a multiyear journey, but as Pat said earlier best in class semiconductor companies have a financial profile that includes gross margins in the <unk> and operating margins in the <unk> and we aim to be best in class.
In the short term, we will continue to manage to the Opex net capital intensity and adjusted free cash flow guardrail established and drive back to our gross margin percentage range of 51% to 53% once economic conditions improve and revenue growth returns.
In closing, we remain committed to the strategy and financial model communicated at Investor day, the compelling long term financial opportunity of strong revenue growth across our six business units and free cash flow at 20% of revenue remains and I believe this downturn represents an opportunity to more quickly make the transformation necessary to.
These goals with that let me turn it back over to John and get to your questions. Thank.
Thank you Dave as we move into the Q&A session. We would ask that each participant ask one question and where appropriate a brief follow up question.
Operator, Please go ahead and introduce the first caller.
Certainly and as a reminder, if you have a question at this time. Please press star one one our first question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.
Hi, guys. Thanks for letting me ask a question you mentioned, both Dave and Pat Many times about the macroeconomic weakness likely persisting into next year. So if you are willing to talk a little bit about the puts and takes in the market you talked about the PC market being down about 5%, Pat but overall from your segments, where do you see either market headwinds or <unk>.
<unk> or individual Intel specific areas for market share gains are still challenges into 2023.
Yeah. Thank you Ross I'll start off of that like we said it's just.
The macroeconomic unpredictable tough market outlook.
Inside of that it's just hard to see any points of good news on the horizon inflation in the U S. The situation in Europe with energy and the war and in Asia. So against that backdrop, we are still looking to have.
Economic headwinds as we go into next year.
And with that in mind, obviously, lowering our guide for Q4, as we think about it at the industry level. Obviously some of that helps to accelerate some of the rebalancing of the supply chain and some of that will help our business like lowering of DDR memory costs will decrease the premiums on DDR five it make sapphire rapids.
A more compelling platform.
Other areas, we still have.
Rebalancing of the supply chain in front of us on some of the older nodes. When we look at our business units the PC more critical device than ever and.
Satya talked about yesterday on his earnings call, 20% more active devices usage, increasing that said, we do expect that the Tam as I indicated in my formal comments is going to be a bit lower next year, we've given a range aligned with the industry.
For servers, we have seen the slowdown in enterprise and to a lesser degree in the cloud market decreasing the Tam outlook there we do.
Our modeling look at that as.
We're building our capacity obviously, our cost efforts have been very specific to give us flexibility for lowering the structural rate cost even as we stay true to the strategic investments that we're making and driving our transformation and disciplined cost modeling more.
Quickly so it really is.
<unk> environment unpredictable environment, and we're staying true to the strategy, making cost adjustments and trying to balance market outlooks as we gained share in some segments and we fight for share in other segments and I was very pleased with how the team executed.
Proving our execution in an environment that really was quite tough. Thank you.
Ross to give a brief follow up.
Just following on to that last part that you said Pat about some of the areas of share gains or share losses, where do you think those will be most acute in both directions, the good and the bad.
Yeah, and we'd say we saw no. If we go to the areas. We're just entering in the <unk> business in Iff's. So everything there is gaining share.
In the <unk> business, we saw our business is entirely driven by the macro.
Our market share seem to have no real shift whatsoever, when we can.
Continue to be a grower in that segment and PC, we had very market share gains this quarter very strong product line. So we think we're well positioned and in the data center, we grew slower than the market and as the product line gets stronger we will be in a position to regain share.
Share regain ASP, obviously ramp the Sapphire rapids, but we still see ourselves not in a position that we're gaining share yet.
Expect that will be the case for a couple more quarters.
Thank you Ross Jonathan can we have the next question. Please certainly our next question comes from the line of Timothy Arcuri from UBS. Your question. Please.
Thanks, a lot Pat I had a question on the internal foundry.
It seems sort of like the first step in basically splitting the company into an external foundry and Fabless company.
Can you sort of play that out is that is that the idea and sort of how does this create value I guess I mean, obviously, if you look at Globalfoundries market cap, that's like 30% of your market cap, but how does it play out functionally how it creates value.
Yes, we do.
Definitely view that there are efficiencies for us to gain as we go through this internal foundry model, where we see numerous areas in the company that were not as rigorous as we need to be when factory loadings, where we make lots of change of factory loadings that we would run the factories more efficiently or stepping R. R.
Countable right through cost modeling back to the business units and thus driving the high quality as arrow stepping some.
Stepping changes being fully reflected internally in the cost of those will make us more efficient leveraging third party IP more aggressively will make us more efficient and the combination of that is the <unk>.
Big piece of why we're stepping to this internal foundry model and we expect that we're going to start giving more financial transparency that way. So that you can start to see the benefits in the margin stacking being realized the both being a product company as well as a.
Fab Foundry company and that's what we're out to get with the structure that we're laying out that said, we think that this tight coupling of the IBM to point out model.
Powerful value generator for us at least the three areas one the technology benefits that we get have a rapid pace of technology innovation and co optimization between product and process. You'll second is the cash flows the balance sheet benefits that we get.
By having these internal to be able to drive the large investments required in the manufacturing networks and third is in the supply chain efficiency and flexibility of being able to balance across the foundry and business unit structure. So these three areas for us are ones that we see that tight coupling, bringing long term meaningful.
Value generation to the company and to our shareholders, but we're going to do it against the backdrop that we are going to be benchmarking yourself against the best in class in each area and that transparency right. We'll provide more visibility to you our shareholders, but also drive our teams internally and engineering manufacturing team when they see benchmarks.
You are holding up against them.
Leashes energy.
For the future and Thats the excitement that we are working to create with us internal foundry model and as we've launched this quarter, we're already starting to see the roots of that permeate through our teams.
Could you give a brief follow up.
Just quickly I guess just to follow up on that so like what's the line in the sand, Dave I guess.
It's a question more on cash flow what is the line in the sand as I think before you said that 2024 was going to be free cash flow neutral is that still the line in the sand, where whatever you have to do youll do youll cut capex as much as you can to be free cash flow neutral in 2024 is that still the free cash flow I understand.
Yes, I mean, we expect to manage in the near term while we're in this investment phase to a kind of a neutral free cash flow over the course of 'twenty three 'twenty four combined.
Obviously.
Our long term goal is to it's actually significantly improved cash flow and we still feel like the model. We gave at Investor day is the right model that we can generate.
20% free cash flow as a percent of percent of revenue and obviously this year I think we showed.
Good discipline on the Capex side.
We brought our Capex I think when we started the year, we thought capex would be in the $27 billion range on an <unk> basis.
Adjusted that down to 21 billion, but we still preserved.
What Pat thought was the most important things to invest in.
To make sure that we are.
We're ready to go as we launch new nodes as we bring out the.
The <unk> business and gained more customer traction in that space and then next year the real protection on the cash flow now will be around the spending reductions we had $3 billion of spending reductions, we're going out to to achieve in 'twenty three.
No guidance, yet on Capex, but I would just say that.
Model in the near term was to run essentially at 35% of revenue and.
Pat I think even mentioned on the investor at the Investor Day, we will manage to the model and that's quite important to us. So we think we can.
Manage both aspects of this protect cash flow be smart around spending but continue to operate our strategy and a roadmap to get to leadership on process and product to bring out these emerging businesses like the foundry business and like graphics.
Tim. Thank you for the question John I think we have the next question. Please certainly our next question comes from the line of Vivek Arya from Bank of America. Your question. Please.
Thanks for taking my question, but that isn't a risky to plan for a $2 70 to 290 million DC time, then clearly the market seems to be reverting back to pre pandemic levels up to $60 million or so and since that time.
Time before the pandemic one large customer has moved away from from X 86, and there have been share shifts. So what is the down next year is more like $2 50 to $2 60, what impact will it have on your cost and fab loading assumptions. Thank you.
So first.
The premise of the question.
Clearly over a number of quarters were above market.
Forecasts that range that I described is exactly in line with the various.
<unk> forecast, our OEM feedback the feedback from key software providers as well so I'd say our range is now aligned with that industry range second point being that range is larger than and the well above pre pandemic levels at that point. It is a structurally larger.
Theres lots of units out there waiting to be replace that are aging and the footprint clear markets that are you have to have the PC penetration. So we feel quite comfortable and as I noted in the earlier question PC usage is high at.
Seen by Microsoft in their metrics and our product line is positioned to gain share so somewhat independent of the size of the Tam we have a great product line and our product line is all were also on our brand is well suited with the higher margin.
So the market that have been more resilient to the market effects low end consumers, where you've seen the.
Biggest issues on our product line is very strong Alder Lake Raptor Lake stunning numbers that we're getting and well on track with Meteor like all of that said, obviously you have to make some assumptions as you build a factory network.
And the range that we gave has a lot of room inside of it.
And as we're demonstrating by the near term cost cutting that.
Dave described we're trying to build flexibility into our factory network, even as we adjust the cost structure, which is largely a fixed cost structure and obviously as we're ramping into the next generation products, we're building into our Intel for and three product lines and the costs associated with.
That even as we balance both the near term and the strategic agenda. So we feel like we're well positioned to manage and thick or thin and.
Against that.
With a strong product line. We believe we are a share gainer in this industry and we're going to be quite aggressive to accomplish exactly that.
Is that do you have a quick follow on.
So maybe just following on to that do you think.
You are shipping to demand on the PC side or do you still think that is channel inventory because as we head into Q1 that is often a seasonally softer peanut, but again compares are very different this year. So I was just hoping to get your perspective on what the supply demand balance is in the PC market as it exists.
Thank you, yes, our belief is is that we shipped below consumption levels, so or in other words inventory levels at the OEM and the channel decreased over the last quarter. They didn't decrease as far as we were originally predicted so consumption was a little bit weaker, but we still saw inventory system.
<unk> going down across the various routes to market throughout the quarter, we expect them to continue to go down next quarter at both the Oems and at the channel level and the numbers I gave on the Tam model would be our consumption models for next year, which are below the consumption models of this year. So.
Somewhat.
Smaller number for next year, but not dramatically different as we already said so overall I think we're getting to a better point of supply demand equilibrium, where we were way behind on demand.
On supply for many many quarters in a row clearly the last couple of quarters have been adjusting of inventory levels, and we think that we're going to be in a better supply demand balance situation. As we go into next year. Thanks, Jonathan can we have the next question. Please.
Certainly our next question comes from the line of Pierre <unk>.
<unk> from New Street Research your question. Please.
Hey, good evening, Thanks for taking my question.
I'd love to I'd love to talk a bit about the very ambitious.
Efficiency plan.
You've you've announced.
First I'd like to understand the timing of it.
So I think that has been challenging the norm.
Should we read that as a very.
<unk> is flat and Youll basically yet.
Are you still on.
Operator, I think we lost pyramid.
I can answer that question, so let's make sure we're alive.
Yes.
Okay. Thank you.
So thanks.
Thanks for the question Pierre Yes.
Yes, so keep in mind.
As we look at this 8% to $10 billion of efficiency gains that we're talking about.
We're actually making a pretty meaningful down payment on those efficiency gains in 2023, we expect to get $3 billion.
Of savings front versus 22 in 'twenty, three and keep in mind actually we have some fixed expenses that come on.
Next year, so the cash savings is actually more like $5 billion of savings.
Next year now as it relates to the eight eight to 10, we think as we eggs.
Exit.
The 2025 period will roughly be in that $8 billion to $12 billion or $8 billion to $10 billion range.
<unk>.
As Pat kind of walked through we just think we have already identified a lot of different efficiencies.
That will get us to this $8 billion, but also as we start to manage the business in this internal foundry model.
We think we will we will find a new can cover a lot more opportunities to drive efficiency and savings.
So we will update you as we progress over the course of the next three years and let you know how we're doing in terms of our progress.
But we have very good line of sight on the first $3 billion and pretty good line of sight on the full $8 million to $10 million.
Jonathan can we go to the next question. Please certainly our next question comes from the line of Joseph Moore from Morgan Stanley . Your question. Please.
Great. Thank you I wanted to come back to the <unk>.
Internal foundry.
Model again.
Can you talk about it's very clear how it makes your foundry business better.
Yes.
10 point of the CPU business back when you guys were on top and process there was a.
Pretty clear indication that it was the alignment of the device business with the fab that was kind of creating this really good.
Outcome is there any trade off that you make with this from the standpoint looking at it from the standpoint of the microprocessor part of the business.
Yeah, Thanks, Joe and I'll start on that one yes. The simple answer is our job is to keep that one Intel synergy when I described the three value vectors that I am expecting to continue to really leverage around this technology collaboration.
So optimization of the microprocessor with the process technology is one that's high on that list and we've made a lot of extra quite a lot of progress since I've been back on driving that and we're really seeing the benefits of that in for instance, the great health that we described on Grand Rapids is an example of that.
The momentum that we're seeing for meteor like we're clear examples. So I do believe that we're well underway at keeping that rich cycle of technical collaborations co optimization, but there's been many of these areas that I described that there hasnt been this intense accountability step things were done.
To easily.
The quality <unk> stepping in some of that came through our stumbles is 14 and 10 nanometers, but we lost the discipline of the understanding of what stepping as cost and not just in the fab, but also in the validation cycles. So we have to bring much more accountability and transparency to that also.
Expedited all the time all Expedites are a good thing when you are bringing a new product to marketplace, but they also create fab in efficiencies and the results of that are we're not being accountable for the fab efficiencies otherwise our margins would be markedly higher than they are today. So to me it's really maintaining.
The good things and the three I described the technology benefits balance sheet capital and the supply chain, while driving a lot more transparency automation.
Efficiency and.
The result will be I believe is a much better Intel for the long term not just for the external foundry customers as you suggest but for my internal customers as well I would just add that we.
We have six business units today, we measure them separately, but they actually do a very good job a lot of cases, they need to pull together.
To engage with customers to develop products and so forth and so I think we have a pretty good process and culture within Intel where we can strike the right balance between creating some transparency and accountability for for the internal foundry business.
But also make sure that they are aligned to the overall Intel goals.
Joe do you have a quick follow up.
Yes. Thank you for that that's very helpful in terms of the cow.
In 2024 around this internal foundry structure is the goal there to sort of have a transfer price between the foundry business and the rest of it that kind of reflects the market price.
It seems like the accounting of how youre going to determine where the profits.
Tricky yeah. It's a good question Thats pretty much what we're thinking I mean, we will have our own foundry business that will have a good sense I think of the market.
And so that's how we will approach it I would say in 'twenty three.
Going to be.
Somewhat light touch we'll do this through mostly.
Kind of spreadsheet oriented analytics.
Eventually.
<unk> been pretty vocal on this we want to create more authorization automation system, a patient customization of everything that we're doing between the foundry and the product and the products. So over time this will get more robust.
And ergo will be able to drive more accountability I think as we progressed through scale.
The add on side, a little bit Joe.
Here. This is a case, where our internal processes and systems were optimized for IBM. One point out right. We were having to say what is a sustainable wafer price that we should be designing again, then we were having a wafer cost.
Our view right, which early in the process life is very high right and then it got some mature and how how to design teams.
Pick the right choice when you have such variability, whereas the foundry model gives them much more predictable you'll wait for pricing that then enables a more efficient business unit model to pick the right technology choices to deliver the best products. So that's just one example that we're finding that we're.
We're not making the best decisions today, and this will allow us to hold the manufacturing teams to be entirely accountable, you've given a price hit the defects hit the cost structures associated with it and the business units you have a wafer costs that will go build the best product against that and ramp it like crazy in the industry and obviously presenting those with clarity.
We'll help you with the street understand the progress, we're making to accomplish that.
Thank you Joe and Jonathan can we have the next question. Please certainly.
Certainly our next question comes from the line of C. J Muse from Evercore ISI. Your question. Please yes.
Yes. Good afternoon. Thank you for taking the question and one more question on your Intel foundry strategy.
It makes perfect sense to me around the discipline in cost that youre looking to achieve here.
If I'm a business unit head.
And you've been pretty clear that you're playing catch up five node migrations over the next four years.
On the business unit head over the next two years why would I not outsource completely so I guess what are the guardrails to ensure that.
Youre keeping capacity internally until you achieve.
The the.
Goals that you've set out for 2025.
Yeah, maybe maybe three different perspectives on that C. J, obviously most of the design decisions that are being made by my product teams now are 'twenty five 'twenty six 'twenty seven decisions when we're back for process leadership, right and they're seeing that progress day today and.
Just as I have said, Hey, if you want to design the best products have the best transistor. So there with the capability to look now at the Intel leadership process technologies as they make those decisions also secondly, as I described this as a tight binding and we're going to maintain that tight binding of optimization and co op.
Fermentation for relationships that are decades old between our teams by bringing in a new discipline to the boundary between them and the third answer as we already use external foundries. Yes. This is a process thats already pretty well established and we're using a range of external foundries our design teams over the last five years or so.
Learn how to use external foundries and in fact as they're interacting now with my internal foundry many of those learnings on expectations of PDK design tools.
IP libraries are driving the expectations for what is required to be a good internal foundry, which will make my internal foundry a better external foundry as well so I see this as a very regenerative cycle as we unleash these energies and ultimately on the <unk>.
Oh across both and we will be making good decisions to hold both of them accountable, even as we clarify the interfaces and the efficiencies between them.
Did you have a quick follow up.
Yeah. Thanks, Jon I guess, Dave as you think about the strategy how does it change capital intensity for the business.
Not into 'twenty, three but perhaps say over the next five years is it still that 35% type of number or how should we be thinking about it. Thank you.
Yeah. Good question C. J. So obviously in this investment phase, where we're catching up on node transitions of what we do we will have a higher capex intensity, that's 35%, but we do expect as we get out of this phase to be back down to a more normalized level of about 25% capex intensity. So there definitely will be.
And evolution and adjustment and Thats, one of the key components of allowing us to kick up our free cash flow to this 20% of revenue level.
That is ultimately the model, yes, I'd also just piling on to that we also look we always look at that through the lens of our smart capital strategy.
Clearly we are at a level.
Viewing both the gross capex, but more importantly, the net capex from your perspective.
How we access other pools of capital to be able to build that out.
In a very financially prudent way and those other approaches you use chips Act.
C. Skip it will give us a lot of flexibility combined with the shelf for our strategy to be able to make sure. We're spending the capital the more expensive equipment capital more timed with the market demand clarity. Thank you C. J Jonathan can we have the next caller. Please.
Certainly our next question comes from the line of Mark <unk> from Jefferies. Your question. Please.
Hi, Thanks for taking my question.
Pat maybe for you. Despite all the current consolidation in the industry and the growth that that Intel has seen and the larger foundries have seen.
The capital intensity continues to seem to have moved higher.
Notwithstanding.
Hope that our expectation is that it is going to come back down again, so given the high levels you could make the argument that the industry actually needs even more consolidation than it has already seen at the level of the some of the biggest players in the industry.
Can you share your thoughts on how you think about the potential for for this large scale at this kind of large scale M&A or maybe joint ventures amongst that class at the leading edge players or are there just are there issues like FTC related or national security related that just means that thinking about that kind of consolidation or John .
Ventures across borders is something that just takes it off the table and maybe it's a different analysis for consolidation versus joint ventures. Thank you.
Well, there's a lot packed into that question and I would just say.
Generally said that hey, we see this industry being a consolidating industry over time, particularly on the manufacturing side because of the extreme capital intensity, but also the incredible R&D costs right. If you think.
If you want to have a world class technology development team. All you have to do is spend $5 billion a year in R&D and do that for 30 years right.
Right now you're okay now your World class right and this is just extraordinary long term.
<unk> that you have to build up and operate this way and against that goal.
Consistently said I expect that there will be further consolidations in the industry going forward now what shape those will take what the timing of those will be what will be the trigger points that would position.
Position such moves and as you said theres many factors associated with that.
In terms of regulatory legal financial.
<unk> associated with it but fundamentally <unk>.
Economics, 101, right would say youll see further consolidations into the future and we believe that will be the case and we would expect to be a consolidate tour.
Process over time.
Mark do you have a quick follow on.
No that was good thank you John and thanks for that answer Pat.
Jonathan I think we've got time for one last question.
Certainly and our final question for today comes from the line of Matt Ramsay from Cowen Your question. Please.
Thank you very much John for squeezing me in.
Todd I wanted to ask a question about the server roadmap, we've got some I think.
Relief from some of the commentary for cloud Capex. During this earnings season, the last three days and.
Particularly from meta last night, but the rest of the big guys as well.
But on the flip side there is some rumblings that maybe has a couple of more months before Sapphire rapids might ramp.
And big volume. So I'm, just maybe you could get help and level set us on the timing of big cloud volume of Sapphire Rapids, and how that dovetails in with the timing it seems like youre keeping for ammo rapids in late 'twenty three.
Yes. Thank you.
Indicated Sapphire Rapids is now <unk> and the ramp is underway we are ramping the product as we speak strong customer demand. We expect this will be our fastest ever xeon to 1 million units and we're going to push that quite aggressively in the factories are ramping up as we speak. Obviously this is good news for that business.
<unk>.
ASP uptick as well on the product so lots of good things come also we had a particularly good quarter on the execution front, not just sapphire rapids peer Q, but great health on Grand Rapids, and we'll wrap is looking very goods CFR. So the next three generation products are all making.
Very good milestone Tonight.
It really feel like that.
The worst of our execution is behind us and we're really starting to see some.
Some enthusiasm momentum excitement building in those teams as they turned the corner on these products.
Products, we do think so.
Said in the formal that's the market is softer right on the enterprise side and somewhat on the cloud side. As you are reinforced by some of the other comments from others that said as we ramp these products. It's all about having the best product to gain share to gain asps to improve the margins of the business and we now feel like.
Our portfolio was taking share are taking shape to accomplish exactly that.
And we're going to be aggressive we're going to fight for every socket.
This is.
The game, where we have to reestablish ourselves in the marketplace. So now we're starting to have the product line to do that and Thats exactly what Youll see in addition to that we're also building out our software assets you ought to have an increased value proposition and one of those is for instance, with Sierra Sapphire Rapids.
Is the market improvements and AI, but even more importantly in security and with our security services and capabilities.
Very differentiated.
Areas like confidential computing are gaining quite a lot of interest in the industry for not just enterprise, but cloud customers as well so a lot of things going on there, but overall, we feel like our momentum is being reestablished in this critical critical area of our business and one that we know has a lot of attention from you all in the community.
Matt do you have a quick follow on yes, John Thank you and thanks for that Pat.
One thing that piqued my interest Pat in your prepared script.
I mean, theres a lot of discussion of five nodes in four years and halfway through that transition.
28 with ribbon fed our gate all around so you guys are going to need to go through that jump your competition as it as well and you.
You mentioned I think some tape outs of your own stuff, but also.
Some tape outs of potential external foundry customers on 28, it seemed I don't know from from the language used kind of meaningful. So if you could give us a stab.
Status report there on sort of the gate all around ribbit pad progress you see versus competition.
Is this external customer really significant. Thank you, yes, thank you and Joe on <unk> and <unk>. They go to ribbon set as you say.
Intel has driven every major transistor right into volume production for the last 35 years.
So the idea that we are the ones who are going to drive this major new transistor.
This restructure into production is something that we're pretty committed to be a driver for <unk>.
<unk> as you said on track on schedule, we expect <unk> will primarily be an internal node not one that we have a lot of external foundry customers for.
The external foundry chipset are tape outs are largely associated with <unk> and a very typical process for our foundry customer will be give me a test chip of my circuits on your process.
That's exactly what we taped out the first one this quarter, we will have several more in the pipeline. So now we're taping out not only our test chips for <unk>, but our foundry customer test chips for a Q&A and that's a pretty critical milestone when they see the results of those silicon for them, making a volume decision for a foundry customer silver.
We're exactly on the timelines that I described earlier for those tape outs and those decisions. So as they start to see the silicon results, which we think are going to be very promising we think that'll be a key step to them, making major foundry decisions and overall. This is just the firms are five nodes in four years, we're making the investments we're seeing good.
Progress to get back to process technology leadership, which for Intel.
That raises all boats in the company it makes our products better and establishes our new business areas positions us in a very profound way for foundry.
Perfect.
Got it.
For the quarter.
Quarter.
In that area.
Stephanie.
Thank you.
Okay.
Okay.
Marco worsening economic.
Macro is very challenged.
We're happy with the.
Execution progress we've made even though we're not happy with the reported results and we know we have a lot more work to do there.
Also thrilling to participate with a mobile IPO in a tough market with very good.
<unk>, we are prepared for the economic headwinds, we're making the necessary adjustments structurally as well as to our cost model to go through them and we remain fully committed to being.
A value generator for our shareholders for the long term as we execute on two points.
And we believe that that will be a great result for our owners for the long term. Thank you for joining us for the call today and look forward to our update next quarter.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
The conference will begin shortly to raise your hand during Q&A you can dial down one one.
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