Q4 2022 Intel Corp Earnings Call
Speaker 1: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
Speaker 2: Thank you for standing by and welcome to Intel Corporation's fourth 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 the session, you'll need to press star 1-1 on your telephone. If you wish to remove yourself from the queue, please press star 1-1 again.
Speaker 3: As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President of Investor Relations. Please go ahead, sir. The program is being recorded.
Speaker 4: Thank you, Jonathan. By now you should have received a copy of the Q4 earnings release and earnings presentation, both of which are available on our investor website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window.
Speaker 5: I am joined today by our CEO , Pat Gelsinger, and our CFO , David Zinser. In a moment, we will hear brief comments from both, followed by a Q&A session.
Speaker 6: Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it.
Speaker 7: As such, it does involve risks and uncertainties.
Speaker 8: Our press release provides more information on the specific risk factors that could cause actual results to differ materially.
Speaker 9: We've also provided both GAAP and non-GAAP financial measures this quarter, and we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings release and earnings presentation include full GAAP and non-GAAP reconciliation.
Speaker 10: With that, let me turn things over to Pat.
Speaker 11: Thank you, John , and good afternoon, everyone. Q4 revenue came in at the low end of Guide and was impacted by persistent macro headwinds, which began in Q2 and underscored a 2022 characterized by unprecedented volatility, which will continue in the near term.
Speaker 12: We made meaningful progress on several fronts in calendar year 22, notwithstanding all the challenges, but we readily admit our results and our Q1 guidance are below what we expect of ourselves.
Speaker 13: We are working diligently to address the challenges brought on by current demand trends and remain confident in our long-term plans introductory. Accordingly, we are even more aggressively executing on the cost measures we described in Q3, even as we keep the investments critical to our long-term transformation intact.
Speaker 14: with a clear eye of making the right capital allocation decision to drive the most long-term value. Today, I'd like to address three areas. One, our view on the macro and the markets in which we participate. Two, the operational progress we made in 2022. Three, our view on the macro and the markets in which we participate.
Speaker 15: as we enter the new year outlining the commitments we are making to all our stakeholders. First on the macro, we expect macro weakness to persist at least through the first half of the year with the possibility of second half improvements. However, given the uncertainty in the current environment, we are not going to provide revenue guidance beyond Q1. Dave will provide guidelines for capital spending, depreciation, and other
Speaker 16: adjusted free cash flow in his prepared comments.
Speaker 17: Having said that, let me give you additional color regarding our view of our markets in 2023. To various degrees, all our markets are being impacted by macro uncertainty, rising interest rates, geopolitical tensions in Europe , and COVID impacts in Asia, especially in China.
Speaker 18: In the PC market, we saw further deterioration as we ended calendar year 22. In Q3, we provided an estimate for the calendar year 23 PC consumption TAM of 270 to 295 million units.
Speaker 19: Given continued uncertainty in demand signals we see in Q1, we expect the lower end of that range is a more likely outcome. Near term, the PC ecosystem continues to deplete inventory. For all of calendar year 22, our sell-in was roughly 10% below consumption.
Speaker 20: with Q4 under shipping meaningfully higher than full year. And Q1 expected to grow again to represent the most significant inventory digestion in our data set. While we know this dynamic will need to reverse, predicting one is difficult.
Speaker 21: Importantly, PC usage data remains strong, reinforcing that use cases brought on by COVID are persistent, even as the economy has reopened. And, as we highlighted in our recent PC webinar, strong usage and install base, which is roughly 10% higher than pre-COVID levels, is not a good thing.
Speaker 22: what we see is a conservative refresh rate supports a longer term PC TAM of 300 million units plus or minus post this period of adjustment.
Speaker 23: We intend to capitalize on this TAM through a strong pipeline of innovation, and based on the growing strength of our product portfolio, customers are increasingly betting on Intel. We grew share in the second half of 2022, and we expect that positive momentum to continue in 2023. We remain clear-eyed on managing to near-term weakness in PCs.
Speaker 24: but we also see the enduring and increasing value PCs have in our daily lives.
Speaker 25: In the server market, the overall consumption TAM grew modestly in calendar year 22, albeit at diminishing rates as the year progressed.
Speaker 26: Inventory burn drove server CPU shipments down mid-single digits year-on-year in calendar year 22, with hyperscale up, offset by declines in enterprise and rest of world. Our share in calendar year 22 was in line with our subdued expectations, and our revenue volatility was a function of TAM, especially given our outsized experience.
Speaker 27: weakened, enterprise and rest of world, especially China, continues to be weaker than hyperscale. However, we'd highlight that the correction in enterprise and rest of world, where we have stronger positions, are further along than hyperscale.
Speaker 28: Lastly, in our broad-based markets like industrial, auto, and infrastructure, demand trends throughout common year 22 were strong but not completely immune to the macro volatility.
Speaker 29: Strong demand in these markets was mirrored by strong Q4 and record calendar year 22 revenue in NEX, PSG, IFS, and Mobileye. We see calendar year 23 as another growth year for us in these areas even though the absolute rate is difficult to predict today.
Speaker 30: This is in contrast to the semi-market X memory, which third parties expect to decline low to mid single digits.
Speaker 31: We enter 2023 with a view that much of the macro uncertainty of the last year is likely to persist, especially in the first half of the year. As such, we are laser focused on executing to our $3 billion in Count-of-the-Year 23 cost savings that we committed on our Q3 earnings call. We are making tough decisions to right-size the organization.
Speaker 32: and we further sharpened our business focus within our BUs by rationalizing product roadmaps and investments.
NEX continues to do well and is a core part of our strategic transformation, but we will end future investments on our network switching product line while still fully supporting existing products and customers.
Since my return, we have exited seven businesses providing an excess of $1.5 billion in savings. We are also well underway to integrating AXG into CCG and DCAI respectively to drive a more effective go-to-market capability, accelerating the scale of these businesses while further reducing costs.
While it was important to focus on what we are doing to address the current macro uncertainty, it is also important to highlight that despite disappointing financial results, Cal
powered by at-scale manufacturing and supercharged by our people.
Success starts with our people, an execution follows culture. In calendar year 22, we took important strides to rebuild the leadership team, promoting from within and adding fresh perspectives from the outside. This includes the Board of Directors with the addition of Lithuania and Barbara Novik, both of whom have already made significant contributions.
and the appointment of Frank Eurea's chair. In addition, a year ago, we reestablished OPRs to drive accountability and transparency across the organization, and we reintroduced TikTok 2 to establish a rigorous methodology of design and product development, both our key spark plugs to our execution engine.
Rebuilding the culture has begun to show benefits in manufacturing and design. Our progress against our TD Roadmap continued to improve throughout Palmyth Year 22 and every quarter our confidence grows. We are at or ahead of our goal of five nodes in four years. Intel 7 is now in high volume manufacturing for both client and server.
On Intel® 4, we are ready today for manufacturing and we look forward to the Meteor Lake ramp in the second half of the year. Intel® 3 continues to show great health and is on track. Intel® 4 and 3 are our first nodes, deploying EUV, and will represent a major step forward in terms of transistor performance per watt and density.
on Intel 20A and Intel 18A, the first nodes to benefit from ribbon FET and power via internal test chips and those of a major potential foundry customer have taped out with the silicon running in the fab. We continue to be on track to regain transistor performance and power performance leadership by 2025.
Progress in TD continues to be validated by our IFS pipeline. I am happy that we were able to add a leading cloud edge and data center solutions provider as a leading edge customer for Intel 3. Including prior customers such as MediaTek, we now have lifetime deal value of greater than 4 billion for IFS.
We also have an active pipeline engagements with 7 out of the 10 largest Foundry customers, coupled with consistent pipeline growth to include 43 potential customers and ecosystem partner test chips. Additionally, we continue to make progress on Intel AT&A and have already shared the engineering release of PDK 0.5 with our lead customers.
and expect to have the final production released in the next few weeks.
In addition, we are working hard to complete the tower acquisition, which will further amplify our momentum as our Foundry business becomes even more compelling to customers.
On the product front, the PRQ of Sapphire Rapids and Q3 in the formal introduction of our fourth-gen Xeon Scalable CPU and Xeon CPU Max series, better known to many of you as Sapphire Rapids and Sapphire Rapids HBM respectively, on January 10th was a great milestone.
It was particularly satisfying to host a customer-centered event including testimonials from Dell, Google Cloud, HPE, Lenovo, Microsoft Azure, and NVIDIA among many others.
We are thrilled to be ramping production to meet a strong backlog of demand, and we are on track to shift a million units by mid-year. In addition, as part of AXG moves into DCAI, it is noteworthy that our Intel Flex series, optimized for and showing clear leadership in media stream density and visual quality.
is now shipping initial deployments with large CSPs and MNCs, enabling large-scale cloud gaming and media delivery deployments.
Our DCAI roadmap only improves from here. Emerald Rapids is sampling and has completed power on with top OEM and CSP customers, and it remains on track to launch in the second half of 2023. Granite Rapids, our next performance core addition to the Xeon portfolio, is on track to launch in 2024.
running multiple operating systems across many different configurations. Further, our first Efficient Core product, Sierra Forest, is also on track for 2024. Lastly, it is appropriate to continue to highlight PSG for its standout performance, delivering record Q4 revenue up 42% year on year.
We are planning to have a more fulsome look at our progress in DCI at our next investor webinar later in Q1. Stay tuned for the invitation.
In CCG, we continue to build on our market share momentum across the PC staff by focusing on delivering leadership products with our broad open ecosystem.
I'm particularly pleased that our clear performance leadership at the high end drove record client ASPs in the quarter. In Q4, the 13th Gen Intel Core Desktop Processor family, codename Raptor Lake, became available starting with the Desktop K processors and the Intel Z790 chipset.
In partnership with ASUS, we officially set a new world record for overclocking, pushing the 13th Gen Intel Core past the 9 GHz barrier for the first time ever.
Hands down, we provide desktop enthusiasts and gamers with the best processors and features for overclocking in the PC industry.
We also introduced our notebook Raptor Lake family at CES, including the world's fastest notebook CPU and the first 24 cores. We look forward to ramping the more than 300 mobile design wins we have already secured in the first half of 23.
Meteor Lake, our first disaggregated CPU built on Intel 4, remains on track for the second half of the year. And with Meteor Lake progressing well, it's now appropriate to look forward to Lunar Lake, which is on track for production readiness in 2024, having taped out its first silicon.
Lunar Lake is optimized for ultra-low power performance, which will enable more of our PC partners to create ultra-thin and light systems for mobile users.
In addition, as we outlined on our webinar, we are excited by the strength of the EVO brand, the introduction of Unison for leadership multi-device experience as we ramped the more than 60 design wins and the uniqueness of VPro in the enterprise market, helping our customers drive an almost 200% return on investment.
by deploying vPro platforms to their end users.
Lastly, as consumer graphics reintegrates into CCG, enthusiasm for our latest, alchemist-based discrete graphics products continue to build and we expect volume ramp throughout the year.
Turning to NEX and Mobileye, both businesses have performed well in Q4 and CalMAN Year 22, partially insulated by some of the market forces impacting PCs and server.
and he exits key product milestones with Mount Evans, Raptor Lake P&S, and Alder Lake N, and Sapphire Rapids to drive a second consecutive year of double-digit year-on-year growth in calendar year 22.
We expect market share gains and outperformance to continue in 23.
Mobileye increased revenue by almost 60% year-on-year in Q4 and is on a solid growth path for calendar year 23.
Calendar Year 22 design wins, including supervision, are projected to generate future revenue of approximately $6.7 billion across 64 million units.
In addition, our manufacturing organization performed well throughout Common Year 22, starting the year navigating the worst supply constraint environment in over 20 years, only to have to pivot in Q2 to respond to rapidly changing demand signals which are now driving near-term underloading in our factory network.
More importantly, we continue to push forward with the next phase of IBM 2.0, creating an internal foundry evolving our systems, business practices, and culture to establish a leadership cost structure.
This new approach is already gaining momentum internally.
As a reminder, the internal foundry model will place our BU's in a similar economic footing as external IFS customers and will allow our manufacturing group and BU's to be more agile, make better decisions, and uncover efficiency and cost savings.
We have identified nine different subcategories for operational improvement that our teams will aggressively pursue.
In addition to establishing better incentives, this new approach will provide transparency on our financial execution, allowing us to better benchmark ourselves against other foundries and drive to best-in-class performance.
It will also provide improved transparency to our owners as we expect to share full internal foundry P&L in calendar year 24. Ultimately, allowing you to better judge how we are allocating your capital and creating value.
We expect additional efficiencies as we implement our internal foundry model, which is a key element to accomplish our $8 to $10 billion of cost savings exiting 2025, as we outlined on our last call. We expect additional efficiencies as we implement our internal foundry model, which is a key element to accomplish our $8 to $10 billion of cost savings exiting 2025, as we outlined
I want to remind everyone that we are on a multi-year journey. We remain focused on the things that are within our control as we navigate short-term headwinds while executing to our long-term strategy.
While I remain sober that we have a long way to achieve our financial expectations, I am pleased with the transformation progress that we are making.
I can tell you, in addition to obviously focusing on the day-to-day running of the company, we continue to examine numerous additional value-creating initiatives for 2023, as we always do. We will update you as we move along on any we deem appropriate.
Rest assured, we remain committed to creating value for our owners and to delivering the long-term strategic roadmap we laid out at the beginning of this journey, and we are confident in our ability to do so. We will 1. Deliver on 5 nodes in 4 years, achieving process performance parity in 2024.
and unquestioned leadership by 2025 with Intel 18a. Two, execute on an aggressive Sapphire Rapids ramp. Introduce Emerald Rapids in second half 23 and Granite Rapids and Sierra Forest in 2024. Three, ramp Meteor Lake in second half 23 and PRQ Lunar Lake in 20...
One, return to profitability and deliver the benefits of our Cal the new year 23, 24, and 25 efforts to reduce costs and drive efficiencies.
2. Execute on our internal foundry P&L by 2024. 3. Expand on the use of our smart capital strategy to leverage multiple pools of capital including skips and chips in the US and Europe to balance our long-term capacity aspirations with near-term realities.
Before I turn it over to Dave, I'm going to close by saying we take our commitments to all our stakeholders extremely seriously, and ultimately we strive to create value for each of them. For our customers, it is rebuilding our execution engine to provide a predictable cadence of best-in-class products to support their ambitions.
for our employees is to provide them with the opportunity to develop and bring to market world-changing technologies.
It is what inspires each of us inside of the company. For our external owners, it is to make thoughtful, deliberate decisions around capital allocation, which drives the highest return on investment we make with your capital.
Our ambitions are equaled by our passions and our efforts across manufacturing, design, products, and foundry are well on their way to driving our transformation and creating the flywheel, which is IDM 2.0.
Thank you, Pat, and good afternoon, everyone.
We saw solid business execution in the fourth quarter despite persistent macroeconomic headwinds impacting the semiconductor industry.
As Pat indicated, we expect challenging macro conditions to continue through at least the first half of the year.
As outlined last quarter, we'll continue to prioritize investments critical to our transformation, prudently and aggressively manage expenses near-term, and drive fundamental improvements in our cost structure longer-term. Thank you.
We're executing well towards our $3 billion target in 2023 and $8 to $10 billion exiting 2025.
Fourth quarter revenue was $14 billion, landing at the low end of our range and down 8% sequentially.
Revenue from DCAI and NEX were in line with expectations, while CCG was impacted by softening demand for PCs.
Gross margin for the quarter was 44%, slightly better than we had expected for the low end of our revenue range.
Q4 gross margins were impacted 220 basis points from factory underload charges, offsetting a sequential 170 basis point benefit from an insurance settlement.
EPS for the quarter was 10 cents, 10 cents below our guide on lower revenue and increased inventory reserves.
Operating cash flow for the quarter was $7.7 billion. Net CapEx was $4.6 billion resulting in an adjusted free cash flow of $3.1 billion and we pay dividends of $1.5 billion.
We finished FY22 with revenue of $63.1 billion, gross margin of 47.3%, and EPS of $1.84.
We generated $15.4 billion of cash from operations and an adjusted free cash flow of approximately negative $4 billion at the low end of the range we provided last quarter, despite approximately $3 billion of capital incentives that shifted from Q4 into 2023.
When we spoke at Investor Day last February , we forecasted revenue of $76 billion and adjusted free cash flow of negative $1 to $2 billion for FY22.
As macroeconomic conditions deteriorated at a rapid pace in second half of 2022, we committed to optimizing the areas of the business within our control.
Through reductions in spending and significant working capital improvements, we offset a $13 billion reduction to revenue expectations to come within $2 billion of our initial adjusted free cash flow guide. While still making the needed capital investments in support of our IDM 2.0 strategy and to position ourselves for long term growth in a market expected to reach $1 trillion.
$6 billion, a decline of 36% year over year as PC TAM deteriorated faster than expected due to macroeconomic headwind.
Customer inventory remains elevated beyond our previous expectations and will continue to burn into the first half of 23. CCG realized record CPU ASPs up 11% year over year as we continue to see relative strength in our premium segments driven by leadership performance and attractive features of our EVO and BPro platforms.
Q4 operating profit was $0.7 billion down year over year on lower revenue and increased Intel® 7 product mix.
DCAI revenue with $4.3 billion in Q4, up 2% sequentially with higher ASPs offsetting demand softness.
and down 33% year over year, driven by TAM contraction and competitive pressure.
DCAI operating profit for the fourth quarter was $371 million.
While still unsatisfactory, profit was up more than $350 million sequentially on reduced factory costs.
Operating profit was down substantially year over year, impacted by lower revenue, increased advanced startup costs, and higher product costs.
Within DCAI, PSG achieved record Q4 revenue, up 42% year-over-year, along with record full-year revenue, up 29% year-over-year, through increased ASPs, improved external supply, and strength in the infrastructure segment.
PSG enters 2023 with still significant unfulfilled backlog.
NEX quarterly revenue was $2.1 billion, down 1 percent year over year as declining global GDP impacted the edge business, offsetting growth in Xeon network CPUs and the ramp of our Mount Evans Infrastructure Processing Unit.
Despite second half macro headwinds, NEX set another full year record revenue at $8.9 billion, up 11% year over year and marking consecutive years of double digit revenue growth.
Operating profit was $58 million in the fourth quarter, down year on mixed shift to lower margin segments and higher factory startup costs.
AXG achieved record quarterly revenue of $247 million, up 34% sequentially and up one point year over year, supported by the launch of Sapphire Rapids HBM.
Operating loss was $441 million, down $63 million sequentially, with inventory valuations negatively impacted by softer demand, especially for crypto processors.
Mobileye delivered another record revenue quarter of $565 million, up 26% sequentially, and growth of more than $200 million and 59% year over year.
Full year revenue of $1.9 billion was also a record for Mobileye, growing 35% year over year.
Fourth quarter operating income of $210 million represents 71% growth year over year.
IFS achieved record quarterly revenue of $319 million, up 87% sequentially and 30% year-over-year on increased automotive shipments.
Operating loss was $31 million, a $72 million improvement sequentially on higher revenue.
We continue to reshape the company to drive to world-class product costs and operational efficiency.
We remain committed to the $3 billion of 23 cost savings outlined on our 2-3 earnings call, while mindfully protecting the investments needed to accelerate our transformation and ensure we are well positioned for long-term market growth.
Before turning to Q1 guidance, let me take a moment to discuss an accounting change that will impact our results beginning in the first quarter.
Effective January 23.
We increased the estimated useful life of certain production machinery and equipment from five years to eight years.
This change better reflects the demonstrated economic value of our machinery and equipment over time and is more aligned with the business model changes inherent to our IDM 2.0 strategy.
The growth of the IFS Steel pipeline will extend the life of manufacturing nodes beyond what was practical within IDM 1.0.
Disaggregated CPU architecture allows performance and cost optimization for each chiplet, better leveraging older nodes.
And we are optimizing our core business around more sustainable capacity quarters to improve equipment utilization and maximize ROIC.
The change will be applied prospectively beginning Q123.
When compared to the estimated useful life in place as of the end of 2022, we expect total depreciation expense in 2022 to reduce by roughly $4.2 billion.
An approximate $2.6 billion increase to gross profit, a $400 million decrease in R&D expense, and a $1.2 billion decrease in ending inventory values.
This change will not be counted towards the $3 billion short-term or $8 to $10 billion long-term structural cost improvements we committed last quarter and is intended to provide the most accurate reflection of company financial results to our owners.
Now turning to guidance.
For Q1, we expect first quarter revenue of $10.5 billion to $11.5 billion.
In addition to continued macro headwinds, we expect customers will burn inventory at a meaningfully faster pace than the prior few quarters in response to macro TAM softness impacting CCG, DCAI, and NEX lines of business.
We see potential for market conditions to improve faster than typical seasonality, as third-party data shows macro headwinds easing in the second half of the year.
While we're progressing toward a $3 billion spending reduction with significant austerity across the company, given the fixed cost nature of our business, we expect a sequential revenue decline will result in negative operating margin in the first quarter.
We're forecasting gross margin of 39%, a tax rate of 13%, and EPS of negative 15 cents at the midpoint of revenue guidance.
Inclusive of $350 to $500 million of operating margin benefit from the useful life accounting change split approximately 75% to cost of sales and 25% to OPEX.
Factory underload charges are projected to impact Q1 gross margin by 400 basis points.
We continue to evaluate all investments and will remain laser focused on optimizing for ROI, adjusting for market conditions across operating expenses and capital assets.
While we're not providing guidance beyond Q1, I'll touch on a few elements of our outlook.
At Investor Day, we noted that during the investment phase of IDM 2.0 from 2022 through 2024, our model was to operate at approximately 35% net capital intensity.
For FY23, despite the lower revenue level, we expect to be at or below the 35% model.
Embedded in our assumptions are capital offsets of around 20 to 30 percent of growth capex including our innovative skip partnership with Brookfield.
We expect FY23 operating expenses of under $20 billion, a roughly 10% year-over-year decline consistent with committed cost-cutting measures totaling $2 billion, adjusting for the depreciation change.
Adjusted pre-cash flow will be below our investor day guide of approximately neutral in the first half of 23 and return back towards guardrails in second half 23.
In closing, we remain committed to the strategy and long-term financial model we laid out at Investor Day last year.
The opportunity for strong revenue growth across our business unit portfolio and free cash flow at 20% of revenue remains.
While we're not satisfied with near-term results, this market downturn represents an opportunity to accelerate the transformation necessary to achieve our long-term goals.
I look forward to providing updates on our transformation journey as the year progresses. With that, let me turn the call back over to John .
Thank you, Dave. We will now move into the Q&A portion of our call. As a reminder, we ask each caller to ask one question and a brief follow-up question where applicable.
With that Jonathan, can we please take the first caller?
Certainly, and as a reminder, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. And our first question comes from the line of Ross Seymour.
from Deutsche Bank. Your question, please.
Hi guys, thanks for letting me ask a question. I guess Dave, to hit on some of the revenue question or items you just said, do you expect the first quarter to be the bottom in absolute dollars through the year? And any color between the segments? It seems like it's exceedingly a CCG problem right now in the quarter, or is it broader than that?
Let me ask a question. I guess Dave to hit on some of the revenue question or items you just said do you expect the first quarter to be the bottom and absolute dollars through the year and any color between the segments. It seems like it's exceedingly a CCG problem right now in the quarter or is it broader than that.
So you want to go first? Okay, so let me I'll start in Pat's gonna add some color. So on the 11 billion dollars We're expecting Most of the business units to be down sequentially double digits
We're not going to provide guidance for the rest of the year, but I did say that the first half is likely to be seeing these inventory corrections. The other thing I would just add, maybe color to kind of position the year, is that we're expecting Q1 to be the most significant.
inventory decline at our customers that we've seen in recent history. So if you look back over the last four or five quarters of reductions, this will be meaningfully higher than all of those quarters. So obviously, that is impacting the Q1 outlook. Now we need to position ourselves.
Yeah, and clearly as we look at Q1, you know, affected by macro, significant inventory adjustments, and that's affecting clearly clients, but also data center as well. And we do see that year on year, quarter on quarter data center to be down as well. And we think that's a macro statement across all segments across cloud.
enterprise, government, and uniquely China. Part of our more positive expectation for the second half of the year is clearly from our customers and what we've heard from them, but also with some expected level of recovery from China as well. So overall, clearly a major inventory correction cycle and coming after.
you know, back to school and holiday refresh, you know, our customers clearly wanting to take more aggressive steps as they adjust. But that inventory adjustment is well below their sellout rates. You know, so for that we do believe that we will see recovery as they, you know, have made those inventory adjustments and we'll see the business be stronger as we go through the year.
I do. Quickly, Dave, I want to pivot to the gross margin side of things, excluding the change in the depreciable life side of the equation. I know revenue is the biggest headwind right now, but you had talked at investor day last year about a 51 to 53% gross margin range and kind of you want to operate within those bands.
What does it take to get back to that? Is there a revenue level? Do you have to be above 17, 18 billion? Are there offsets? Any sort of framework you can give to give investors confidence that, you know, we never thought we'd see a three handle on your gross margin. And so we really want to know what it's going to take to get back to a five handle and if that's significantly changed.
from the last framework that you provided us. Yeah, good question. So obviously revenue is the most significant impact to gross margins. We obviously did not expect to be down at these levels. That said, you know, it's.
It's a function of some significant inventory burn. So it's not necessarily a reflection of the demand in the market. So obviously we would expect that to cover at some point, which will be a significant lift to the gross margins. The other thing is in the first quarter, we're going to have about a 400 basis point impact on our gross margins.
improve gross margins and we're well underway. When you look at the $3 billion reduction that we talked about for 23, a billion of that is in cost of sales. And we're well underway on our way to getting that billion dollars. And then when you click it further into the eight to $10 billion that we want to hit by the end of 2025.
about 66% of that, two thirds of that, is cost of sales improvement. And we're getting a lot of that from our internal foundry model that Pat mentioned. We're already seeing significant opportunities to be efficient, more efficient, between our business units and our factories. And I think we'll have a lot of things to say over the course of this year.
about areas that we see meaningful improvement. Also, we have smart capital that was modest in 22. It's going to be more significant in 23. And much of that smart capital does translate to a better cost structure for us that will help gross margins. So, net of that.
I feel very confident we will get back to 51 to 53 percent in the medium term and in the long term I feel very confident we will get back to 54 to 58 and I think Pat said it in the past, you know, we aim to beat that range.
Thank you, Ross. Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Vivek Arya from Bank of America. Your question, please.
Thanks for taking my question. I'm curious how many weeks of PC microprocessor inventory is still in the channel? I'm trying to understand whether the demand assumptions are not what they should be, right? Or is it the supply assumptions?
you know when you say that the consumption this year will be you know 270 million right which is the low end how do we know that for sure you know what if the consumption rate is much you know lower than that so just how many weeks of pc microprocessor inventory is there and do you think q1 is that clearing quarter or you think even in q2 you could be shipping below consumption levels
So, overall, as we said, we saw the range 270, 295. We believe the sell-through rate will be to the lower end of that. The consumption that we saw in Q4 was well below that, and the consumption rate, or the sell-in rate in Q1 is even more significantly almost 2X.
more significant below the consumption rate. Obviously, these are the macro effects that we can't predict, and that's what's taken us a little bit more to the low end of the range. But clearly, as we were working with our customers and channel partners, we've been monitoring very carefully the sellout.
that they've seen. So we're pretty comfortable with that range. Also, we would point to China and, you know, a very unique circumstance there as is well known. And we do expect that there'll be some level of economic recovery there, you know, particularly we forecast into the second half of the year. And this is a topic that we continue to work closely with our colleagues.
You know, the number of hours per PC, you know, continues to be up. The installed base has gone up. So, all of those factors give us reasonable confidence that post this period of inventory correction, you know, that we'll have a very healthy 300 million unit plus or minus market that we're selling into.
So, Zach, do you have a follow-up question? Yes, thank you, John , and thank you, Matt. Second question is on the data center. Historically, the semiconductor market likes incumbency, and there is only a sheer shift if and when the incumbent messes up. And right now, your competitor seems to be becoming a larger incumbent in a lot of cloud deployments. It doesn't seem to be a big deal.
What helps you specifically to change this current momentum of share shift in cloud servers specifically? Yeah, thank you. And you know, I think the most important thing is what we just did with Sapphire Rapids, right? Our customers were anxious for a great product from Intel.
Obviously, we would have liked it to be earlier, as we had initially estimated, but we are now shipping a very high-quality product with significant areas of leadership in areas like AI performance, power performance, security feature function, high-performance computing workloads that are 5x the competition and features.
in areas like confidential computing and security that are quite differentiated from anything in the marketplace. Obviously, share shift, right, particularly in the data center space, you know, these designs were one a year ago, right, or two years ago, and so it takes some amount of time. And against that, we're seeing a very strong outlook for Sapphire Rapids Ranch.
and Sierra Far is looking very healthy for next year. And all of those, I believe, are rebuilding our customers' confidence. And I believe with that, given the massive incumbency that Intel has, and I would just emphasize that even though we have seen the share shift in recent tellin', the install base is Intel.
There's an enormous, in some, many of the cloud customers, 95 plus percent of their install base is Intel. That gives us a very strong incumbency that we get to renew as we rebuild our customers' confidence. So, as we put all of those things together, yeah, we realize that we stumbled.
Right? We lost share. We lost momentum. We think that stabilizes this year and we're going to be building a roadmap that allows us to regain leadership for the long term in this critical market. Thanks for that. Jonathan, can we have the next question, please? Certainly. Our next question comes from the line of Timothy O'Curry from UBS. Your question, please.
Thanks a lot. Dave, I had a question on CapEx. I know you don't want to guide for the full year, but you did say that 20 to 30% of the gross CapEx, whatever the number is this year is going to be offsets.
I know you don't have a lot of visibility on the chips money you're going to get, but it seems like best case, you know, revenue is going to be in the mid 50s roughly, and if I take a little less than 35% of that because you said that it's, you know, still going to be 35% or less that will be the net capx intensity, and I sort of, you know, divide the numbers, it implies a gross capx number something in the range of
you know, 20 billion give or take. Can you sort of help us just, you know, handicap that number?
Yeah, so let me see if I can. You know, obviously we're trying to avoid, you know, guiding beyond the first quarter given the murkiness. I would just say we are very focused on the appropriate level of investment necessary for the long term strategy.
of IDM 2.0 while being very thoughtful around how much CapEx we spend to manage our free cashflow. I think smart capital offsets will be pretty healthy this year, much better than last year. Partly that's because we'll be...
fully along with SCIPS1 with our partnership with Brookfield. We are expecting grant incentives to be a part of this year's smart capital offsets. And then lastly, we do have already an seed grant program to assist CS lasts. Indeed, this $ Gir sheet we're
in place the investment tax credit, which could have some benefit to us this year. So certainly smart capital will be healthy, but we are being very prudent around our gross capital spend through the year. And as we kind of progress through the year, we'll see how things develop and you can expect us to manage it accordingly. I think most people.
that message. Yeah, also, I just add, you know, we do and you know, Dave sort of implied it, but we do expect to do skip to this year as well, which is another source. And also the credits, I mean, clearly there's motivation on the part of commerce to get that underway and the rules making a place in the near future and start to dispense funds this year.
Also, I point to Europe as well. So it's EU chips as well as US chips. So all of those efforts are part of smart capital for us. We do believe that we'll have the capital necessary to meet both our near term, but more importantly the strategic long term investments.
where we say, you know, we're on track with IDM 2.0, we're on track with the capital, the builds that allow us to restore leadership in our process technology, as well as have the factory capacity to both deliver that for our products as well as for our Foundry customers. Tim, do you have a follow-up?
I do John thanks. Yeah Dave can you just sort of walk through maybe some of the gross margin puts and takes. I know that again you don't want to guide for the full year but can you just help us think about what some of the puts and takes might be. I mean obviously as you know as as volumes grow that will help gross margin but are there any other puts and takes that you would sort of call out for us. Thanks.
Yeah, I think clearly revenue is going to be the most significant driver of gross margins. We're a high fixed cost model. So we suffer the consequences of that, obviously, when revenue is declining, but we also get the benefit when revenue is expanding. And so what is currently
a headwind does turn to a tailwind as business recovers. The second most significant impact we have is the underload charges. So that's 400 basis points or so this quarter, and we'll make a determination as to what.
loading makes sense for the second quarter as we get closer to the second quarter. But we're doing this to be appropriate in terms of our management of cash flow. But again, as business conditions adjust, we will start loading the fab at a higher rate and that will improve gross margins.
I think beyond that, it really is around a lot of the cost initiatives we have underway.
It's the $3 billion for 2023, and it's the $8 to $10 billion improvement over the course of the next few years that really will help drive the costs and drive the gross margins beyond just revenue and loading.
Thanks, Tim. Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of CJ Muse from Evercore ISI. Your question, please.
Thank you for taking the question. Another question on capex, I guess. A bigger picture, can you kind of speak to your capex philosophy in a slower demand environment? Is it finding the right number to fit a free cash flow model? Or are you looking at your overall demand picture and saying we need access to the right number to fit a free cash flow model?
delaying investments into 24 and 25. Thanks.
Yeah, thanks CJ. I'll start and ask Dave to jump in. You know, we sort of think about the capital budget with two lenses in mind. Right, one is the strategic lens. Am I going to get back to leadership at 20A and 18A? Yes. Am I going to make the capital investments required to do that? Absolutely.
you know, to some degree, you know, do we scrub those? Do we look hard at those? Where can we save, you know, tens or hundreds of millions of dollars in those? Yes, we will, but we're not going to diminish from the capital required for strategic leadership for the long term. So strategic capital, largely unchanged.
The second bucket, of course, I'll just call it capacity capital, right? You know, and adjusting to the near-term ebb and flows of the business requirement. And obviously in this macro environment, that's been adjusted meaningfully downward, and we're finding everywhere we can to squeeze our existing capacity more effectively, you know, to be more aggressive in terms of...
how we work with our equipment suppliers in those areas and doing everything we can to minimize the capital that's required for capacity-driven requirements as well. And that's where the larger trade-offs have been. And of course in a business as large as ours, we have labs and buildings and everything else.
I'll say we are scrubbing those like crazy as you would want us to. Dave, what else would you add? You took one of mine. Obviously, the OPEX area is an area that we're really focused on, and Pat mentioned the lab piece, which is one of the areas that we have found efficiency. I guess the last thing is...
that we have seen our capital offsets be higher than our original expectation. We were planning for probably a third of what we think we'll get in 2023 when we announced our Smart Capital initiative at the Analyst Day. So that's obviously coming in stronger. Of course Pat already alluded to the fact that
A lot of that is, you know, skip has turned out to be a pretty powerful tool and, you know, this will enable us to do a skip to this year as well, which will which which obviously helps.
So you have a follow-up? I do a quick one again. I know you don't want to guide the full year But as you kind of look at different scenario analysis for 2023 How do you how do you see kind of return to positive free cash flow playing out? Is that something that could come in the second half or or that's really a 24 event?
Well, 23 we were thinking was kind of a break even free cash flow year for us back at the analyst day last February . Obviously in the first half of this year we're going to be below that model. But as we look into the back half of the year we would expect to approach the model in 23. And of course 24 is
is a bit away from where we are right now, but this is the thing that we spend a lot of time on. I would tell you one thing, if you look at our free cashflow for 22, we came in roughly around minus $4 billion. If you remember in the quarter before, we...
we forecasted that we would be somewhere between minus two and minus four billion. We were actually assuming a higher level capital offsets, which is still coming but pushed into 23. And yet we still hit the high end of that range. And the way we did it was through working capital initiatives. So this is a big part of our strategy around managing free cash flow.
is more attention to working capital. It's something that I think in the past may not have been a big focus here, but is a very big focus here. It's how our shipments are managed in terms of linearity, how we manage payments, how we manage our inventory. The fact that we're taking under load does affect.
the gross margins, but it also improves our cash flow because we're spending less on variable and variable costs. So these are areas that we think can be pretty beneficial to us and be a tailwind for us in terms of free cash flow as we progress through the year.
Thanks, CJ. Jonathan, can we have the next question, please? Certainly. And our next question comes from the line of Matt Ramsey from Cowen. Your question, please.
Good afternoon, guys. Thank you. David.
The first question, I get it a lot, is just with the challenges that you just mentioned at CJ's question on free cash flow and I guess well done to you and your team of extracting as much cash as you did out of working capital in the quarter. But I get questions about the security of the dividend all the time and maybe that's a board level decision.
36.5% dividend for the first quarter. That was consistent with the last quarter's dividend. I just say, you know, the board management, we take a very disciplined approach to the capital allocation strategy, and we're gonna remain committed to being very prudent around how we allocate capital for the owners.
And we are committed to maintaining a competitive dividend.
Matt, do you have a follow-up question? Yes, thanks guys. Thanks, John . I guess this is my follow-up question, guys. I wanted to dig into the DCAI business a little bit. You guys talked about the...
PSG or Altera being up, I don't know, 40 odd percent year over year, which if you just kind of rough math, it means that the core cloud plus enterprise server business is down 40, something like that. And so maybe Pat, could you walk us through what you're seeing?
Is that roughly right in terms of math and just where you're how you see share loss versus ASP versus weakness in the markets in China and enterprise just how do you break that that down for us? What what operationally is happening in the server share space? Thank you Yeah, so yeah PSG did have a very good quarter has a very strong backlog continues to grow But I say the math that you suggest is quite incredible.
response and you know our announcement event on January 10th was a customer centric ramp this baby you know product line. We had you know strong participation from all the CSPs, all of the OEMs, all of the ISVs, end users, so it was seen as a very strong event. This year will be very much about ramping that and we'll see the improvements in both markets.
established a very credible roadmap. You'll see, you know, lots of news coming from us this year as we start to, you know, delivering on samples, etc., of the next generation of products, as well as the continued ramp of SAFIRE Rapids with highly differentiated features and capabilities. So we feel like we've put the worst behind us.
And we're now coming back to the front foot in this business area, and I'll say in a very customer-centric, ISV-centric way that delivers our customers the use cases that they need in their business. Thanks, Matt. Jonathan, can we have the next question, please?
Certainly one moment for our next question and our next question comes from the personal line of Tushya Hari from Goldman Sachs. Your question please.
I was hoping you could talk a little bit about the demand environment in DCI across cloud, enterprise, and perhaps your comms customers. I think in your prepared remarks, you talked about the inventory correction in enterprise being ahead of cloud. So do those comments kind of imply that going forward cloud...
Obviously, we have more exposure to enterprise and China, which we believe weakened our position a little bit more in the year. But we're seeing those same characteristics now with the cloud providers as well. So we see all of them weaker in the first half of the year. We are, I'll say, a touch optimistic that China will come back and enterprise will come back more rapidly.
than the cloud. And with our stronger exposure in those segments, we believe that is a potential good news for us as we go through the year relative to competition. You know, the networking space is one where we have very sustained leadership and strength. And areas like VRAN and ORAN are ones that our platform is dramatically
year on year and the second half of the year to returning to growth. So inventory adjustments, a weaker market in first half, recovery in the second half of the year is what we expect overall. And obviously, you know, the relative position we believe that we have is stabilizing and the markets that we're stronger in, we're optimistic that they'll come back a little bit stronger.
the switching business. As you look across your portfolio as of today, I think to your point, you've done quite a lot since coming back. Where is the incremental opportunity as you think about improving the portfolio going forward and creating value? Thank you.
Yeah, and I'll just say, you know, here without being too specific, since some of these things are under evaluation discussion with customers and the best way to handle it, you know, we're doing a thorough analysis across the portfolio. And I would say we are looking at every aspect of the portfolio, where we're getting good returns, where we're not, and we're making systems.
decision after decision, you know, to optimize the portfolio. And as you say, we haven't been hesitant to make those decisions inside the back, and we have a few more that we're looking carefully at. But we're also looking at every area of the business. You know, Dave, you know, suggested in his comments, hey, you know, could we do a better job with our labs? Thank you.
Could we do a better job with our building assets? We've also discussed as part of the internal foundry model that we're making major steps to improve our automation and ERP efficiency to run the company more. Some of our people actions, we've been very scrutinizing and benchmarking ourselves against best in class in every aspect of how we run the business.
So one by one, we're saying we're going to be world class as measured by benchmarks in these areas and all the business areas that we're in. We believe they're strategically important and yielding good results with our shareholders investments. Thanks, Nishiha. Jonathan, we have time for one last question, please. Certainly. Then our final question for today.
comes from the line of Joseph Moore from Morgan Stanley . Great, thank you. I'm going to talk about the reception you're seeing with Sapphire Rapids, and in particular, it seems like it's a really good...
Chip, but I think that the price at the platform level is getting more expensive, DDR5 is more expensive. What's it like right now migrating to a more expensive platform in an environment where budgets are under pressure? Or does that change the ramp relative to other CPUs that you have?
Yeah, thanks Joe. And you know, you are touching on a very important issue, the memory. And obviously the memory pricing for DDR4 has collapsed, right? And making that pricing gap versus DDR5 very visible currently.
know, that said, customers don't buy these platforms on memory prices. They buy them on TCO, right? The total cost of the operations, right, that they get for the performance as they put them into operations. So memory price is one piece of that, but I'd also say DDR prices are, you know, expected to decline as we go through DDR5.
five to six X performance benefits and when you put that into a TCO calculation it's overwhelmingly positive. You know security is not measured on TCO it's measured on absolute statements of security and confidential computing. So overall you know we are you know driving this ramp very aggressively through the year we have strong demand.
business into DCAI and CCGI. Is there a change there in any of the priorities or is it just kind of a restructuring of where those businesses reside?
Yeah, it's a restructuring of where the businesses reside, and as we move past this, I'll say launch phase of those products, and we're now into the scale phase of those product lines. And for instance, discrete graphics, you know, driving the attach rate and channel motions with our enormous client business.
in the data center bringing a broader portfolio across HPC, our Flex product line, the AI capabilities that we have that we're uniquely delivering through data center. So all of this is about is efficiency and scale of those business areas. And we've been having numerous discussions with our customers.
about these changes and they've been very well received. And I'd say all the products that we launched out of AXG, you know, the Flex product line, the Discrete Graphics product line, the Max products line, all of those products are continuing forward and we believe all of those will have strong ramps.
in their volumes, revenues, and market impact as we go through the year. So with that, let me just wrap up our time together. First, thank you. We're grateful for you joining us today, the opportunity that you've given us to update you on our business.
and clearly the financials aren't what we would hope for, but we're also pleased with the execution progress we made, and as a result, we're confident in the strategic outlook that we have for our business. The macro is difficult. It was difficult in Q4. We expect it to remain difficult as we go through the first half of the year.
but we're laser focused on controlling the things that we can, and every aspect of our execution, cost management, and transformation is in our hands, and we are well underway in executing against those paths. So with that, we look forward to seeing many of you throughout the quarter, updating you on our progress next quarter. Thank you very much.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. Thank you, ladies and gentlemen, for your participation in today's conference.
I'll see you in the next video.
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