Thank you for standing by, and welcome to Intel Corporation's Fourth Quarter 2023 Earnings Conference Call. 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.

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 Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Pat Gelsinger; and our CFO, David Zinsner. In a moment, we'll hear brief comments from both followed by a Q&A session. Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it, and as such, are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release, most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Pat.

Thank you, John, and good afternoon, everyone. Q4 was the culmination of a year of tremendous progress towards our IDM 2.0 transformation. We consistently executed on our plan to reestablish process leadership, further build out our capacity and foundry plans, greatly improved product execution and began to execute on our mission to bring AI everywhere across our product segments. We delivered solid Q4 results exceeding expectations for the fourth quarter in a row. Revenue was at the higher end of our guidance, and we had strong EPS upside as a result of our ongoing relentless focus on driving operating leverage and expense management, including comfortably meeting our $3 billion cost savings commitment for fiscal year '23. 2023 was definitely a year when we did what we said we would do and more. We intend to make 2024 another such year. And when we look out over the next 12 months, we are confident that we can continue to drive considerable progress on our IDM 2.0 journey. As we look into Q1, our core business, including client server and edge products continues to perform well and is tracking to the lower end of seasonal. However, discrete headwinds, including Mobileye, PSG and business exits, among others, are impacting overall revenue, leading to a lower Q1 guide. Importantly, we see this as temporary, and we expect sequential and year-on-year growth in both revenue and EPS for each quarter of fiscal year '24. Momentum and excitement around new products and businesses remain strong as we head into the year and will grow stronger as the year progresses. We could not be prouder of the execution across our process technology roadmap in 2023 and we became the world's first high-volume manufacturer of logic devices using EUV, both in the U.S. and Europe as we aggressively ramped Core Ultra on Intel 4 in both Oregon and Ireland. Intel 3 achieved manufacturing readiness in Q4 as committed with solid performance in year progression. Our two lead vehicles in Intel 3 are on track, and we look forward to launching Sierra Forest in the first half of '24 followed shortly thereafter by Granite Rapids. Sierra Forest has final samples at customers and the production stepping of Granite Rapids is running ahead of schedule well into power-on validation and very healthy. We are even more excited about breaking into the Angstrom era with Intel 20A and Intel 18A. We are first in the industry to have incorporated both gate-all-around and backside power delivery in a single process node, the latter unexpectedly two years ahead of our competition. Arrow Lake, our lead Intel 20A vehicle will launch this year. Intel 18A is expected to achieve manufacturing readiness in the second half of '24, completing our five nodes in four year journey and bringing us back to process leadership. I am pleased to say that Clearwater Forest, our first Intel 18A part for servers has already gone into fab and Panther Lake for clients will be heading into fab shortly. As we complete our goal of five nodes in four years, we are not satisfied nor are we finished. We have begun installation of the industry's first high NA EUV tool in our most advanced technology development site in Oregon aimed at addressing challenges beyond 18A. We remain focused on being good stewards of Moore's Law and ensuring a continuous node migration path over the next decade and beyond. Third-party engagements with IFS continue to validate our progress on process technology. We launched IFS with a long-term view of delivering the world's first system foundry that brings together a secure and sustainable supply chain with the best of Intel and our ecosystem. While our ambitions will not materialize overnight, we made tremendous progress in both Q4 and fiscal year '23 towards our goal of becoming the second largest external foundry by 2030. The rapid adoption of AI by all industries is proving to be a significant tailwind for IFS as high-performance compute, an area where we have considerable wafer and packaging know-how and IP is now one of the largest, fastest-growing segments of the semiconductor market. We made major strides in building our foundry ecosystem in 2023 with now over 40 strategic agreements across EDA design services, IP, cloud and U.S. military aerospace and government. Critical agreements with ARM and Synopsys continue to gain momentum. We delivered the Intel 18A 0.9 PDK and broadened its availability in Q4. We expanded the RAMP-C program significantly and just this quarter signed a major foundry contract with the United States Government and Department of Defense. We are also very pleased to have completed a major agreement with United Microelectronics, or UMC, to develop a 12-nanometer process platform targeting high-growth markets, including mobile, communication infrastructure and networking. This expands both Intel and UMC's foundry process portfolios and customer access to a broader and more resilient supply leveraging our Arizona site. This agreement builds upon and furthers our long and deep relationships with the vibrant Taiwan ecosystem. This also meaningfully extends the production life of our installed capacity and improves our returns on investments, similar to the announcement last quarter of our Tower Semiconductor partnership at the 65-nanometer node with our New Mexico site. Our success with IFS will be measured by customer commitments and revenue. We have taped out more than 75 ecosystem and customer test chips. IFS already has more than 50 test chips in the pipeline across 2024 and 2025, 75% of which are on Intel 18A. During CES, we welcomed the Valens Semiconductor to the growing list of foundry customers as they announced they would use IFS to fabricate their MIPI A-PHY chipsets using our advanced technology. In addition to the three Intel 18A customers we disclosed in Q3, we won a key design win with a significant high-performance computing customer. This customer was particularly motivated by our unique leading-edge manufacturing capabilities and U.S. capacity. We came into 2023 committing to one 18A foundry customer. We executed on four inclusive of a meaningful prepay and our momentum continues to grow. Our advanced packaging business is proving to be yet another important advantage for IFS, a faster on-ramp to broader foundry relationships. During the quarter, we captured three additional advanced packaging design wins, bringing the total to five in 2023, with the majority of revenue starting in 2025. To support our growing demand, just yesterday, we opened Fab 9 in New Mexico, marking a milestone for high-volume 3D advanced packaging manufacturing. The momentum in advanced packaging is very strong and is another facet of our foundry strategy, which is clearly benefiting from the surge of interest in AI. With leadership technology and available capacity, our opportunity set continues to grow. In total, across wafer and advanced packaging, our lifetime deal value for IFS is now over $10 billion, more than doubling from the $4 billion we provided in our last update. Supporting our growing momentum in IFS is our global manufacturing footprint. We are the only semiconductor company with that scale and sustainable manufacturing in every major region of the world providing ourselves and our foundry customers resilient access to the right capacity in the right regions at the right time. All of our expansion projects in the U.S., EU and Asia are progressing on schedule, and our chips applications in the U.S. and EU are progressing well. Finally, we are thrilled to be hosting our first Foundry Day, IFS Direct Connect on February 21 in San Jose where we will have the opportunity to showcase the breadth of our ecosystem as well as begin to talk about our process roadmap beyond Intel 18A, next-generation packaging and our full foundry vision. We hope to see many of you there. Intel continues its mission to bring AI everywhere. We see the AI workload as a key driver of the $1 trillion semiconductor TAM by 2030. And given our foundry and product offerings, we are the only company able to participate in 100% of the TAM for AI Silicon logic. We have already discussed how our 50-year heritage and high-performance computing transistors and our advanced packaging positions IFS to benefit from the accelerating move to AI. Within our product portfolio, we are the only company with the products, IP and ecosystem reach to empower customers to seamlessly integrate and effectively run AI in all their applications from the cloud through the network, into the enterprise client and edge. For the developer working with multitrillion parameter frontier models in the cloud, Gaudi and our suite of AI accelerators provides a powerful combination of performance, competitive ML perf benchmarks and leadership TCO. As AI proliferates and the world moves towards more AI integrated application, there's a market shift toward local inferencing and smaller, more nimble models. It's a nod to both the necessity of data privacy and an answer to cloud-based inferencing cost and round trip latency. With AI accelerated Xeon for enterprise, Core Ultra ushering in the AI PC era and OpenVINO enabling developers seamless and versatile support for a range of clients and edge silicon, we are bringing AI to where the data is being generated and used rather than requiring it in the cloud. Our expansive footprint spanning cloud and enterprise servers to volume clients and ubiquitous edge devices positions us well to enable the AI continuum across all our market segments. In Q4, our server business experienced solid sequential growth, consistent with market share, which we believe was flat with Q3 levels. Since launching 4th Gen Xeon in early 2023, we have shipped more than 2.5 million units with approximately one third of all 4th Gen demand driven by AI. With our 5th Gen Xeon launch, we enable up to 42% higher AI inference performance compared to the industry-leading 4th Gen Xeon. 5th Gen Xeon has reached general availability at Alibaba is entering public and private previews with several CSPs and is on track to ship with OEMs next month. More importantly, our improved execution is strengthening our product portfolio with Gen 4 and Gen 5 Xeon ramping well, Sierra Forest and Granite Rapids coming soon and Clearwater Forest already going into the fab. Momentum is building and positioning us well to win back share in the data center. Our Gaudi 2 AI accelerators continue to demonstrate price performance leadership compared to the most popular GPUs. In a recent blog published by Databricks, Gaudi 2 was shown to clearly deliver the best training and inference performance per dollar based on public cloud pricing. We're building on this momentum with Gaudi 3, which is on track to launch this year and is expected to deliver performance leadership with four times the processing power and double the networking bandwidth for greater scale out performance. Gaudi 3 is now in the lab, powered on and showing great health and performance and Falcon Shores is also well underway. Our accelerator pipeline for 2024 grew double digits sequentially in Q4 and is now well above $2 billion and growing. We recently increased our supply for both Gaudi 2 and Gaudi 3 to support the growing customer demand and we expect meaningful revenue acceleration throughout the year. As we announced last quarter, we are now operating PSG as a standalone business beginning on January 1. Our intent is to bring in private capital this year to create an eventual path to an IPO over the coming years. As we outlined on our Q3 call, PSG is in the midst of an industry-wide cyclical correction for FPGAs, which we expect to last through the first half of '24. Despite the financial correction, operational momentum is strong and PSG executed its most ambitious FPGA roadmap, delivering 21 new product releases in 2023 and executing supply assurance agreements valued by our customers. Finally, even as we congratulate Sandra Rivera, the new CEO of PSG, I am extremely pleased to welcome Justin Hotard as Executive Vice President and General Manager of DCAI. Justin joined us from Hewlett Packard Enterprise, where he was Executive Vice President and General Manager of High Performance Computing AI and Labs. He will play a key role in helping customers accelerate their businesses with our Xeon processor family, delivering on our commitments to customers and partners by increasing our GPU and accelerator footprint and supporting our mission to bring AI everywhere. Moving to client. CCG performed very well in Q4, posting the third consecutive quarter of double-digit sequential growth. Demand reflected a normalized inventory environment of sustained strength in gaming and commercial with our highest end SKUs exceeding Q3 records by 20%. The 2023 consumption TAM was roughly 270 million units consistent with our views entering the year, and we expect the PC TAM to be up low single digits year-on-year in 2024, in line with third-party estimates. Our share position is strong, and our product portfolio for 2024 and beyond and ecosystem work will continue to drive industry-leading performance and experiences. In Q4, we ushered in the age of the AI PC with the launch of Intel Core Ultra. Representing our largest architectural shift in decades, the Core Ultra is the most AI-capable and power-efficient client processor with dedicated acceleration capabilities across the CPU, GPU and Neural Processing Unit or NPU. Ultra is the centerpiece of the AI PC, systems that are capable of natively running popular multimillion parameter models and drive superior performance on key AI-enhanced applications like Zoom, Adobe and Microsoft. We expect to ship approximately 40 million AI PCs in 2024 alone with more than 230 designs from ultrathin PCs to handheld gaming devices to be delivered this year from OEM partners, Acer, Asus, Dell, HP, Lenovo, LG, MSI, Samsung Electronics and others. The Core Ultra platform delivers leadership AI performance today with our next-generation platforms launching later this year, Lunar Lake and Arrow Lake tripling our AI performance. In 2025 with Panther Lake, we will grow AI performance up to an additional 2x. NEX is well positioned to benefit from the proliferation of AI workloads on the edge where our market-leading hardware and software assets provide improved latency, reliability and cost. OpenVINO adoption grew by 60% sequentially in Q4 and today is a core software layer for AI inferencing on the edge, on the PC and in the data center. NEX Q4 results beat our internal forecast and the division is poised for solid growth in 2024 across edge network and ethnic products more skewed to the second half. Yet another growing market opportunity for us is automotive. While Mobileye is experiencing a sharp inventory correction in Q1, we are encouraged by their improving forecast throughout 2024 and more importantly, the recent announcement at CES that they were awarded a series of production design wins by a major Western automaker across the company's three key platforms: SuperVision, Chauffeur and Drive. In addition to Mobileye's strengths in AV, at CES, we announced the launch of AI-enhanced software-defined vehicle, SoCs with Geely’s Zeekr brand as our first OEM partner and our agreement to acquire Silicon Mobility, a fabulous silicon and software company specializing in power management SoCs focused on EVs. These announcements build on shared IP across clients and data center and our existing Intel SoC footprint of more than 50 million vehicles worldwide. Our strategy will continue to broaden our exposure to the growing auto market on both the product and the foundry sides of our business. Finally, underpinning our across-the-board progress in 2023 is our operational and financial discipline. As our new internal foundry model, which is designed to drive greater transparency, accountability and focus on cost begins to take root, we expect to unlock further cost savings and efficiencies in 2024 and beyond. We have officially transitioned to this new operating model on January 1, and we'll report the new segmentation format as part of our Q1 earnings. We see incremental efficiencies as we drive to our long-term model of 60% gross and 40% operating margins. As I reflect on our progress in 2023, I am incredibly proud of our employees whose commitment and perseverance were instrumental to the execution of our ambitious strategy. Together, we exited the year accomplishing exactly what we set out to do. We improved our execution engine consistently being on track or ahead on our process and product roadmap. And as I said at the beginning of my remarks, we are confident in our performance and financial trajectory for the year ahead. We know we have much work in front of us as we work to regain and build on our leadership position in every category in which we participate. We will maintain our relentless focus on our mission and commitment to driving long-term value for our shareholders. With that, let me turn things over to David.

Thank you, Pat, and good afternoon, everyone. We delivered strong financial results in the quarter on top of continued execution of our products and process roadmap commitments. We again beat our guidance across revenue, gross margin and EPS. We've taken proactive steps to prioritize our investments, aggressively manage near-term expenses and made meaningful progress on reducing our structural cost gaps. We exit 2023 a healthier and leaner company, but there is much more work to do in 2024 and beyond to deliver on our long-term financial objectives and the potential of IDM 2.0. Fourth quarter revenue was $15.4 billion, up 9% sequentially, 10% year-over-year and $300 million above the midpoint of our guidance with solid execution across reported segments. Gross margin was 48.8%, 230 basis points better than our guidance, driven by favorable product mix and ASPs, improved unit costs and higher revenue. EPS for the quarter was $0.54, beating guidance by $0.10 on improved gross margins, stronger revenue and disciplined OpEx management. Q4 operating cash flow was $4.6 billion. Net inventory was down more than $300 million and nine days in the quarter, and DSO remains under 20. Net CapEx was $5.9 billion resulting in an adjusted free cash flow of negative $1.3 billion, and we paid dividends of $0.5 billion in the quarter. Moving to the fourth quarter business unit results. CCG delivered revenue of $8.8 billion, up 12% sequentially, 33% year-over-year and ahead of internal expectations for the fourth consecutive quarter. We saw sustained strength in gaming and commercial segments, along with record performance notebook shipments in the quarter. Customer inventory levels have normalized and 2023 PC consumption was in line with our 270 million unit forecast. Operating profit was $2.9 billion, up more than $800 million sequentially and nearly $2.4 billion year-over-year on improved TAM and market share and sell-through of reserved inventory. DCAI revenue was $4 billion, up 4% sequentially. The server business delivered double-digit growth sequentially, partially offset by the FPGA inventory correction. Revenue was driven by improved unit TAM, stable share and rising average core density contributing to record Xeon ASPs. Operating profit was $78 million, roughly flat sequentially as advanced node development costs continue to weigh on profitability. NEX revenue was $1.5 billion, up 1% sequentially and ahead of internal expectations on strength from network and Ethernet segments. The business saw an operating loss of $12 million, down modestly quarter-over-quarter. Intel Foundry Services contributed revenue of $291 million, down modestly on a sequential basis and up 63% year-over-year on increased traditional packaging revenue. IFS operating loss was $113 million, driven by continued investment to develop and grow world-class systems foundry. Mobileye delivered record revenue of $637 million, up 20% sequentially and 13% year-over-year, along with record operating profit of $242 million, up 42% sequentially and 15% year-over-year. Recently disclosed design wins are expected to contribute more than $7 billion of future revenue or more than 3.5 times Mobileye's record FY '23 revenue. As Pat summarized, the company made significant progress towards our IDM 2.0 strategy including strong execution against our 2023 financial commitments despite macro headwinds throughout the year. As committed at our Q1 '23 earnings call, we delivered revenue gross margin, operating margin and EPS growth each quarter. Despite significant investments in future growth and continued progression through five nodes in four years, we achieved our 2023 commitment of $3 billion of spending reductions. Through a strong focus on cash and cost controls, we achieved excellent DSO and DPO in the second half of 2023, and delivered net inventory reductions of nearly $2 billion and 35 days from our peak in Q1 '23. Working capital initiatives yielded roughly $2 billion of cash in 2023, helping us to meet our commitment for roughly breakeven adjusted free cash flow in the second half of the year. We remain committed to our smart capital framework with growing contributions from our Skip agreement with Brookfield and progress toward government incentives in the U.S., Europe and Israel. In Q4, we also recognized $845 million of advanced manufacturing investment credits or AMIC, as defined in the CHIPS Act. While our continued IDM 2.0 capital investments will result in increased gross CapEx in '24 as compared to '23, we're on track to our aggregate 2023 through 2024 guidance of net CapEx spending in the mid-30s as a percent of revenue, with offsets towards the high end of the 20% to 30% range. Now turning to Q1 guidance. We expect Q1 revenue of $12.2 billion to $13.2 billion. At the Q1 revenue midpoint of $12.7 billion, we expect gross margin of approximately 44.5% with a tax rate of 13% and EPS of $0.13. While we expect a slightly subseasonal first quarter from our core product businesses, we see material inventory corrections in Mobileye and PSG. Additionally, we expect a significant drop in IFS revenue after seeing accelerated purchasing in our traditional packaging business and cyclical weakness in wafer equipment buying in the first half of the year, impacting the IFS business. When combined with businesses we exited in 2023, we expect a roughly $1 billion sequential revenue impact from businesses outside of our core products. With market signals remaining positive for PC demand and usage rates, we expect TAM to grow in the low single digits in 2024, consistent with third-party views. Our recent results show the PC remains essential, and we remain confident in our longer-term TAM forecast as the age of the AI PC further enhances the value of device refresh. We expect Q1 data center revenue to decline double-digit percent sequentially before improving through the year. While the data center has seen some wallet share shift between CPU and accelerators over the last several quarters, we expect growth in CPU compute cores to return to more normal historical rates and our discrete accelerator portfolio with well over $2 billion in pipeline to gain traction as we move through 2024. Within NEX, telco markets are likely to remain weak through the year, though we expect solid growth from our Network, FNIC and Edge products. These signals give us confidence that consolidated revenue will grow beyond typical seasonality after a soft Q1. And that we can deliver sequential and year-over-year growth in both revenue and EPS each quarter of 2024. We're confident we can grow earnings faster than revenue this year and maintain roughly breakeven adjusted free cash flow, though I'll remind you that the rapid pace of delivering five nodes in four years and capacity expansion in support of external foundry commitments remain headwinds on the pace of our margin expansion. We expect depreciation to grow by approximately $2 billion in 2024, in addition to a significant increase in variable factory start-up costs. 60% gross margin flow-through as a percent of revenue growth remains a rule of thumb in aggregate in the intermediate term, though we may see volatility in our quarterly gross margin results. We're excited to mark the first month fully operating under our new internal foundry reporting structure with improved accountability, transparency around cost and value drivers and increased focus on driving higher rates of return for our owner's capital. We intend to provide you with the recast historical financials this quarter in the form of an 8-K. We will unpack the details at that time, but you will see not only the first view of our manufacturing P&L, but a view of our products group more in line with external peers. While there will be no surprise, our manufacturing P&L is under significant pressure as we get back to process leadership and build the infrastructure to meet both internal and external demand, we see abundant opportunity to drive improvement. Finally, standing up a separate legal entity for manufacturing, technology development and IFS is important to our foundry customers. We expect to have that structure in place in the second half of 2024. As we look back at 2023, we have a lot to be proud of. We entered the year with a challenging macro backdrop. I'm pleased with our team's efforts, controlling spending, ramping new products, managing share, executing product and process roadmaps and delivering for our customers. We continue to focus our portfolio by exiting five businesses in 2023 for a total of 10 since past return. While also identifying profitable adjacent markets we can serve with our existing IP as we have done with Intel Auto. We executed within our Smart capital framework and are beginning to see meaningful capital offsets. We unlocked value for our shareholders through Mobileye and IMS and announced our intention to pursue external investments in PSG. I'd like to thank the entire Intel team for the hard work and execution, which drove our improved 2023 results. While we aren't yet where we want to be from a financial perspective, we're participating in a large and growing semiconductor TAM. Our foundry and AI assets are showing great momentum in the market and with the strong foundation of financial discipline we set in 2023, we're confident and committed to our long-term financial objectives. With that, let me turn the call back over to John.

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

Certainly. One moment for our first question. And 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. I have a near-term one and then for my follow-up would be a longer-term one. So the near-term one is on the demand picture. Dave, you were helpful in breaking up kind of the non-core impacts in the first quarter versus the core, but the low end of seasonality is a little bit of a surprise given that cyclical pressures seem to have been abating and some of the market share trends should have been going in your favor, at least also not worsening. So can you just talk a little bit about why you're at the low end of seasonality in the first quarter for your core businesses and what gives you confidence in super seasonality thereafter?

Yes. Hi, thanks, Ross. I'll start and ask Dave to follow-up. And first, what's seasonality Q4 to Q1? There's a wide range of perspectives, anywhere from 3% to 20% historically. So I'll just say it's a wide statement of what that looks like. Obviously, as we come into the year, it's coming off a very strong Q4. Our product lines are strong. We feel our inventory positions are healthy. We're gaining momentum across it. And obviously, we've built the forecast consistent with our customers and channel partners that we believe is merited. Obviously, Dave talked about some of the discrete events, which as we added them up, were a little bit larger than we forecast, but the core business we see is healthy. For it, we see no areas for market share loss and the products are getting stronger. So, we'll say it really reflects as we view the market, but we've also said, hey, we're improving every quarter as we go through the year, like improving on revenue, top line, improving on profitability as we go through the year. And we've quite scrutinized that outlook for the year. And obviously, as the year improves, new product lines are merging, tailwinds in areas like AIPC, Gaudi ramping for accelerators. Overall, a lot of things just keep improving as we go through the year. Combined with good cost discipline, we feel quite comfortable that we're starting strong and we're going to have an improving year as the year progresses.

And what's the long-term question, Ross?

You just, the confidence in, oh, the second half. The long-term question is one, yes, sorry. The long-term question is one of the manufacturing nodes. The five nodes in four years is going well, but one of your biggest foundry, well, customers and competitors is doubling down on their ability to keep the leadership positioning. So what gives you confidence that 18A will in fact have the leadership node? And how do we reconcile the fact that you seem to be using that customer as a foundry partner for some of your heterogeneous products, whether it be Arrow Lake or Lunar Lake going forward? If you have the leadership, why wouldn't you be doing that internally?

Yes, thank you. I'll do that and ask Dave to pile on both of those a little bit. But with respect to the manufacturing, I'll just say, hey, we look at this every single day and we're scrutinizing carefully our progress on 18A. And obviously the great news that we just described those Clearwater Forest taping out, that gives us a lot of confidence that 18A is healthy. That's a major product for us. Panther Lake following that shortly. We've also had our fourth customer this quarter. Some of the IP providers are giving us very strong affirmation on the competitiveness of the process technology. And particularly, we're just way ahead on backside power. And that's not even, everybody in the industry is recognizing that. And many of the customers who are looking at it are seeing substantial gains, not just in power performance, but in area savings as well. So overall, we feel very confident that our roadmap is strong in the process technology side. We do use external foundries and obviously that grew as we were dealing with some of our own challenges for process competitiveness. And as we create more and more focus in the business, more wafers will come in internal to the Intel factory network. But long-term, we're going to continue to use external foundries to complement, manage our capital requirements. And to make sure that our teams always are building the best products in the industry and using the best technologies to accomplish that. So overall, we feel super good with our strategy. You'll see more use of our own factory network, even as we leverage external foundries where appropriate.

The only other thing I'd add is just the use of external foundries as part of our smart capital strategy. It's one of the five pillars. So as Pat said, that will continue to be part of our strategy. Obviously, we're going to maximize how much we can do internally, but we're always going to be using external foundries based on smart capital.

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

Certainly. One moment for our next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question, please.

Thanks a lot, Dave. I had a question about gross margin. It was obviously much, much better in December, and the March guidance is actually pretty good. So does this include the sale of any previously written down inventory and maybe help us get a clean margin number? Is this March number pretty clean that we can carry that incremental forward through the year?

Yes. I mean - what I said in the prepared remarks, I think, is that we think that a 60% fall through is probably the best rule of thumb. That said, as you know, quarter-to-quarter, things can move that number up and down. In Q4, we saw a better fall through. Largely, it was related to a better sell through of previously reserved product. We also actually did better on the factory side in terms of spending and yield. And so that also benefited us to some extent. And then in Q1, I think we're going to do a little worse. We're going to see the fall through be a little harder on us. And largely, that's some of that stuff going away a little bit. But I think if you look at it on a year-over-year basis, it's kind of a '23 to '24, '24 to '25, we'd largely expect it to be this 60% fall through. We're going to have these quarter-to-quarter movements that kind of violate that, because of just one-off things. But I think in general, you'll see 60% fall through be the right measure. Longer term, we're obviously going to want to see that number go up, because it's going to drive us to the 60% gross margins we ultimately want to attain. But in the near term, we're kind of dealing with a lot of the costs associated with five nodes in four years. It's just a lot of startup costs back. We'll probably hit our peak start-up cost in 2024. So that's a huge headwind we'll have to deal with. So, that's going to keep us in this 60% fall through range for the next couple of years.

Tim, do you have a follow-up question?

I do. I do, Dave. Yes. Just how you get to that 60%. So it seems like there could be persistent headwinds in terms of capacity utilization. I mean, I think a lot of us see that there's this plan to cut over to internal, starting with Panther Lake, but that doesn't really ramp into high volume until probably 2026. So are you managing to some sort of like utilization rate for your internal capacity to sort of get to that 60%? Thanks.

Yes. Well, maybe step back a little bit on the 60%. I mean, it will be driven by a number of factors, one of which is just revenue. Revenue growing on a largely fixed cost business is going to help gross margins. Obviously, we have optimism around how we can drive the growth of the business. The second, as you point out, is loadings. And we are managing our capital spend and our investment with an eye on loadings to make sure that we keep those in a good place. Obviously, last year, we had some underloadings to deal with. But as we kind of break out of that and start to move into the next year, I think we'll start to see some improvements there. Third, as we get, as Pat was talking about, to leadership in terms of nodes and products, ultimately across the entire product portfolio, that's going to help out on margins. It's going to help out from a cost structure perspective, but also better performing products are just going to yield better pricing and so forth, better profitability. And then lastly, we've got this internal foundry model that Pat mentioned, and I mentioned in the prepared remarks that we think is going to deliver tons of savings for the company. I think every week that Pat and I spend on this, somebody brings up another big rock that they found of savings they can identify, because they were looking at the business in an entirely different way than they're used to looking at it. The product groups are now hyper-focused on test times and how many - and what sort of hot lots they do and how much sample activity they use. The factories now, as you point out, very, very hyper-focused on loadings and making sure they're properly thinking about their capital investments associated with the loadings. So, we're way more focused in terms of steppings and so forth. So, I think we'll get, like I said in a call a couple of quarters ago, $4 billion to $5 billion of savings from this internal foundry model ultimately. And so that's another big step function that I think gets us to the 60% gross margin.

I'd also add things like we just announced with UMC, right. We're taking older factories. And as Tim, as you might've heard me say in the past right, a bug in the Intel business model, just when a factory got very good and depreciated, we moved to the next node. Well now, we're starting to fill that with long-term foundry business as well. So all of these are improving the discipline of running the business as well as how we utilize our factory networks long-term. And we really do think that the 60-40 is what Dave and I are driving the business to and we're going to get there.

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

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

Great. Thank you. I wonder if you could talk about the data center decline in Q1, how much of that is a function of the weakness in FPGAs that you've talked to already and then just any sense of what the cloud and server environment is like in the first quarter?

Yes. So, overall, when you fact, obviously, we've spoken separately about the FPGA business. So, let's just move that to the side. Overall, I'll say it's fairly seasonal quarter-to-quarter in what we expect. That said, we're seeing strength from our server customers. For instance, more of the OEM responses are strong with regard to the momentum they're seeing in the enterprise server business. And obviously, our product line is improving there. We do expect year-on-year growth here. We see our market share stabilizing. And obviously, as we're ramping, Gen 4, Gen 5, Granite Rapids, Sierra Forest, the momentum is building for us overall. And as we indicated, we think more of the AI surge is going to result in AI inferencing on-prem, which we're well positioned to be a beneficiary of. I would just cite that here we are in year 20 of the public cloud, and you have 60% plus of compute in the cloud, but 80 plus percent of data remains on-prem. Customers want to realize the value of that on-prem data with AI, and that's an enterprise strength for Intel. So, we do see all of these trends giving us a very favorable outlook for the year. And there's nothing surprising about the Q1 guide here. And we're going to be very focused on beating those numbers and building on the momentum of improving our product line.

Joe, do you have a follow-up question?

Yes, I do. Along the same lines, can you talk about Sierra Forest and Granite Rapids? And I guess, how do you see the long-term mix between those? What kind of appetite do you see for the Sierra Forest and higher core count designs?

Yes, thank you. And I would love to talk for hours about Sierra Forest and Granite Rapids. I am super excited about those products, both of them on Intel 3. And if I build on the last question from Tim about factory loadings, we are driving hard to accelerate those products into the marketplace, and they're really the drivers of Intel 3 capacity. The mix between them, obviously, this is our first volume mainstream offering for a high core count. I sort of view this as the cloud guys just want VMs at scale or just want containers at scale. That's what Sierra Forest is about, is sort of that bulk workload. And it doesn't have some of the performance capabilities, peak capabilities, feature capabilities that Granite Rapids has. I expect the bulk of the market to stay on Granite Rapids type products, the P-core products, certainly in '24 and '25. But we do see a pretty steady rise in the use of Sierra Forest. And then as we move to Clearwater Forest in '25, a very compelling product. We do see a pretty healthy split between those for the cloud and data center customers. I think most of the enterprise customers will stay with the P-core products that they will have. And it really is Sierra Forest, Clearwater Forest, and successors being sort of that bulk mainstream cloud offering that's very focused on TCO. So with that, we feel super good about our product portfolio, P-cores, E-cores, really allowing us to stretch the offerings to the highest performance with high core count and to the best TCO. And with that, this is a portfolio that will allow us to regain share in the core data center market.

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

Certainly. One moment for our next question. And our next question comes from the line of Ben Reitzes from Melius Research. Your question, please.

Yes. Hi. Thanks. Appreciate it. I wanted to revisit the gross margins, and I appreciate the 60% flow-through comment that we should use as a rule of thumb. But Dave, starting at 44.5% in the first quarter, how do you - are you still looking for the overall reported non-GAAP number to be up year-over-year from the 43.6%? And you mentioned some volatility there. I just want to clarify on the call how the gross margin trajectory is going to look year-over-year and understanding there's that volatility there?

Yes. Yes, to be clear, the way I was looking at gross margins is on a year-over-year basis on the 60% fall-through. So you should take the full year gross margins that we had in '23, which were roughly 43.5%. And think about this 60% fall-through based on the 43.6% gross margins. I think when you do that, we obviously start off at a level that's better on a year-over-year basis, but obviously down on a quarter-to-quarter basis. And so, you should expect generally improving dynamics through the year. The only challenge will be this quarter-to-quarter always has volatility to it. So there could be quarters in which we get less ship through of previously reserved products. Sometimes it's more. And so and kind of avoiding trying to pinpoint every quarter, because of the difficulty around pinpointing that, but we feel very confident around the 60% fall-through.

Ben, do you have a follow-up?

Yes, thanks, John. Could you talk a little bit more about the client market? There was - you mentioned that corporate, you said some strength and Dell had said there was some weakness. And heading into the first quarter, can you talk about the revenues on client and what makes you so confident that it's really going to pick up?

Yes. So as we look at the market year-on-year, we expect it to be a few points bigger than it was last year. So last year was 270. This year, a couple of points higher than that. I think that's consistent with the various market forecasters that we have. Our market share position is very stable. We had good execution of market share through last year. And the product line is better this year with a number of tailwinds, like we said. So overall, we think it's going to be a very solid year for us in our client business. Obviously, as we start the year, everybody is, I'll say, managing through what their Q1 outlook looks like, even as they expect to see stronger business as we go through the year. I'd also comment, Ben, that some of these tailwinds really only start to materialize as you go into second quarter and second half. AIPC is just ramping right now. The Windows 10 EOS goes into effect. And customers are starting to look at the post-COVID refreshes. So a lot of those benefits materialize as you go through the year. But our position in gaming, commercial, very strong for us overall. And I'll tell you, we're just seeing a lot of excitement for the AIPC. I describe this as the Centrino moment. The most exciting category-defining moment since Wi-Fi was introduced two-plus decades ago. So, we do think that it's going to bring a multi-year cycle of growth, great ISVs, great new use cases, and a product line that is clearly leading the industry established in this category.

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

Certainly. One moment for our next question. And our next question comes from the line of Vivek Arora from Bank of America Securities. Your question, please.

Thanks for taking my question. But I'm curious, now that we are a year into the generative AI deployments, what's your view on how cloud customers are thinking about the CapEx between traditional and AI servers? Because when we look at the revenue growth across your GPU competitors, they seem to be capturing nearly all of the incremental CapEx and in some cases, even more than just the CapEx at the public cloud company. So does that really leave much room for your CPU business to grow beyond just the seasonal variations? So just how are you looking at the AI market overall? And what part of that is Intel really able to capture when we just look at how much is being or needing to be dedicated to your GPU competitors?

Yes, thank you. And let's just maybe three different aspects to it. The first one is clearly the high end cloud guys and what they're doing for maximizing training environments. Clearly that's been an accelerator market so far. But that even is giving, I'll say a bit of a tailwind in the sense there are lots of head nodes associated with that. We do think, as we said, that the market moves much more from high end training to inferencing. Of where our product line is more substantive for it. But the enterprise market, as we see it for data centers, is very much going to be an on-premise play, taking advantage of inferencing in that data pools that they already have. And that's an area of good strength for Intel. And we're starting to see that in some of the conversations with our OEM customers. And as I finished, probably 50 meetings between World Economic Forum and Davos and CDS with customers, I'll say we have absolute unanimous response that they're going to be deploying a lot of their AI on premise in their data centers. And, you know, Xeons and our on premise offerings are simply the preferred way for them to be taken advantage of those capabilities inside of their data centers. Inside of the TCO envelopes, power, networking management that, they have in place. Obviously, we need to be participating more in the accelerator piece of that. And we're seeing the growing pipeline of our opportunities. We saw a nice uptick in revenue in Q4 from a small number, but a lot of momentum as we come into the year. And Gaudi3 is getting a lot of excitement, you know, clearly leading in TCO. So, we're going to be competing much more for that high end accelerator footprint. But I think the message of 2024 is going to be inferencing, AI everywhere. That's going to be at the edge, that's going to be the AIPC. And it's going to be in the enterprise data center, all areas that Intel has a much stronger footprint.

Vivek, do you have a follow-up question?

Yes. Thank you, John. Thank you, Pat. So on the foundry side, I think you mentioned IFS, you know, some declines in Q1 after the strong Q4 that you had. So, I was hoping if you could just help us size what is IFS in Q1. And then longer term, you know, you mentioned now you have four 18A wins, but how do we quantify what they mean for '24 or '25 or '26? And I think on the call you had mentioned somewhere about $10 billion in lifetime wins. I'm hoping that that's what you meant for 18A. But when I look at that $10 billion over multiple years, that is not really that big relative to I think the $130 billion plus annual foundry market. So could you just help us size what does Intel's external foundry business mean for 2024 or 2025 perspective? Thank you.

Yes. And the two things in the Q4 to Q1 numbers on IFS, one is the - I'll say the natural ending of our traditional packaging volume. So that affects Q4 as we go into Q1. And obviously our focus there isn't doing traditional packaging. You know, that's best supplied by OSAT vendors, but we were in a unique position to help our customers as we went through the COVID cycle. All of our packaging focus going forward is advanced packaging where our technology is differentiated, the margins are good. And as you saw, we just announced the New Mexico facility, as the first major advanced manufacturing facility on U.S. soil. A lot of excitement from customers across the world. Also, we had our foundry equipment business, which was another factor Q4 to Q1, very consistent with the profile that you might've heard from people like ASML, right? As they saw the quarter-to-quarter implications on the equipment business. So I'll say Q4 to Q1, all explainable in those contexts. The business we're winning 18A foundry customers, Intel 3 packaging, it takes quarters for that to materialize and for wafer customers' years. And that's why we said lifetime deal value is probably the best metric that we can give you to help you understand the nature of that business as it's growing. And as I said, we saw a big uptick from our prior update to this one. Obviously, we need to, as your question suggests, get to a much bigger number. And that's exactly what we're going to do. We're now well underway. We're seeing healthy growth in lifetime deal value. We'll be giving you periodic updates on it as a good metric of seeing how rapidly that business is growing for us. And I've emphasized that number is just external foundry, right? Our internal business is what's going to be driving the factory build out. And that really gives us the scale to then start adding these additional external customers to it. Those deals, as we say, they could be a year or two, or they could be multiple years in length. There'll be a varying contract length associated with them. And we just want to give some visibility, transparency to the business and a rapidly growing lifetime deal value is a good way for us to give you some characterization of that business outlook. Finally, I want to see you on February 21. We're going to hold a big industry ecosystem event, our IFS direct connect and meeting with the ecosystem, our customers, but we're inviting analysts to listen in to the great conversations we're going to have and the disclosures that we'll be giving there.

Thanks Vivek. Jonathan, if you have time for one more question, please.

Certainly. One moment for our final question for today. And our final question for today comes from the line of C.J. Muse from Cantor Fitzgerald. Your question, please.

Yes, good afternoon. Thank you for squeezing me in. I'll combine both my questions into one. Typically, you know, in a manufacturing transition, you take on one, maybe two kinds of technical challenges. Here at 18A, you know, you're taking on backside power, gate all around and high in A. So, we'd love to hear kind of maybe some of the struggles you've seen, how you've worked through them, and what kind of feedback you're getting from customers in all three of those and kind of the confidence on delivering the goods in the timeline that we set out? Thank you.

Very good. So let me characterize a little bit more carefully, because we've been trying to carefully manage the risk that we're taking on. So first was the move into EUV. We began that with Intel 4 and Intel 3. And those, as we said, are high volume manufacturing underway done. So, we sort of took the risk of EUV off the table there. Backside power, right, we ran an internal node, something we didn't disclose to external foundry customers. But we ran many, many wafers using Intel 3, with backside power to go de-risk backside power before we put it into Intel 20A and Intel 18A. So, we had a major step to de-risk backside power. And then of course, gate all around the transistor. So 18A brings those two together, backside power and the gate all around transistor. But I'll tell you, as we've been going through the development process. Backside power on 18A has been elegant, beautiful, high yield, very clean in its introduction into the process. And really the focus has been on the new transistor structure with gate all around. As customers are taking advantage of that now, as they're starting to look at that, they're really seeing great benefits from backside power. In some cases, almost as much performance benefit and significant area benefit from that. And gate all around transistors making good progress are 0.9 PDK that we delivered in Q4. And we'll be having the 1.0 PDK in Q2 on track. And as I said, Clearwater Forest is the first product. And it's now in fab on 18A, a huge milestone for us, both on the product side, as well as on the process side. High-NA, the next generation of EUV is not part of 18A. That will be part of the next major node. We'll talk more about that at the Intel Foundry Day, as we said on February 21, but we're not introducing that as a risk factor into 18A. You know, it's the EUV tools that are in production today that we've already de-risked as part of the Intel 4 and Intel 3. So, we think we've done a very careful management of risk. And we look at this all the time as we're rebuilding our momentum. And as I said, overall, we are confident five nodes in four years. This was audacious. It's been superbly executed, and we are on track to deliver it and get back to process, technology leadership for both our products, as well as to establish a major foundry opportunity for the industry. Rebuilding Western supply chains, the momentum we're seeing in our whole factory network. You know, this is really incredible, the progress, and I couldn't be prouder of our team for getting it done. So with that, you know, let me say thank you for joining us on the call as always. We appreciate the opportunity that we have to update you on a strong Q4, beating on top and bottom line, finishing an incredible year in 2023. And we're just excited about the momentum we see across the business for both our products, our business and financial execution, the manufacturing technology, foundry design wins really across the board. Our say-do ratio has been extremely high, and we appreciate the interest. And as I said, we look forward to the opportunity to give you some more updates as part of Foundry Direct Connect, February 21 in San Jose. And I hope to see many of you there as we lay out an exciting update to the industry, and it'll be a great day for us. Thank you so much for joining us.

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