Intel Corp (INTC) — Q4 2021 Earnings Call Transcript

Thank you, operator. Welcome to Intel's fourth quarter earnings conference call. By now, you should have received a copy of our earnings release and the earnings presentation. If you have not received both documents, they are available on our investor website, intc.com. The earnings presentation is also available in the webcast window for those joining us online. I'm joined today by our CEO, Pat Gelsinger; and our new CFO, Dave Zinsner. Also joining us is our prior CFO, George Davis. In a moment, we'll hear brief remarks from Pat and Dave followed by Q&A. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and, as such, it does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. A brief reminder that this quarter we have provided both GAAP and non-GAAP financial measures. Today, we will be speaking to the non-GAAP financial measures when describing our consolidated results. The earnings presentation and earnings release available on intc.com include both the full GAAP and non-GAAP reconciliations. In today's call, we will be discussing both the Q4 2021 and the full year 2021 results, providing forward-looking guidance for Q1 '22. We will be providing guidance for full year '22 at our Investor Day on February 17. With that, let me hand it over to Pat.

Thank you, Tony, and good afternoon, everyone. First, let me say welcome to Dave, who is joining us for his first earnings call. Many of you know Dave well and know his track record of successfully driving shareholder value. We're very excited to have him join our team. I also want to take a moment to thank George for his many contributions during the critical period in the company's transformation. Everyone here at Intel wishes him all the best in his future endeavors as he begins his planned retirement in May. Q4 was a tremendous finish to a transformational year where we beat expectations on both the top and bottom line. We exceeded our guidance for the quarter by over $1 billion on the top line, finishing with our best quarter and our best full year revenue ever. We had a record quarter for DCG, where we grew 20% year-on-year and where we continue to be the partner of choice for cloud and data center customers. We expect that our Xeon shipments in December alone exceeded the total server CPU shipments by any single competitor for all of 2021. We had a record year for our client business. And in Q4, we outperformed our plan and delivered another $10 billion quarter, highlighting again that the PC is more essential than ever. Continuing our momentum as the market leader in ADAS and AV solutions, Mobileye grew more than 40% year-on-year in 2021, delivering a 14th consecutive year of revenue growth. And finally, IOTG had another $1 billion quarter to cap a record year as the need for compute at the edge continues to grow. Supporting these record results, our manufacturing network continued its superb execution throughout the year. As an IDM, we were able to rapidly adjust to support customers' mix changes, often with a normal lead time, and manufactured more than 2 million wafers. We broke ground on 2 new fabs in Arizona 3 months ahead of schedule as part of the largest overall manufacturing expansion in Intel's history and all while managing a challenging COVID environment and focusing on the safety of our employees, suppliers and partners. We also took several in a series of key steps to shape our business. To begin with, we've recently completed the first close of the sale of our NAND business on time, a critical step in optimizing our portfolio in line with our new strategy. Second, we began unfolding our plan to find innovative ways to sustainably unlock shareholder value with the announcement of our intent to take Mobileye public in 2022. Third, just last week, we announced our new manufacturing site in Ohio, which will support our future growth and advances our plan to create a more geographically balanced, resilient supply chain. While there is a lot left to do, we're building momentum, and we intend to continue our laser focus on execution, innovation and growing the business. Finally, Q4 was a sacred moment for the entire technology industry as we led the 50th anniversary celebration of the Intel 4004, the chip that changed the world. Microprocessor technology sparked by the Intel 4004 allows us to stay connected during the pandemic. It has opened up new ways to work and learn. It has removed geographical boundaries and changed almost every aspect of our lives. We are committed to accelerate this impact for the next 50 years as the insatiable need for compute that started with the 4004 continues to drive the value of Moore's Law. At IEDM, we outlined a long-term path toward more than 10x density improvement in packaging and a 30% to 50% area improvement in transistor scaling. As the steward of Moore's Law, we remain committed to keeping it alive for the next decade and beyond. Looking across the industry, 2021 was dominated by 2 recurring themes, unprecedented demand and ecosystem supply constraints. The strong demand we saw throughout 2021 continued in Q4, and markets remained robust across all our businesses. We expect this trend to continue as the digitization of everything, driven by the 4 superpowers of AI, pervasive connectivity, ubiquitous compute and cloud-to-edge infrastructure leads to an era of sustainable growth. 2021 marked the best year in a decade for the PC industry, with third parties reporting a growth rate of approximately 15%, driven by higher PC density, shorter replacement cycles and increased market penetration. In Q4, we also saw the strong recovery in the channel as increased supply led to a record sell-through for Intel, and we started to see inventories return to pre-pandemic levels. The data center market was strong across all geographies in Q4, led by the enterprise where the market continued to recover from COVID lows. We expect the data center, network and edge markets to continue to have robust growth as hyperscalers lay out multiyear cloud CapEx investment plans. The ongoing need for data privacy and security drives additional edge and on-prem deployments. 5G network and edge build-outs are scaling and workloads like AI continue to expand. This unprecedented demand continues to be tempered by supply chain constraints as shortages in substrates, components and foundry silicon has limited our customers' ability to ship finished systems. Across the industry, this was most acutely felt in the client market, particularly in notebooks, but constraints have widely impacted other markets, including automotive, the Internet of Things and the data center. As we predicted, these ecosystem constraints are expected to persist through 2022 and into 2023, with incremental improvements over this period. The industry will continue to see challenges in a variety of areas, including specialty and overall foundry shortages, substrates as well as third-party silicon. While constraints will remain, our IDM2.0 strategy affords us a superior position to navigate this environment. With control over our manufacturing network and supply chain, we are able to react to rapid changes in demand that help solve challenges for our customers, suppliers and partners. Equally important as an IDM, we remain more resilient to foundry price increases as only a minority of our volume is produced by third parties. Turning from the ecosystem to Intel. We made incredible progress over the last year improving our execution in technology development, manufacturing and product leadership. With unprecedented transparency, we laid out an ambitious path to deliver 5 process nodes in 4 years and regain process performance parity by 2024 and unquestioned leadership by 2025. We are shipping Intel 7 in volume today. And as I was able to say last quarter and can reaffirm today, we remain on or ahead of schedule for Intel 4, 3, 20A and 18A against the timelines we laid out in July. Our manufacturing execution continued to improve. And in Q4, as we ship a record number of servers and we have more than a 30% year-on-year reduction in 10-nanometer wafer costs, we had record quarterly increase in our substrate capacity with our vendors, and we accelerated our pace of innovation with a record number of PDK releases and new product introductions in our factories. Finally, as part of our strategy to use both internal and external manufacturing, we signed multiple long-term supply agreements ranging from foundry partners to substrates to equipment suppliers that will support the growth of our business for years to come. In particular, we announced the deepening of our ASML partnership and our leadership position with the second generation of EUV High-NA. In client, we had another $10 billion quarter, and 2021 was our 6th straight year of revenue growth. We feel great about our position within the sustainably larger client market, and we had an all-time record shipments with customers like Dell. We have a great product lineup starting with Tiger Lake, which has now shipped over 100 million units, making it the fastest-ramping notebook in our history. We are extending our leadership position further with products like our 12th generation Alder Lake, the fastest client processor ever, which is now shipping to over 140 customers in 30 countries around the world. As our first performance hybrid product, it features the highest-performance CPU core Intel has ever built as well as the efficient cores optimized for power. It leads the industry transition on DDR5 and PCIe 5 to enhance gaming and creator experiences. The Alder Lake family will scale across every PC segment from ultra-thin and light laptops to enthusiast desktops, where we've now set new overclocking records to mobile gaming, where the Core i9-12900HK, the world's best mobile gaming processor, is up to 40% faster than the prior generation. Following on the success of Alder Lake, we will continue to build momentum later this year when we expect to introduce Raptor Lake, which is already booted in our labs. In addition to leadership products, we are also driving platform innovations. And at CES, we unveiled our third-gen EVO platform. This new generation includes features like intelligent collaboration to optimize remote work and learning experiences as well as Thunderbolt 4 and WiFi 6E. With no legacy Wi-Fi interference, WiFi 6E will enable incredible performance with low latency, the biggest Wi-Fi advancement in 20 years. We are further reinvigorating the PC ecosystem with technologies like Screenovate, which provides a seamless multi-device and screen-sharing experience, which will begin rolling out on select Intel Evo platforms starting later this year. Driven by the strong product and platform lineup, we feel confident in our ability to compete and drive growth going forward. Our Data Center Group had its best quarter ever as customers continued rebuilding their confidence in choosing Intel. Enabled by our IDM advantage, Ice Lake servers shipped more than 1 million units, equal to the amount we had shipped in the prior 3 quarters combined. All of our OEMs are currently shipping systems, and all of our major cloud customers have announced instances, including our third instance with Amazon Web Services. Going forward, our roadmap only gets better, and we expect to ship initial SKUs of Sapphire Rapids to select customers in Q1. Sapphire Rapids will offer significant performance improvements across a range of workloads, including AI, where we are targeting up to 30x total gain for Xeon. This demonstrates that a general-purpose CPU with built-in AI acceleration can solve even more customer use cases that once necessitated GPU acceleration. Customers remain excited about Sapphire Rapids, and it has been chosen, along with HPE, to power the new Kestrel supercomputer, built for the U.S. Department of Energy's National Renewable Energy Laboratory. Kestrel will accelerate discovery of renewable power. Once completed in 2023, Kestrel will have more than 5x greater capability than NREL's existing system with approximately 44 petaflops of peak performance. Beyond the core data center, we continue to build on our leadership position from the network to the edge with our comprehensive portfolio of hardware and software solutions. We are leading the transformation of the network where Xeon and FlexRAN software are used in almost all DRAM commercial deployments. We are driving AI inferencing adoption at the edge with our OpenVINO software and partners like BMW Group and Samsung in the factory and medical environments. And we are extending the IPU ecosystem and accelerating the creation of a fully programmable network by collaborating on new FPGA-based IPU solutions with Inspur, Ruijie Networks and Silicom. In our discrete and accelerated graphics business, we are starting the year very quickly. Alchemist, the first product in our Intel Arc Discrete Graphics lineup, is now shipping to customers with more than 50 new mobile and desktop designs, including with Acer, Asus, Dell, HP, Lenovo, Samsung and others. Our Arc family of products will scale from mainstream up to the performance graphics segment and will be available in the market later this quarter. In high-performance computing, our Ponte Vecchio GPU is already sampling to customers. With 100 billion transistors, Ponte Vecchio has our highest compute density ever and along with Sapphire Rapids will power the 2 exaflop Aurora supercomputer at Argonne National Laboratory. There are over 100 HPC applications running on Ponte Vecchio, which, enabled by 1 API, provides a unified and open programming model across CPU and GPU. We are working with numerous partners and customers, including Atos, Dell, HPE, Lenovo, Quanta and Supermicro to deploy our HPC-tuned CPUs and GPUs in their latest systems. Our IFS business continues to see strong and enthusiastic customer support. We have a strong pipeline of potential customers and IP development with the ecosystem is progressing well. We are shipping for revenue on our packaging solutions, and we continue to expect customer test chips in our factories on our Intel 16 process this year. Innovations like RibbonFET and PowerVia are proving to be very attractive features to potential customers, and the Intel 18A design kit has now been released to 3 RAMP-C customers. Overall, we are ahead of where I thought we'd be, and I am thrilled with the progress of our IFS team. In mobility, Mobileye continues to be an industry leader in both ADAS and AV, and we recently hit a significant milestone shipping our 100th million IQ SoC. At CES, we gave a glimpse of the future with the EyeQ Ultra, which will do the work of 10 EyeQ 5 SoCs in a single package and was designed to deliver the optimum power and performance for a fully self-driving vehicle. In Q4, we also introduced our first autonomous on-demand service in Paris in collaboration with the RATP Group. Paris is the latest in a list of locations where Mobileye is piloting autonomous vehicle test fleets, including New York, Munich, Detroit, Tokyo, Israel and China. Looking ahead, we still expect to launch commercial robotaxi services in Munich and Tel Aviv in 2022. As we announced in December, we are working to take Mobileye public to unlock shareholder value. We are making good progress, and we'll share more as we go through the year. You'll hear a lot more about how we are rearchitecting our business for growth as part of our upcoming Investor Day. We will lay out details on how we are leveraging our core strengths to accelerate our plans and how we are uniquely positioned to create value. We'll give you the proof points you should expect to see in 2022 that show that we are on track for our long-term plan, all backed up by the transparency and accountability that our new reportable segments will provide. Let me close by saying again that Q4 was an incredibly strong finish to a great 2021. And I believe that, with growing markets, our strong product roadmap and our increasingly solid execution, 2022 will only be better. In fact, just in the past 24 hours, we were pleased to see the ruling from the General Court in Europe and their decision to overturn the EUR 1.1 billion fine. The semiconductor industry has never been more competitive than it is today, and we look forward to continuing to invest and grow in Europe. At the same time, here in the U.S., we were very excited to see the progress on the CHIPS Act with the House introducing their version of the bill yesterday. The President and other members of the administration have been clear on the importance of this transformational investment, and it's encouraging to see the strong bipartisan and bicameral support as we continue to work together to address the long-term impacts of the semiconductor shortage, restore U.S. leadership in this critical industry and rebalance the global supply chain. With that, let me turn it over to Dave.

Thanks, Pat, and good afternoon, everyone. First, let me say how happy I am to be part of Intel. It's a really exciting time, and I'm looking forward to the opportunity to support Intel's transformation and plans for growth. I think we have a great opportunity to drive compelling returns and shareholder value, which all starts with the plans that we will lay out for you at Investor Day in February. Q4 was a record quarter, delivering a stronger-than-expected finish to another record year. Both DCG and IOTG achieved record quarters, with CCG, IOTG and Mobileye delivering full year record revenue. Q4 revenue was $19.5 billion, exceeding our guidance by $1.2 billion. The revenue beat was broad-based, led by stronger-than-expected enterprise and government demand in data center, desktop PC strength and better-than-expected notebook demand. Gross margin for the quarter was 55.4%, exceeding our guidance by 190 basis points due to strong flow-through on higher revenue. Q4 EPS was $1.09, $0.19 above our guide due to strong operational performance. For full year 2021, we achieved record revenue of $74.7 billion, up $1.2 billion from our previous guidance and up 2% year-over-year. 2021 gross margin was 57.7%, and EPS was $5.47, up $0.37 year-over-year. We generated $11.3 billion of free cash flow in 2021, approximately $1 billion lower than prior expectations as higher net income was offset by Q4 working capital fluctuations. Now turning to our business units. CCG delivered record annual revenue, its 6th straight year of revenue growth, up 1% year-over-year and up 6% when excluding the modem and connected home divestitures. For the quarter, revenue was $10.1 billion, up 5% sequentially on strong commercial demand. Platform ASPs were up 15% year-over-year on a richer mix, driven by strong demand for our highest-performing platforms and industry-wide constraints leading our customers to prioritize limited components to higher-end systems. Operating profit was down 3% year-over-year on increased spending to further strengthen our product and platform roadmap. The Data Center Group delivered a record $7.3 billion in revenue for Q4, up 12% sequentially and up 20% year-over-year on strong enterprise and government demand. Full year revenue was down 1% due to a slower-than-expected recovery earlier in the year as well as competitive pressure, partially offset by stronger enterprise and government and communications service provider demand. Platform ASPs were up 3% sequentially and 4% year-over-year on improved mix to our highest-performing products. Operating profit in Q4 was down 17% year-over-year, primarily due to the previously disclosed Intel Federal-related one-time charge and 10-nanometer product ramp. Full year operating profit was down due to lower revenue, with an increased mix of 10-nanometer products, Intel 4 start-up charges and increased investment in our product roadmap. IOTG achieved record Q4 and full year revenue. Q4 revenue was $1.1 billion, up 36% year-over-year on broad-based strength, led by the industrial and retail segments. Full year revenue was $4 billion, up 33% year-over-year as the business saw a strong recovery from COVID-related impacts. Operating profit for the year was $1 billion, up 110% year-over-year. PSG delivered $484 million in Q4 revenue, up 15% year-over-year and up slightly quarter-over-quarter as industry-wide supply constraints continue to severely limit revenue growth. Full year revenue was $1.9 billion, up 4% year-over-year. Operating profit was $51 million, up 19% year-over-year. If not for the external supply constraints, we believe the PSG business would have delivered over $500 million in additional revenue in 2021. Mobileye reported Q4 revenue of $356 million and $1.4 billion for full year, up 43% year-over-year. Full year operating profit was $460 million, up 91% year-over-year. Before moving on to Q1 guidance, I want to briefly discuss changes to our non-GAAP reporting beginning in 2022 that we touched on in our Q3 earnings. First, in an effort to more closely align with our semiconductor peers and allow for more consistent comparability between periods, we'll be removing stock-based compensation and all gains and losses related to our ICAP portfolio from our non-GAAP results. Despite this change, we'll continue to closely evaluate stock-based compensation to ensure we're in line with industry benchmarks and optimize ICAP investments to advance our strategy and maximize ROI. Second, we're modifying our segment reporting to align with our revised organizational structure and business strategy. Moving forward, we will report results under the following business units: Client Computing, which includes our historical CCG business plus workstation revenue; Data Center and Artificial Intelligence, which includes our data center CPU products plus our PSG business; Networking and Edge, which includes our IOTG business plus our networking-focused products previously included in DCG; Accelerated Computing and Graphics, which includes all discrete graphics products; Mobileye, which is unchanged from our prior segmentation; and Intel Foundry Services, which includes revenue from our wafer and packaging offerings. This new reporting structure enables transparent accountability relative to how well we are managing and executing against the 6 business units that will be further communicated at Investor Day in February. Moving to our Q1 outlook. We continue to see strong demand across all our businesses, and note that Q1 includes the impact of an additional 14th week. We expect results to be tempered by continued industry-wide component constraints, normal seasonality and PC notebook inventory burn as OEMs work through inventory imbalances created by ecosystem constraints that have limited their ability to ship systems in certain segments. We expect Q1 revenue of $18.3 billion, down 1% year-over-year, but up 2% when adjusting for an approximately $600 million one-time corporate revenue item recognized in Q1 '21. As we signaled in our Q3 call, gross margin will be impacted by our 10-nanometer product ramp and increased process technology investments. The aforementioned one-time corporate revenue item in Q1 '21 will also impact the year-on-year compare. We are forecasting gross margin of 52%, EPS of approximately $0.80 and a tax rate of approximately 15%. Note that we will provide full year 2022 guidance and more details on our long-term financial model as part of our Investor Day on February 17. We hope to see you there in person for a full day of presentations and Q&A sessions with our most senior leaders. Finally, I want to thank George for his 3 years at Intel, delivering outstanding results and making many of the changes necessary to begin our transition to a growth company.

Thanks, Dave. I want to close my final earnings call with sincere thanks to our Intel employees who amaze me every day and for the privilege to have served as your CFO. And I could not be more delighted that Dave is taking over, knowing all the incredible strengths he brings to the role. Thanks all.

Thanks, George. With that, let me turn the call back over to Tony to get to your questions.

All right. Thank you, Dave. Moving on now to the Q&A. As is our normal practice, we would ask each participant to ask only one question. Operator, please go ahead and introduce our first caller.

Congratulations on the results. Pat, it's great to see a second quarter of year-over-year growth in DCG and an acceleration over the calendar third quarter. But if you look underneath the covers, there's sort of 2 stories at play. Enterprises coming back extremely strong. But if you look at the cloud part of the business, I think this is the 5th consecutive quarter of year-over-year declines. And so I guess there's 2 parts to my question. One, when do you see a return to year-over-year growth in cloud? And two, to the extent that the investment community has a bias that everything eventually ends up in the cloud, what is kind of your long-term view of the sustainability of this enterprise demand?

Thank you, John, for your comments on a strong finish to an impressive year. In terms of our DCG business, we started the year off behind but have been catching up and gaining momentum in the cloud segment throughout the year. We anticipate this momentum to continue into next year, contributing to the year-on-year quarterly comparisons you mentioned. The E&G segment had a remarkable second half, with a particularly strong Q4, where we've gained market share and experienced a favorable environment. Our customers indicate that E&G's momentum is set to continue next year, supported by a robust backlog, which could have been even stronger if not for other supply constraints. As I've mentioned previously, we do not envision a complete shift to the cloud; rather, we see a balance between on-premises and cloud-based delivery. While cloud growth outpaces on-premises, workloads are still expanding on-prem. We also expect to see significant acceleration in edge-based solutions, which I discussed at our innovation conference. In the coming two to three years, I believe edge growth will be a major focus, and Intel holds a strong market position in this area, with leadership in 5G, inference, and AI. Overall, we anticipate balanced growth across our portfolio, with strength in our cloud business next year and ongoing sustainability in E&G. Ultimately, the key narrative for the next few years will revolve around explosive growth in the edge segment.

Congrats on the strong end of the year. And thank you to George, and congrats to Dave. So with all that out of the way, Pat, I want to talk about the PC market. I know you've been one of the more optimistic folks on that. And the fourth quarter results showed a little bit of evidence as to why you're optimistic. But you also talked about some interesting inventory dynamics in there, where channel inventory was rising. Can you talk a little bit about your expectations for this year? Again, not front-running the Analyst Day too much, but the expectations for growth for the year and a little bit more on how you reconcile inventory rising with shortages still persisting?

Thank you. Last year was a really strong year for the PC sector, with forecasts indicating about 15% growth. Looking ahead, we're expecting modest growth in the market, aligning with what Sacha mentioned. We anticipate a structurally larger market for next year, with a couple of percentage points of growth. We believe we will continue to see growth in our client business, especially with our enhanced product lineup, positioning us well for client market share. Currently, our inventory levels have been historically low for an extended time as we work to meet demand. We're aiming to reach inventory levels that feel normal for a business of this size, particularly while managing ongoing supply constraints in areas like power controllers and various components. These challenges have contributed to supply issues across our customer base. As we move into next year, we hope to see improvements in these conditions, especially regarding channel inventory, which has been nearly nonexistent for most of the year, but is now starting to see some recovery. This will provide our channel and distribution partners with products to sell throughout the year, which is promising. Overall, we see the PC continuing to play an essential role in a work-from-home and learn-from-home context, with Windows 11 contributing to a strong upgrade cycle. We have a solid product line and positive market conditions ahead, making for a promising year in the client space.

Great. I wonder if you could talk about the capital spending a little bit. And again, I don't want to tread on material you're going to cover at the Analyst Day. But the footprint in Ohio, the various comments that you've made about not being able to foresee having too much capacity in the next couple of years, as you think about that, how much of that is your existing x86 business versus foundry and other opportunities? And any sense for the capital spending you felt through this year, how much of that is going to be buildings versus equipment?

Thank you, Joe. I'll start and then ask Dave to add his thoughts. Overall, we want to say that we have significant supply constraints and a lot of work ahead in expanding our capital footprint. Part of this is about making up for lost time, and part involves developing new process technologies, which include five launches over four years. We're also implementing our smart cap strategy, where we currently lack sufficient space for ramping up. We need to increase our shell capacity and plan how best to utilize it as we develop those areas. Everything we've mentioned regarding our expansions in Arizona and Ohio is aimed at supporting both our internal products and creating opportunities for our foundry business. We will provide more clarity on this during Analyst Day, where Dave will discuss various capital elements for both the foundry and our internal capacity. So, Dave, do you want to add anything?

Thank you, Pat, and I appreciate everyone joining the call. I'm thrilled to be part of Intel and to be involved in IDM 2.0. We have a significant opportunity to enhance shareholder value, and one way we are doing that is by increasing the dividend by 5%. This marks my first dividend increase during my quarter. Regarding capital expenditures, as Pat mentioned, we will provide more detailed information about 2022 and beyond related to CapEx. Looking back at the 2021 capital expenditure breakdown, it was approximately 60% for equipment and 40% for space build-out. This ratio may change over time, but it gives you a general idea of the figures.

I wanted to revisit your comments about inventory. You're indicating that you're building inventories, but your PC volumes decreased by 18% year-over-year, while the PC market overall did not see an 18% decline. This suggests that it doesn't appear you're increasing inventory. In fact, it seems like inventory is being depleted. So how do we resolve this discrepancy? What’s happening there?

You want to address that, Dave or George?

Yes. I’d like to share some insights on this. When comparing year-over-year, it’s important to note that the fourth quarter of last year was particularly strong for CCG, especially in the consumer and entry SKU segments. In the latter half of 2021, we've observed a shift from the consumer and entry markets toward what we classify as our core notebooks and desktops, which had experienced a significant decline but are now showing a robust recovery. Considering the year-over-year growth of CCG, we anticipate it to be lower than the total addressable market (TAM). However, accounting for our exit from modem and Home Gateway, which contributed about 6 points of growth, along with a major customer's decision to pursue a vertical strategy, which accounts for another 6 points, the overall growth pattern has shifted due to the mix of products compared to last year. When these factors are considered, our growth is more aligned with the overall industry growth.

On Intel Foundry Services, it appears that the team is off to a good start. It looks like a lot of good early engagements. If I'm a potential IFS customer and I start my design today, realistically, right, I'm not expecting my chip design to be ready for manufacturing conservatively for at least 2 years because that's just how long the design cycle times are for these leading-edge chips. And it seems consistent with your prior commentary on IFS customers more focused on your 20 and 18A nodes which is kind of 2024, 2025 timeframe. So if I think about the real big CapEx outlay to support IFS, my assumption is that it's probably not until 2024 or maybe even 2025 timeframe. Is that kind of the right way to think about it that most of the CapEx spend for IFS is probably 2 to 3 years' delay and more of the CapEx spend over the next 2, 3 years is to support growth of the core compute businesses?

Yes. Your comments provide some clarity on this. To elaborate on what you said, in order to allocate capital in 2024 and 2025, we need to start building the infrastructure in 2022 and 2023. This is why, for example, in our Ohio announcement, we indicated that we are constructing facilities to support both our products and foundry customers. When we reach the ramp-up of Intel 3 and Intel 18A for foundry customers, we expect that the bulk of capital investments will occur later, particularly as we place equipment, which will significantly increase in 2024 and 2025. However, it's essential to begin expanding our capacity in 2022 and 2023. Regarding your other points, we do anticipate that some products from Intel 16 customers will begin ramping up next year, bringing in revenue from design starts that are already in progress. We expect Intel 3 to contribute in 2024 and Intel 18A in 2025 and beyond, creating a positive growth trajectory. We've also mentioned that we currently have packaging customers, and their revenues started coming in during the fourth quarter of this year. Additionally, some services, which include paid offerings, will begin generating revenue even sooner. Overall, there is a significant demand for capacity and leading-edge foundry capabilities. We've observed strong interest across various sectors, including leading-edge technologies, high-performance computing, mobile, industrial, and automotive customers, demonstrating the strong momentum for Intel Foundry Services.

Thanks for taking my question and thank you to George and a welcome to Dave. I actually have a near and longer term question on gross margins. So in the near term, I am wondering the 52%, how does this kind of evolve through the year? I know you're not trying to give a specific number right now. But what are the puts and takes and kind of the key drivers? Is this the floor or ceiling or kind of the average level that we should be thinking about? And then longer-term, Pat, how do we reconcile that your main competitor who is kind of just fabless is pretty much at the same gross margins without having to spend any of the CapEx that Intel plans to spend? When can Intel start using the pricing power in the markets where you have very large incumbency?

Let me begin, and Pat can provide additional insights on pricing. You're correct that we will share more details during the Investor Day, including perspectives on the long-term outlook. In our third quarter earnings call, when Pat and George were representing Intel, we mentioned the need for investments in newer process technologies and the associated start-up costs, particularly for ramping 10-nanometer technology, which would pressure our gross margins. We presented a gross margin target range of 51% to 53% during that time, which we are currently tracking towards with guidance set at 52%. We feel confident in maintaining that 51% to 53% range for the year, although it may fluctuate. Once we regain a leading position in technology and products, there will definitely be opportunities for improvement, and we intend to provide strong evidence of that at the Investor Day in February. We hope this encourages your participation.

We wanted to provide some insights into the long-term margin outlook. As we’ve mentioned, our leadership products and advancements in process technologies will serve as significant accelerators. We anticipate our margins will recover in the later stages of the five-year period we outlined in our last earnings call. We believe these factors will support a gradual increase in our margins over time. Furthermore, we expect our long-term margins to be influenced by our foundry business, which will be positioned at the lower end of our operational margin range, as discussed in our investor meeting. Over time, we are confident that we will develop a structurally advantageous margin model, especially given the inflationary pressures and costs others in the foundry industry are facing. Our factory network will allow us to achieve a more balanced cost structure, which we believe others will struggle to replicate. Overall, we are optimistic about our margin potential and the prospects for cash flow and free cash flow moving forward. We plan to elaborate on these points in more detail during our investor meeting, and we believe our business model offers significant advantages for supply, margin generation, and cash flow. All these elements are poised to come together effectively.

So you're spinning out Mobileye to maximize shareholder value, which I think everybody likes. Have you given any thought or is there any possibility of spinning out Altera to maximize shareholder value as well?

Thank you for the question. The Mobileye spinout is progressing smoothly, and we will provide updates as appropriate over time. As mentioned, this will be a partial spin, and we believe there will continue to be significant value creation for Mobileye as it maintains a strong relationship with Intel. We will share more updates as developments occur. I want to emphasize that this may not be the only such move we consider. We see this strategy as a way to create value that could apply to other areas within the Intel family as we plan for the future. This model for value creation is one we believe is powerful and will be implemented in the industry, but we do not have any additional specifics to discuss at this moment. Please keep tuning in; we will have many positive updates to share.

Pat, I have a question regarding your thoughts on DCG and your server market share. Sapphire Rapids is expected to be much more competitive, and Gen will also be launching around the same time. Is there a specific market share percentage that you aim to maintain? Could you discuss your overall perspective on market share in the server segment? Is there a point at which you'd consider adjusting prices to remain competitive?

Yes. Thank you. And overall, we do see that the product line is getting more competitive. Sapphire Rapids will be a stronger product. But we're already seeing that the product line is getting more competitive with Ice Lake. And our Q4 numbers on Ice Lake were very good. And we see the Q4 equaled all of the shipments of the first 3 quarters of the year. So Ice Lake is an improvement. Sapphire Rapids gets better. We do expect that there's going to be a bit of to and fro with the competitive alternatives where they'll deliver a product, we'll deliver the next product. And as you've heard me say, we are on a path to sustained unquestioned leadership into this area. It's going to take us a few generations until we're unquestionably in a leadership position, but we believe our product teams, our packaging teams and our process technologies, our factory capacity, all of these give us the tools to create leadership products. And then we combine that with our platform leadership and our software technologies, we have a path to unquestioned leadership over time. Obviously, we believe we're going to have a superior cost structure, as we've already touched on, given that many of our server products come from our factories. So we're going to be in a better margin and cost position and capacity we think we have a lot of tools to address market share over time. And we're going to dimensionalize the business a bit more as part of our Analyst Day coming up.

Just following up on the Data Center Group. The revenue very strong, but the operating margin, I think, was down 10 points year-over-year. And I wanted to dig into that a little bit. The slides and the release mentioned an Intel Federal charge, if you guys could quantify that. But the bigger part of the question is now with the Ice Lake ramp, there's a lot more volume in DCG that's going on to the 10-nanometer node. And my question, Pat, is do we need to evolve the product set to where we get to Granite Rapids and we get off of 10-nanometer before we see margin improvement in DCG? Or is there going to Sapphire Rapids in a tiled approach with smaller tiles while still on 10? Is that enough for the margins to recover?

Do you want to start that, Dave?

Yes, I'll begin. In discussing the operating margins of the DCG business, I want to highlight some factors affecting gross margins. We are in the process of ramping up to 10-nanometer technology for the data center, which comes with higher initial costs related to new process technologies. Additionally, we incurred a one-time charge in our E&G business due to a Federal issue, which had a negative effect on the operating margins. Furthermore, as we mentioned, we are increasing our investments in product technology and R&D, leading to higher operational expenses. However, all these actions align with the plan that Pat outlined a quarter ago, and they are intended to position the company for future growth.

Yes, we expect to improve the operating margin of this business over time. We haven't ramped the new node in our data center business for five years, which is somewhat embarrassing to admit. As a result, our operating margins have been higher than they should have been because we've been using very mature nodes well beyond their typical cycle. Now, we are aggressively ramping our 10-nanometer technology and starting the ramp for 7 and 4 as well. Taken together, these factors create an unusual situation in the gross margins and operating margins of this business. We believe this is a very healthy business for the long term. As we advance through the cycle of new process technologies and invest in the business, none of this is surprising to us. We anticipate that this will be a strong area for Intel as we roll out leading process technologies with unmatched products.

Dave, I have a question about gross margins for clarification. If I take your guidance and add back the Federal charge, you're suggesting a 52% for Q1, which indicates a drop of about 5 to 6 points. I'm curious about the factors affecting this change. I understand the headwinds you've mentioned, but are there any tailwinds or impacts related to the mix as well?

Sure. So definitely, the Federal charge not repeating itself in the first quarter is certainly helpful. And there are a couple of mix benefits that we're seeing. But the charges associated with ramping 10-nanometer, particularly in the data center space, and the start-up costs on Intel 4 are predominantly what's driving the reduced gross margins. But again, it's exactly where we thought we would be in the first fiscal quarter. I mean, this is the number that we were planning to drive the business to. And ultimately, the ROI on all the investments we're making that that drive headwinds in the gross margins for the first quarter will turn around and drive a very good ROI down the road.

Pat, I just wanted to check in on the expansion plans that you have. How much of that is dependent on the CHIPS Act passing and also from other incentives? And I asked that because I was listening to your presentation, I guess, earlier in the week at the Ohio site. And you did make a comment there urging attendees to make sure that they weigh into the standard they can to get the act passed. So I just was wondering how much of that of the expansion plans are dependent on the act here as well as in Europe, some government incentives.

Thank you for your question, which I was eager to address during the call. Overall, it was an incredible day in Ohio, filled with enthusiasm. As I mentioned at the event, we helped establish significant tech hubs across the country. The support we've received from leadership, including the governor and congressional leaders, has been tremendous. Standing on stage at the White House to introduce the President felt surreal, marking a fantastic day for Intel, our nation, and our industry. With the CHIPS Act now under consideration in the House, we are optimistic about its prospects. I spoke with Speaker Pelosi about this yesterday, and it's set for debate next week. We are hopeful for its passage and the subsequent reconciliation process, which has increased optimism about its timely approval. The passage of this bill is viewed as a catalyst for our investment plans. We are committed to building a site in Ohio, and with the CHIPS Act, we foresee it being larger and developed more quickly, which is beneficial for our company and essential for creating a resilient, globally balanced supply chain. The movement of this bill in the House is a very encouraging sign for our goals. Additionally, we are aware of similar initiatives gaining traction in Europe, particularly with the EU CHIPS Act, where we hope to see our expansion plans accelerate. All these developments will benefit the industry and enhance our competitiveness, particularly for our foundry business. Thank you for your question. Thank you, Dave, for joining us for the first time. George, I appreciate your support and the contributions you've made during this critical period for the company. I want to remind you of our strategies as we work to build the team and improve execution. Looking back on 2021, we've made significant progress in all areas we've outlined. There is still much work ahead, but we are focused, energized, and momentum is building. I look forward to sharing our progress as we continue this exciting journey. Investor Day is approaching, and we will present our strategy with a lot to discuss. This is a great business, and we had a successful year. Thank you all for joining us today.

Thank you, Pat. Thank you, Dave and George. Operator, can you please close the call?