Intel Corp (INTC) — Q3 2023 Earnings Call Transcript

Thank you, Jonathan. By now, you should have received a copy of the Q3 earnings release and earnings presentation, both of which are available on our investor website, intc.com. For those joining us online, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Pat Gelsinger; and our CFO, David Zinsner. In a moment, we will hear brief comments from both followed by a Q&A session. Before we begin, please note that today’s discussion does contain forward-looking statements based on the environment as we currently see it, and as such, are subject to various risks and uncertainties. Our discussion 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 our 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. Before we begin, given our significant and now almost 50-year presence in Israel, we are deeply saddened by the recent attacks and their impact on the region. Our utmost priority is the safety and welfare of our people in Israel and their families. But I also want to recognize the resilience of our teams as they have kept our operations running and our factory expansion progressing. Our thoughts are with all of those affected by the war, and I am praying for a swift return to peace. Turning to our results, we delivered an outstanding Q3, beating expectations for the third consecutive quarter. Revenue was above the high-end of our guidance and EPS benefited from both strong operating leverage and expense discipline. More important than our standout financial performance were the key operational milestones we achieved in the quarter across process and products, Intel Foundry Services, and our strategy to bring AI everywhere. Simply put, this quarter demonstrates the meaningful progress we have made towards our IDM 2.0 transformation. The foundation of our strategy is reestablishing transistor power and performance leadership. While many thought our ambitions were a bit audacious when we began our five nodes and four-year journey roughly 2.5-years ago, we have increasing line of sight towards achieving our goal. Intel 7 is done with nearly 150 million units in aggregate of Alder Lake, Raptor Lake, and Sapphire Rapids already in the market. In addition, Emerald Rapids has achieved product release and began shipping this month. In Q3, we began initial shipments of Meteor Lake on Intel 4, which we are now aggressively ramping on the most productive fleet of EUV tools in the industry, providing us with a greater than 20% capital efficiency advantage, compared to when EUV tools were first launched. High volume EUV manufacturing is well underway in Oregon and more recently in Ireland. Our FAB 34 in Ireland represents the first high-volume EUV production in Europe, underscoring our commitment to establish geographically diverse and resilient supply. We are the only leading-edge semiconductor manufacturer at scale in every major region of the globe. Our Intel 3 process is tracking to be manufacturing ready by year-end, supporting our first two Intel 3 products, Sierra Forest and Granite Rapids. In fact, our production stepping of Sierra Forest is already out of fab, and what we expect to be the production stepping of Granite Rapids has already taped in and is in the fab now. We are particularly excited by our move into the Angstrom era with Intel 20A and Intel 18A. Adding to our accelerating adoption of EUV are two key new innovations, RibbonFET and PowerVIA, representing the first fundamental change to the transistor and process architecture since we commercialized FinFET in 2012. I have been studying SEM diagrams for almost 40-years. RibbonFET and PowerVIA are true works of art, the most exquisite transistors ever created. We expect to achieve manufacturing readiness on Intel 20A in the first half of 2024. Arrow Lake, our lead product on 20A, is already running Windows and demonstrating excellent functionality. Even more significant, we hit a critical milestone on Intel 18A with the 0.9 release of the PDK with imminent availability to external customers. In simple terms, the invention phase of RibbonFET and PowerVIA is now complete, and we are racing towards production-ready, industry-leading process technology. Our first products on Intel 18A will go into fab on schedule in Q1 ‘24 with Clearwater Forest for servers, Panther Lake for clients, and of course a growing number of IFS test chips. We expect to achieve manufacturing readiness for Intel 18A in the second half of 24, completing our incredible five nodes and four years journey on or ahead of schedule. While Intel 18A reestablishes transistor leadership, we are racing to increase that lead. We announced our innovation plans to lead the industry in a move to glass substrate for high density, performance, and unique optical capabilities. We also announced our plans to begin installation of the world's first high NA EUV tool for commercial use by the end of the year to continue our modernizations and infrastructure expansions of our Gordon Moore Park in Oregon, home of our technology development team. Moore's Law continues to be the foundational driver of semiconductor technology and economics, which, in turn, fuels broader innovation in every industry across the globe. We remain committed to be good stewards of Moore's Law and drive advancements until we have exhausted every element on the periodic table. Importantly, our progress on process technology is now being well validated by third parties. We have made great progress with early IFS customers this quarter, which we expect to only accelerate with the release of the 0.9 PDK for Intel 18A. A major customer committed to Intel 18A and Intel 3, which includes a meaningful prepayment that expedites and expands our capacity corridor for this customer. The customer is seeing particularly good power, performance, and area efficiency in their design. This opportunity is very significant and highlights our full system's foundry capabilities and high-performance computing, big die designs, leadership performance, and area efficient transistors, advanced packaging and systems expertise. In addition, we are extremely pleased to announce today that we have signed with two additional 18A customers. Both are particularly focused in areas of high-performance compute and benefiting from power performance per unit silicon area. We have also made substantial progress with our next major customer and are expecting to conclude commercial contract negotiations before year-end. Finally, we were also very happy to expand our growing foundry ecosystem by completing our strategic partnership with Synopsys in Q3 to include IP for Intel 3 and Intel 18A for both Intel internal and external foundry customers. With the rise of AI and high-performance computing applications, our advanced packaging business is proving to be yet another unique advantage. We have seen a surge of interest in our advanced packaging from most leading AI chip companies. With capacity corridors quickly available, this is proving to be a significant accelerant and on-ramp for Intel foundry customers. During the quarter, we were awarded two customer AI designs for our advanced packaging, and with an additional six customers in active negotiations, we expect several more awards by year-end. We have also established an important business relationship with Tower Semiconductor, utilizing our manufacturing assets in New Mexico, along with Tower investing capital expenditures of roughly $300 million for its use in this facility. This represents an important step in our foundry strategy, improving cash flows by utilizing our manufacturing assets over a significantly longer period of time. Finally, we have submitted all four of our major project proposals in Arizona, New Mexico, Ohio, and Oregon, representing over $100 billion of U.S. manufacturing and research investments to the CHIPS Program Office and are working closely with them as they review these proposals. We look forward to providing a deeper update on our foundry business during our planned IFS industry event in Q1 of 2024. We are on a mission to bring AI everywhere. We see the AI workload as a key driver of the $1 trillion semiconductor TAM by 2030. We are empowering the market to seamlessly integrate and effectively run AI in all their applications. 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 MLPerf benchmarks, and a very cost-efficient TCO. However, as the world moves towards more AI-integrated applications, there's a market shift towards local inferencing. It's a nod to both the necessity of data privacy and an answer to cloud-based inference cost. With AI-accelerated Xeon for enterprise, Core Ultra launching the AIPC generation, and OpenVINO enabling developers seamless and versatile support for a range of client and edge silicon, we are bringing AI to where the data is being generated and used rather than forcing it into 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. The AI continuum enables AI everywhere. DCAI exceeded our forecast this quarter with server revenue up modestly sequentially. We continue to see a strong ramp of our 4th Gen Xeon processor with the world's top 10 CSPs now in general availability and improving strength from MNCs. During the quarter, we shipped our 1 millionth 4th Gen Xeon unit and are on track to surpass 2 million units next month. 4th Gen Xeon includes powerful accelerators, demonstrating best-in-class CPU performance for AI, security, and networking workloads. Our AI-enhanced Xeons are primed for model inferencing, enabling seamless infusion of AI into existing workloads. This was visible this quarter with over one-third of 4th Gen Xeon shipments directly related to AI applications. We are the clear leader in AI CPU results as seen in MLCommons benchmarks today, and our roadmap provides significant further improvements with Granite Rapids expected to deliver an additional 2 times to 3 times AI performance on top of our industry-leading 4th Gen Xeon. We continue to make excellent progress with our Xeon roadmap. Our 5th Gen Xeon processor code-named Emerald Rapids is in production and ramping to customers and will officially launch on December 14 in New York City. Sierra Forest, our first E-core Xeon is on track for first half '24, with customers well into their validation process. Sierra Forest will feature up to 288 E-cores targeting next-generation cloud-native workloads, delivering even more price performance and power efficiency for our customers. Granite Rapids, which shortly follows Sierra Forest, is also well into our validation cycle with customers. While the industry has seen some wallet share shifts between CPU and accelerators over the last several quarters, as well as some inventory burn in the server market, we see signs of normalization as we enter Q4 driving modest sequential TAM growth. Across most customers, we expect to exit the year at healthy inventory levels, and we see growth in compute cores returning to more normal historical rates off the depressed 2023. More importantly, our successful roadmap execution is strengthening our product portfolio with Gen 4 and Gen 5 Xeon, Sierra Forest and Granite Rapids positioning us well to win back share in the data center. In addition, we expect to capture a growing portion of the accelerator market in 2024 with our suite of AI accelerators led by Gaudi, which is setting leadership benchmark results with third parties like MLCommons and Hugging Face. We are pleased with the customer momentum we are seeing from our accelerator portfolio and Gaudi in particular, and we have nearly doubled our pipeline over the last 90 days. As we look to 2024, like many others, we now are focused on having enough supply to meet our growing demand. Dell is partnering with us to deliver Gaudi for cloud and enterprise customers with its next-generation power edge systems featuring Xeon and Gaudi AI accelerators to support AI workloads ranging from large-scale training to inferencing at the edge. Together with Stability.ai, we are building one of the world's largest AI supercomputers entirely on 4th Gen Xeon processors and 4,000 Intel Gaudi2 AI accelerators. Our Gaudi roadmap remains on track with Gaudi3 out of the fab, now in packaging, and expected to launch next year. And in 2025, Falcon Shores brings our GPU and Gaudi capabilities into a single product. Moving to the client. CCG delivered another strong quarter, exceeding expectations for the third consecutive quarter, driven by strength in commercial and consumer gaming SKUs where we are delivering leadership performance. As we expected, customers completed their inventory burn in the first half of the year, driving solid sequential growth, which we expect will continue into Q4. We expect full-year 2023 PC consumption to be in line with our Q1 expectations of approximately 270 million units. In the near term, we expect Windows 10 end-of-service to be a tailwind, and we remain positive on the long-term outlook for PC TAM returning to plus or minus 300 million units. Intel continues to be a pioneer in the industry as we ushered in the era of the AIPC in Q3 when we released the Intel Core Ultra processor code-named Meteor Lake. Built on Intel 4, the Intel Core Ultra has been shipping to customers for several weeks and will officially launch on December 14 alongside our 5th Gen Xeon. The Ultra represents the first client chiplet design enabled by Foveros Advanced 3D packaging technology, delivering improved power efficiency and graphics performance. It is also the first Intel client processor to feature our integrated neural processing unit, or NPU, that enables dedicated low-power compute for AI workloads. Next year, we will deliver Arrow Lake as well as Lunar Lake, which offers our next-gen NPU, ultra-low power mobility and breakthrough performance per watt. Panther Lake, our 2025 client offering, heads into the fab in Q1 '24 on Intel 18A. The arrival of the AIPC represents an inflection point in the PC industry, not seen since we first introduced Centrino in 2003. Centrino was so successful because of our time-to-market advantage, our embrace of an open ecosystem, strong OEM partnerships, our performance silicon, and our developer scale. Not only are these same advantages in place today, they are even stronger as we enter the age of the AIPC. We are catalyzing this moment with our AIPC acceleration program with over 100 ISVs already participating, providing access to Intel's deep bench of engineering talent for targeted software optimization, core development tools, and go-to-market opportunities. We are encouraged and motivated by our partners and competitors who see the tremendous growth potential of the PC market. NEX is also seeing early signs of the benefits from growing AI use cases. Our ethnic and IPU businesses are well suited to support the high I/O bandwidth required by AI workloads in the data center with growth expected to accelerate for both in 2024. Additionally, at the edge, as part of Intel's focus on every aspect of the AI continuum, NEX launched OpenVINO 2023.1, the latest version of the AI inferencing and deployment runtime of choice for developers on client and edge platforms, with AI.io and Fit Match demonstrating how they use OpenVINO to accelerate their applications at our innovation conference. We have leadership developer software tool chains that have seen a doubling of developer engagements this year. While NEX entered their inventory correction after client and DCAI, Q3 results beat our internal forecast and grew sequentially. We see continued signs of stabilization heading into Q4. Finally, our Smart Capital strategy underpins our relentless drive for efficiency and our commitment to be great allocators of our owners' capital while consistently looking for innovative ways to unlock value for all our stakeholders. We remain on track to reducing costs by $3 billion in 2023, and we continue to see significant incremental opportunities for operational improvement as we execute on our internal foundry model. In addition, in Q3, we made the decision to divest the pluggable module portion of our silicon photonics business, allowing us to focus on the higher-value component business and optical I/O solutions to enable AI infrastructure scaling. This marks the tenth business we have exited in the last 2.5 years, generating $1.8 billion in annual savings and a testament to our efforts to optimize our portfolio and drive long-term value creation. Mobileye's solid Q3 and Q4 outlook continue to underscore the benefits of increased autonomy afforded by our initial public offering last year. In addition, we added TSMC as a minority investor in our IMS nano fabrication business in Q3. And earlier this month, we announced our plans to operate PSG as a stand-alone business beginning January 1. Similar to Mobileye and IMS, this decision gives PSG the mandate, focus and resources to better capitalize on their growth opportunities. We plan to report PSG results as a stand-alone segment in Q1, to bring in private investors in 2024 and to create a path to an initial public offering over the next two to three years. In summary, we continue to deliver tangible progress 2.5 years into our transformation journey. We are on track with five nodes in four years. We are hitting or beating all our product roadmap milestones. We are establishing ourselves as a global at-scale systems foundry for both wafer processing and advanced packaging. We are unlocking new growth opportunities fueled by AI. And we are driving financial discipline and operational efficiencies as we continue to unlock value for our shareholders. While we are encouraged by our progress to date, we know we have much more work in front of us as we continue to relentlessly drive forward with our strategy, maintain our execution momentum, and deliver our commitments to our customers. I'd like to personally thank the Intel family for all their efforts. With that, let me turn it over to Dave to go through our results in more detail and provide guidance for Q4.

Thank you, Pat, and good afternoon, everyone. We delivered another strong quarter financially on top of outstanding execution on our product and process road maps as we continue to drive our IDM 2.0 transformation. We beat our guidance across revenue, gross margin, and EPS. While we continue to monitor economic indicators and geopolitical risks, we're pleased with the momentum and health of our business, and we'll continue to focus on prioritizing our investments, prudently and aggressively managing near-term expenses, and driving fundamental improvements to our cost structure longer term. Third quarter revenue was $14.2 billion, up 9% sequentially and $750 million above the midpoint of our guidance. Revenue exceeded our expectations across all major lines of business. Gross margin was 45.8%, 280 basis points better than our guidance, driven by higher revenue and ASPs and better sell-through of previously reserved inventory. EPS for the quarter was $0.41, beating guidance by $0.21, as our revenue strength, improving gross margins, and disciplined OpEx management resulted in sequential EPS growth of $0.28. Q3 operating cash flow was $5.8 billion, up $3 billion sequentially. Net inventory was down $500 million or 7 days in the quarter. We also significantly improved the linearity of our shipments, which brought DSO down by 5 days. In total, our working capital improvement initiatives have yielded more than $2 billion of cash year-to-date. Net CapEx was $4.9 billion, resulting in positive adjusted free cash flow of approximately $950 million, and we paid dividends of $0.5 billion in the quarter. In Q3, we announced the sale of 10% of our IMS nano fabrication business to TSMC, following the investment from Bain Capital in June. When combined with the Mobileye IPO, these transactions have unlocked more than $30 billion of value. Earlier this month, we signaled our intent to pursue private investment and ultimately, an IPO for our PSG business as we continue to pursue opportunities to increase value for our shareholders. Moving to third quarter business unit results. CCG delivered revenue of $7.9 billion, up 16% sequentially and ahead of our expectations for the third consecutive quarter. Customer inventory levels are healthy, and the market remains on track to our January consumption TAM signal of roughly 270 million units for 2023. CCG's operating profit doubled sequentially to $2.1 billion on higher revenue, sell-through of reserved inventory, and stronger ASPs driven by strength in our commercial and gaming products in the quarter. DCAI revenue was $3.8 billion, ahead of our internal forecast. Despite continued unit TAM softness, the Xeon business was up sequentially, with MNC customers showing a better than seasonal recovery in the quarter. Favorable customer mix, along with strong adoption of newer products with higher core density, led to record Xeon ASPs in Q3. Despite sequential revenue decline, DCAI returned to profitability and contributed operating profit of $71 million, improving sequentially on better ASPs, reduced factory underload charges, and continued spending discipline. Within DCAI, revenue for the Programmable Solutions Group declined mid-teens percent sequentially. As we discussed earlier this month, after a period of strong growth and tight supply, the FPGA business is entering a period of inventory burn. We expect PSG to decline in Q4 and be depressed for the next few quarters as customers work through inventory before returning to a more normalized run rate and growth. NEX revenue was $1.5 billion, up 6% sequentially. Edge markets showed signs of recovery in Q3, leading NEX revenue to exceed our expectations. Network and telco markets continue to work through elevated inventory and weak demand, which we expect to persist through the end of the year. NEX also returned to profitability in Q3 with operating profit of $17 million, up $200 million sequentially on stronger revenue and reduced operating expenses. Intel Foundry Services revenue was $311 million, growing 4 times year-over-year and 34% sequentially on increased packaging revenue and higher sales of IMS tools. IFS operating loss was $86 million as ramping factory and operating expenses offset stronger revenue in the period. Mobileye continues to perform well. Q3 revenue was $530 million, up 18% year-over-year and 17% sequentially, with operating profit of $107 million on a consolidated basis, up 32% sequentially. This morning, Mobileye increased their fiscal year 2023 outlook for adjusted operating income by 7% at the midpoint. Q3 represented another outstanding quarter of cross-company spending discipline and focused portfolio management with operating expenses down 15% year-over-year. While we're on track to achieve $3 billion of total spending reductions in 2023, we expect sequentially higher OpEx in Q4 due to seasonal marketing activities, higher profit-dependent compensation and the end of some temporary austerity measures taken earlier in the year. We also had a one-time credit in Q3 associated with an asset sale, which will impact the sequential comparison in Q4. Now turning to Q4 guidance. We expect fourth quarter revenue of $14.6 billion to $15.6 billion, delivering on our January commitment to grow revenue sequentially throughout 2023. In the client business, we're encouraged by the return of historical purchasing cycles as our channel checks, partner feedback, and ASPs all point to healthy inventory levels and growing demand. We expect moderate sequential growth from DCAI, with Xeon's strength more than offsetting a decline in PSG and continued recovery in edge markets roughly offsetting persistent network weakness. At the revenue midpoint of $15.1 billion, we expect gross margin to flow through at approximately 60% of revenue growth, resulting in Q4 gross margin of approximately 46.5% with a tax rate of 13% and EPS of $0.44. We continue to operate under our Smart Capital framework. In Q3, we received a capital grant from the State of Ohio and our first foundry prepay. In addition, we continue to work with the U.S. CHIPS Office on their review of our four U.S. applications. And we continue to work with Germany, Poland and the European Commission on our planned expansions in Europe. There are no changes to our prior forecast of mid-30s percent net capital intensity across 2023 and 2024 in aggregate. Capital offsets will trend towards the higher end of our 20% to 30% range in that time frame, though we do expect the vast majority of those offsets to land in 2024. In closing, Q3 was Intel's strongest quarter since we began our transformation. We achieved significant milestones toward regaining process leadership on Intel 18A, delivered Meteor Lake and Emerald Rapids on time, secured multiple wafer and advanced packaging foundry customers, and delivered another quarter of financial results that exceeded our expectations on both the top and bottom lines. We will continue to make significant investments as we execute the IDM 2.0 strategy, and we remain confident and committed to our long-term financial targets. We're participating in a large and growing semiconductor TAM. Our foundry and AI assets are showing great momentum in the market. We're steadily closing structural cost gaps, and we continue to make progress toward delivering the financial returns that we and our owners expect. With that, let me turn the call back over to John.

Thank you, Dave. We will now move to the Q&A segment of our call. Jonathan, can we take our first caller?

Thanks a lot. Dave, I just wanted to see if you can clear up some of the confusion on gross margin that sort of came out of the innovation event. You're now coming out of the year at 46.5% but you did roughly 43% for the year. And I think at that event, you said next year is going to be up but probably not a couple of hundred basis points. So did you mean off of the Q4 run rate or do you mean off of the 43% for the year? And can you kind of shape that for us throughout the year?

Certainly. Let me take a moment to discuss the third quarter because I was really impressed with the team's performance in achieving gross margins just shy of 46%. They executed well in managing spending and improved inventory sell-through, which greatly contributed to our strong gross margin results. Looking ahead to the fourth quarter, we expect to return to a more typical range for fall-through, possibly around 60%, though this is slightly dampened by the ongoing efforts related to our five nodes in four years initiative, which does involve some spending. As we think long-term, we feel increasingly confident about reaching the 60% gross margin target for several reasons. Firstly, once we complete the current transitions, we anticipate a shift from headwinds to tailwinds for margins as our process leadership enhances gross margins. Improvements in product execution will contribute positively as well. Additionally, our internal foundry model, which we are formalizing next year by measuring manufacturing and the technical development organization as a separate profit and loss entity, is already beginning to show benefits. We are currently aligning our operational reviews and long-term planning with this framework. This has started to enhance collaboration between functions, leading to better decision-making regarding test times, sample management, and overall fab operations—areas that have gained newfound importance and focus. Manufacturing teams are also becoming more conscious of loadings and P&L performance, aiming to maximize revenue while minimizing costs. Thus, as we move into 2024 and beyond, we expect to uncover numerous opportunities that will positively impact our gross margins, reinforcing our confidence in achieving the 60% target.

Tim, do you have a quick follow-up?

Pat, can you share insights about the dynamics and allocation from your major foundry partner? They emphasized that your 18A would be competitive with their offerings in the same timeframe. Now that it's clear you're making progress, has there been any change in your relationship and the allocation you receive from them? Thanks.

Yes. And first, I'd say, we've come to a different conclusion than what you might have heard from them. We feel that our five nodes in four years, the leadership position that we expect with Intel 18A, this is a remarkable set of work. And as you heard me say in my formal comments, we think of 18A as a work of art. This is the finest transistor, right? And we've invented the last 30-years of transistors. This is the best one that's ever been built, right? And that and PowerVia, we feel very confident that we are on track to the leadership position that we described. And as we've also said, hey, we're well underway on the things after that. And things like high-NA, the next generation of EUV or advanced packaging with glass, all of these are now being backed up and reinforced by their customer commitments. Three 18A customers now making commitments, the prepay customer I spoke about earlier, two additional customers, partners, we announced the ARM relationship in April, and they're now seeing very positive results on power performance area from 18A. And as we think about the relationship with TSMC, hey, this is a great company and one that we partner with, one that we are a competitor to, one that we're a customer of. We collaborate with them. As you saw, they became an investor in the IMS business this quarter as well. And as a customer of those, we're very happy with how they're supporting us and our products as we're raising many of these products forward to there, a critical supplier to us as we're a critical supplier to them. This is one of the most critical relationships in the industry. I spent a lot of time personally on it. We're very confident in our roadmap. And this is really an exceptional quarter for five nodes in four years and getting back to process leadership. We are well on our way to doing exactly what we said we would.

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

Hi, guys. Thanks for asking a question. Pat, I wanted to follow-up on one of the topics you just mentioned about your partnership with ARM. The flip side of that is there's been reports recently of a number of people entering the CPU business for PCs using ARM architectures similar to what we've seen over the last couple of years on the data center side of things. Can you just talk about the competitive landscape of x86 versus ARM? And potentially, more importantly, if in fact, ARM was gaining traction, would you consider using that architecture and broaden your technology internally?

Yes. Thank you, Ross. Overall, the industry is excited about the AIPC. Since I introduced this generation of AIPC at our Innovation Conference a couple of months ago, we have seen that excitement translate into interest from customers and competitors alike. Generally, ARM and Windows client alternatives have taken on relatively minor roles in the PC market. While we take all competition seriously, history suggests that we don't anticipate these alternatives becoming significantly impactful. Our momentum is robust, and we have a solid roadmap, with Meteor Lake launching this AIPC generation on December 14. We have already demonstrated next-generation products like Lunar Lake, which offers notable improvements in performance and capabilities. We will be signing Panther Lake, the next generation, in the fab in Q1 along with Intel 18A. We also announced our AI Acceleration program, which currently includes over 100 ISVs. We expect to see over 100 million x86 AI-enhanced PCs in the marketplace within the next two years, which represents an extraordinary volume and the ecosystem advantages it brings. Regarding alternative architectures like ARM, we see a fantastic opportunity for our foundry business. Given the results I mentioned earlier, we view this as a unique chance to contribute to the success of the ARM ecosystem or any other market segments that may emerge as an accelerant for our foundry offerings, particularly with our foundry packaging and 18A wafer capabilities.

Ross, do you have a quick follow-up?

Yes, I do. One for Dave. The OpEx side of things, you guys did great in the third quarter. You talked about it going up in the fourth quarter, but I still think the full-year is ahead of what you originally had targeted. How do we think about next year's OpEx just conceptually? I know you said you're going to have $3 billion in total cost savings this year, $8 billion to $10 billion longer term. What are the puts and takes on OpEx as we look into 2024?

I am very proud of our achievements in the third quarter and our overall execution on spending reduction for the year. This involved significant effort and a focus on driving efficiency. As Pat mentioned, we divested or closed ten programs or product areas to enhance our spending. Additionally, we identified businesses where we could unlock significant value, which we believe we have successfully done in three key areas. From this standpoint, we feel that our spending-related activities are largely complete. Moving forward, we anticipate benefits from our internal foundry model, impacting both costs and operating expenses. Our long-term focus will be on managing spending, aiming for 60% gross margins and 40% operating margins, which requires driving efficiency in operating expenses. We believe there is considerable opportunity in this area, just as there is for gross margins. We will provide visibility for the fourth quarter and 2024 once we close out 2023.

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

Great. Thank you. I think you talked about the Gaudi pipeline doubling in the last 90-days, so I guess you're nearing kind of $2 billion of visibility there. Can you talk to that a little bit, how much of that is training versus inference?

Thank you. Overall, there's been a significant increase in interest in this category. Our Gaudi business is small but growing quickly. We see opportunities in both training and inferencing. On the inferencing side, we anticipate that workload will expand significantly; while few people create models, many utilize them. It's similar to weather modeling—few develop the models but many use them. The real market potential lies in inferencing deployments, which will utilize both accelerators and a substantial amount on Xeons, particularly as we integrate AI into various applications. Our Gen 4 performance for AI applications is already strong, and it improves with Gen 5. With the launch of Granite Rapids, performance is projected to improve two to three times, and this will continue as we progress further down our roadmap. We believe our capability to perform inferencing at scale with our Xeon line is critical moving forward. The combination of Gaudi and Xeons reflects what Dell announced in their roadmap, and we're witnessing normal buying behavior indicating growth. Our OEMs have seen a solid uptick in Xeon sales this quarter, and more customers are embracing our DevCloud for AI purposes on both Xeon and Gaudi. Key partnerships, like the one with Deloitte, focus on application optimization and AI development using our Xeon platform. We are confident in a growth cycle for CPUs driven by Xeon and accelerators, and Intel will play a significant role in both areas. Our strategy encompasses AI across various domains, including the edge, clients, data centers, and the cloud, making inferencing a major discussion point for the industry in 2024, primarily executed on Xeon processors. I want to express my appreciation for our resilient Intel team in Israel and everyone impacted by recent events. Thank you for joining the call today and showing interest in Intel. We value this opportunity to update you, answer your queries, and reflect on the positive momentum we’re experiencing. Our financial and operational results this quarter have been exceptional, affirming our foundry strategy and our commitment to AI integration. We hope to see you at our Emerald Rapids Gen 5 and Meteor Lake launch event in New York in December, as well as at our Q1 Intel Foundry Day. Thank you, and good afternoon or good night, wherever you may be. Stay safe.