Intel Corp (INTC) — Q4 2025 Earnings Call Transcript

Thank you, Jonathan, and good afternoon to everyone joining us today. By now, you should have received a copy of the Q4 earnings release and earnings presentation, both of which are available on our investor website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Lip-Bu Tan, and our CFO, David Zinsner. Lip-Bu will open with comments on our fourth quarter results as well as provide an update on the progress we are making on our strategic priorities. Dave will then discuss our overall financial results, including first quarter guidance, before we transition to answer your questions. 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 our non-GAAP financial measures including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Lip-Bu.

Thank you, John, and thank you all for joining us today. 2025 was a year of solid progress. Over the last 10 months, we established the foundation for new Intel, a more focused and execution-driven company. We simplified our organization and greatly reduced bureaucracy to improve efficiency and accelerate decision-making. We also recruited new leaders from the outside and empowered key leaders from within. We strengthened our balance sheet, forged strong new partnerships, and deepened relationships with existing as well as new customers. I'm encouraged by my conversations with our customers and partners around the world. I'm hearing a clear, consistent message. They see the progress we are making; they want Intel at the table as they navigate their own transformations. The opportunity in front of us is meaningful and significant. The era of artificial intelligence is driving unprecedented demand for semiconductors across the entire compute landscape from AI-accelerated and traditional data centers into the network and enterprise domains all the way out to client and edge devices. Rapid deployment of AI workloads across this diverse environment will require heterogeneous silicon solutions, leveraging CPU, embedded NPUs, discrete and integrated GPU, ASICs, and XPUs. In addition, we will need to see innovation in the software stack along with new emerging technologies like photonics, memory interfaces, interconnect, and quantum, to name just a few. The breadth of our IP and know-how across silicon design, system-level integration, wafer manufacturing, and advanced packaging uniquely positions us to capitalize on these AI-driven trends and capture sustainable profitable growth. This will not happen overnight, and our execution needs to continue to improve. While we will stay humble as we address the work ahead, we will never be satisfied. Our Q4 was another positive step forward. Revenue, gross margin, and EPS were all above our guidance. We delivered these results despite supply constraints, which meaningfully limited our ability to capture all of the strengths in our underwriting markets. We are working aggressively to address this and better support our customers' needs going forward. Looking ahead for 2026, we will continue to position Intel to capture the significant growth opportunity AI presents across all our businesses. We will do this by strengthening our client franchise, advancing our data center, AI accelerator, and ASICs strategies, and continuing to build trusted U.S. foundry. Let me start with our core x86 franchise, which remains the most widely deployed compute architecture in the world. The deployment of AI is only amplifying the importance of x86 from orchestration and control planes to inference edge workloads and agentic AI. In our Client Computing Group, we strengthened our position in both consumer and enterprise notebooks with our Core Ultra Series 3 lineup, formerly known as Panther Lake, and built on our most advanced Intel 18A manufacturing process. We committed to deliver our first Series 3 SKU by the end of 2025, and we exceeded that commitment by delivering our first 3 SKUs. While we still have work to do, I'm encouraged by the steady progress on our Intel 18A use, and Naga and his team remain laser-focused on additional improvements as they ramp Series 3 into the high volume needed to meet strong customer demand. Our client momentum was on full display at CES earlier this month, where we formally launched Series 3 with our OEM partners, powering over 200 notebook designs. Series 3 will be the most broadly adopted and globally available AI PC platform we have ever delivered. Along with our next-generation Nova Lake coming at the end of 2026, we now have a client roadmap that combines best-in-class performance with cost-optimized solutions, giving me confidence that we are on the path to fortifying market share and profitability in both notebooks and desktops over the next several years. In addition, PCs have become an important part of AI infrastructure. The surge in AI workloads is driving massive demand for data centers, but cloud capacity alone cannot meet the scale of inference needed, especially in the power-constrained environment. This accelerates the push toward hybrid AI, splitting workloads between cloud and client which offers clear advantages in performance, cost, and control. We are working closely with ecosystem partners to seamlessly enable hybrid AI, and we are encouraged by the opportunity to grow the installed base and accelerate the refresh rates over time. Let me now turn to DCAI to support our AI objectives. I believe that our traditional server and accelerated roadmaps must advance together. To reinforce the alignment, I centralized our data center and AI businesses under Kevork, ensuring tight coordination across CPUs, GPUs, and platform strategy. Demand for traditional servers continues to be very strong, and we are focused on ramping available capacity to support the meaningful uptick we are seeing, including partnering with key customers to support their needs beyond 2026. The continuing proliferation and diversification of AI workloads is placing significant capacity constraints on traditional and new hardware infrastructure, reinforcing the growing and essential role CPUs play in the AI era. This is and will continue to benefit the ongoing ramp of Granite Rapids as well as our mainstream products, Sapphire and Emerald Rapids. We have also made decisive changes to simplify our server roadmap, focusing resources on the 16-channel Diamond Rapids and areas to accelerate the introduction of Coral Rapids, where we can. With Coral Rapids, we will also reintroduce multi-threading back into our data center roadmap. We also continue to work closely with NVIDIA to build a custom Xeon fully integrated with their NVLink technology to bring best-in-class x86 performance to AI host nodes. Over the last several quarters, we have been developing a broad AI and accelerated strategy that we plan to refine in the coming months. This will include innovative options to integrate our x86 CPU with fixed function and programmable accelerator IP. Our focus is on the emerging wave of AI workloads, reasoning models, agentic and physical AI, and inference at scale, where we believe Intel can truly disrupt and differentiate. Our long-term ambition is clear: to rebuild Intel as a compute platform of choice for the next era of AI-driven computing, grounded in world-class engineering and an accelerated roadmap, and a renewed culture of execution. We are also building momentum in ASICs as customers seek purpose-built silicon for AI, networking, and cloud workloads. Our combination of design services, IP building blocks, and manufacturing capabilities position Intel well to resolve specialized problems at scale. This is not a new area for us; however, this is one that I'm committing significantly more focused resources and investment dollars, including leveraging my own experience at Cadence Design supporting and growing this market. Finally, we remain focused on the long-term objective of building a world-class wafer and advanced packaging foundry anchored in trust, consistency, and execution. As I have said before, building a foundry business will take time and considerable effort and resources. While still early in our journey, we have hit some important milestones worth highlighting. We are now shipping our first products built on Intel 18A, the most advanced semiconductor process developed and manufactured on U.S. soil. As stated earlier, yields continue to improve steadily as we work to ramp the supply needed to meet strong customer demand. In addition, Intel 18AP continues to progress well, and we are engaging with internal and external customers on this note, delivering our 1.0 PDK at the end of last year. Intel 14A development remains on track. We have taken meaningful steps to simplify our process flow and improve our rate of performance and yield improvement. We are developing a comprehensive IP portfolio on Intel 14A, and we continue to improve our design enablement approach. Importantly, our PDK is now viewed by customers as an industry standard. Engagements with potential external customers on Intel 14A are active. We believe customers will begin to make firm supplier decisions starting in the second half of this year and extending into the first half of 2027. We also have the opportunity to provide strong differentiation in advanced packaging, particularly with EMIB and EMIB-T. We are focusing on improving quality and yield to support customer desire for ramps beginning in the second half of 2026. In closing, as I reflect on 2025, I'm proud of the resilient commitment our team has demonstrated. We exit the year with a stronger foundation and clearer roadmap for 2026 and beyond. The opportunity ahead is meaningful and significant as AI-driven computing expands across all the markets we serve. However, I'm also mindful of the challenges ahead of us and transparent about the areas that we are doing well and areas we need to improve. In the short term, I'm disappointed that we are not able to fully meet the demand in our markets. My team and I are working tirelessly to drive efficiency and more output from our fabs. While yields are in line with our internal plans, they are still below what I want them to be. Accelerating yield improvement will be an important lever in 2026 as we look to better support our customers. As I said earlier, we are on a multiyear journey. It will take time and resolve, but my team and I are committed to rebuilding this iconic American company and increasing long-term value for our shareholders. I would like to thank my team for their hard work over the course of the last 10 months. I look forward to updating you on our progress as we continue this journey together, including hosting an Investor Day in the second half of this year at our headquarters in Santa Clara. Let me now turn it over to Dave to walk through our financials and business trends in more detail.

Thank you, Lip-Bu. We remain encouraged by the fundamental drivers of demand across our core markets. Fourth quarter revenue was $13.7 billion at the high end of the range we provided in October. We experienced strong growth across all our businesses, benefiting from the AI infrastructure build-out with AI PC, traditional server and networking revenue, all up double digits sequentially and year-over-year. Q4 marks the fifth consecutive quarter of revenue above our guidance, even as we navigate industry-wide supply constraints for our key products. Non-GAAP gross margin came in at 37.9%, approximately 140 basis points ahead of guidance on higher revenue and lower inventory reserves, partially offset by increased mix of outsourced client products and the early ramp of Intel 18A to support the launch of Core Ultra Series 3 codenamed Panther Lake. We delivered fourth quarter non-GAAP earnings per share of $0.15 versus our guidance of $0.08, driven by higher revenue, stronger gross margins, and continued spending discipline. Q4 operating cash flow was $4.3 billion with gross CapEx of $4 billion in the quarter and positive adjusted free cash flow of $2.2 billion. NVIDIA's $5 billion investment closed in Q4 as expected. For the full year, revenue was $52.9 billion, down slightly year-over-year due to constraints across our own manufacturing network and with external suppliers which limited growth, especially in the second half. Full year non-GAAP gross margin was 36.7%, up 70 basis points on reduced period charges. Full year non-GAAP EPS was $0.42, up $0.55 year-over-year on lower period charges and improved operating leverage. Specifically, non-GAAP OpEx of $16.5 billion was down 15% versus 2024 as we executed actions to reduce complexity and bureaucracy in the business and drive improved execution. For the full year, we generated $9.7 billion in cash from operations and made $17.7 billion of gross capital investments with capital offsets of approximately $6.5 billion. Although adjusted free cash flow was minus $1.6 billion in 2025, we produced $3.1 billion in the second half as cash from operations more than doubled half-on-half. We exit 2025 with $37.4 billion of cash and short-term investments, bolstered by further monetization of Mobileye, the completion of our stake sale of Altera to Silver Lake, accelerated funding from the U.S. government, and investments by the SoftBank Group and NVIDIA. In addition, we repaid $3.7 billion of debt. Looking back, 2025 marked an important year of progress against our key priorities, even as we know we have more work ahead. Internally, we reorganized and rightsized the team to become customer-centric and engineering-focused while shoring up our balance sheet to give us more flexibility to pursue our goals. We've navigated a market that has shifted from tariff-driven uncertainty in the first half to an intense AI-driven demand environment constrained by supply in the second half. 2025 demonstrated the staying power of the x86 ecosystem across client and data center and the importance of our manufacturing assets as we launched Core Ultra Series 3 on Intel 18A, the most advanced process fully developed and manufactured in the United States. Both create a firm foundation on which to build the new Intel. Moving to segment results, Intel Products' Q4 revenue was $12.9 billion, up 2% sequentially. CCG revenue was down 4% quarter-over-quarter even as AI PC units grew 16%, and DCAI was up 15%, reflecting strong demand for traditional server compute. These results reflect our efforts to balance our constrained supply with strong data center demand while maintaining support for our client OEM partners. Where possible, we're prioritizing our internal wafer supply to data center and leveraging an increased mix of externally sourced wafers in clients. CCG revenue was $8.2 billion and in line with our expectations. We estimate the client consumption TAM was greater than 290 million units in 2025, marking 2 straight years of growth from the post-COVID bottom in 2023 and the fastest TAM growth since 2021. Within the quarter, CCG launched 3 SKUs of Series 3 ahead of our expectations of one. Performance reviews have been extremely favorable, with up to 27 hours of battery life, a 70% year-on-year improvement in graphics and performance on industry-standard benchmarks that is 50% to 100% better than peers. DCAI revenue was $4.7 billion, up 15% sequentially, above expectations and the fastest sequential growth this decade. Revenue would have been meaningfully higher if we had more supply. While the market continues to benefit from more power-efficient CPUs, stimulating a refresh cycle, all indicators point to the growing and essential role CPUs will play within hyperscale and enterprise AI data centers as inference-driven AI usage expands. The world is shifting from human-prompted requests to persistent and recursive commands driven by computer-to-computer interactions. The CPU central function coordinating this traffic will drive not only traditional server refresh, but new demand that grows the installed base. In addition, due to the networking demand for the AI infrastructure build-out, our custom ASIC business grew more than 50% in 2025, 26% sequentially and reached an annualized revenue run rate greater than $1 billion in Q4. This strength provides our ASIC team a solid base to pursue a $100 billion TAM opportunity. Operating profit for Intel Products was $3.5 billion, 27% of revenue, and down approximately $200 million quarter-over-quarter on an increased mix of outsourced products and seasonally higher operating expenses. Intel Foundry delivered revenue of $4.5 billion, up 6.4% sequentially on increased EUV wafer mix. EUV wafer revenue grew from less than 1% of wafers out in 2023 to greater than 10% in 2025. External foundry revenue was $222 million in the quarter driven by projects with the U.S. government and the deconsolidation of Altera. Intel Foundry operating loss in Q4 was $2.5 billion and $188 million worse quarter-over-quarter driven by the early ramp of Intel 18A. Within the quarter, Intel Foundry met key 18A and 14A milestones. With the official launch of Core Ultra Series 3, Intel Foundry is the only semiconductor manufacturer in the world shipping gate-all-around transistors with backside power for revenue. These advanced wafers are rolling off our production lines in Oregon and Arizona here in the United States. Finally, our continued progress on Intel 14A demonstrates our commitment to research and develop the world's most important technology on U.S. soil. Turning to All Other, revenue came in at $574 million and was down 42% sequentially due to the Q3 2025 deconsolidation of Altera. The primary components of All Other in Q4 were Mobileye and IMS. Collectively, the category delivered an operating loss of $8 million. I'm pleased with the early momentum at Altera as an independent company with a new leadership team. Their industry-leading programmable fabric, developer productivity-driven software tools, and a large installed base position them well to drive long-term value creation. Now turning to guidance. During the second half of 2025, we supported strong demand for our products with intra-quarter wafer production and inventory on hand. As we enter 2026, our buffer inventory is depleted, and the mix shift in wafers towards servers, which began in Q3 will not come out of the fab until late Q1 '26. As a result, and as we stated last quarter, our internal supply constraints are most acute in Q1. In light of these dynamics, we are forecasting a Q1 revenue range of $11.7 billion to $12.7 billion. The midpoint of $12.2 billion reflects a lower end of seasonal Q1. Within the Intel Products, we forecast a more pronounced revenue decline in CCG than in DCAI as we continue to prioritize internal supply to our server end markets. We expect Intel Foundry revenue up double digits quarter-over-quarter, helped by continued mix shift to EUV wafers and Intel 18A pricing. At the midpoint of $12.2 billion, we forecast a gross margin of approximately 34.5% with a tax rate of 11% and breakeven EPS, all on a non-GAAP basis. Gross margin is down sequentially due to lower revenue, increased 18A volumes, and product mix. Let me take a few moments to provide some color for your full year 2026 model. First, from a revenue perspective, we expect our factory network to improve available supply beginning in Q2 and for each of the remaining quarters in 2026. Within the server market, customer feedback and our own market intelligence point to the likelihood of a strong year of growth for DCAI. Finally, client CPU inventory is lean, and there is excitement for Series 3. In contrast, over the last several months, industry-wide supply for key components like DRAM, NAND, and substrates has come under increasing pressure due to intense demand to support the rapid expansion of AI infrastructure. Rising component pricing is a dynamic we continue to watch closely, especially relative to the client market, and could limit our revenue opportunity this year. For OpEx, we target 2026 operating expenses of $16 billion. We expect noncontrolling interest or NCI to net to approximately $325 million in Q1 and be approximately $1.2 billion for the year on a GAAP basis. NCI is expected to grow meaningfully again in fiscal 2027. Our share count is forecast to be 5.1 billion shares in Q1 and grow in line with our stock-based compensation going forward. As we think about our capital expenditures for 2026, we're working to balance our ability to drive capital efficiencies with our need to respond to the demand signals we're receiving. Previously, we said CapEx would be down but are now planning for a range of flat to down slightly, and for expenditures to be more weighted to the first half. As a reminder, CapEx in 2026 would be to support demand in 2027 and beyond. We expect to generate positive adjusted free cash flow for the full year, and we're planning to retire all $2.5 billion of maturities as they come due this year. I'll wrap up by saying that Q4 was another solid quarter to mark our fifth consecutive quarter of overdelivering to our guide. We exit 2025 increasingly confident in the long-term sustainability of the end markets we serve. We believe our improved balance sheet, thanks in part to the trust of our strategic partners, combined with the strong talent we have, will enable us to meaningfully participate in the next wave of computing as the industry pushes for returns on their AI investments. I look forward to providing you, our shareholders, an update on what this future means to you at our Analyst Day later this year.

Thank you, Dave. Jonathan, can we please take the first question?

I guess the first one is 2 quick parts. It's both on supply. In the short term, are the yield improvements and the other actions you're taking sufficient to address just typical seasonality throughout the year, given that usually the first quarter would be the low point on revenues? And then perhaps more importantly, longer term on the supply side, you guys seem more confident in your 14A, your 18A, the customer engagements, your internal roadmap. When would you decide to loosen up the reins on the CapEx side of things so that you could address structurally higher demand going forward with more internal supply?

Thank you, Ross, for your question. Regarding short-term supply, improving yields and throughput is a significant factor in increasing supply. This approach has a great return on investment since it doesn't require additional capital. Lip-Bu and I are actively working on enhancements, and we're quite optimistic about the progress. However, concerning capital expenditures, the situation is more complex than just suggesting it will be stable or slightly reduced. In fact, we're seeing a significant decrease in expenditures for space. We're spending much less in that area and believe we have a solid cleanroom footprint. Our focus is now more on tooling, as we plan to significantly increase our tool spending in 2026 compared to 2025 to address the supply shortfall. Each quarter, we are experiencing increases in wafer starts across Intel 7, Intel 3, and 18A, with all three showing improvement. We anticipate that conditions will certainly get better in Q2, though we won't be completely out of the challenges. As the year progresses, we expect improvements. Regarding 14A, Lip-Bu has been clear that he wants to limit spending on capacity for 14A and instead focus on technology development and R&D until we secure customers. We expect to begin securing customers for 14A in the latter half of this year and the first half of next year. Once we have more visibility, we will start to allocate funds for 14A.

I can just add a little bit more. I think on the yield improvement, which we see in the 7%, 8% yield improvement per month. I think it's more in focus in the variation, make sure that we can be more consistent delivering and also the defect density at the end so that we can ship quality wafer to the customer. So I think all those are very important for our PC client, Panther Lake and then also for the 18A and 14A development. So I think, all in all, I see improvement, but still not quite to the industry-leading standard yet.

Ross, do you have a quick follow-up?

Yes, I do. Dave, you provided some insights on various metrics for the full year, but you didn’t address gross margin. How should we consider that? Also, regarding the 40% to 60% incremental guidance, it seems quite broad. Any additional clarity on that would be appreciated.

I'm not even sure the math is that good on this, this time around. When you look at Q1, the gross margin decline in Q1, there's 2 main components. Obviously, revenue coming down with a largely fixed cost business is going to affect gross margins. But the other piece of it is Panther Lake, while the cost structure improves from Q4 to Q1, it's still dilutive to the corporate average, and it's a bigger percentage of the mix. So it actually has a relatively negative impact on gross margin. So that's partly why we're guiding down. There's some mixed things going on as well. I think as we progress through the year, the 2 things should benefit us. One, we improve our supply; ergo, that should improve our revenue picture. On top of that, Panther Lake's cost structure gets better and better. Look, we talked about the incremental improvement every month, we're going to see in yields. We're working on the throughput as well. So those 2 things combined, that should help in terms of cost structure and make this more of an accretive product to us as opposed to a diluted product. And I think that will be a lot of what is the story around gross margins for the year. There's still mix, and mix can go in any different direction depending on how things play out. But what we're largely focused on for the next 12 months is driving the cost structure of these products that we're building to improve the margins. We know that 34.5% is by no means an acceptable level of gross margins, and we're actively working it, first to get it to 40%, and then once we get it there, we'll move to a new target.

Dave, I'm wondering, in the guidance, you're guiding to $12.2 billion, but I'm wondering if you can kind of pro forma that for us like if you could meet all the demand, what would the kind of unconstrained guidance be for March?

Yes. It's a squishy figure to figure out, Tim, but I would tell you that if you look at kind of that $12.2 billion relative to the $13.7 billion we posted in the fourth quarter, and look at normal seasonality. It's in the range of seasonal but it's at the low end of that range of seasonal. We'd be well above seasonal if we had all the revenue or supply, I should say, to hit the revenue.

Tim, do you have a follow-up?

I appreciate it, Lip-Bu. There's clearly a lot of enthusiasm surrounding your foundry business. It seems we might see a few customer announcements in the second half. However, I'm curious about how you define success in that area. Before you joined, the goal seemed to be becoming the second-largest foundry player by 2030. Most forecasts suggest that this second player could reach around $30 billion in revenue by then. Is this still a target you're aiming for, and what do you see as a successful outcome?

Yes, thank you for the question. We are committed to establishing a world-class foundry business. Regarding the 14A development, things are progressing well, and we are pleased with our advancements. We are streamlining the entire process and focusing on building our IP portfolio, which is essential for serving our customers. We are observing a positive trend in yield improvements and better valuations. Looking ahead, we are actively engaging with key customers and expect to receive their capacity commitments in the second half of this year, which will guide our capacity CapEx decisions. Overall, this is a service-oriented business, and we are focused on building trust and consistency in our deliveries. We also have the PDK ready for the first quarter of 14A and are starting discussions with customers about their desired products. By the second half of this year, we anticipate having the necessary commitments to drive the scale of our operations effectively.

Another early indicator, I think, of success in the foundry is going to be advanced packaging. And we'll start to see that revenue come in even before we start to see meaningful wafer revenue. And I think as I was talking to investors over the past kind of 12 to 18 months, I was thinking that those opportunities would be measured in hundreds of millions of dollars and wafer opportunities would be measured in billions. I'd say some of the early customer engagements suggest that we'll be well north of $1 billion on many of these opportunities for advanced packaging. So they're way more exciting than even I had expected. And it's because we have really good technology there that's very differentiated and supports AI in a way that is particularly special.

I think the EMIB-T is a very big differentiator for us. And then clearly, we have a couple of customers willing to even prepay the subscription because there is a very big supply shortage, and then they're willing to share with us. That means that shows the commitment they are going to be working with us.

Yes, I wonder if you could talk about server prospects. You sort of talked about some of the challenges of Diamond Rapids not having symmetric multi-threading and Copper Rapids is going to be important. Can you give us a time frame on Copper Rapids and sort of what's your expectation for the potential for market share puts and takes as you wait for that to come?

Yes, great question. First, I want to highlight that we are centralizing the data center and AI efforts under Kevork, who we brought on to help build that area. He has already assembled a strong team and we plan to recruit additional talent. Right now, our primary focus is on the 16-channel Diamond Rapids, and we are working to simplify our product roadmap. Additionally, we are accelerating the launch of Coral Rapids, which will reintroduce multi-threading into our data center workforce. Overall, we are very optimistic. The team is now established, the roadmap is clear, and we are taking decisive actions as we concentrate on the 16-channel Diamond Rapids while also speeding up the introduction of Coral Rapids.

Joe, you have a quick follow-up?

Yes, can you adjust the wafer distribution for the remainder of the year to favor data centers instead of PCs? Is that a consideration for you? It appears that the constraints reached their peak in Q1 and are expected to improve, but I assume challenges will still persist beyond that. Are you able to shift the focus towards data centers?

We're absolutely constrained, Joe. So what we're doing within client we're focusing on the mid- and high end and not as focused on the low end. And then to the extent we have excess, we're pushing all of that into the data center space to meet that customer demand. And I think you'll see some share adjustments based on that because our primary focus is to our main customers. And obviously, we have important customers in the data center side. We have important OEM customers on both data center and client, and that needs to be our priority to get the limited supply we have to those customers.

My first question is about seasonality throughout the year. So Dave and Lip-Bu. I mean you're subseasonal in the first quarter, you said you'd be well above seasonal if you had the supply. So what does that imply for Q2 to Q4? Should we model that above seasonal or are the constraints in PC so much that we shouldn't?

Yes, I mean, we would expect to be better than seasonal through the year if we can get the supply to where we think we can as we get into Q2. So that's correct.

Ben, do you have a follow-up question?

I wanted to ask about the situation with hyperscalers in servers. Is your momentum primarily driven by hyperscaler demand, or do you think the shortages are mainly affecting them, which makes your performance below expectations? Additionally, are you seeing any demand from the enterprise sector?

Yes. I think, let me answer that question. I think the hyperscaler is very important for us to scale the business, and I spent a lot of time with the hyperscalers. I think a couple of things. One, clearly, the message from them is the CPU actually is driving a lot of that business in terms of the different workloads that they're driving. So I think it's very encouraging to see that they are willing to commit to long-term agreements. So we really prioritize their CPU deployment. So that's something very positive. And then, secondly, I think they are very excited about working with us in terms of deciding on the silicon, the software, and the system-level engagements, and that's something very exciting. So all in all, I think they are very strong. The workload they shared with us what they're looking at and how we can help them. And also the ASIC design is also an opportunity for us. They also want to build some of the purpose-built silicon with the Xeon CPU included. And also, they are very interested in overall how do you use the advanced packaging and then make it more complete. I think overall, I think it's a great opportunity for us to work with them.

For my first question, I wanted to explore the segments a bit more. It seems that Mobileye is expected to see growth, and Altera foundry revenues might reach a couple of hundred million dollars. However, both DCAI and client revenues are likely to be down significantly. I believe DCAI might see a decline in the high single digits, while client revenues could drop in the mid-teens. Is that accurate? Also, why do we expect such a significant decline in data center revenues given the demand and your focus areas? It seems like data center units are poised for a notable decline in Q1.

Yes. I mean, both will be down as a function of supply. Obviously, we're shifting as much as we can over to data center to meet the high demand. But we can't completely vacate the client market. So we're trying to support both as best we can and obviously work our way out of this supply issue. I do believe that the first quarter is the trough. We will improve supply in the second quarter. And part of the challenge is that in the third and fourth quarter of '25, we lived off of supply, but we also had a reasonable chunk of fixed finished goods inventory to also work through. Unfortunately, that is now down to kind of 40% of what it was at peak levels. So we don't have that to rely on. So it's just literally hand to mouth, what we can get out of the fab and what we can get to customers is how we're managing it.

Stacy, do you have a follow-up question?

I understand your point. However, considering that you operate your own factories, I'm curious why you're facing the current inventory challenges. You have $11.6 billion in inventory, yet it's not positioned correctly. How did that situation arise?

That's largely a win. I'll tell you, Stacy. I think the biggest thing is that if you go back 6 months or so ago and looked at what the outlook was. Core count was absolutely looking like it would increase, but the units were not expected to increase. And every hyperscaler customer we talked to was signaling that. And obviously, it has rapidly increased over the third and fourth quarter. And in talking to a few of them right before this call, I got the feeling like it was going to be a story we'd feel for several years. And yes, the advantage we have is we do have our own fab, so we can squeeze out supply as much as possible, which is what we're working on, but we directionally weren't managing the supply to an expectation that there would be unit increases that significantly in data center.

For the first one, Lip-Bu, I'm curious, when do you think Intel should start getting any credit for external foundry efforts because you mentioned that you might hear of awards in the second half of this year. I assume that you start building the capacity for that, right, sometime late this year or next year. So when do you actually start to get a decent amount of revenue from those customers? And I think you mentioned that building this business will take an incremental amount of resources. So what level of external foundry revenue does Intel need to call this business a success? And when do you get that? Is it '27? Is it '28? Is it later?

Yes. Good question. I think first of all, I think the engagement with our potential external customers on the 14A are very active right now. A couple of key customers are working with us. We expect them to really go through the milestone basis on 0.5 PDK and then starting to look at the test chip and look at how is our yield performance. And it's going to be a process to work with them. And then I think the second half of the year, then they're starting to satisfy, then they're going to be asking us, okay, now this is the particular product we're going to run with your foundry and the production. And then the indication to us and that's the time my discipline is until they have a commitment to the volume, then starting to really build and the foundry expansion so that we can meet their requirements. And then the other part parallelly, they also give us a list of IP. If it's a mobile-related, you have to be low power IP that we need to have. If it is data center related, it clearly will be the performance, the connectivity, all these things that we need to really get ready so that we can serve our customers' requirements. So this is a very complex step and we are very familiar with the right way.

And I'd just say, we probably will be able to give you a lot more color around all of these things at the Analyst Day that Lip-Bu mentioned will have in the back half of the year.

Vivek, do you have a follow-up question?

For my follow-up, I'm curious about the server CPU total addressable market in 2026. How much of that will be x86 and how much will be ARM? If you are supply constrained, does that mean the entire industry is facing supply issues? Do you believe that the market share you can't supply will go to your x86 competitors and to those in the AI sector building ARM-based servers? When do you expect your supply constraints to ease and how much do you think the market will grow?

I believe the current demand is primarily an x86 issue, driven by an upgrade cycle for older networks that need to interface with AI systems, which are underperforming. Therefore, I see this as mainly related to x86. We do have competition in this space, and we will be competing for market share. However, I expect to make significant improvements in supply as the year progresses, so I don’t believe that will be the main factor affecting market share. The focus will be on product development, particularly with advancements like the 16-channel Diamond Rapids and the faster introduction of Coral Rapids. These factors will be crucial for our market share dynamics in the upcoming years.

I think from my side, I think clearly, hyperscale and the high-end OEM, ODM is critical for us on the server side. And then we're basically working with them. Their first choice is the CPU from Intel. And that is a very clear message from them. They will try to get as much as we can give them. And then I think that's the key home driver.

I guess to follow on Stacy's question around supply. Considering your bullish commentary and AI-led demand and how you're supply-constrained, and your peers, TSMC and Samsung, Taylor are aggressively slotting for equipment delivery. Do you worry that if you wait for late 2026 to place orders that the lead times then might be longer than you thought? And as part of that, why wouldn't you look to be more aggressive today?

Yes, maybe I don't know if this is the answer to your question, but I mean we are aggressively getting tools on Intel 710, Intel 3, and 18A. That is happening. And we will be increasing our wafer starts as aggressively as possible on those nodes. What we're holding back on is 14A because 14A is really linked to foundry customers, and it does not make sense to build out significant capacity there until we know that we have the customers that will accept that demand. And so that's just the discipline we're going to have. I'd say the other thing with regard to a lot of this around supply is, Lip-Bu's first focus and our short-term focus is we think we gain a lot of supply just by doing things better with our existing tools and footprint, getting yields improved, getting cycle times improved, and we're aggressively working on that. And we think there's lots of opportunities to improve our supply just on those 2 things that don't require CapEx, quite honestly. And that's something that's probably more unique to us right now than to other foundries.

C.J., do you have a follow-up question?

Yes, John. Just to hit on the press release, you talked about demonstrating technical feasibility on High NA for future HVM. And so just curious, is that something you're still contemplating for 14A? Or is that more of a 10A adoption?

It will be part of our 14A process. Of course, there will be different variants of 14A, but High NA is targeted at 14A.

Lip-Bu, as you look forward to 14A, you talked about engineering engagements with customers. And typically, the largest fabless semiconductor companies in the world want to run their own test chips to assess the new foundry node, and they typically wait for PDK 0.4 or 0.5 before they start their test chip designs. It looks like they can get started now on test chip design with the release of your PDK 0.5. So I guess the question is, have customers commenced test chip designs or are they maybe even further along than that and customers are already running their own 14A test chips now? I mean, in order for them to make decisions on 14A in the second half, they need to be running their test chips fairly soon. So if you give us an update there.

Yes, good question. So I think you're absolutely correct. A couple of customers we are already engaging about the PDK 0.5 and they are looking at the test chip. And also more important is a specific product they're going to run to our fab foundry. And that one, we are working with them. And then, of course, they want to know the capacity, the pricing, those are all in the discussion right now. So that's why I mentioned the second half of this year, they're starting to satisfy; then they can start to say, okay, now we need this volume and we need particular fab from yours to do it. And then also the other part is, do we have all the right IP to serve them? And so those are the things that we are parallelly processing with their supply chain and also their design teams to work with them. So this is a very complex step and that we are very familiar with doing the right way.

Harlan, do you have a follow-up question, please?

Yes. On your server portfolio, I apologize if I missed this earlier, but Clearwater Forest, right, your E-core sort of cloud workload optimized server platform that was targeted to be the first server platform to use your 18A manufacturing and ramp first half of this year. But Lip-Bu, you talked about server roadmap changes to focus on more performance-focused products. So is the team still supporting Clearwater Forest? Or just focusing now on Diamond Rapids? And has the team taped out or taped in your next-gen Xeon 7 Diamond Rapids products and any preliminary views on ramp timing of Diamond Rapids?

Yes, we continue to support this initiative. My emphasis on the 16-channel of Diamond Rapids highlights our commitment to the high-end segment, allowing us to concentrate on delivering competitive products with distinct advantages. Additionally, as I have previously mentioned, multi-threading is crucial for enhancing performance. We are working on this and will introduce it in Coral Rapids. The key consideration now is determining how much we can expedite this process. Customers are eager for updates, prompting me to collaborate with Kevork and his team to explore ways to accelerate our timeline for market delivery.

I have 2, if I can fit them in. But on the memory side and what we're seeing in the market, I'm curious of how you guys are seeing customers react to memory. Is there a potential demand disruption in the PC market? Just any kind of curiosity on what you're seeing in that? And how impactful is memory pricing to the gross margin, given obviously, I think, stronger for longer Lunar Lake demand.

Yes, that's a good question. The industry is indeed facing significant challenges regarding memory constraints and pricing. We've been listening to our customers, particularly larger players in the OEM and hyperscale sectors, who have better access to memory allocations. In contrast, many smaller companies are struggling to secure adequate memory. It's crucial for us to consider how to effectively allocate resources and support the right customers. We want to avoid situations where a CPU is sent to a customer who lacks the necessary memory, preventing them from completing their products. Having the right insights and feedback from our customers is essential for us to meet their needs. Dave?

Yes. I think on the Lunar Lake side, I think we've got what we need based on the current forecast, of course, that could always tick up, and then we would need more memory which would kind of impact gross margins. But we were relatively aggressive in terms of getting the memory early. So I feel like we're in a relatively good place there. Now that said, those margins are low because the memory is in package. So that is an impact to our gross margins as well. But I think we're largely in the place we thought we would be a quarter or 2 ago.

Aaron, do you have a quick follow-up?

I do, and I'll be really quick. I'm curious on the custom ASIC side, you talked about hitting $1 billion of run rate business. How do we think about the progression of that? And how broad is the customer base within that opportunity set?

Good question. I think Dave mentioned earlier, is a $100 billion TAM market opportunity. And we are delighted. We are already in the run rate of $1 billion. It's a robust demand and customers really excited about what we have in terms of the CPU Xeon and also the AI-related momentum. So they're more building a purpose-built silicon for AI and network and cloud. And that part, I think we continue to work on that. And also more important for them is also the advanced packaging, making that more compelling. And that's the advantage of Intel that we can do both to provide the customer delight. And so that, I think, is a good opportunity for us. With that, thank you again for joining us today. As we move forward, I remain focused on disciplined execution and deep collaboration with our customers to seize the meaningful opportunity created by the AI era. While we have a lot more to do, we are confident in the foundation that we built and the progress underway. We're looking forward to providing you another update in April.