The operator introduces the Intel Corporation's Third Quarter 2023 Earnings Conference Call, with a reminder that the call is being recorded. CEO Pat Gelsinger and CFO David Zinsner will give brief comments and then answer questions. The discussion may contain forward-looking statements and references to non-GAAP financial measures. Pat Gelsinger expresses sympathy for those affected by recent attacks in Israel.

In the third quarter, the company exceeded expectations and achieved key operational milestones in process and products, Intel Foundry Services, and their AI strategy. They have made significant progress in their IDM 2.0 transformation, with Intel 7, Emerald Rapids, and Meteor Lake already in the market and ramping up production. They also have a competitive advantage with their EUV tools and are establishing diverse and resilient supply globally.

The company's Intel 3 process is on track to be ready for manufacturing by the end of the year, with two products already in production. They are also working on Intel 20A and Intel 18A, with new innovations in transistor and process architecture. They expect to achieve manufacturing readiness for Intel 20A in the first half of 2024 and for Intel 18A in the second half of 2024. The company is also planning to lead the industry in using glass substrate for high density and performance.

Intel has announced plans to install the world's first high NA EUV tool for commercial use by the end of the year, as part of their efforts to continue modernizing and expanding their technology development team in Oregon. They remain committed to advancing Moore's Law and have made significant progress with early IFS customers. They have also signed with two additional 18A customers focused on high-performance computing and are expecting to conclude negotiations with another major customer before year-end. Additionally, they have expanded their foundry ecosystem through a strategic partnership with Synopsys.

Intel's advanced packaging business is gaining interest from leading AI chip companies, and they have secured two customer AI designs with several more expected by the end of the year. They have also established a partnership with Tower Semiconductor and submitted proposals for major projects in multiple states. Intel plans to provide a deeper update on their foundry business in 2024. They believe AI workloads will drive the semiconductor market to $1 trillion by 2030 and are focused on making AI integration seamless and cost-efficient. However, there is a growing demand for local inferencing as more applications become AI-integrated.

Intel is focused on bringing AI to where the data is being generated and used, rather than relying solely on the cloud. They have seen strong growth in their 4th Gen Xeon processor, with over one-third of shipments related to AI applications. Their AI-enhanced Xeons are leading in performance benchmarks and their road map promises even further improvements. The 5th Gen Xeon processor is already in production and their first E-core Xeon is on track for release in 2024.

Intel's upcoming products, Sierra Forest and Granite Rapids, will offer improved performance and efficiency for cloud-native workloads. The company expects to see growth in the server market and plans to capture a larger share of the accelerator market with its AI accelerators, including Gaudi. Dell is partnering with Intel to deliver Gaudi for their customers, and Intel is also working with Stability.ai to build a large AI supercomputer. The Gaudi road map is on track, with Gaudi3 expected to launch next year.

In 2025, Intel will release Falcon Shores, a product that combines their GPU and Gaudi capabilities. The company's client division, CCG, had a strong quarter due to commercial and consumer gaming SKUs. They expect PC consumption to stay around 270 million units for 2023 and are positive about the long-term outlook for PC TAM. Intel also released the Intel Core Ultra processor, built on Intel 4 and featuring their integrated NPU. Next year, they will release Arrow Lake and Lunar Lake, followed by Panther Lake in 2025. Intel sees the introduction of AIPC as a major turning point in the PC industry, similar to the success of Centrino in 2003.

The advantages of the AIPC are even stronger today, and Intel is accelerating this momentum with their AIPC acceleration program. They are also seeing growth potential in the PC market and early signs of benefits from AI use cases. NEX launched OpenVINO 2023.1 for AI inferencing and deployment, and their developer software tool chains have seen increased engagement. NEX's Q3 results beat forecasts and they remain on track to reduce costs by $3 billion in 2023. Intel's Smart Capital strategy focuses on efficiency and value for stakeholders.

In the third quarter, Intel divested its pluggable module business and exited ten other businesses in the past 2.5 years, generating significant savings. The company's focus on higher-value components and optical I/O solutions for AI infrastructure has been successful, as seen in Mobileye's strong outlook. TSMC has also become a minority investor in Intel's IMS nano fabrication business. Additionally, Intel announced plans to operate PSG as a stand-alone business, with the goal of bringing in private investors and eventually going public. Overall, Intel is making progress in its transformation journey and is on track with its goals, including becoming a global systems foundry for wafer processing and advanced packaging and capitalizing on growth opportunities in AI. The company remains committed to its strategy and is grateful for the efforts of the Intel family.

Dave Zinsner, the Chief Financial Officer of Intel, discusses the company's strong financial results for the third quarter and their progress in their IDM 2.0 transformation. Revenue exceeded expectations across all major lines of business, and gross margin was better than expected due to higher revenue and ASPs. EPS also beat guidance, and operating cash flow and working capital improved significantly. The company also announced the sale of 10% of their IMS nano fabrication business, which, along with other recent transactions, has unlocked over $30 billion of value.

In the third quarter, the CCG business unit saw strong revenue growth and doubled operating profit, with healthy customer inventory levels and expected growth in the market. DCAI also had strong revenue and returned to profitability, with record Xeon ASPs and reduced charges. However, the PSG business is expected to decline in the fourth quarter and for the next few quarters due to inventory burn. NEX revenue exceeded expectations, but network and telco markets are still struggling with inventory and weak demand.

In the third quarter, NEX returned to profitability with operating profit of $17 million, driven by increased revenue and reduced expenses. Intel Foundry Services saw strong growth, while Mobileye continued to perform well with an 18% increase in revenue. The company maintained spending discipline and expects higher operating expenses in the fourth quarter due to seasonal activities and the end of temporary measures. They also expect to achieve $3 billion in spending reductions by 2023. For the fourth quarter, they anticipate revenue growth and are encouraged by the return of historical purchasing cycles in the client business. They expect moderate growth from DCAI, offset by declines in PSG and network weakness.

In paragraph 14, the company discusses their revenue midpoint of $15.1 billion and expects a gross margin of 60% of revenue growth resulting in a Q4 gross margin of 46.5%. They mention their Smart Capital framework and recent capital grants and prepay. They also provide updates on their applications and planned expansions in Europe. The company maintains their prior forecast for net capital intensity and expects most capital offsets to occur in 2024. They highlight their achievements in Q3, including regaining process leadership and delivering on time, securing customers, and exceeding financial expectations. They reaffirm their commitment to their long-term financial targets and express confidence in their position in the semiconductor market. The call is then turned back over to the moderator for the Q&A portion.

The speaker, Timothy Arcuri, is asking about the confusion surrounding the company's gross margin. He wants clarification on the 46.5% gross margin for the year and the statement made by the company's CEO, Pat, about reaching a 60% gross margin in the future. The speaker also mentions the team's performance in the third quarter and the expected fall-through range for the fourth quarter. The speaker suggests that more information will be provided next year when the company closes out 2023.

In this paragraph, the speaker discusses the potential for improved gross margins in the future due to becoming a process leader and launching competitive products. They also mention the implementation of an internal foundry model, which is already showing improvements in the P&L. The speaker believes this will lead to more opportunities and confidence in achieving a 60% gross margin. In response to a follow-up question, they mention that they are receiving good allocation from their major foundry partner.

Pat Gelsinger, CEO of Intel, disagrees with the idea that Intel's 18A node will not be comparable to TSMC's in the same time frame. He believes that their 18A node is a work of art and the best transistor ever built. Intel has already secured three customers for 18A and is making progress on future technologies like high-NA, advanced packaging, and ARM partnerships. Gelsinger also mentions the strong relationship between Intel and TSMC, as they are both competitors, customers, and collaborators. This is a critical relationship in the industry.

Pat Gelsinger, CEO of Intel, discusses the company's partnership with ARM and the potential competition from ARM-based PCs. However, he believes that ARM-based PCs have historically not been significant in the PC market and Intel is confident in their strong roadmap and upcoming AIPC generation. They have already demonstrated their next-generation product, Lunar Lake, which has significant improvements in performance and capabilities.

Intel announced their next generation fab, Panther Lake, and their AI Acceleration program, which already has over 100 ISVs participating. They expect to have over 100 million AI-enhanced PCs in the market in the next two years, creating a large ecosystem. They also see an opportunity for their foundry business in alternative architectures like ARM. Their OpEx for the third quarter was better than expected, and they plan to have $3 billion in cost savings this year and $8-10 billion long term. They have divested or closed out 10 programs or product areas to improve spending.

The company has focused on unlocking value and managing spending, with a goal of reaching 60% gross margins and 40% operating margins. The Gaudi pipeline has doubled in the last 90 days, with a mix of training and inference opportunities, and there is a surge of interest in this category. The company sees inferencing as a significant expansion of workload, with a comparison to weather modeling and usage.

The speaker discusses the market for training and inferencing in the field of AI, highlighting the potential for both Gaudi and Xeon processors. They mention Dell as an example of a company utilizing both processors for different purposes. The demand for Gaudi is worldwide, with a strong presence in the cloud. The speaker also mentions the potential for AI in edge, client, and on-premise data centers. When asked about the impact of China export controls, the speaker states that they primarily affect high-end training and accelerators, but they have seen worldwide demand for their products.

Pat Gelsinger, CEO of Intel, discusses the company's current supply constraints and their efforts to catch up with demand for their Gaudi products. They are also working closely with the Bureau of Industry and Security (BIS) to comply with new regulations, but are confident in their ability to continue deploying products in China. During the earnings call, they also mentioned their foundry business and the signing of new customers, with an event planned for the first quarter.

The company has added two new customers for their Intel 18A product, bringing the total to three. This is a critical milestone in the productization phase and has generated a lot of interest from external customers. Additionally, there has been a surge in interest for Intel's advanced packaging technology, with two new customers and six more in negotiations. This is seen as a faster way to build the business and will lead to revenue next year.

The Synopsys partnership, ARM momentum, and Tower agreement have created a flywheel of momentum for the Intel Foundry Services business. The company is seeing strong demand for PCs and believes that inventory levels are matching demand. They expect the AIPC generation to bring excitement to the category and have additional tailwinds with upcoming launches and support. The company is confident in their roadmap for the future.

Pat and Dave discussed the competitive pressures that Intel faced in the third quarter, which led to some market share losses. However, they were pleasantly surprised by the record ASPs, or average selling prices, due to the faster ramp-up of their new product, Sapphire Rapids, which has a higher ASP. They acknowledged that these competitive pressures have been ongoing for years and are actively working to address them. Overall, they see positive momentum in all aspects of their business and are optimistic about the future.

Intel is confident in their future trajectory, with upcoming products such as Sapphire Rapids and Emerald Rapids driving higher average selling prices. They believe their market competitiveness is improving and customers will see benefits from their strong roadmap. The company is focused on achieving process leadership and improving their product roadmap, which will drive a significant lift in gross margins.

The speaker discusses the potential for improved profitability in the Data Center segment, citing recent investments and improvements in product portfolio. They also mention a goal to reach profitability and compare the segment's potential margins to those of its peers.

The speakers discuss their plans for improving margins and driving profitability in the Data Center business. They also mention the potential for margin expansion across other areas of the company and the positive impact of increasing foundry capacity on overall profitability. The reversal of an inventory reserve also had a significant impact on gross margins in the quarter.

The speaker discusses the impact of underload charges in the quarter and how they will continue to affect the company's operations in the following year. They also mention the situation in Israel and the resilience of the Intel team despite the challenges they face.

Intel's operations in Israel are performing well and are resilient due to their multi-geo supply chain. They have three locations for Intel 7 and are confident in their ability to continue production despite any issues in other regions. There has been a surge in interest in gen AI, which has led to a bias towards investing in it over data center CPUs. However, Intel is confident in the return to normalcy for data center CPU growth and cites anecdotal evidence to support this.

The race for the largest system environments has led to a focus on training large AI models, but the deployment and inferencing of these models is where the true potential lies. Intel's Gen 4 and upcoming Gen 5 processors, as well as their future road map, will greatly improve performance for AI applications. This has been reflected in the buying behavior of customers, with a good uptick in Xeon sales and increased usage of Intel's DevCloud. Intel is also partnering with companies like Deloitte for AI development and optimization on their Xeon platform. Overall, Intel is confident in their position in the growing AI market, with a focus on inferencing at scale on their Xeon processors.

The speaker thanks the listeners for joining the call and expresses thoughts for those affected by recent events in the region. They also express excitement for the momentum and success of their foundry and AI strategies. They invite the listeners to upcoming events, including a launch in New York and a Foundry Day in Q1. The call concludes with the speaker wishing everyone well and encouraging them to stay safe.

This summary was generated with AI and may contain some inaccuracies.