Intel Corporation, Q4 2023 Earnings Call, Jan 25, 2024 - NasdaqGS:INTC

NasdaqGS:INTC

During the Intel Corporation's Q4 2023 Earnings Call, John William Pitzer, the Corporate Vice President of Corporate Planning & Investor Relations, made the following statements:

Opening Remarks

• Introduction:
  • Thanked the operator and acknowledged the presence of attendees.
  • Mentioned that a copy of the Q4 earnings release and earnings presentation were available on the Investor Relations website and during the webcast.
  • Introduced Pat Gelsinger, CEO, and David Zinsner, CFO, who would be speaking.
• Forward-Looking Statements:
  • Noted that the discussion contained forward-looking statements based on the current environment and was subject to risks and uncertainties.
  • Mentioned the inclusion of non-GAAP financial measures and referred listeners to the earnings release, 10-K filing, and other SEC filings for more information on risks and reconciliations.

Transition to Pat Gelsinger

• Introduction of Pat Gelsinger:
  • Passed the call over to Pat Gelsinger for his comments.

Q&A Session Introduction

• Transition to Q&A:
  • Announced the transition to the Q&A portion of the call.
  • Reminded participants to ask one question and a brief follow-up.
  • Invited the operator to take the first question.

Closing Remarks

• Conclusion of the Call:
  • Thanked everyone for joining the call.
  • Acknowledged the strong Q4 results and the achievements of 2023.
  • Expressed excitement about the momentum across the business, including products, business, financial execution, manufacturing technology, and foundry design wins.
  • Invited attendees to the Foundry Direct Connect event on February 21st in San Jose.
  • Concluded the program and thanked everyone for participating.

These remarks by John William Pitzer framed the overall structure of the earnings call, setting the stage for executive commentary and the subsequent Q&A session.

Patrick P. Gelsinger, the CEO and Director of Intel Corporation, provided an overview of Intel's progress and future plans during the Q4 2023 earnings call. Below is a detailed summary of his statements:

Key Points from Patrick P. Gelsinger

1. Q4 Results and Progress

   • Q4 marked the culmination of a year of significant progress towards Intel’s IDM 2.0 transformation.
   • Intel consistently executed on its plan to re-establish process leadership, expand capacity and foundry plans, improve product execution, and integrate AI across its product segments.
   • Solid Q4 results exceeded expectations for the fourth consecutive quarter, with revenue at the higher end of guidance and strong EPS upside due to a relentless focus on driving operating leverage and expense management.

2. Financial Performance

   • Intel met its $3 billion cost savings commitment for fiscal year 2023.
   • Confidence in continued revenue and EPS growth in each quarter of fiscal year 2024.

3. Process Technology Roadmap

   • Intel became the world's first high-volume manufacturer of logic devices using EUV in both the U.S. and Europe, ramping Core Ultra on Intel 4 in Oregon and Ireland.
   • Intel 3 achieved manufacturing readiness in Q4 with solid performance progression.
   • Lead vehicles in Intel 3 are on track, with Sierra Forest expected to launch in H1 2024 followed by Granite Rapids.
   • Excitement about breaking into the angstrom era with Intel 20A and Intel 18A, incorporating both gate-all-around and backside power delivery, 2 years ahead of competition.
   • Arrow Lake, the lead Intel 20A vehicle, will launch this year.
   • Intel 18A is expected to achieve manufacturing readiness in H2 2024, completing the 5 nodes in 4 years journey and returning Intel to process leadership.

4. IFS (Intel Foundry Services)

   • Tremendous progress towards becoming the second-largest external foundry by 2030, with over 40 strategic agreements across various sectors.
   • Delivered the Intel 18A 0.9 PDK and broadened its availability in Q4.
   • Signed a major foundry contract with the United States government and Department of Defense.
   • Completed a significant agreement with UMC to develop a 12-nanometer process platform targeting high-growth markets.
   • More than 75 ecosystem and customer test chips have been taped out, with IFS having over 50 test chips in the pipeline across 2024 and 2025.
   • Lifetime deal value for IFS is now over $10 billion, more than doubling from the previous update.

5. Advanced Packaging Business

   • Captured three additional advanced packaging design wins in 2023, with the majority of revenue starting in 2025.
   • Opened Fab 9 in New Mexico, marking a milestone for high-volume 3D advanced packaging manufacturing.

6. Global Manufacturing Footprint

   • Intel is the only semiconductor company with a global manufacturing footprint, providing resilient access to the right capacity in the right regions at the right time.

7. AI Everywhere Mission

   • Intel sees AI as a key driver of the $1 trillion semiconductor TAM by 2030 and is uniquely positioned to participate in 100% of the TAM for AI silicon.
   • High-performance computing transistors and advanced packaging position IFS to benefit from the AI surge.
   • Intel's product portfolio enables seamless integration and effective running of AI in all applications, from the cloud through the network, into the enterprise, client, and edge.

8. Server Business

   • Solid sequential growth in the server business, with market share believed to be flat with Q3 levels.
   • Shipped over 2.5 million units of 4th Gen Xeon since its launch, with approximately 1/3 of all 4th Gen demand driven by AI.
   • 5th Gen Xeon enables up to 42% higher AI inference performance compared to the industry-leading 4th Gen Xeon.
   • Momentum building with Gen 4 and Gen 5 Xeon ramping well, Sierra Forest and Granite Rapids coming soon, and Clearwater Forest already in fab.

9. Accelerator Pipeline

   • Accelerated pipeline for 2024 grew double digits sequentially in Q4 and is well above $2 billion.
   • Increased supply for Gaudi2 and Gaudi3 to support growing customer demand.
   • Gaudi3 on track to launch this year, expected to deliver performance leadership with 4x the processing power and double the networking bandwidth.

10. Client Computing Group (CCG)

    • CCG performed very well in Q4, posting the third consecutive quarter of double-digit sequential growth.
    • Demand reflected a normalized inventory environment with sustained strength in gaming and commercial segments.
    • Launched Intel Core Ultra, representing the largest architectural shift in decades, ushering in the age of the AIPC (AI-Powered Client Processor).

11. Network and Edge Group (NEX)

    • NEX Q4 results beat internal forecasts, with the division poised for solid growth in 2024 across edge, network, and Ethernet products.
    • OpenVINO adoption grew by 60% sequentially in Q4.

12. Automotive Market

    • Mobileye experienced a sharp inventory correction in Q1 but is expected to improve throughout 2024.
    • Announced the launch of AI-enhanced software-defined vehicles with Geely Zeekr brand as the first OEM partner.
    • Agreement to acquire Silicon Mobility, a fabless silicon and software company specializing in power management SoCs for EVs.

13. Operational and Financial Discipline

    • Transitioned to a new operating model on January 1, 2024, with improved accountability, transparency, and focus on cost.
    • Expect to unlock further cost savings and efficiencies in 2024 and beyond, driving towards the long-term model of 60% gross and 40% operating margins.

14. Future Outlook

    • Confident in performance and financial trajectory for 2024, with a focus on regaining and building on leadership positions in all categories Intel participates in.

15. Closing Remarks

    • Intel is committed to driving long-term value for shareholders.

    • Looking forward to the first Foundry Day, IFS Direct Connect, on February 21, 2024, in San Jose, where Intel will showcase its ecosystem and discuss its process roadmap beyond Intel 18A.

David A. Zinsner, the Executive Vice President and Chief Financial Officer of Intel Corporation, provided financial insights and updates during the Q4 2023 Earnings Call. Below is a detailed summary of his statements:

Financial Performance Overview

• Fourth Quarter Revenue: $15.4 billion, up 9% sequentially and 10% year-over-year, exceeding guidance by $300 million.
• Gross Margin: 48.8%, 230 basis points better than guidance, driven by favorable product mix, ASPs, and improved costs.
• EPS: $0.54, beating guidance by $0.10 on improved gross margins, stronger revenue, and disciplined OpEx management.
• Operating Cash Flow: $4.6 billion.
• Net Inventory: Down more than $300 million and 9 days in the quarter.
• Net CapEx: $5.9 billion, resulting in an adjusted free cash flow of negative $1.3 billion.
• Dividends Paid: $0.5 billion in the quarter.

Business Unit Results

• Client Computing Group (CCG): Revenue of $8.8 billion, up 12% sequentially and 33% year-over-year. Operating profit was $2.9 billion, up more than $800 million sequentially and nearly $2.4 billion year-over-year.
• Data Center and AI Group (DCAI): Revenue of $4 billion, up 4% sequentially. Operating profit was $78 million, roughly flat sequentially.
• Network and Edge Group (NEX): Revenue of $1.5 billion, up 1% sequentially. Operating loss of $12 million, down modestly quarter-over-quarter.
• Intel Foundry Services (IFS): Revenue of $291 million, down modestly sequentially but up 63% year-over-year. Operating loss was $113 million.
• Mobileye: Record revenue of $637 million, up 20% sequentially and 13% year-over-year. Record operating profit of $242 million, up 42% sequentially and 15% year-over-year.

Progress Towards IDM 2.0 Strategy

• Financial Commitments: Delivered revenue, gross margin, operating margin, and EPS growth each quarter.
• Spending Reductions: Achieved the 2023 commitment of $3 billion of spending reductions.
• Working Capital Initiatives: Yielded roughly $2 billion of cash in 2023, helping to meet the commitment for roughly breakeven adjusted free cash flow in the second half of the year.

Q1 2024 Guidance

• Revenue: Expected to be $12.2 billion to $13.2 billion.
• Gross Margin: Approximately 44.5%.
• Tax Rate: 13%.
• EPS: $0.13.
• Headwinds: Material inventory corrections in Mobileye and PSG, significant drop in IFS revenue, and cyclical weakness in wafer equipment buying impacting IMS business.

Long-Term Financial Objectives

• Capital Framework: Growing contributions from the SCIP agreement with Brookfield and progress toward government incentives in the U.S., Europe, and Israel.
• CapEx: On track to the aggregate 2023 through 2024 guidance of net CapEx spending in the mid-30s as a percent of revenue, with offsets towards the high end of the 20% to 30% range.

Internal Foundry Reporting Structure

• Improved Accountability: Improved accountability, transparency around cost and value drivers, and increased focus on driving higher rates of return for owner's capital.
• Historical Financials: Intent to provide recast historical financials in the form of an 8-K.
• Separate Legal Entity: Standing up a separate legal entity for manufacturing, technology development, and IFS is important to foundry customers, expected to have that structure in place in the second half of 2024.

Summary

Zinsner expressed confidence in the company's performance and financial trajectory for the year ahead, highlighting the strong foundation of financial discipline set in 2023 and the company's participation in a large and growing semiconductor TAM. He also mentioned the momentum in the foundry and AI assets and the commitment to long-term financial objectives.