INTEL CORP (INTC) FY 2023 MD&A

Management's Discussion and Analysis

Our Products

We are a global IDM of CPUs and related solutions that we design, develop, manufacture, market, sell, support, and service. Our CPUs and related solutions are incorporated in computing and related end products and services, and utilized globally by consumers, enterprises, governments, and educational organizations. Our customers primarily include OEMs, ODMs, cloud service providers, and other manufacturers and service providers, such as industrial and communication equipment manufacturers and other cloud service providers who buy our products through distributor, reseller, retail, and OEM channels throughout the world. We market and sell these products directly through our global sales and marketing organizations and indirectly through channel partners. We manufacture our products at our fabrication and assembly and test facilities located throughout the world.

Our product offerings provide end-to-end solutions, scaling from data center to network, PCs, edge computing, and the emerging fields of AI and autonomous driving, to serve an increasingly smart and connected world. Products, such as our gaming CPUs, may be sold directly to end consumers, or they may be further integrated by our customers into end products such as notebooks and storage servers. Combining some of these products—for example, integrating FPGAs with Intel Xeon processors in a data center solution—enables incremental synergistic value and performance. In 2023 we launched new products, including the 13th Gen Intel Core mobile processor family, the 4th Gen Intel Xeon Scalable processors with Intel vRAN Boost, and the Intel Core Ultra processors, which feature our first integrated neural processing unit for power-efficient AI acceleration and local inference on the PC.

Our diverse product line includes CPU and chipset, an SoC, or a multichip package based on Intel® architecture that processes data and controls other devices in a system. The primary CPU products in CCG are our Intel Core processors, which include designs specifically for notebook and desktop applications. The primary CPU product in DCAI is our Intel Xeon processor, which includes solutions for data center compute, networking, and the intelligent edge. The primary offerings of NEX include Intel Xeon, Intel Core, and Intel Atom® processor products.

During 2023, we managed our business through the operating segments that are presented below and have included the 2023, 2022 and 2021 financial results for each segment."Note 3: Operating Segments" within the Notes to Consolidated Financial Statements of this Form 10-K reconciles our segment revenues presented below to our total revenues, and our segment operating income (loss) presented below to our total operating income (loss), for each of the periods presented. We have also included a discussion of our 2023, 2022 and 2021 consolidated results of operations and related information subsequent to the operating segment discussion below.

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Market and Business Overview

Market Trends and Strategy

In 2023, the PC market started to stabilize from a soft macroeconomic environment and inflationary pressures, with PC supply and demand levels beginning to normalize. We remain positive on the long-term outlook for PCs, as household density is stable to increasing, educational device penetration rates remain low outside of the US, and PC usage remains elevated compared to pre-pandemic rates1. Commercial growth opportunities also remain as corporations expand the size of their PC fleets, while also replacing older devices. Currently, approximately 200 million commercial devices are more than four years old2.

We see the AI PC as a critical inflection point for the PC market over the coming years, and we believe we are well positioned to capitalize on the emerging growth opportunity of AI. We believe that the PC is as essential as ever, and we expect our leadership in client AI to further support our original forecasted long-term PC TAM of approximately 300 million units3. Together with our industry partners, we are working to increase demand and drive market growth through enhanced PC capabilities, which we expect will lead to greater market penetration and faster PC refresh cycles.

As we continue on our strategy to develop more competitive products and more capabilities for customers, we are designing our product roadmap to drive product leadership grounded in a philosophy of openness and choice. We deliver value to our customers by leveraging our engineering capabilities and working with our partners across an open, innovative ecosystem to deliver technology that drives every major vector of the computing experience, including performance, power efficiency, battery life, connectivity, graphics, and form factors, to create the most advanced PC platforms.

Products and Competition

We released our 14th Gen Intel Core desktop processor family, delivering improved single-threaded and multi-threaded performance when gaming, streaming, and recording. In addition, we released our first Intel Core Ultra family of processors, which utilizes a disaggregated architecture and is the first PC platform built on Intel 4 technology. Our latest processor family is the first client processor to feature a dedicated NPU for AI acceleration and delivers improved power efficiency and graphics performance. Intel Core Ultra represents an inflection point in Intel's client processor roadmap as we usher in the age of the AI PC. With new capabilities in the PC, including significantly improved battery life, AI capabilities with our NPU and GPU products, and up to double the graphics performance with Intel Core Ultra processors, we seek to provide compelling reasons to drive refresh in commercial and consumer markets. We expect to deliver more than 230 Intel Core Ultra designs to market.

There is strong demand for our 13th Gen Intel Core processor family, which features Intel® Thread Director technology and our second-generation performance hybrid architecture. We expect to deliver more than 300 designs from partners across major multi-national corporations and leading manufacturers.

We continue to innovate beyond the CPU to deliver premium PC experiences with Intel Evo Edition laptops and Intel vPro Platforms. We worked with industry partners to co-engineer and deliver new experiences with Intel Evo Edition, which are designed to deliver key experience indicators such as responsiveness, battery life, intelligence collaboration, and Intel Unison Multi-Device Experience. Intel vPro is designed for enterprise needs and delivers increased productivity, connectivity, security features, and remote manageability.

We operate in a particularly competitive market. In processors, we compete with Advanced Micro Devices, Inc. (AMD) and vendors who design applications processors based on ARM architecture*, such as Qualcomm Inc. (Qualcomm), and Apple Inc. (Apple), with its M1 and M2 products. We expect this competitive environment to continue to intensify in 2024.

We remain committed to creating an open ecosystem to foster growth and technology innovations. We embrace and collaborate with a global ecosystem of industry partners to deliver leadership technologies together. We launched the industry's first AI PC Acceleration Program, designed to provide the software ecosystem with engineering tools and resources to enable AI on more than 100 million PCs through 2025. We also announced a collaboration with Microsoft to drive the development of AI on personal computing, with Intel Core Ultra processors and Windows 11 expected to scale across the ecosystem of Intel and Microsoft OEM and ISV partners.

During 2023, we continued to diversify our product strategy across nodes, advance our packaging capabilities with disaggregated silicon, and balance internal and external manufacturing. We increased our levels of operating inventory and worked with our customers to develop strategically located supply hubs that forward position inventory. In addition, we continue to invest in a globally diverse supply chain that enables us the flexibility and proximity to support customers. These have further enhanced the service and responsiveness we are able to provide our customers.

1Source Intel calculated PC density from industry analyst reports.

2Source: Intel calculated volume of devices over four years old from industry analyst reports and internal data.

3Source: Intel calculated multi-year TAM forecast derived from industry analyst reports.

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Financial Performance

Revenue Summary

2023 vs. 2022

▪Notebook revenue was $17.0 billion, down $1.8 billion from 2022. Notebook volume decreased 5% from 2022, driven by lower demand across market segments, partially offset by increased volume in the second half of the year as customer inventory levels normalized compared to higher levels in the first half. Notebook ASPs decreased 5% from 2022 due to relative strength in the education market segment resulting in a higher mix of small core products combined with a higher mix of older generation products.

▪Desktop revenue was $10.2 billion, down $495 million from 2022. Desktop volume decreased 9% from 2022, driven by lower demand across market segments, partially offset by increased volume in the second half of the year as customer inventory levels normalized compared to higher levels in the first half. Desktop ASPs increased 5% from 2022, due to an increased mix of product sales to the commercial and gaming market segments.

▪Other revenue was $2.1 billion, down $229 million from 2022, primarily driven by the continued ramp down of our legacy smartphone modem business and lower demand for our wireless and connectivity products as a result of lower notebook volumes.

2022 vs. 2021

▪Notebook revenue was $18.8 billion, down $6.7 billion from 2021. Notebook volume decreased 36% from 2021, driven by lower demand in the consumer and education market segments, and notebook ASPs increased 15% from 2021 due to an increased mix of commercial and consumer products and a lower mix of education products.

▪Desktop revenue was $10.7 billion, down $1.8 billion from 2021. Desktop volume decreased 19% from 2021, driven by lower demand in the consumer and education market segments, and desktop ASPs increased 5% from 2021, primarily from an increased mix of commercial products.

▪Other revenue was $2.3 billion, down $870 million from 2021, primarily driven by the continued ramp down of our legacy smartphone modem business and lower demand for our wireless and connectivity products.

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Operating Income Summary

Operating income increased 17% year over year, and operating margin was 22% in 2023 and 18% in 2022.

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Market and Business Overview

Market Trends and Strategy

Data is a significant force in society and is generated daily at an unprecedented pace. The desire to harness insights from data to drive better outcomes for businesses and society is ever expanding. AI is becoming pervasive in nearly all applications, creating the potential for intelligence everywhere, and enabling powerful new uses of compute resources across all market segments. The installed base of Intel Xeon processors, combined with our portfolio of heterogeneous compute solutions (FPGAs, GPUs, IPUs, and AI accelerators), we believe positions us to lead in this high-growth area. DCAI is integral to our growth in AI through deep investments in the AI ecosystem, developer tools, frameworks, networking and memory, technologies, and open standards to drive a scalable path forward.

We take a system-level approach that supplies the necessary hardware and software optimized for power and performance. Our technology is differentiated at the system level and in high-growth workloads based on our integrated hardware acceleration engines and software. For example, architected into our Intel Xeon processors are Intel® Advanced Matrix Extensions (Intel® AMX) for AI acceleration; Intel® Software Guard Extensions (Intel® SGX), providing enclaves of protected memory designed to deliver enhanced security for sensitive data; and Intel® Crypto Acceleration, which is designed to deliver breakthrough performance across cryptographic algorithms. We believe this acceleration and performance will continue to drive our differentiated value and growth across our customer base.

Products and Competition

Our products and services include:

We provide our customers with an extensive portfolio of silicon and software products, engineered to deliver workload-optimized performance. Our hardware portfolio comprises CPUs, GPUs, domain-specific accelerators, and FPGAs, designed to support the performance, agility, and security that our customers demand. Deployment of our silicon platforms is accelerated by a software development environment that enables workload mobility across our heterogeneous architectures and enables developers to execute their workloads on the hardware that best meets application requirements.

Our competitors include AMD, providers of GPU products such as NVIDIA, companies developing their own custom silicon, and new entrants and incumbents developing ARM- and RISC-V-based products customized for specific data center workloads. We expect this competitive landscape to continue.

The Intel Xeon Scalable processor family delivers advanced CPUs for the data center, the network, and the edge, driving industry-leading performance, manageability, and security with differentiated features and capabilities. In 2023, we launched the 5th Gen Intel Xeon Scalable processors, which utilize modular SoCs for increased scalability and flexibility to deliver a range of products that meet the growing scale, processing, and power efficiency needs for AI, cloud, and enterprise installations.

Our Intel Gaudi 2 AI deep learning processor is engineered to allow customers to benefit from the most cost-effective, high-performance training and inference alternative to comparable GPUs.

Our FPGA and structured ASIC portfolio enhances Intel's ability to meet the needs of customers in the data center, across the network, and at the edge. In 2023, we released 21 new products within our FPGA business. These include the Intel Agilex 9 and Intel Agilex 7 product families, which are intended to handle the increased demand for customized workloads, including enhanced AI capabilities, and to provide lower total cost of ownership.

Our Intel Xeon CPU Max Series, introduced in 2022, was the first and only x86-based processor with high bandwidth memory for HPC and AI workloads. The Intel Data Center GPU Max Series 1550 and 1100 are now broadly available through OEM systems. Our Intel CPU Max Series includes 64GB of on-package high bandwidth memory, which benefits data-intensive HPC workloads. Our Intel Data Center GPU Flex Series offers customers a flexible, general-purpose GPU for the data center and the intelligent visual cloud. We delivered and installed, in collaboration with Argonne National Laboratory (ANL) and Hewlett Packard Enterprise (HPE), the largest cluster of Max GPUs to the Aurora Supercomputer at ANL.

The ubiquity of Intel Xeon in the installed base, along with our heterogeneous compute solutions combined with software that unlocks the value of our hardware, enable our customers to develop highly differentiated solutions. Our integrated approach has created significant value for Intel, our customers, and our partners by helping us mitigate risks, reduce costs, build brand value, and identify new market opportunities to apply our technology to address our customers' and society's most complex issues.

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Financial Performance

Revenue Summary

2023 vs. 2022

Revenue was $15.5 billion, down $3.9 billion from 2022, driven by a decrease in server revenue. Server volume decreased 37% from 2022, due to lower demand in a softening CPU data center market. Server ASPs increased 20% from 2022, primarily due to a lower mix of hyperscale customer-related revenue and a higher mix of high core count products.

2022 vs. 2021

Revenue was $19.4 billion, down $3.3 billion from 2021, due to a decrease in server revenue, partially offset by higher other DCAI revenue. Server volume decreased 16% from 2021, led by enterprise customers in a competitive environment, and due to customers tempering purchases to reduce existing inventories in a softening data center market. Server ASPs decreased 5% from 2021, driven by a higher mix of revenue from hyperscale customers. Other DCAI revenue increased 18% from 2021 primarily driven by growth in our FPGA business.

Operating Income (Loss) Summary

We had an operating loss of $530 million in 2023, compared to operating income of $1.3 billion in 2022.

Market and Business Overview

Market Trends and Strategy

The Internet is undergoing a shift toward a cloud-to-edge infrastructure, combining unrivaled scale and capacity in the cloud with faster response times at nearby edges. As AI is transforming and automating every industry—from factories to smart cities to hospitals—the demand for high-performance computing at the edge has expanded exponentially. Networks are moving toward software, becoming more programmable and flexible.

Our network and edge solutions aim to unleash the power of intelligent edge solutions for our customers and move the world's networks to a software infrastructure that runs on Intel technologies by (1) providing edge-optimized, AI-enabled compute and connectivity solutions to run every workload at the edge, between the cloud and the end user, and (2) deploying software platforms that enable developers to build, deploy, run, manage, connect, and secure distributed edge infrastructure, applications, and edge AI across several verticals, such as industrials, federal, aerospace, retail, healthcare, education, and smart cities.

Products and Competition

With a greater emphasis on systems and solutions designed to harness the growth of data processed at the edge to yield insights, our competitive landscape has shifted beyond application-specific standard product vendors to include cloud, network, and AI computing platform providers.

Today, we speed the deployment of network and edge computing solutions based on our open software frameworks, AI-enabled platform solutions, and edge and network-optimized broad silicon portfolio to address a wide range of applications across several markets.

On-Premises Edge: More than just providing silicon, we partner with companies to design and deliver solutions to help a wide range of customers transform their businesses and take advantage of the rapidly increasing number of connected and intelligent devices. We develop high-performance, AI-enabled compute platforms that solve for technology and business use cases that scale across several industries, such as retail, education, manufacturing, energy, healthcare, and medical.

We deliver edge-optimized AI-enabled platforms for edge applications based on our Intel Xeon, Intel Core, and Intel Atom processor portfolio, which reduces operational complexity for our customers and helps our customers create, store, and process data at the edge so they can analyze it faster and act on it sooner. We also build differentiated networking offerings that keep pace with industry speeds and deliver unique features needed for the intelligent edge, such as networking offloads, time-sensitive networking, and scalable reliable transport.

Enterprise Networking: Enterprises are evolving their networks to connect new and varying environments, host services from anywhere between cloud and edge, deliver heightened service levels, and handle growing volumes of devices and data. We are leading the world's shift to run networking workloads in software and create network function virtualization to provide our customers with more efficient, cost-effective, and programmable platforms that enable secure, agile, and reliable networking solutions from edge to cloud. We work with our ecosystem partners of over 500 network builders to help enterprises optimize their networks with right-sized compute and connectivity requirements for current and future needs.

Telecommunication Networks: We lead 5G core network deployments, demonstrating that 5G base stations can be almost entirely built from software running on Intel Xeon processors with Intel vRAN Boost. We continue to drive the transformation from fixed-function networks onto Intel Xeon Scalable processors and Intel Xeon D processors coupled with our FlexCore and FlexRAN™ software. Our customers are tier-one global communication service providers and their equipment suppliers. Our software-based cloud RAN platform is designed to allow operators to deploy the fastest cloud-native 5G infrastructure quickly and efficiently at scale to meet the needs of their end customers.

Cloud Networking: Our cloud customers require uncompromised data center network performance and reliability driven by increased networking investments to support AI cluster deployments. We address these requirements by providing our open-standards-based NICs and IPUs. The IPU, a new class of product, is an open and programmable compute platform that frees up more compute cycles for customers by running infrastructure workloads in a separate, secure, and isolated set of CPU cores.

Software and Platforms: Our customers' need for flexibility, programmability, and versatility drives workloads toward software and away from fixed-function hardware. As networking in the cloud, core network, 5G, and private networks move to software, and as our edge customers increasingly deploy AI applications, we aim to simplify innovation on Intel hardware. We support our customers' software strategy at the edge with an edge-native software platform with modular building blocks, premium service, and support offerings. The platform enables developers to build, deploy, run, manage, connect, and secure distributed edge infrastructure, applications, and edge AI. The platform is a horizontal approach to scaling the needed infrastructure for the intelligent edge and hybrid AI, as well as bringing together an ecosystem of Intel and third-party vertical applications. Offering unique optimizations for network, the Internet of Things, hybrid AI, and edge workloads on Intel architecture, the platform also broadly supports diverse architectures and can be consumed on a modular basis—avoiding vendor lock-in. The platform delivers a seamless cloud-like experience, combining truly edge-native capabilities for security and zero-touch management with our deep industry experience and unrivaled ecosystem.

Financial Performance

Revenue Summary

2023 vs. 2022

Revenue was $5.8 billion, down $2.6 billion from 2022, as customers tempered purchases to reduce inventories and adjust to a lower demand environment across product lines.

2022 vs. 2021

Revenue was $8.4 billion, up $744 million from 2021, driven by higher Ethernet ASPs and increased demand for 5G products, partially offset by lower demand for Network Xeon. Ethernet demand declined in Q4 2022 due to lower server demand, and edge demand declined in Q4 2022 due to macroeconomic factors.

Operating Income (Loss) Summary

We had an operating loss of $482 million in 2023, compared to operating income of $1.0 billion in 2022.

Market and Business Overview

Market Trends and Strategy

In 2023, the automotive industry grew with an approximately 9% increase in global vehicle production year over year. We expect industry ADAS volumes to grow faster than overall global vehicle production in the coming years and anticipate long-term ADAS growth from increases in the percentage of vehicles that are equipped with basic ADAS features from the factory. Despite our expectation for a decline in Mobileye ADAS volumes in 2024 due to a correction of inventory with our customers, we continue to believe we will benefit from positive industry ADAS growth over the medium-term. In addition to potential volume growth, our portfolio of advanced solutions has the potential to drive higher average system price over time.

Beyond ADAS solutions, we believe that the availability of AVs will cause a significant transformation in mobility, including vehicle ownership and utilization. We expect that AV technology will eventually be accessed by consumers through shared-vehicle MaaS networks, as well as in consumer-owned and operated AVs. We are pursuing this market trend by using our eyes-on/hands-off Mobileye SuperVision solution as a baseline to scale to our eyes-off/hands-off Mobileye Chauffeur consumer AV product in a variety of operational design domains. As it relates to AMaaS, we intend to primarily go to market by supplying Mobileye Drive™ self-driving system to transportation network companies, public transit operators, and suppliers of AV-ready vehicle platforms. In some cases, we expect to bundle our Mobileye Drive self-driving system with Moovit’s urban mobility and transit intelligence application and its global user base.

Products and Competition

We currently ship a variety of ADAS solutions to a large number of global automakers. We are recognized for our top-rated safety solutions globally, and since 2007, we have introduced numerous industry-first ADAS products.

We are building a robust portfolio of end-to-end ADAS and autonomous driving solutions to provide the capabilities needed for the future of autonomous driving, leveraging a comprehensive suite of purpose-built software and hardware technologies. We pioneered “base” ADAS features to enhance vehicle safety and to meet global regulatory requirements and safety ratings with our driver assist solution and we have since created a new category of ADAS with our Cloud-Enhanced Driver-Assist™ and premium driver assist offerings, such as Mobileye SuperVision. By leveraging Mobileye SuperVision’s full-surround computer vision and True Redundancy™, we are developing Mobileye Chauffeur, our consumer AV solution and Mobileye Drive, our eyes-off/hands-off autonomous driving solution designed for fleet deployment. Our current offerings to Tier 1 and OEM customers do not include cameras, radars, lidar systems, or other sensors (except in particular cases). We intend in the future to offer radar and lidar products that are currently in development stages.

The ADAS and autonomous driving industries are highly competitive. In the ADAS and consumer AV market, we face competition primarily from other external providers, including Tier 1 automotive suppliers and silicon providers, as well as in-house solutions developed by OEMs to a certain extent. Our Tier 1 customers may be developing or may in the future develop competing solutions. In the autonomous driving market, including AMaaS and consumer AV, we face competition from technology companies; internal development teams from the automakers themselves, sometimes in combination with investments in early-stage autonomous vehicle technology companies, Tier 1 automotive companies, as well as robotaxi providers.

1Source: S&P Global Production Forecast

Financial Performance

Revenue and Operating Income Summary

2023 vs. 2022

Revenue was $2.1 billion, up $210 million from 2022, primarily driven by higher demand for EyeQ products. Operating income was $664 million, down $26 million from 2022.

2022 vs. 2021

Revenue was $1.9 billion, up $483 million from 2021, primarily driven by higher demand for EyeQ products and Mobileye SuperVision systems. Operating income was $690 million, up $136 million from 2021, primarily due to higher revenue, partially offset by increased investments in leadership products.

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Market and Business Overview

Market Trends and Strategy

The chip industry is undergoing a structural transformation driven by:

▪Five superpowers: ubiquitous compute, pervasive connectivity, cloud-to-edge infrastructure, AI, and sensing;

▪A generational shift in computer architectures: the move from system on chip to system of chips (chiplets), increased tailoring of chips to workloads, especially AI, and the vertical integration into chipmaking by OEMs and CSPs;

▪Increasing costs of R&D and capacity for advanced node technologies; and

▪Supply chain risk highlighted by geo-political issues and the growing need for a resilient, secure, and sustainable global supply chain.

These transformational trends are driving significant semiconductor market growth in leading-edge silicon and packaging technologies, especially in systems of chips for AI applications. Customers have to make complex design choices at every level of the system, from packaging technologies, process nodes, interconnects, physical IP, and compute elements to software. The abundance of technology choices and optimizations is adding complexity in design, technology, integration, and manufacturing.

Our IDM 2.0 strategy includes our pursuit of these complex manufacturing and market growth opportunities by making significant capital investments in leading-edge semiconductor technologies in order to create foundry capacity and establish IFS as a major provider of foundry services that provides semiconductor manufacturing solutions for others and for ourselves. We have made and expect to continue to make significant capital investments in furtherance of this strategy.

Products and Competition

We seek to address this tectonic shift in the chip industry by enabling our customers to create optimized systems of chips by combining the best technologies from Intel and the ecosystem. We believe Open System Foundry is a world-class foundry offering, delivered from a resilient, secure, and sustainable source of supply and complemented by access to the systems of chips capabilities from Intel. The basic foundry offering is advanced process technologies backed by an ecosystem of IP, EDA, and design services, which enable customers to design as they would with other foundries. The systems of chips capabilities include advanced packaging technologies, software to accelerate bring-up and integration of complex chips, and driving standards that will improve system performance.

With our IFS accelerator program members and the Arm and Synopsys agreements, we believe we are well on the way to building out a world-class foundry offering. With the rise of AI, our advanced packaging business is expected to be another unique advantage for Intel. Chips created with us or other foundries can be packaged using Intel's advanced packaging technologies, including 2D and 2.5D/3D solutions designed to enable large, highly scalable packages at competitive costs. We continue to drive technologies, capabilities, and standards needed to optimize systems of chips, including the Universal Chiplet Interconnect Express* standard for communication between chips in a system, which was demonstrated in silicon in 2023. We accelerate our customers' designs by providing services and software that leverage Intel's vast experience as a systems company.

Our competitors are mostly pure-play foundries that focus on delivering a pure-play foundry offering from fabrication plants based primarily in Asia. Of the five major semiconductor foundries, TSMC, Samsung, Global Foundries (GF), United Microelectronics Corporation (UMC), and Semiconductor Manufacturing International Corporation (SMIC), only Samsung is an IDM and foundry, and only GF is headquartered in the US. TSMC leads the market with 59% market share, followed by Samsung at 16% in 20221. Neither Samsung nor TSMC currently offers its most advanced nodes outside of Asia and both have limited advanced node capacity in the US.

We believe the Open System Foundry model delivers differentiated capabilities to help our customers lead in their industries while bringing stability to the global semiconductor supply chain. The momentum and customer commitments we are seeing demonstrate that our strategy and offerings are resonating, and we look to build on this success in 2024 and in future periods.

1Source: TrendForce

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Financial Performance

Revenue and Operating Income (Loss) Summary

2023 vs. 2022

Revenue was $952 million, up $483 million from 2022, driven by higher packaging revenue. We had an operating loss of $482 million, compared to an operating loss of $281 million from 2022, primarily due to increased spending to drive strategic growth.

2022 vs. 2021

Revenue was $469 million, up $122 million from 2021, primarily driven by higher sales of multi-beam mask writer tools. We had an operating loss of $281 million, compared to operating income of $76 million in 2021, primarily due to increased spending to drive strategic growth.

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Consolidated Results of Operations

For additional key highlights of our results of operations, see "A Year in Review."

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Revenue

Segment Revenue Walk $B

2023 vs. 2022

2023 revenue was $54.2 billion, down $8.8 billion, or 14%, from 2022. CCG revenue decreased 8% from 2022 primarily due to lower notebook and desktop volume driven by lower demand across market segments, partially offset by increased volume in the second half of the year as customer inventory levels normalized compared to higher levels in the first half. Notebook ASPs decreased due to the relative strength in the education market segment resulting in a higher mix of small core products combined with a higher mix of older generation products, and were partially offset by higher desktop ASPs due to an increased mix of product sales to the commercial and gaming market segments. DCAI revenue decreased 20% from 2022 due to lower server volume resulting from a softening CPU data center market, which was partially offset by higher server ASPs from a lower mix of hyperscale customer-related revenue and a higher mix of high core count products. NEX revenue decreased 31% from 2022 as customers tempered purchases to reduce existing inventories and adjust to a lower demand environment across product lines.

Incentives offered to certain customers to accelerate purchases and to strategically position our products with customers for market segment share purposes, contributed approximately $700 million to our revenue during Q4 2023, the impacts of which were contemplated in our financial guidance for Q1 2024, as included in our Form 8-K dated January 25, 2024.

2022 vs. 2021

2022 revenue was $63.1 billion, down $16.0 billion, or 20%, from 2021. CCG revenue was down 23% from 2021 due to lower notebook and desktop volume in the consumer and education market segments, and lower revenue due to the continued ramp down from the exit of our 5G smartphone modem business and lower demand for our wireless and connectivity products. Notebook volume decreased, driven by lower demand in the consumer and education market segments, while ASPs increased due to the resulting product mix. Desktop volume decreased, driven by lower demand in the consumer and education market segments while ASPs increased due to an increased mix of commercial products. DCAI revenue decreased 15% from 2021 due to lower server demand from enterprise customers, and due to customers tempering purchases to reduce existing inventories in a softening data center market. The decrease was partially offset by higher revenue from our FPGA business. Server ASPs decreased due to customer and product mix. NEX revenue increased 10% from 2021, driven by higher Ethernet ASPs and increased demand for 5G products, partially offset by lower demand for Network Xeon. Mobileye revenue increased 35% from 2021, primarily driven by higher demand for EyeQ products and Mobileye Supervision systems. The decrease in our "all other" revenue was due to revenue from the divested NAND memory business of $4.3 billion recognized in 2021, for which historical results are recorded in “all other,” and $584 million of revenue recognized in 2021 from a prepaid customer supply agreement.

Incentives offered to certain customers to accelerate purchases and to strategically position our products with customers for market segment share purposes, particularly in CCG, contributed approximately $1.7 billion to our revenue during Q4 2022.

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Gross Margin

We derived most of our overall gross margin in 2023 from the sale of products in the CCG and DCAI operating segments. Our overall gross margin dollars in 2023 decreased by $5.2 billion, or 19%, compared to 2022, and in 2022 decreased by $16.9 billion, or 39%, compared to 2021.

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We are making capital investments in furtherance of our IDM 2.0 strategy. As of December 30, 2023, our capital investments classified as construction in progress totaled $43.4 billion ($36.7 billion as of December 31, 2022). These assets have not yet been placed into service and have not yet begun depreciating. As these construction-in-progress assets are placed into service, we expect to incur depreciation expense that impacts future production costs and, ultimately, cost of sales. To the extent we are unable to grow our revenues to offset these production costs, our gross margin and operating income will be unfavorably affected. Additionally, we could incur asset impairments on property, plant, and equipment assets if our IDM 2.0 strategy is not successful.

Effective January 2023, we increased the estimated useful life of certain production machinery and equipment from 5 to 8 years. When compared to the estimated useful life in place as of the end of 2022, we estimate total depreciation expense in 2023 was reduced by $4.2 billion. We estimate this change resulted in an approximately $2.5 billion increase to gross margin, $400 million decrease in R&D expenses, and $1.3 billion decrease in ending inventory values. These estimates are based on the assets in use and under construction as of the beginning of 2023 and are calculated at that point in time. Most of the depreciation expense associated with this useful life change is included in overhead cost pools and is combined with other costs and other depreciation expense from assets placed into service after this calculation was performed, for which such costs are subsequently absorbed into inventory as each product passes through our manufacturing process. As a result, the actual amount of impact from the useful life change that is included in our 2023 operating results and financial position is impractical to individually and specifically quantify on a year-over-year basis.

Operating Expenses

Total R&D and MG&A expenses for 2023 were $21.7 billion, down 12% compared to 2022. These expenses represent 40.0% of revenue for 2023 and 38.9% of revenue for 2022. In support of our strategy, we continue to make significant investments to accelerate our process technology roadmap. This requires increased investments in R&D and focused efforts to attract and retain talent. We have implemented certain cost-cutting measures while we continue to improve our product execution.

Research and Development

Marketing, General, and Administrative

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Restructuring and Other Charges

The 2022 Restructuring Program was approved to rebalance our workforce and operations and to create efficiencies and improve our product execution in alignment with our strategy. In 2023, activity related to the 2022 Restructuring Program consisted of cash settlements of previously accrued employee severance and benefit arrangements, as well as incremental accruals throughout the year and was substantially complete as of December 30, 2023. The 2022 Restructuring Plan, in conjunction with other initiatives, reduced our cost structure and allowed us to reinvest certain of these cost savings in resources and capacity to develop, manufacture, market, sell, and deliver our products in furtherance of our strategy. The cumulative cost of the 2022 Restructuring Program as of December 30, 2023 was $1.3 billion.

Litigation charges and other includes a $1.2 billion benefit in 2023 due to a reduction in the previously accrued $2.2 billion charge as a result of developments in the VLSI litigation in Q4 2023. 2023 charges also include a $401 million charge for an EC-imposed fine. In 2009, we recorded and paid an EC-imposed fine that was subsequently annulled, resulting in a benefit of $1.2 billion in 2022. Also in 2023, we mutually agreed with Tower to terminate the acquisition agreement that was entered into during 2022 and, as a result, we paid a $353 million termination fee to Tower in accordance with the terms of the agreement.

Gains (Losses) on Equity Investments and Interest and Other, Net

Gains (Losses) on Equity Investments, Net

Ongoing mark-to-market adjustments recognized in 2023, 2022, and 2021 were primarily driven by our investment in Montage Technology, Co. Ltd. (Montage).

In 2023, we recognized $243 million of initial fair value adjustments in sale of equity investments and other related to the public market offerings of four of our portfolio companies; in 2022, we recognized $278 million of initial fair value adjustments related to the public market offerings of five of our portfolio companies; and in 2021, we recognized $447 million related to the public market offerings of four of our portfolio companies.

In 2022, the sale of McAfee Corp. (McAfee) consumer business was completed, and we received $4.6 billion in cash for the sale of our remaining share of McAfee, recognizing a $4.6 billion gain in sale of equity investments and other. In 2021, we recognized McAfee dividends of $1.3 billion, which included a special dividend of $1.1 billion paid in connection with the sale of McAfee's enterprise business, and recognized $228 million related to the partial sale of our investment in McAfee.

In 2021, we recognized $471 million in observable price adjustments related to our investment in Beijing Unisoc Technology Ltd.

Interest and Other, Net

In 2022, we recognized a gain of $1.0 billion from the first closing of the divestiture of our NAND memory business.

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Provision for (Benefit from) Taxes

Our effective tax rate decreased in 2023 compared to 2022, primarily driven by our R&D tax credits, which provide a tax benefit based on our eligible R&D spending and are not dependent on lower income before taxes, and a higher proportion of our income being taxed in non-US jurisdictions. Our benefit from income taxes increased in 2023 compared to 2022 primarily due to a higher proportion of our income being taxed in non-US jurisdictions. The 2023 shift in income was attributable to the 2022 tax costs associated with the gains recognized from the equity sale of McAfee and the divestiture of our NAND memory business.

Our effective tax rate decreased in 2022 compared to 2021, primarily driven by a higher proportion of our income being taxed in non-US jurisdictions and a change in tax law from 2017 Tax Reform related to the capitalization of R&D expenses that went into effect in January 2022. In 2022 we recognized a benefit from taxes as compared to a provision for taxes in 2021 as the higher proportion of our income being taxed in non-US jurisdictions and the change in tax law from 2017 Tax Reform were only partially offset by the tax costs associated with the gains recognized from the equity sale of McAfee and the divestiture of our NAND memory business.

In 2021 the OECD announced an Inclusive Framework on Base Erosion and Profit Shifting including Pillar Two Model Rules defining the global minimum tax, which calls for the taxation of large multinational corporations at a minimum rate of 15%. Subsequently multiple sets of administrative guidance have been issued. Many non-US tax jurisdictions have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in 2024 (including the European Union Member States) with the adoption of additional components in later years or announced their plans to enact legislation in future years. We are continuing to evaluate the impacts of enacted legislation and pending legislation to enact Pillar Two Model Rules in the non-US tax jurisdictions we operate in.

Liquidity and Capital Resources

We believe we have sufficient sources of funding to meet our business requirements for the next 12 months and in the longer term. Cash generated by operations, supplemented by our total cash and investments1, is our primary source of liquidity for funding our strategic business requirements. These sources are further supplemented by our committed credit facilities and other borrowing capacity and certain other Smart Capital initiatives that we have undertaken. Our short-term funding requirements include capital expenditures for worldwide manufacturing and assembly and test, including investments in our process technology roadmap; working capital requirements; and potential and pending acquisitions, strategic investments, and dividends. Our long-term funding requirements incrementally contemplate investments in significant manufacturing expansion plans and investments to accelerate our process technology. These plans include expanding existing operations in Arizona, Ireland, Israel, New Mexico, and Oregon, and investing in new leading-edge manufacturing facilities in Germany and Ohio. We also expect to continue to benefit from government incentives and any incentives above our current expectations would enable us to increase the pace and size of our investments. Conversely, incentives below our expectations would increase our anticipated cash requirements. We expect our planned capital investments to continue to put pressure on our adjusted free cash flow in the short term.

As we invest in multiple expansions, we expect our capital expenditures to continue to be higher than historical levels for the next several years. We expect to adjust the cadence of our investments based on the execution of our roadmap and changing business conditions. As of December 30, 2023, we had commitments for capital expenditures of $20.4 billion for 2024 and had $7.1 billion in capital expenditures committed in the long term. As of December 30, 2023, other purchase obligations and commitments in 2024 under our binding commitments for purchases of goods and services were $2.7 billion, with an additional $5.6 billion committed in the long term.

We have additional obligations as part of our ordinary course of business, beyond those committed for capital expenditures and other purchase obligations and commitments for purchases of goods and services. For example, see "Note 19: Commitments and Contingencies" within the Notes to Consolidated Financial Statements for information about our lease obligations, which include supply agreements structured as leases; "Note 8: Income Taxes" within the Notes to Consolidated Financial Statements for information about our tax obligations, including impacts from Tax Reform enacted in 2017 for the one-time transition tax on previously untaxed foreign earnings; and "Note 13: Borrowings" within the Notes to Consolidated Financial Statements for information about our debt obligations. The expected timing of payments of our obligations is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the timing of receipt of goods or services, or changes to agreed-upon amounts for some obligations. In addition, some of our purchasing requirements are not current obligations and are therefore not included in the amounts above. For example, some of these requirements are not handled through binding contracts or are fulfilled by vendors on a purchase order basis within short time horizons.

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When assessing our current sources of liquidity, we include our total cash and investments1 as follows:

1 See "Non-GAAP Financial Measures" within MD&A.

We maintain a diverse investment portfolio that we continually analyze based on issuer, industry, and country. Substantially all of our investments in debt instruments are in investment-grade securities.

Our sources of liquidity in 2023 included $1.5 billion from partner contributions, net proceeds of $1.6 billion from a secondary offering of Mobileye Class A common stock, $1.4 billion of cash proceeds from the sale of minority stakes in our IMS business to both Bain Capital and TSMC, and government incentives of $1.0 billion. Other potential sources of liquidity include our commercial paper program and our automatic shelf registration statement on file with the SEC, pursuant to which we may offer an unspecified amount of debt, equity, other securities, and non-recourse factoring arrangements with third-party financial institutions. Under our commercial paper program, we have an ongoing authorization from our Board of Directors to borrow up to $10.0 billion and, as of December 30, 2023, we had no commercial paper obligations outstanding. During 2023, we issued a total of $11.0 billion aggregate principal amount of senior notes for general corporate purposes, including, but not limited to, refinancing our outstanding debt and funding for working capital and capital expenditures. We also amended both our five-year $5.0 billion variable-rate revolving credit facility agreement, extending that maturity date by one year to March 2028, and our 364-day $5.0 billion credit facility agreement, extending the maturity date to March 2024. As of December 30, 2023, we had no borrowings outstanding on the revolving credit facilities.

In Q1 2023, we declared a reduced quarterly dividend on our common stock. This dividend reduction reflects our deliberate approach to capital allocation, is expected to support the critical investments needed to execute our business strategy, and is designed to position us to create long-term value. In January 2024, our Board of Directors declared a quarterly dividend of $0.125 per share on the company's common stock, which will be payable on March 1, 2024 to stockholders of record as of February 7, 2024. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.

Our cash and investments and related cash flows may be affected by certain discretionary actions we may take with customers and suppliers to accelerate or delay certain cash receipts or payments to manage liquidity, among other factors, for our strategic business requirements. In 2023 these actions included, among others, negotiating with suppliers to optimize our payment terms and conditions, adjusting the amounts and timing of cash flows associated with customer sales programs and collections, managing inventory levels and purchasing practices, and selling certain of our accounts receivable on a non-recourse basis to third-party financial institutions. While such actions have benefited, and may further benefit, cash flow in the near term, we may experience a corresponding detriment to cash flow in future periods as these actions cease or as the impacts of these actions reverse or normalize.

Our cash flows for each period were as follows:

Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.

For 2023 compared to 2022, the $4.0 billion decrease in cash provided by operating activities was primarily driven by lower 2023 net income after adjusting for non-cash items, partially offset by 2023 cash-favorable working capital changes compared to 2022.

For 2022 compared to 2021, the $14.0 billion decrease in cash provided by operating activities was primarily driven by lower 2022 net income after adjusting for non-cash items, including the gain on the sale of McAfee and the pre-tax gain from the divestiture of our NAND business, partially offset by 2022 cash-favorable working capital changes compared to 2021.

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Investing Activities

Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; proceeds from capital-related government incentives; and proceeds from divestitures. Our capital expenditures were $25.8 billion in 2023 ($24.8 billion in 2022 and $18.7 billion in 2021).

The increase in cash used for investing activities in 2023 compared to 2022 was primarily due to a lack of proceeds from the divestiture of our NAND business and from the sale of our remaining McAfee share that occurred in 2022, lower maturities and sales of short-term investments, and increased capital expenditures. These unfavorable cash flow impacts during 2023 were partially offset by higher 2023 proceeds from capital-related government incentives and by other cash favorable investment activities, including lower acquisitions during 2023.

The decrease in cash used for investing activities in 2022 compared to 2021 was primarily due to increased maturities and sales of short-term investments, proceeds from the divestiture of our NAND business, and proceeds from the sale of our remaining share of McAfee, partially offset by an increase in capital expenditures.

Financing Activities

Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from partner contributions and equity-related issuances.

The increase in cash provided by financing activities in 2023 compared to 2022 was primarily due to higher debt issuances along with lower repayment of long-term debt, decreased dividend payments to stockholders, and increased proceeds from sales of subsidiary shares, partially offset by commercial paper issuances in 2022 that were subsequently repaid in 2023. Our total dividend payments were $3.1 billion in 2023, compared to $6.0 billion in 2022. We have paid a cash dividend in each of the past 125 quarters.

Cash provided by financing activities in 2022 compared to cash used for financing activities in 2021 was primarily due to higher commercial paper and debt issuances, our 2022 curtailment of common stock repurchases, proceeds from the Mobileye IPO, and partner contributions for joint investments, partially offset by higher 2022 debt repayments.

Critical Accounting Estimates

The methods, assumptions, and estimates that we use in applying our accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (1) we must make assumptions that are uncertain when the judgment is made, and (2) changes in the estimate assumptions, or selection of a different estimate methodology, could have a significant impact on our financial position and the results that we report in our Consolidated Financial Statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made.

Refer to "Note 2: Accounting Policies" within the Notes to Consolidated Financial Statements for further information on our critical accounting estimates, which are as follows, as well as our significant accounting policies:

▪Inventories—the transition of manufacturing costs to inventory, net of factory excess capacity costs. Inventory reflected at the lower of cost or net realizable value considering forecasted future demand and market conditions;

▪Long-lived assets—the valuation methods and assumptions used in assessing the impairment and evaluation of useful lives of property, plant, and equipment; identified intangibles; and impairment of goodwill, including the determination of asset groupings and the identification and allocation of goodwill to reporting units; and

▪Loss contingencies—the estimation of when a loss is probable and reasonably estimable.

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Non-GAAP Financial Measures

In addition to disclosing financial results in accordance with US GAAP, this document contains references to the non-GAAP financial measures below. We believe these non-GAAP financial measures provide investors with useful supplemental information about our operating performance, enable comparison of financial trends and results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business and measuring our performance. These non-GAAP financial measures are used in our performance-based RSUs and our cash bonus plans.

Our non-GAAP financial measures reflect adjustments based on one or more of the following items, as well as the related income tax effects. Beginning in 2023, income tax effects are calculated using a fixed long-term projected tax rate of 13% across all adjustments. We project this long-term non-GAAP tax rate on an annual basis using a five-year non-GAAP financial projection that excludes the income tax effects of each adjustment. The projected non-GAAP tax rate also considers factors such as our tax structure, our tax positions in various jurisdictions, and key legislation in significant jurisdictions where we operate. This long-term non-GAAP tax rate may be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix, or changes to our strategy or business operations. Management uses this non-GAAP tax rate in managing internal short- and long-term operating plans and in evaluating our performance; we believe this approach facilitates comparison of our operating results and provides useful evaluation of our current operating performance. Prior-period non-GAAP financial measures have been retroactively adjusted to reflect this updated approach.

Our non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with US GAAP, and the financial results calculated in accordance with US GAAP and reconciliations from these results should be carefully evaluated.

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Following are the reconciliations of our most comparable US GAAP measures to our non-GAAP measures presented:

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