So I do want to call out that it’s — with all the uncertainty, complexity and sensitivity at these profitability levels, our write-down and the benefits that we had in the third quarter were not far off what we estimated in our guide. So I think that’s a good reflection of our handle of what’s happening in the business. Now we’ve also got underutilization effects, which are creating higher costs in inventories and adding period costs. We project roughly $1.1 billion of underutilization impact in FY ’23 associated with the front end. Most of that will impact the P&L this year. Some of it will carry over to next year. But because of the effect of the write-down accounting, less of it will carry over to next year than would have otherwise. Beyond this period of write-down effects, the impact of lower wafer starts between the period cost and the higher cost inventories, the effect is higher single digits on margins, then down to mid and lower single digits on margins as revenues increase.
So considering all this, just to give you a sense of profile of margin and in turn pricing, to your question, we said last quarter that we expect — or as we said last quarter, we expect — we had a reported second quarter margin to be the trough, and that was driven by the $1.4 billion write-down. With a much lower inventory charge forecasted in the third quarter, which happened, that margin improved about 15 points. And then also, as mentioned last quarter, we said that fourth quarter would be better than third quarter on a lower write-down, hence, we guided today 5 points better than the third quarter. Again, these estimates are sensitive to pricing changes. And — but in our current view, we expect a gradual improvement on margin to continue sequentially on a reported basis.
Now if you take our non-GAAP third quarter gross margin of negative 16%, and we were to strip out the write-down effects in third quarter, both the write-down portion and the realized benefit, and also to normalize, you strip out the insurance settlement which we had in the third quarter, we would still be — those two things largely offset, so we’d be still at about 16% negative gross margin. So again, over $100 million net inventory effects, the $400 million write-down less than $300 million realized benefit and then the roughly the same over $100 million insurance settlement. So — and this is a function of the pricing environment, which we, I think, properly captured in our guide. Now that adjusted 16% — that adjusted margin 16% is down clearly versus the adjusted second quarter margin, which, as I recall, is about 7%, so down 23 points.
So under this adjusted view, we would trough on gross margin over the next few quarters, and then we would improve off these low levels through FY ’24. So this is a profile that’s consistent with what we’ve discussed before, though the levels are a bit lower and a bit delayed. And so hopefully, that provide you some color both on how we see pricing and how we see gross margin playing out with all the puts and takes.
Krish Sankar: Yes. Thanks a lot, Mark. Thank you.
