Intel Corporation (INTC) Earnings Call Transcript & Summary

Good afternoon. Good morning, everybody. This is Matt Ramsay, again, from the semiconductor research team at Cowen. Really appreciate you joining day 2 of our Annual TMT Conference, and for all the investors participating in the sessions. Really happy to be joined with -- by Tom from Intel that runs Intel's IoT business. And before we get started in some of the conversation, and I turn it over to Tom to give a bit of an opening statement, the Investor Relations team have asked me to read a brief safe harbor statement. Today's discussion will include some forward-looking statements, which are subject to risks and uncertainties. Please refer to Intel's SEC filings available at intc.com for more information on the risk factors that could cause actual results to differ materially from the things that Tom and I might discuss today. So with that out of the way, Tom, thank you for spending some time with my team, with Cowen's clients, and I'll turn it over to you for a brief introduction.

Yes. Thanks, Matt, and I'm delighted to be here and to sort of share our story of what's going on with regards to the IOTG business at Intel. Just a little bit of quick background about myself before I get to the questions that I'm sure you have for us is. So I'm 4.5 years at Intel. I joined, frankly, in January of 2017. And prior to that time, I spent 10 years with ARM and was Executive Vice President of Corporate Strategy for ARM. So -- and then before that, I did some small venture work with some small companies, but I also had a recur at Motorola and also TI. So 40 years in the industry, small company, big companies and always tried to pick into locations that I thought were at a point of disruption. And so I joined Motorola when the wireless trend was happening. My journey at ARM was all about where I felt that the semiconductor industry is going through fundamental disaggregation strategy and IP technologies were going to be more and more pervasive. And ARM obviously, was the market leader there. And then -- and finally, at Intel, where I came into this role, and you could scratch your head and say, "Well, what's Intel and IOTG?" But I thought -- due to my period of time at ARM that I thought there was a unique opportunity for sort of the different definition of that product line. It was really focused on what now everybody is calling the edge. But we weren't calling it the edge when I joined, but we can spend some time talking about that. So anyway, I'm delighted to be here today.

No, thank you for that. I think it's -- we prepared a number of questions here, and investors will be pinging me ones as we work through the session. But one of the reasons I was excited to have this conversation with you is my semiconductor team at Cowen led a big project that we did around the edge market about a year ago. And it culminated in, I don't know, 5 or 6 big industry reports touching on everything from semis to software, to security in a bunch of different markets around the edge. And your -- the group that you lead at Intel was called IOTG. But I spent some time with the folks at Silicon Labs this morning with STMicro and Infineon yesterday, companies that have microcontroller and connectivity portfolios that think about the edge from more of a client perspective. Intel's view of IoT and edge, as I imagine, very different. Then there are some synergies between your group and the Data Center Group. Maybe you can just step back and talk about what is Intel's view of the IoT and the edge? And where do the lines blur? Where are they fixed between what the microcontroller companies do and maybe what your data center business does?

Yes. That's a great question. So yes, as I sort of said, when I joined Intel a little over 4.5 years ago, I think the industry view at that point in time was IoT was going to be defined by -- largely driven by the companies that you're talking about, microcontroller connectivity, companies connecting to a gateway, and most of the action happening up in the cloud and the processing technology happening up in the cloud. I think that was a conventional wisdom at the time. And that as an IoT business within Intel wouldn't be very interesting, even though, at that point in time, Intel actually had some microcontroller businesses, which I closed. And it had some modem technology business, which, obviously, we also have gotten out of. I -- due to my view from ARM, I had a different perspective, which was, I thought that compute was going to get closer to where this data was getting created, and there were going to be big compute loads happening that were going to be closer to where the action was. And so that was sort of the reason why I joined Intel and largely because there are very few people that could actually pull this off because it wasn't just a silicon technology and a big compute problem, but it was also a big software problem. And it leveraged a tremendous amount of the assets that had been developed into -- in the data center and brought that down closer to this location of where computation was happening. And I'm talking about virtualization. Now we're talking about containerization. We're talking about all these various things that have been developed and deployed in the cloud. But I had a view 4.5 years ago when we started this journey that we were going to bring that closer to where this data was created. The other thing is that we focus on pretty much nonconsumer things. We're really not focused on consumer-like applications, which, I think, consumer applications, heavily, will be impacted by sort of the first thing that I talked about, smart connectivity, microcontroller-based companies connected to gateways and the action up in the cloud. I think that will be the norm for consumer-based applications. So we're focused on big industry problems across big verticals and how we take advantage of providing compute to enable, really, business outcomes with some of these technologies, largely driven by AI, actually. And we can spend some time about that as we get further in the conversation.

No, it's interesting, the way that you articulated your answer there. I -- our thesis and the conclusion, I guess, preliminary conclusions from a bunch of the work that we did on edge was there were going to be very data-intensive applications that were exceedingly latency sensitive that were going to require cloud. Maybe not mega data center, we're not talking about that, but then we're talking about server-level and cloud-level computing be pulled towards the edge. If you -- as you look around your business and say what applications are really what Intel's strike zone is versus not, is it -- what are the, I guess, limiting factors? Is it data intensity? What kind of factors are you looking for?

Yes. So when we talk to our customers, first and foremost, I'll be clear, no one comes and says, "Tom, I really want to buy one of those edge things," right? That's not the conversation that happens. And again, we really try to find business outcome-driven things. Now with that being the case, what we -- and this started, the hypothesis we had, which we're now 4 years into, actually, September 2017, we really started this journey, which was, "All right, we believe that workloads were going to get consolidated closer to where this data was created." That was -- we called it workload consolidation. We didn't call it edge devices. They are server class or high end, they could be high-end CPU, like desktop class products. We -- and we were going to provide the software infrastructure to enable those kinds of applications to exist there. We saw the killer app to drive this process initially is video streams. It was cameras. It was AI on cameras taking action, and largely because they're just sheer amount of volume of data that was coming off these cameras. There was no way you could send it all to the cloud. And we thought cameras were very interesting. The combination of camera technology and AI technology was an impetus to go do that. And so that horizontal technology, we thought, was critically important. We thought that we were -- historically, this business -- you would call this business, prior to my arrival, pretty much Intel's embedded business in many ways, where we took products from Data Center Group and Client Group and would apply it to different markets. That was fine for the compute platform, but these systems were going to require more and more differentiation, mostly on IOs. It's not so much on the compute structure, but the IO structure. You can well imagine, if you were to take a compute structure of a modern-day laptop, even if we put it into a factory, the IO structure would be a little bit different than what you could expect on a PC. So we went from purely adopting technology from other groups to actually doing our own chips. And we've done chips all the way from Atom class chips to we've got -- we're doing our own Xeon product. So we have our own development team. Then we obviously leveraged the mother chip significantly, but we modify a lot of it in the IO structure. We thought that developer communities were going to be increasingly important and largely driven by this AI computer vision workload that's going to be critically important. So we invested big in the development community. We can talk about that. And then last but not least, as everybody on this phone call probably realizes this, we'll call it operational technology world that we deal in, very fragmented, similar use cases but very fragmented in their deployment. And so we had to really crank up our ecosystem partners on enabling them to address the various capabilities across these various vertical markets. And we created a big program around that, we call them Market Ready Solutions. But it's an ecosystem approach to providing these solutions across these various verticals. And all of that, in turn, is really then targeted taking these horizontal technologies and applying them vertical by vertical. It is a vertically driven -- we go to market very vertically focused in this business. And so that's essentially the playbook we've been underway for the last like almost 4 years now.

Yes. It's interesting you talk about going to the market from a vertical-specific approach. If you look back over the last 4, 5 years since you joined, it looks like the business is growing double digits. I mean there's a couple of things in there. You mentioned you're killing a couple of microcontroller programs. You guys divested Wind River. There's a couple of things that are perturbating the revenue. But it organically seems like a double-digit growth rate that, given the opportunity, should be accelerating. I wonder, which verticals are driving the majority of the revenue today?

It's pretty well distributed across all of our vertical space. We also had a headwind -- probably the fastest-growing vertical that we had, that we had a little bit of a headwind going actually is leveraging this video technology. Two of our major customers, several of our major customers were in China, which now have appeared on the U.S. government entity list so I can no longer sell to them, which was, quickly, it was a 10% hit. And despite that 10% hit, we're continuing to grow. Our first quarter this year was a record revenue, despite having a 10% hit on that business and COVID the previous year. So I would say, horizontally, vision systems are driving this growth. It doesn't matter if we're applying those across every vertical, from industrial to education to retail spaces, they're all growing quite well. We've seen quite a rebound post-COVID. Last year was a bit of a rough year for us. COVID impacted us very strong. And as you said, prior to COVID, even with the departure of Wind River, we were growing this business in the mid- to high-teen growth rates and expanding bottom line up margin. So we sort of think 2021 is going to be the year 2020 -- we anticipate 2020 to be. And so far, through the first quarter, it's shaping up to be just that.

No, that all makes sense. And I guess, as you go to market and try to go and win business from customers, your business is in between a couple of very, very large businesses at Intel that the Data Center Group has connectivity with, I would imagine, the majority of your customers. The client business probably does as well. When -- do they lead the customer engagement in certain instances, and you get pulled in? Do you guys have specific go-to-market and sales and marketing channels that you dominate? I just wonder how that -- it's not often that you have 2 groups that are that large. And the strategic focus of your group and the growth rate of it could be significant, but it's a bit of a tweener relative to some of the bigger organizations.

Yes. Yes, I think over the last couple of years, we have now got a dedicated sales team that we've carved out. It's a combination of -- it's a bit of a hybrid, to be honest with you. But we have a dedicated team that really focuses on -- instead of the IT organizations of these major verticals, the OT organizations of these major verticals. So from that perspective, it's significantly different, I would say, in that we're really focused on operational technologies. Whereas our client teams or even our data center teams, historically, has been focusing on the CIO of these organizations. And we're not. And so that makes us a little bit different, which drove us to create our own dedicated sales team, which is somewhat -- in some cases, is independent and, in some cases, it's an overlayer and collaborative with our various groups. And because what we're really trying to do is help these customers and our partners be disruptive in their own industries and to provide them technology and guidance to go do that. So again, it's a little bit different motion, significantly different motion than the rest of Intel. And again, if I take a look at the semiconductor environment in its entirety, which I have a pretty good handle on, it's a different motion even than, say, what I was working on when I was at ARM with our microcontroller partners. And it's totally different from that perspective on how we go about doing our business.