Intel Corporation (INTC) Earnings Call Transcript & Summary

Hi. Pat, George, thank you so much for making the time to do this unplugged conference call. It's much appreciated. I like to take the time to have a conversation with CEOs and CFOs outside of earnings to talk about everything but the last quarter and the next quarter. It's always refreshing. That's the philosophy of this unplugged events. Thank you, everybody, for making the time to follow this webcast. Thanks for the great audience. So I'll have a conversation with Pat and George. In the next hour, I plan to cover broad topics from Pat's career to the road path that George see for Intel ahead. [Operator Instructions] So with that, I think we should get to it.

And Pat, I'd like to ask you first a few questions about yourself. You joined Intel as a CEO in February. But at the same time, you've had like a fairly extensive experience at the firm, spending 30 years there. Amongst others, you've been a CTO of Intel. So you left Intel in 2009 to become the President of EMC. After 3 years, you became the CEO of VMware, and that's a role that you kept until earlier this year. So I think it's important for investors to understand a couple of things about this personal trajectory. And the first question I would have for you is really about when you left Intel in 2009. So what was in it for you? What were you interested in, in terms of personal development? What opportunities did you see at EMC that convinced you to leave the firm at which you had spent so many years already?

Yes. Yes. Thank you, Pierre. And to some degree, I was -- it was one of those where I was being pushed out of Intel and I was being aggressively recruited by the leadership at EMC. And it really ended up boiling down to the commitment of EMC to develop me to the next level. And I had written in my personal mission statement decades before that I wanted to be CEO of Intel. So leaving Intel was one of the hardest things in my career in that sense. It was sort of a death of a vision, as I would call it. But boy, I wasn't being developed here. Paul Otellini was pushing me out of the company. Joe Tucci, the EMC team said, "Hey, we're going to develop you." They started to invest in me. The relationship with the Board, the opportunity to become -- when I went there to become the successor of Joe. And obviously, I went to the East Coast and I ended up moving back to the West Coast to take over VMware, sort of an in-the-family move to become the CEO of VMware. And I'll tell you, it was, as I described it, my 11-year vacation, which curiously, Pierre, Steve Jobs was 11 years outside of Apple. And so it's like well, that's a nice little coincidence. But it really was a time where I'd just say I learned a lot, matured a lot, became a CEO, really added skills not just at silicon but then at systems and at software, so it ended up being a hugely valuable development period, but one that I would have never chosen on my own course and route. And it really ended up having sort of the Cinderella ending to what seemed like a path that was taking me away from what I'd always dreamed I do.

Thanks. That's great. There are 2 areas that I'm particularly curious about. So when you joined EMC, if I recall correctly, EMC was actually in a tough position, had lost market share to a new entrant, to a challenger. That's actually a situation to which we can draw a lot of parallels. So tell us about that. How was it to discover what it is to be at the company that has clients and that is -- that has to sell and that is not allocating products to their buyers?

Yes. The first thing in coming to EMC, EMC was a sales-driven company. And Intel was always a technology manufacturing product-led company. So it was just a radical cultural shift to go to a place that you had to sell, right? So I would just say a whole lot of things about learning to sell and what it meant to be in enterprise companies and having to fight and, as you suggest, EMC had lost a lot of share to NetApp, that scrappy upstart, which we have our perpetual upstart in AMD, always nipping at our heels here at Intel, and that's been going on for 4-plus decades now. But it really was that view and over -- when I came there, we just laid out a clear strategy for how we were going to regain market share from them, what it meant in terms of products, market segmentation, sales approaches, rebuilding the engineering engine at EMC at the time. And 3 years later, we had essentially won back the 20 points of share that we had lost. So it was really a pretty successful period for me. Also learned a lot about M&A, right? And we effectively used M&A, and Intel, when I left, was always bad in M&A. So learned a lot about M&A skills and what it takes to make those successful. So it was a really, really good period in multiple respects. And as I say, Pierre, I call God the great conservationist. If you're doing what He wants you to do, no experience of your career goes unutilized. And that's how I feel that I'm back now at Intel. All of those experiences are being fully utilized.

So you've learned at TMC to regain market share against a challenger. I definitely see how you can use that at Intel. Let's talk about VMware. And there are 2 things that interest me there. The first one is, at some point, VMware was getting into the big cloud battle and was trying to have a fairly comprehensive cloud strategy, and you have very tough decisions to make at that point. And I think it's absolutely not the same environment, but you are now, at Intel, in this circle of very large cloud titans who are at the same time your clients, potentially your competitors, definitely your partners. So what did you learn at VMware on that front?

Well, first, I'd say the biggest thing I learned at VMware was learning the value of software. And for a company like Intel, software is sort of like always that like glue-ware that you stick at the finish of a product. Well, in many respects, software is more important than silicon. So I'll take -- first, I just learned the critical role that software plays, and now the software industry is a lot bigger than the hardware industry and the role that cloud, cloud delivery as a service, subscription business models, all of those play. Secondly, as the question suggests, Pierre is very much about how to walk with the mega cloud players. And VMware started on a path of competing with them. We made a major shift in strategy to then go partner with Amazon, Azure, Google, and really forge deep sustainable partnerships. And one of the things that we've done very quickly in my coming back to Intel is deepen the partnerships with the cloud service providers. Immediately, what does it take? And given the 8 years of investments at VMware, all the Andy Jassy and now Adam and Scott Guthrie and Jason and Thomas at Google, Alibaba, these are deep relationships and these really are turning into co-innovation relationships with each one of them. And I think we're able to quite quickly sway the relational view that was deteriorating before it came back. And now I'd say all of the mega cloud vendors are on a positive slope with repartnering with Intel.

Thanks, Pat. And so now let me ask you maybe 1 last question on your background, and I really want to leverage as much as I can, it's like a super position you have of being like a new joiner at Intel and, at the same time, like a multi-decade old-timer. So the question I want to ask you is on the first one, your time at Intel is, how would you summarize what made Intel? What made what Intel is today? And here, I really want to insist on the fact that Intel, I mean investors see a lot of challenges at the moment, but we need to keep in mind, you own more than 80% market share on the largest franchises in the semiconductor market. It's an extremely successful company. And so in my question, what I'm interested in is like, first, where we are like turning points, major turning points decision Intel made that really built their success? And second, what can you tell us about like Intel's culture, way of doing business that were like the strength of Intel?

Yes. And we think back over Intel, it always had this deep engineering, I call it, we bend physics. We're at the deepest levels of understanding materials, material science, putting that into at-scale manufacturing. And as I say, Moore's Law ain't done until the periodic table is exhausted. And sort of that deep engineering aspect was, is and will be the future of the company. It's also then complemented by this culture of execution. We get stuff done, right? We do big things aggressively. And then in that, the data, the points of view and you get the best answers coming out of it, that toughness, that paranoia that Grove would speak about. So the cultural elements. And then combining it by just saying, hey, we're going to make great products and make them standard in the industry and x86, the standards and PCIs and WiFis and USBs that we create these critical industry platforms and technologies that allow entire ecosystems to be built on and built around. And these are some of the core things that have always made Intel just great. And clearly, as I come back, some of those things are alive and well, maybe a little bit rusty and we got to go clean them up a little bit. Some of those were lost and need to be reestablished as we go forward. And there really was a bit of demoralization of the teams, where we need to get them fired up again, that, yes, we're Intel. We're going to get that mojo back. We're going to have this manic execution, commitment to leadership and establishing the rightful place of Intel, the U.S. technology industry and moving these innovations forward. And there's a new term inside of Intel. We call it the TPU, that our leadership team is the torrid pace unit, right? We got to move fast in this environment to catch up and reestablish leadership. And with that, I'll say some -- what's old is new again and reviving some of what I've called the Grove-ian culture and bringing those back to the forefront of what we're doing as a company. And in the 6 months since we've been back, I believe that we've successfully created that inflection point, as Grove would always talk about that, is now starting to feel like, okay, yes, we're leaning in again. We're getting back on the front foot.

That's great to hear. It's a great segue to my last question about you and then we can talk more about the industry and Intel. And how do you define your role as a CEO within the context of what you just described? How does your day look like? And how are you going to define success in your role today?

Yes. Obviously, the CEO is responsible for everything in the company. But as I think about it, clearly, it's laying the strategy, right? And I -- the company's strategy needs to be owned by the CEO more than any. Obviously, it needs to be delivered down the company. And obviously, IDM 2.0, I'm sure we'll touch on that a little bit more, but what's the strategy? Everybody got to know it. And anything that's not consistent with the strategy got to go, and so that you can put more and more energy into the strategy. Second, you got to go -- the CEO got to build the team. What are the seats on the bus, right? Get the right butts in the seats on the bus, right? So where are we going, get the right team in place to go do that. You've seen we've reorganized. We've moved some people out. We brought some key people in. You have to have the right leadership talent that are aligned to go execute that strategy. For a company like Intel, I'm the self-appointed geek-in-chief, right? We love tech, right? We love engineers. We want to be the place that anybody who has bold, vicious industry-changing ideas, we're the place you want to come. And so we're bringing that geek back to the company, and we have our innovation conference later this year. This week, we're doing our Architecture Day layout. People have to say, "Wow, they're doing cool stuff." And finally, the CEO is the culture-bearer-in-chief, right? And the culture of the company needs to be set by the CEO, supported by his leadership team and then rolled down across the organization. And those are the unique roles and responsibilities of the CEO. And everything else matters. The finances have to make sense, the road map, you have to meet with customers. You've got to go support the analysts and press and so on. But I sort of think of those 4 as the most critical roles that the CEO must uniquely take place and drive in the company.

Thanks, Pat. Let's talk now about like the industry at large before coming back to Intel. So during like your 11 years of holidays when you were away having some rest at EMC and VMware, the industry changed a lot. And the 2 things that are very striking is that 10 years ago, like in 2009, definitely smartphones were not that big, on the radar screen definitely, but they weren't that big. And then cloud barely existed. So what's your perspective to like you 2 -- like, the perspective from a Qualcomm point of view would be interesting as well, George. What's your view in the way the cloud and smartphones change the industry? And then Intel, of course, retain leadership in servers and PCs, but a lot of product flavors of compute flourished around this strong goal. So how did that happen?

Yes. A lot in that question, Pierre. And clearly, if you would think back, obviously, semiconductors were used lots of places but sort of the PC was the driver. That was sort of followed by servers, which became cloud. Mobile is another major industry. We're now seeing a lot happening at the edge, sort of a next major segment. Cars are turning into semiconductors with tires. Just more -- and I just called it the digitization of everything, right? Every aspect of human existence is becoming more digitally driven. Computes is ubiquitous, connectivity is pervasive, infrastructure is scalable and distributed and AI is bringing intelligence to everything. I call those the 4 superpowers, and they're just reinforcing, expanding and building on each other. And as a result, the semiconductor industry, what used to be sort of boring, is now like the coolest industry on Earth. We're in shortage everywhere, right? Everybody needs more semiconductors. We can't build fabs fast enough. We have a $30,000 car sitting there waiting for $1 semiconductors, right? It's just become this political, right, to center point of humanity. So it's all of a sudden that there is such energy around the semiconductor industry and global issues. COVID has caused an acceleration for that, has disrupted supply chains. So all of a sudden, semiconductors, we're like the sexiest industry around all of a sudden. And it's right in the sense that everything is digital. This isn't a flash in the pan. This is an accelerating industry that is large and will become dramatically larger over the next decade as a result of everything going digital and everything digital requiring semiconductors. And clearly, mobile's a big aspect of that, like your question suggests. But to me, I think it's going to be this wave of different industries going digital. Next 1 up, I think, will be the automotive industry, where they're just going to see dramatic increases in the amount of semiconductor. We're going to see the medical industry become much more semiconductor-driven as well in addition to burgeoning PC demand, everything going cloud, 5G and edge. Yes, we have a lot of good things in front of us.

Yes. Pierre, maybe I'll just jump in too because we've talked about the period of 2009 to today. And the 1 thing that mobile did is it created the scale to create the TSMC ecosystem, which was all of the support entities. And then it created what I would call intelligent fabless players that worked with TSMC to get their capabilities to the level that became kind of self-reinforcing. So we come into the market now in a situation where competitors have the benefit of all of that. And so one of the things Pat has done is accelerated our engagement with the ecosystem to make sure that we're getting the same benefit out of this amazing ecosystem that's been built over the last 13 years. And so we're much closer today, for instance, than we were before with the EDA vendors, much closer today with the equipment suppliers, where we would use to tell them what to do. Now we're making sure that we understand, what are the best practices? How do you get the most productivity out of tools? What are the things that people who already learned in our table stakes nowadays that -- and our teams are benefiting from that. So a little bit of the -- we got a little behind because of some of these issues, but we have the ability to play catch-up because we haven't had the benefit of all of these issues in the past and more rapidly adopting those, not the least of which is EUV. And bringing EUV into our process flows is bringing a significant simplification process. And some of the problems and performance issues at our 10-nanometer, this is going to be a big factor as we go forward, that we're going to not only have the benefit of design simplification but our relationship and our engagement with ASML, led by Pat's engagement with ASML, is going to be fundamentally very helpful.

That makes sense. And actually, my next question for you guys was what does it take to win today compared to 10 years ago? But I think, George, you answer that very well. And that makes really a lot of sense. So let me move to the next one, which is I think like in the last 6 months, things were very surprising; at least, I have to admit I was very surprised. So my question to you guys is very simply, like in 2009, did you think this industry could be spending $160 billion on CapEx a year, like $90 billion in wafer equipment, manufacturing equipment a year? Is that something that was part of a possible scenario? Or were you as surprised as I was of the acceleration of the last, let's say, maybe 9 months or a bit more than 6?

Yes, let me start and George layer a little bit here. If you think about, I mean that capital intensity that's going on, it's somewhat been going every generation, right? Every fab generation has gotten more expensive. You've been seeing the number of players shrink as the capital intensity has been expanding over time. So to some degree, I'll just say this is the normal course of economics, right, if you do -- this is a story and this is a consolidating industry play, that capital and R&D intensity is forcing a narrowing of the players in the industry. So that's sort of 1 effect. Second is that you combine this dramatic acceleration in semiconductor demand, which the industry was growing 5%, 6%, and by all accounts, if we were unconstrained in terms of supply, we'd probably grow 20% this year. I mean this is an extraordinary growth rate for this industry in comparison. And we uniquely were behind in our capital spend, right? This is one of the big resets of the Pat coming in as CEO. Buybacks, no. Capital investment, yes. We're going to go lean in because we have to go build more capacity. And we built out our IDM strategy. And you've seen the spectacular numbers that TSMC and others have set for their capital investments as well. And we're responding to very strong demand signals from the marketplace that are very sustainable. And as you've certainly seen in some of the TSMC numbers and some of the others, prepays and others are becoming norms in this because customers are ready to say, "Hey, we're ready to go invest in the future capacity requirements as well." And you put the math of where the cost per node is, continuing innovations like EUV, and yes, there's not many companies that are going to be able to make this move into this capital. And I'll say there's going to be a line at 10 nanometers where it will be the haves and the have-nots, right? And everybody else will come up to that line, and that's going to cause a further narrowing of the people that can play on the other side of the 10-nanometer line, and we're going to be one of those players. George, anything you'd add?

Yes. No, I think back in '09, when we looked at it, I was -- I think I was at Applied Materials still at that point in time -- we did not see the capital intensity growing that rapidly because we were using mobile as the reference point. And memory, as you may recall, was there was a lot of action in memory but it was very cyclical. So you weren't necessarily feeling that, that was going to be the long-term driver. It's looking pretty good right now. But the cloud build-out has certainly been a factor, automotive. We're just starting the edge and private networks and also IoT. So there's a lot of potential forces that we don't really understand whether they're going to be more of a cyclical or long-term growth but they have the nature of long-term growth more than cyclicality. So it'll be -- it's going to be interesting time. And -- but I do think the -- we definitely see tailwinds exceeding any headwinds, which there will certainly be if only because of macroeconomic issues.

That makes sense. Let me actually touch on briefly on your 2 main, I would say, segments, product segments or segments, more largely. So in cloud, first, of course, you see these cloud players. They are very healthy. They're growing revenues. They can't stop talking about how important it is for them to invest in their data centers. So that's an extremely positive outlook for you guys. My question would be more -- or my challenge would be more about like the pace at which compute is evolving and changing and the fact that alternatives to CPUs are like architectures that are complementary to CPUs are gaining share of wallet very rapidly. So how do you feel about that? How do you make sure Intel remains central and the #1 supplier in cloud?

Yes. There's probably 3 different aspects to this, Pierre, to talk about. Obviously, there's the AMD view, there's the AI and alternative architecture view and then how we deepen and partner with the cloud guys. And we think about it sort of in all 3 dimensions. And one, if we just say about the AMD threat, we got to do better products, period, so we're going to build better products. And they've had a period that we haven't executed particularly well and we are going to execute, execute, execute. And with that, we see that we're coming into a period that we're going to be very competitive. So we're in a period that we were behind, right? We're now with Ice Lake, Sapphire Rapids, Diamond Rapids. We're in a period that we're going to be very competitive. And then as we get out 3, 4 years from now, we just see that we'll be in sustained leadership again. So we're coming to a period that we're going to be much more competitive and with products that are much more competitive, better pricing dynamics, better market share potential, better TCO value for the cloud guys. So we just got to compete with regard to, as we already said, deepen the relationships with the cloud vendors and do a lot more co-engineering with them. IFS gives us a powerful new tool where we can now go to them and say, "Hey, Amazon, you got that Annapurna thing. Why don't we fab it for you? Why don't we do some unique packaging? Let's put this together in unique ways to give you sustainable TCO value that you weren't able to get before when it was a product and a product. Let's go co-engineer those together." We see this as a nice area where IFS gives us a powerful new strategic tool as we deepen the relationships with the cloud guys. The alternative architectures arm, TPUs, GPUs as well, part of that is some of that gets fixed by, "Hey Google. I'll go fab those TPUs for you, right? We're going to go deep in the relationship and start doing it." The other aspect is, hey, we're going to start offering more and more products that are competing for AI workloads. We're just having the Habana Labs instances go live on Amazon for extreme training. We've added a lot more AI into the core Xeon product that we're actually getting very competitive on pretty much every inference workload. Now the core Xeon is getting better. We're -- we have -- later this week, we'll be updating on some of our performance numbers now for our GPU platforms where they are now very competitive. We'll start knocking NVIDIA off the perch that they've been sitting on for way too long because we've given them way too big of a gap in the AI leadership space that we're going to start putting products that are winning the key AI benchmarks and customers are lusting for an alternative architecture as well. So we're coming into a phase. We're going to start delivering competitive products to compete with every one of those alternative architectural aspects. And 1 minor point on that as well is the workloads, particularly for AI, are evolving rapidly. And the more programmable architecture like Xeon actually is pretty important, because when you've gone from vector to matrix to spatial and the algorithmic domains are evolving very rapidly, people are finding it hard to keep up using more fixed function GPU capabilities. So having some of that programmability aspect is really, I think, giving us a new lease of life in the space of some of the most critical workloads, AI workloads for the future. But across the board, we're going to have better products. We're going to be more competitive, and we're seeing really, really positive response from the industry as we're starting to bring those things to the fore.

Thanks. Very clear. And really quick on PCs. So very surprisingly, the PC market rebounded. So if I look back, it peaked in 2012, so a long time ago. It came down steadily for 5 years, found the floor in 2017. What I found very interesting at the time that the number of PC users never changed. I don't know anyone who stopped choosing a PC, right? If you know one, let me know, but I've never met a single one. And now we see PC shipments going back up again. And of course, there is an argument which is to say, well, people had to replace their old PC because it was a pandemic, but it's going away and it's just a refresh cycle. And I hear people at Intel getting more and more -- like more optimistic than that, about PC. So what's the case for PC going forward?

Yes. We're more optimistic than many of the analysts, and I've had these arguments with some of the IDCs and Gartners, and they're slowly moving toward my perspective here, Pierre, but we're not done with some of those arguments yet. But we see 3 factors. We just see that, hey, there is a deepening penetration of PCs. And as you're going into emerging markets, more PCs per home, it's just a broadening market. It is the best tool for many, many applications. Secondly, we are seeing that there's going to be a very healthy refresh cycle, right, associated with it. Windows 11 is looking pretty good. I'm running it on one of my machines now. And every time there's a new Windows, there's a refresh cycle, right, associated with it. All corporations are now 1 year old on their refresh cycles as people start coming back to work. So there is this aspect of, hey, this is a 0.5 billion-unit market that is on a refresh cycle, right, in the corporate space that is overdue now. So we see that aspect as well. And with the COVID-induced density of PCs in homes, we believe is pretty consistent. And as people are dealing with Delta variants and so on, this higher market isn't going away, right, in that perspective. One of the other points is, hey, we just got to take the ecosystem of the PC seriously again. I think to some degree, we and Microsoft, we said, oh, the PC was dead. We sort of said it was as well, and we're acting like we were building this vibrant ecosystem experience, right? My first meeting with Satya, I held up my iPhone to him and I said, "Satya, you have to help me get off of my Apple addiction and we have to go make the PC ecosystem better than the Apple experience. We have to make the 'Droid connection better than that. We have to have better peripheral devices. We have to have better AI capabilities in the PC." And we, all in the U.S., we get too Apple, right, centric. When you get outside of the U.S., Apple isn't Apple right? There is a much, much broader market that we need the Samsungs, Lenovos, the broader Xiaomis as you go to Asia and China, that there is an exciting and vibrant ecosystem to be rebuilt and harvested. So yes, we see a lot more sustainability in the PC market per se and moving the PC marketplace into these new segments such as education, such as the tablet space as well.

Thanks. That's a great perspective, and it's going to be very interesting years to follow this industry and see how things play out.

Yes. I have multiple bets, Pierre, with analysts on what the PC market is going to be next year. All of them are saying it's down year-on-year. I'm saying it's up year-on-year. So now multiple cases of their favorite beverages are now out there in bets. So I'm happy to take any -- cover any bets that way as well.

Very good. I have some good bottle of French champagne in my cellar that I can put on that one. You might build like a great set of champagne against every single analyst covering Intel. That's a good thing. That's great. I know now, George, you are on a time constraint so I'd like to get to my next topic ASAP. And so I'd like to come back to talking about Intel today. And I'd like to address, first, the most visible aspect of your competitiveness, which is your gross margin. We analyze them to associate gross margin to competitiveness. And that's kind of right, but it's -- I think it's very often much more subtle to analyze.

Can you hear me because you're cutting in one of those awkward moments where it looks like I'm wooden.

Yes, it looks like you're frozen, George, but we still hear you okay.

Yes.

So keep going, Pierre.

So I'll keep going and hopefully you -- oh, we -- oh no, we just lost George. Okay, great. So you're on mute, George?