Intel Corporation (INTC) Earnings Call Transcript & Summary

And so Dan's area of expertise is network transformation, 5G and Intel's edge strategy. So Dan, welcome. Brooke, welcome. Thank you for making the time for us. And Brooke, I think you wanted to go over the safe harbor.

Yes. Thank you, Ambrish. Well, thank you for having us here today. And before we start, I just want to read our safe harbor statement. Today's discussion includes 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. All right. I think we're ready, Ambrish.

Okay. Great. So same format, we'll kick off with Dan. Would be great if Dan provided us with a bit of a perspective on the business, and then I will go into Q&A. I apologize I'm having some technical issues on the portal. So feel free to e-mail me your questions. And we'd like to keep the discussion to Dan's area of expertise so that we can avail of his availability today and go over what he is responsible for. But that will not stop me from asking some very high-level questions, and I know Dan can answer them. So -- but before we get into that, Dan, it'll be great if you just kind of walk us through your business, how big is the group in terms of revenues, what has the performance been publicly that you can share with us. So that will be a good way to kick off our session.

Yes, absolutely. So first, Ambrish, it's really a pleasure to be here with you as well as the audience. I really appreciate the opportunity. So first, the group that I lead is known as the Network Platforms Group. And essentially, it's the group that is accountable for driving what we call our network transformation strategy. At a high level what that means is that means moving the market and the network from really a series of fixed function appliances that are kind of quite rigid in nature, do one thing really, really well, to more of a cloud-like infrastructure that's more software-defined and more workload-converged. And with that strategy and the partnership directly with the ecosystem as well as with the Comms Service Providers, our business has experienced very strong growth. If you go back to 2014, we were a $1 billion franchise. Fast forward to 2019, we hit $5 billion. And then in 2020, we hit $6 billion. So we've had a very strong run within this business. And then if you look at kind of the market drivers or some of the dynamics at play going forward, first, you're just seeing more and more of a push to more of a cloud-like network with strong agility and flexibility. Of course, this pulls through critical platforms and silicon that we sell, including Xeon. And when you think about this transformation, it really started in the wireless core. And now there's a whole bunch of excitement and even some real early deployments around a concept called virtualized RAN or ORAN. And we're excited that, that transformation is starting to shift out to the edge. But then if you kind of take maybe a bigger step back and you look at even the broader market dynamics and you just consider 5G for a moment, 5G is really different than other generations of wireless. With this generation, the spec was written to not only serve all sorts of consumer use cases, of course, with great mobile broadband, mobility, et cetera, but it was built from the ground up to deliver all sorts of new and innovative services really to a ton of vertical markets or different sectors. And this includes everything from industrial ports, retail, smart cities, et cetera. So what this leads to is, obviously, it leads to 5G being built with kind of service flexibility in mind, which really calls out for a more software-defined general purpose-like platforms. But in addition to this, it also demands compute at the edge to be built out. So I'm really excited about the overall market dynamics. And if anything, I consider 5G and edge really a tailwind or an accelerant to our base network transformation strategy.

Okay. Great. That's a great introduction. So let me just zoom back into the higher level for a sec. Intel has had many announcements. In my understanding, it is a deliberate way to kind of bring us to a higher level of understanding of Pat's strategy. So you started out with the Intel Unleashed event. And then as part of the -- part of that series, second time you spoke with us, you talked about the road map. I've been following Intel for a long time. I don't remember Intel giving out a 5-year road map. So one big takeaway from that event on the process side was parity with your foundry peers by 2024. And so by extension, you will not have parity on the process side with AMD until then. So how does that factor into your closing the gap on the CPU side, Dan?

Yes. So I think when you think about how to deliver world-class products for customers across a variety of market segments, of course, process leadership is one factor, but it's certainly not the only factor. So when we think about how to design products for our customers, we draw upon our packaging technology, our architecture, our memory, our interconnect, our software and our security and really just our deep understanding across all of our market segments. Obviously, we've been participating in the data center business and cloud business for 10, 20 years, and then we've extended really into the network the last 10 years with our network transformation strategy. So you think about that deep expertise and then you think about where we're going with our disaggregated architecture strategy, the disaggregated die architecture strategy along with IDM 2.0, what this does is it allows us to have all sorts of flexibility or optionality in terms of how we deliver leading edge products for our customers. And maybe the unspoken kind of hero, if you will, a lot of our magic across Intel, but also certainly in the Network Platforms Group, is how we partner with our customers, understand their workloads and then bring out all sorts of software innovations via tools and reference solutions that really help our customers not only get the most out of Intel silicon, which you would expect, but also reduce their time to market by making it easier for them to adopt their solutions and then meet the customers' needs. And if you think about what we've done on the network side for this, we've been innovating in software for a number of years. I think a few people or hopefully many people on this call have heard of that development kit called the Data Plane Development Kit. This is a kit that runs packet processing very, very efficiently on general purpose servers. We originally innovated this within Intel, and then we contributed this to the Linux Foundation. And it really has become the de facto standard for running packet processing on the network. And then we've also innovated in other software reference solutions. You heard me talk about vRAN earlier. We've innovated with our FlexRAN reference software that helps really jump-start the market for both vRAN and ORAN. So when you think about how we deliver products, it's not just about that physical silicon. It's about the software, and it's also about the ecosystem that we create around those solutions that really makes a big difference for our customers and allows them to have a lot of confidence in the solutions that they buy from Intel.

Got it. Got it. And one of the areas that Intel has been putting a lot of emphasis is packaging technology. And obviously, it's not something you're doing now. But maybe just help us understand how is that manifesting itself in the solutions that you're providing in your group in addressing the -- it seems like a very disparate customer base with very different use cases.

Yes. It's a great question. So when you think about our packaging strategy, it kind of goes hand in hand with our disaggregated die strategy, meaning if you have these advanced packaging technologies, you can create, again, all sorts of optionality and flexibility by creating different dies and sometimes even maybe making those market segment-specific. So when you think about this from a networking business, it allows me the opportunity to really dial in the right solution for our customers with workload optimized silicon in our standard products. But also, as you may know, we do have a custom ASIC business in our network business. It also allows me to again provide all sorts of flexibilities in really a custom way with this advanced packaging technology. And then obviously, when you step back at a higher level -- at an Intel level and you think about what we're trying to do with IFS, this is just another strong differentiator that we can offer our customers to deliver unique solutions long term to the marketplace.

Got it. Got it. Back on to the CPU side, can you provide us with an update on the rollout of Ice Lake? And as it relates to your business, how is it -- the uptake in terms of expectations and then what customer base is actually leading the uptake of Ice Lake?

Yes. So simply put, in our network business, Ice Lake was the fastest Xeon Scalable processor ramp ever. We've had a lot of uptake on the product, a lot of excitement around it. This is due to a few factors. One is that we have increased overall performance across our cores, so we have better memory bandwidth, PCI Express Gen 4, crypto performance and then the AVX512 instruction sets, these vector instructions are very helpful in communication workloads, including workloads in the radio access network as one quick example. And in addition to this, we also introduced a new set of network-optimized SKUs, cleverly named the N-SKUs. And we are supporting these SKUs that are really tailor-made for networking in trials as well as early deployments across many different markets, including NFV-based servers for wireless core, VRAN, security firewalls, et cetera. So very broad-based strong pickup across the network.

Okay. Go a little bit deeper into your area of expertise. And maybe we will start off with when you define network transformation, how is Intel defining it? And then what's the role that your group is playing in that transformation?

Yes. So when you think about the transformation of the network, this is something that we really started about a decade ago. And it was in partnership directly with our end customer, the telecommunication service providers as well as the ecosystem that delivers the end solutions to them. And essentially, what we did is we set off and we went off to tackle big kind of bold challenges service providers gave us. They basically came to us and said, hey, we want you to do the same thing you did in the data center, bring a strong platform with really infinite flexibility to be able to address our workloads and then greater -- and then provide greater automation at scale. So with that, we kicked off something known as the [ SE NFVI ] project, and that had again the bold ambition to move from these rigid fixed function appliances to more of a virtualized network server format and do it in a standard way and scale with the ecosystem. And when you look at kind of the progress that we've made, you heard me mention wireless core earlier. And essentially, if you go back to 2013 when we kicked off that project, there was pretty much no virtualized network service on the network. Now fast forward to today, about 50% of all new core network deployments are on virtualized servers, and that's expected to go well over 80% by 2024. So very significant progress there. And then I'm sure that many people on this call have been studying the movement to virtualized RAN as well as ORAN. We are starting to see traction there, and we're really excited that nearly all commercial deployments thus far have been on Intel architecture. So then you kind of think about this and then you think about what's going to happen going forward, and the goal of our organization as well as really the service providers themselves is to continue this momentum to more of a virtualized network server, but then continue to push the bounds on greater levels of automation, allowing them to more dynamically place workloads really anywhere, anytime across their network, whether that's a network workload or a compute workload, and move to, again, more of a cloud-style implementation by using more micro services or smaller little pockets of the applications, if you will, as well as the use of containers. So we've got kind of a big game plan ahead of us that includes, again, transforming that network, but also building out capabilities to really support all sorts of new and interesting use cases at the edge of the network.

Okay. Just along the lines, what is the product portfolio -- what does the product portfolio look like? So a 2-part question, what does the product portfolio look like? And where are you seeing the most success in terms of driving your growth? You mentioned the business was about $1 billion 6 years ago, hitting $6 billion exiting 2020. So can you just give us a feel for the portfolio?

Absolutely. So the first thing is, obviously, we're a product company. So we need to deliver silicon as well as those software capabilities. And from a silicon perspective, the good thing here is that we do have a quite wide CPU portfolio that really allows our customers to scale from the high-end process with a lot of flexibility, which is, of course, our flagship product, Xeon, but also scale down to a wide variety of SoCs to be able to hit more, let's say, dense computing environments that are sometimes a lot more power-sensitive as well as price-sensitive. But in addition to this, we also do have our FPGA portfolio, which allows our customers to put some of their own specific algorithms in the FPGAs to really provide a boost in system performance. And we also have our Ethernet portfolio. And when you think about networking, you immediately have to think about connectivity as well. And having that Ethernet really work alongside Xeon to ensure the packets are handled efficiently really allows us to deliver performance at a system level. And then with this silicon, again, I can't emphasize enough, it's about the software we bring along with it. I mentioned DPDK. I mentioned our FlexRAN reference software. We also have a package for media workloads around Open Visual Cloud. So it's about how we package up the silicon with the hardware reference solutions, with the software that really helps differentiates us in the market. And then the second thing that I would point out is we've been at this game with network transformation for, again, around a decade. And in that decade, we gained all sorts of expertise and really gained the trust of our customers. So oftentimes, we have very strategic conversations with our Comms Service Providers, customers and really help as a trusted adviser guide them through the different industry transitions and help them, as technology advisers, pick the right technologies to adopt to really drive their networks to that more autonomous, flexible and agile network that they're definitely seeking. And then the last thing I would say is that you think about the software, you think about the silicon, the trusted adviser, then it's all about delivering that really robust and open ecosystem that our customers have wide choice to implement these Intel-based solutions from. And I'm super excited about what we've been able to do with our Network Builders program. We've got about 440 members, I think, at last count, which is pretty amazing, all these companies coming together to deliver solutions in the name of network transformation. And then we also have a group that's part of this new network and edge organization that you spoke of, Ambrish, that is also bringing all sorts of IoT-based solutions to the market with that same kind of recipe that I just spoke of with NPG. And we're working together to converge these solutions to help really allow you to take advantage of the network, but also add all sorts of IoT capabilities on top.

Okay. This is an area -- an -- the competitive dynamics, there's a lot of companies buying for this business. There's the ARM ecosystem, which is also going after this. Can you just help us understand competitively how do you stack up? And who do you see the most? And then where do you win? And I think you did a great job of kind of highlighting the way you approach this, but just give us a better sense for the competitive dynamics in this space.

Yes. Absolutely. So in the network space, it is a fragmented market, but I'm really pleased to say through the hard work that we've done over the last decade that we are now the -- a leading network silicon provider in networking. So I'm really excited about that. The way we go to market is quite differentiated from our competition. We go to the market with a mindset of how do we bring cloud technologies in an open platform into the world of networking to truly unleash flexibility and agility. And that's quite a different strategy than many of our competitors. And the good thing is, is that the market is truly resonating with that approach. And kind of -- and if I just -- maybe what I'll do is maybe I'll provide you just like kind of a Capstone type example that shows how we pull really all these ingredients together to really deliver the right solution for our customer. So when you think about 5G and you think about that core network that I've been talking about, we partner with all sorts of service providers worldwide. And one partner of ours is SK Telecom, and they asked us to bring a 5G virtualized core to the marketplace in a way that they can easily adopt it and get the right system performance, including deliver the right latencies, so then they could later adapt that to all sorts of different IoT use cases. So essentially, we brought to bear our Xeon platform, our -- excuse me, our Xeon platform and our Ethernet platform and partnered with HPE. We partnered with Samsung to really pull together that overall solution for our customer and really deliver it in a way that they had confidence it was going to hit the performance as well as our latency and be able to tackle not only all sorts of network services, but also look at unique services down the road. And of course, this did use our DPDK software package as well. So that's just an example of kind of how we partner with the end customer and then partner with the ecosystem to pull that overall solution set together.

And just remind us, please -- I don't think I asked you this question earlier. How big is the TAM for your business?

It's -- I mean I think you know that -- if you look at the overall telco space, the CAGR on the TAM in the telco space -- or sorry, the overall network, I should say, even in enterprise networks as well. First, the CAGR on these things in aggregate is typically in that 5% CAGR range. The good thing here is that when you think about the size of this market, we estimate this market is roughly a $25 billion TAM by 2024. And essentially, if you look at our success, it's really in transforming the compute construct of that TAM that has led to all those strong year-on-year growth, that really the run up from 2014 through 2020.

Okay. Okay. A question on 5G, and I would love to get your perspective on how is 5G impacting the transformation. Do you think there's a better understanding of the use cases at the edge and what 5G is bringing versus, say, just 12 months ago?

Yes. So I think I'll build upon the answer I gave earlier. So again, when you think about 5G, yes, cloud gaming, yes, mobile broadband, streaming videos, et cetera, all the consumers and kids are going to have a great time on 5G, and it's already starting to happen. But I think when the industry designed this back, they had much broader ambitions. Essentially, the idea being is enabling a specification or a standard that has the ability to really reach all sorts of markets. And these markets could include smart cities. It could include industrial. It could include retail. And it could include just shipping ports, if you will. And when you think about all those different industries, they all have a variety of use cases. Some are very, very low latencies. Some require more reliability, others better security, and others better bandwidth. So we're seeing a whole bunch of excitement and really investment, and Intel is investing here as well, to really shape the network to be able to work alongside all these different vertical markets to help them deliver OT technologies but really in more of a, let's say, a transformed digital fashion, if you will. And just maybe to think about how we're doing this directly with customers, the first thing is, is that, again, we're going to invest in silicon, we're investing in software. I haven't mentioned all of our edge software investments, but we've got something called Smart Edge, which helps enable mobilized computing. We're investing in different software kits to enable edge analytics such as OpenVINO. And essentially, we bring all of these innovations together, and we directly again partner with the ecosystem, but also the end users. And maybe one just quick example, we partnered with a company called EXOR. It's a company out of Italy. And essentially, they're a digital platform provider for industrial, and they specialize in making industrial PCs and human machine interfaces in the factory. So essentially, we partnered with them to really deliver an end-to-end smart factory in Italy, and the goal was to make this 100% digitalization of this overall factory. And they took advantage of our capabilities in 5G, AI as well as machine learning. So in this, they utilized our hardware, which you would, of course, expect, but they also utilized our software. They utilized that OpenVINO software that I mentioned earlier for edge inferencing to help them with quality inspection. And then they also utilize some industrial edge-specific software we've created to better manage tight control loops on industrial factory floor. And as a result of all this effort, we're able to integrate data from across a wide variety of sources, from resource planning, sales, marketing and logistics. And just to give you a quick snapshot of one of the benefits thus far is that they were able to essentially improve autonomous resource scheduling, which essentially means that they can react really in real time to changes in orders, resource availability all in real time, so they can better meet the needs of their customers. And they plan to extend this throughout -- to extend these real-time, let's say, data insights and operational benefits across the factory floor and other domains in the future as well.

Okay. Maybe we can zoom up at the infrastructure side. Where are we in the 5G build-out? There was a big slug of investment in China. And then that -- it seems like the U.S. and North America and Europe are picking up and maybe some other parts, obviously, Korea, South Korea and Japan. So just give us your perspective on the infrastructure spend that we should expect going forward.

Yes. Absolutely. So we did -- as you know, we saw an accelerated pace in China, of course, and also a good pace in the U.S. And I will say, you mentioned a lot of geographies, and we're also seeing a pickup really starting globally. And I think that as the -- in the next 3, 4 years, we're going to see China continue to invest, U.S. continue to invest in some of those key geographies in Asia you mentioned as well as Europe overall. And if you look at -- just take a snapshot of where we're at today, and I'll just give you a couple of quick data points from a recent report from Dell'Oro, essentially, if you look at the radio access network, really that access layer, today, it's about a 50-50 split between LTE and 5G. But by year's end, it's expected to be 2/3 5G. So very strong growth. And obviously, that -- if you go fast forward to 2025, it's probably in there over 80% 5G. And then if you look at the core network that I mentioned earlier, the core network was designed from the get-go to be able to -- 5G was designed from the get-go to be able to operate with an LTE core, but also a 5G core. So the plan from operators the whole time was start with an LTE core while they're migrating the RAN to 5G. So essentially, if you look at it today where we're at in the core network, it's only about 1/3 5G today. But then by 2023, 5G is expected to outpace LTE. So that's kind of at a high level. So RAN went faster, core lagged, but that was by design. And then I do expect global rollouts to continue to pick up pace.

Okay. Great. On the edge, how important is the build-out of edge to Intel's overall growth? And how do you expect to differentiate on that side?

Yes. So edge computing, so when you think about those IoT verticals and the build-out of edge compute in combination with the network, it's a $65 billion TAM by 2024. So this is a big opportunity for the industry and a great opportunity for Intel. And essentially, the way we're looking at this is we're focused on our customers. We're focused on delivering and -- delivering real business outcomes and solving pressing problems, whether that is helping them work through how to be more efficient in a factory floor to doing quality inspections on the factory floor, to working inventory management, to perhaps providing customer insights in a retail floor. So essentially, the way we are going to market, again, it's that same playbook with broad silicon, platform level silicon, including CPUs, FPGAs, Ethernet, but also we haven't talked much about our AI assets. We're innovating in AI in our CPUs. We're innovating with accelerators like Habana and Movidius. And then we're packaging it up with easy-to-use software. So you can think about the edge is really a combination of network. It's compute. It's AI. And our game plan to go to market is to deliver a horizontal platform based on a whole bunch of open source software but then also create vertical-specific recipes targeting industries such as industrial and vertical. And I gave you that EXOR example earlier that showed the use of one of our vertical specific softwares, that control loop software. And the great thing here is that we do have a really great start to the business. If you look at how many deployments we've already had through our partners in IoT verticals, it's approximately 35,000 with Intel technology. So this is really a market that we're winning in today and a market that we will continue to grow in.

And you said that this is a $65 billion TAM by 2024. How big is the market today?

This is -- again, I don't have that number off the top of my head, but I'll just say that this is in a market that's growing at 20% CAGR. This is a combination of network and IoT. So it is already a big market today, and it's going to continue to grow to $65 billion. So it's more of a transformation story as well as a buildup of compute.

Okay. That's fair. Just switching gears within the context of the edge business. Pat made a pretty -- fairly big organizational change recently. How does that -- what does it mean for your group? And does that change your goals for the edge business within that construct?