Intel Corporation (INTC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Intel Corporation's Business Update Call. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President, Investor Relations. Please go ahead, sir.

Thanks, Jonathan. I'd like to welcome everyone to today's webcast to discuss the press release issued after the close of market regarding our Programmable Solutions Group. I am joined today by CEO, Pat Gelsinger; and Executive Vice President and General Manager of DCAI, Sandra Rivera. In a moment, you will hear brief comments from both followed by an abbreviated Q&A session. Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it and are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe are useful to our investors. Our quarterly earnings release and most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on non-GAAP financial measures, including reconciliation where appropriate to our corresponding GAAP financial measures. After our prepared comments, Pat and Sandra will be available to answer your questions. We ask that your questions focus on today's announcement and today's announcement only. We will be hosting our Q3 earnings call after the close of market on October 26, and we will provide details on our results and outlook at that time. With that, let me turn things over to Pat.

Thanks, John, and thanks to all of you who were able to join the webcast on short notice. Over the last 2.5 years, Intel has been fully focused on our IDM 2.0 transformation, executing on our process and product road maps, establishing ourselves as a global at-scale systems foundry for both wafer processing and advanced packaging and positioning ourselves to benefit from the five superpowers propelling the semiconductor industry to $1 trillion in revenue by 2030. Specifically, the increasingly ubiquitous need for compute, connectivity, cloud to edge infrastructure, sensing and of course, the opportunity we have to bring AI everywhere. . A key part of our transformation has been looking for innovative ways to unlock value for all of our stakeholders, including the successful IPO of Mobileye and the investments by Bain Capital and TSMC into our IMS nano fabrication business. In combination, these two businesses are valued at over $35 billion and added roughly $4 billion in cash to our balance sheet. Beyond the financial benefits, our actions provided renewed focus, flexibility and autonomy for both companies to pursue the significant opportunities ahead more aggressively. Against this backdrop, I am extremely pleased to announce this afternoon our plans to operate our Programmable Solutions Group as a stand-alone business and to appoint Sandra Rivera as Chief Executive Officer; and Shannon Poolen as Chief Operating Officer. This decision gives PSG the mandate focus and resources to better capitalize on the attractive expected growth of FPGAs across data center and communications and importantly, the multi-market embedded opportunity in the industrial, automotive and aerospace and defense sectors. While we have demonstrated the early evidence of the PSG repositioning, including three consecutive quarters of record revenue and the strengthening of our road map to address a broader set of customers and market segments with 11 new product launches year-to-date, this is just the beginning of the opportunity we have with PSG. Our actions today will accelerate our time line to achieve those goals. The stand-alone business operations for PSG will begin effective January 1, 2024, and we expect to report PSG as a separate business unit when we release our Q1 fiscal year '24 financials. Our intent is to bring private investors into the business in 2024 on the path to an initial public offering over the next 2 to 3 years. Both will serve to further drive the repositioning and value creation of PSG. Importantly, even as we take on incremental investors, Intel will retain a majority stake in PSG and remain tightly aligned, including and especially PSG's growing relationship with IFS, building on PSG's highly successful supply resilience program pilot. We continue to see FPGAs as very complementary to our data center and networking offerings, and PSG will benefit at the high end as we reestablish transistor power and performance leadership on Intel 18A. In addition, as we bolster PSG's midrange and low-end product offerings, we see strong synergies between the long product life cycles in industrial, automotive and aerospace and defense sectors and our IDM 2.0 strategy focused on utilizing our manufacturing assets over a much longer time period for higher rates of return. I am very excited for Sandra as she transitions into this new role and embraces these new challenges and opportunities. Sandra has been instrumental in putting DCAI on the right path over the last 2.5 years of leading the organization. We continue to see great traction for fourth gen Xeon in the marketplace and are excited to have the official launch of fifth gen Xeon, codename Emerald Rapids on December 14. In addition, we are on track to launch Sierra Forest on Intel 3 in the first half of next year with Granite Rapids following shortly thereafter. Clearwater Forest, our first product on Intel 18A is on track for 2025. Lastly, our pipeline for Gaudi continues to grow as we are seeing tangible traction in the strong and growing accelerate compute market being fueled by AI everywhere. This includes two recent collaborative announcements at our Intel innovation event with stability.ai and Dell. Sandra's work with DCAI is only her most recent accomplishment. She is a well-rounded 23-year veteran of Intel and has driven critical and diverse efforts from human resources to networking. Sandra drove the significant growth of our network platforms group where she advanced breakthrough ways to integrate silicon and software to create greater customer value and evolve network infrastructure to Intel-based solutions. It is this breadth and consistency in results that makes me confident she is ready to take the next step and take on the CEO role of PSG. We have already begun an extensive search both internally and externally for Sandra's successor as she will continue to lead DCAI and ensure a seamless transition as we bring in the new leader of the group. On a personal note, I am extremely thankful for all of Sandra's efforts to set up DCAI for many future successes. Lastly, while today's announcement is about the great opportunity ahead for our Programmable Solutions Group, we also issued a press release setting our Q3 earnings date. We will report after the close of market on October 26 with our usual conference call beginning at 2:00 p.m. Pacific Standard Time. At the Deutsche Bank Technology Conference several weeks back, we noted that revenue for the quarter was tracking above the midpoint of our guided range. We had a strong quarter, and we look forward to having final numbers to share with you at the end of the month. With that, let me turn things over to the newly appointed Chief Executive Officer of our Programmable Solutions Group, Sandra Rivera, to make some additional comments.

Thank you, and I'd like to add my welcome to everyone joining us on the webcast this afternoon. As Pat shared moments ago, today marks the beginning of an exciting new chapter for PSG. I'm honored to be entrusted with leading the business as we accelerate its repositioning to capture growth and improved profitability. I'm also thrilled to be joined by Shannon Poulin as my Chief Operating Officer. Together, we will be building out the leadership team in the coming weeks and months, including the addition of a Chief Financial Officer. I'm extremely excited by the opportunity to lead PSG, but also very proud of what the DCAI team has accomplished together over the last 2.5 years. We've simplified and strengthened our product road map, and as Pat mentioned, are executing on or ahead of schedule on all of our key programs. In addition, we've also started to show the market the value of our AI product portfolio, including our ability to address AI workloads across the compute continuum, including the largest, most challenging large language models. As we bring in a new leader, I remain confident that DCAI is on a clear path to recapture product and TCO leadership across all workloads and markets. It is also very clear that there are significant areas of tight collaboration with DCAI and NEX as we augment their core offerings with PSG's considerable FPGA IP. As one particular example, we're seeing growing interest in AI use cases for FPGAs to augment CPUs and other accelerators like Gaudi and Falcon Shores. Areas in AI where FPGAs are well suited, include data ingest at the front of the AI pipeline data and traffic management with FPGA-based IPUs for offload, security acceleration and edge-based training and inference work look. I am equally excited to be able to give PSG the flexibility and resources to be able to go well beyond our original charter when we were acquired in 2015. While well represented in data center, we will increase investment and focus on parts of the FPGA market that represent significant growth, especially the industrial, automotive, aerospace and defense sectors. As many of you know, these markets have very attractive growth profile, longer product life cycles and higher levels of profitability. Third-party sources estimate the FPGA market at roughly $8 billion in 2023, growing to $11.5 billion by 2027 or roughly a high single-digit compound annual growth rate. As Pat mentioned, we've done a good job putting PSG on the right track, but there's still more work to be done. As of the end of Q2, our trailing 12-month revenue was $2.9 billion with gross and operating profits well above Intel Corporate average. Over the next few quarters, we expect to navigate through a normalization of supply and demand caused by extreme COVID-induced cyclicality even as we make some necessary investments in products and go-to-market capabilities. These actions will position us to gain share, especially in the most profitable markets over the next 2 to 3 years. We will discuss our long-term target model in more detail in early 2024 when we expect to unpack our PSG strategy. But longer term, we are driving the business to comparable FPGA gross margins in the mid-60s plus with operating margins in the mid-30% range. Broadly speaking, we intend to achieve this by investing in the business to develop new products aimed at driving a better balance amongst our end markets as noted previously. We also have significant opportunity to increase our presence and scale and distribution, a critical go-to-market channel for FPGAs. We will also have the benefit of leveraging our strong collaborative relationship with Intel, DCAI for data center, NEX for communications and networking and, of course, Intel foundry for manufacturing. We see a strong appetite, especially in aerospace and defense and industrial markets for long-term supply agreements with domestically produced products in the U.S. and Europe, and we'll use that to create and capture value with our customers. I look forward to interacting with many of you over the coming months and quarters as we strive to be good stewards of our owners' capital and unlock significant value for our customers, our employees and our shareholders. With that, let me turn things back to John to moderate as we answer your questions on today's announcement.

Thanks, Sandra. We're now going to transition to the Q&A portion of our presentation today. we ask that each participant ask a single question with a brief follow-up if appropriate. Again, please keep all questions germane to today's announcement. With that, Jonathan, can we have the first question?

Certainly. Our first question comes from the line of Timothy Arcuri from UBS.

Pat, I guess the first question is, how does this separation? I mean, I certainly understand that it helps you monetize the asset. But how does it help PSG compete better? Was PSG being starved for resources previously and it will be -- it will have better resource allocation. Can you just talk about that?

Yes. Thank you. And we're excited about today's announcement because we think it will unlock value. We certainly heard that from our shareholders that, boy, this is an asset that we think makes sense to do what you've done with Mobileye and what you've done with IMS. So we've clearly got an affirmation from shareholders there. But we also see that the business has underperformed, right, particularly in the higher-margin areas of the business where we've been very focused on data center and other areas of the business. So we haven't been managing it as well as we could have. We believe this will give the best of Intel, as we said, leveraging data center and networking really benefiting from IFS and that relationship is really emerging nicely now for the supply assurance program pilot, as we described. Coming off of COVID, we see that there was substantial interest in this type of program. But we also see that we have the opportunity to execute more effectively in the lower margin rich mid- and low-end areas of the business with industrial with military aerospace, areas of the business that we've been underperforming and are better margin-rich long-term opportunities. and having a more nimble execution model where this team is entirely focused on what we think is a great opportunity there. And Sandra, maybe if you want to add a bit.

Yes. So I mean clearly, having the opportunity to operate with greater independence and more speed, agility in decision-making and just turning our strategy to execution while leveraging all the goodness of what we have in terms of the deep Intel relationship. Clearly, as Pat pointed out, leveraging the semiconductor manufacturing and packaging leadership that we have, both in Europe and in the U.S., which is very important for our customers and particularly -- higher margin, stickier markets like aerospace, like military, certainly the work that we're doing in industrial and automotive. So just the opportunity to build derivatives faster. As Pat mentioned, we already launched 11 of the 15 products we committed year-to-date. We're going to be sampling products in that mid-range here in Q4 the low end in the first half of next year. And we can leverage that performance leadership that we have in our fabric, the IP reuse that we have across the portfolio and just moving to that [chiplet] architecture with faster derivatives, leveraging Intel packaging technology will just allow us to create more value for our customers and deliver greater levels of innovation more quickly.

Tim, do you have a quick follow-up?

I do, John. Thanks Pat, I also wanted to clarify. I mean PSG is going to be a separate entity you had announced an unnamed new 18A foundry customer. So I just wanted to make sure that this is not that customer. So this customer is not PSG, correct?

No. This is not. Now I will say we expect PSG is going to take full advantage of 18A over time. We have a next-generation product line that is uniquely going to benefit from that. And as Sandra said, we do think that high end of this product portfolio is going to be uniquely benefited there but the announcement of our 18A prepay customer entirely separate from this. And as we've indicated there, we do expect to be able to make further announcements of 18A progress before the end of the year. But this is not that customer. And we do see the continued momentum. And as you saw just this week, the Intel 4 announcement or last week and that we had in Ireland was a great momentum statement for our continued 5 nodes in 4 years. And PSG properly is going to be a big beneficiary of the foundry business and the supply assurance program or supply resilience program is a big deal. Right? And post COVID, this ability to leverage long-term sticky supply chains for customers who were severely impacted by that last year. This is important.

Jonathan, can we have our next question please?

And our next question comes from the line of Ross Seymore from Deutsche Bank.

Just wanted to talk a little bit about or get some answers as to how quickly can you diversify back into that kind of broad-based core Altera business. When you bought the asset, it was really to double down on the data center side of things. Now you seem like you're kind of going back to the old school Altera side. good news of the profitability, the long tail, et cetera, but those design wins take many years to develop. So just talk about how fast you can accelerate into those markets as a stand-alone entity, if you could, please?

Yes. Thanks, Ross. I'll start on that one. And one of the points is that Shannon, right, and this has been a business under Sandra's leadership for the last couple of years, we're already well underway. And many of those products, as Sandra mentioned in her earlier comments, that the mid- and low-end products are already in the pipeline, and those are part of some of the additional products that we expect to launch this year. So I'll say this transformation is already underway. Another point I'd emphasize, right, and ask Sandra to amplify, will be around building up the channels. right? And here, we've been largely homogenized inside of the Intel channel structure and particularly building up the distributors and [ VARs ] here. It was another area of particular focus that we see as nicely accelerated by creating this clear operational separation under Sandra, Shannon's leadership. So Sandra, you might add?

Yes. And Ross, it's an excellent insight because as you know that some of those longer tail, stickier, very profitable segments do have long design cycles. But when I came into the organization, PSG was part of DCAI, we saw the opportunity to restructure the road map to go after some of that mid-range and low end, and we are going to be sampling the midrange Agilex 5 products this quarter before the end of the year. and then moving into sampling that low end, the first tranche of our low-end products, Agilex 3 in the first half of '24. And we have a lot of customer interest, and so the pipeline looks excellent, the demand is high, and we believe we can have an end-to-end portfolio that leverages all the innovation that we're water falling down from the high-end cloud and comms business where we had initially focused when the asset came in. So design cycle is long, but it's not our first day. We've been driving this transformation now in that road map for the last couple of years and are looking to really capitalize on it now as a separate entity, ability to make decisions faster and execute more quickly.

Ross, do you have a quick follow-up?

Yes. I just wondered, on the manufacturing side being part of IFS, what percentage of this PSG business is currently run at Intel? Or any sort of metrics on how we should see that transitioning over time?

Yes. We'll share a lot more of that in early '24, but I will say that increasingly, our portfolio is biased towards leveraging the packaging innovations, the supply resiliency that the Intel foundry nodes can provide to us. And so increasingly, we are actually adopting more and more of the innovations and differentiation that we get from Intel Foundry. Some of the historical products, which still have a lot of long life are on older nodes.

And I'd also add, Ross, that the PSG business will have opportunity and we'll be encouraged to continue to leverage other foundries as well, particularly where they have unique technology offerings that aren't part of the IFS portfolio. That said, following this COVID experience, we see enormous customer interest in a more secure resilient supply chain in North America. I think you can just imagine the industrial customers, the aerospace defense-based customers. There's a lot of interest in this. So we really think we're setting this up to really have unique advantage leveraging Intel but also the flexibility to build the best products using other foundries where appropriate.

Jonathan, can we have the next question, please?

Our next question comes from the line of Aaron Rakers from Wells Fargo.