Intel Corporation (INTC) Earnings Call Transcript & Summary

Okay. We're going to get started. Thank you for being here. I'm Tim Arcuri. I'm the semiconductor analyst here at UBS. And very pleased to have Intel. We have Dave Zinsner, who is the CFO and the interim co-CEO. And we have Naga Chandrasekaran, who is the Chief of Global. He's the Chief Global Operations Officer and the EVP and GM of Intel Foundry Manufacturing and Supply Chain. So thank you to both Dave and Naga.

Yes. Thanks for having us.

So I have to read a safe harbor for Intel before we start. Before we begin, please note that today's discussions may contain forward-looking statements that are subject to various risks and uncertainties and may reference non-GAAP financial measures. Please refer to Intel's most recent earnings release and annual report on Form 10-K and other filings with the SEC for more information on the risk factors that could cause actual results to differ materially and additional information on their non-GAAP financial measures, including reconciliations, where appropriate, to the corresponding GAAP financial measures.

Okay. With that out of the way, well, it's been an interesting few days. So Dave, let me start with you. Big announcement, yet there wasn't a financial update in the announcement. You're 2/3 of the way through the quarter. Wondering if there was anything you wanted to say about that? And yes, just...

Yes. No, I mean, we typically don't provide updates, and we still have another month to go of wood to chop. So we stand by the guidance that we gave at earnings, and more to update, obviously, when we do our earnings at the end of January, which I'll be doing double duty on it, sounds like.

Okay. Great. And then, I guess, a bigger picture question that I'm getting, and I'm asking both of you, actually. Bigger picture question that I'm getting is, if I'm an external foundry customer and I've been engaging with you, and you're making progress on 18A, but given this change, does this cause me to pull back and see what the direction of the company is going to be going forward? Does this affect that at all?

Yes, it shouldn't. I mean the Board was pretty clear that the core strategy remains intact. We still want to be a world-class foundry. We want to be the Western provider of leading-edge silicon to customers. That remains our goal. But we also understand that it's important for the #1 customer of foundry to be successful in order for foundry to be successful. And so the Board wants to also put emphasis on execution around the Product side of the business to make sure that the Foundry business remains successful. We're still engaged with customers. As we talked about at the last earnings, we've got a number of RFPs we're working through. Actually, just 1.5 hours earlier, I was on a call around one of those RFPs, which looks pretty good. So we intend to be -- continue to focus on adding customers to our long lifetime deal value for the foundry side. I'd say, the one thing that has definitely come out of the way the Board is thinking about this is, they do recognize and have pushed us that, hey, we made a lot of investments from a capital perspective in foundry, and we need to start seeing some incremental ROIC on those investments. And so and that's what we're committed to do. That's going to be my -- one of my major focuses, definitely, while I'm CFO or as I'm CFO. But of course, in the interim period where I'm CEO, I'll obviously be focused on that as well. And I think as you think about like when they are -- as they're looking at CEOs to come in, they're going to look at that kind of model and that kind of aspiration from the CEO. So we're going to -- well, I'm going to guess, obviously, I'm not in the process. But I'm guessing that the CEO will have both some capability around foundry as well as on the product side.

Yes. I wanted to ask about that. And there was a question last night at our dinner that I thought was a good one, that it was notable that MJ also got promoted to Head of Intel Products and also co-Interim CEO. So more of an emphasis on the Board's part on the product side, maybe in recognition that there's been -- I'm not saying too much, but there's been a lot of foundry, foundry, foundry. And so that, kind of in conjunction with kind of where you are, does that -- there's a question of who -- like if the Product business is what's important to the Board now, I mean, Pat knew the products better than anybody. So there is some confusion, I think, among some investors, if that's the emphasis for the Board, Pat seemed like the perfect guy.

Yes. I wouldn't read into the fact that the Board wants to focus, make sure we build out the Products business and continue to execute there, while standing up a Foundry business as something related to Pat and the Board deciding that now is the right time. That was for personal reasons specific to Pat and the Board. I think, though, it was very important that they had MJ, Michelle, for 2 reasons. One, I think her stepping into the Products CEO position is important. I think that has been one thing that we have noticed is, there are things that transcend all the business units on the product side that probably we're getting suboptimized. And I think having a leader overall of it allows us to be a little bit more functional about how we drive products, have excellence across all those functions, perform better, execute better and be cohesive across the business units in terms of how they go to market. I think that was absolutely important. And I think that's the primary reason why the Board felt MJ should have that role on a permanent basis. And then the fact that we had MJ allows the timing to work out the way it is. I mean the good news is that we had somebody very capable that could step in. She obviously knows all the customers really well. They all love her. She's been in that business unit or a sales role for decades. So she understands the business quite well. So she was kind of the perfect person, not only to take on the Products CEO job, but also the slot in as kind of in this co-CEO role. And then I can -- the areas that probably aren't or haven't been areas where she's had a lot of exposure to, like finance and investors and some of the more operational activities, I can pick on that slack. And the good news is I got people like Naga that are amazing at that and augment what I'm not as good at.

Great. Well, let me ask Naga the question. So you've been at Intel, I think, for maybe 6 months?

Three months.

Three months, okay. Okay. Time goes fast.

Seemed like 10.

Seems like years. So can you just give us a little bit -- I mean, you're SVP of Technology Development at Micron prior to coming to Intel. Can you tell us what brought you to Intel? What opportunities you saw here? And what are your impressions in the first few months?

So thanks for having me here, first. And yes, I was with Micron for 23 years, and I was doing technology development, manufacturing and different roles within Micron. I was very happy and satisfied with where we were positioned as a company and as a technology development team, and I'm thankful to Micron for everything that they have done for me. Then it was opportunistic that I started talking with Pat and Ann. And over a period of months that I was talking with them, I really believed in the consequential journey of trying to set up a foundry. I believe that Intel Foundry is very important for Intel. It is very important for the semiconductor ecosystem. And it is very important to have some level of competitive space that's going to continue to drive innovation. So I truly believe in the mission that Pat and Ann and everyone in Intel is driving towards with this foundry. That's number one. Number two, I was very happy with where we have brought Micron. As part of the journey, we have set Micron as technology leaders in memory, packaging and financial stability where the company was. And also, my team was in a very good place. So I thought, if I'm going to go do something else, then this was a pretty good time. I was with Micron for 23 years, and I was telling Tim this yesterday that I joined in 2001 June, and then 2001, September 11 happens. And my first increment was a 10% takeup. And probably, for the next 10 years, I never sold a stock because the only direction it went was downwards. But I still stayed with the company because I like the challenge. I liked what I was doing with Micron and really like the journey. And the last 10 years, it was transformational. So I felt I have done a good role and the company was in a good place for me to go do something different. And that's the third piece was, personally, there's very few people who can do technology development role in the industry. There's very few that can do technology development and manufacturing. And then there's very few who can do both in memory and logic. This was a great opportunity also for me personally to say, how can I expand myself? So that's the combination of those 3 that's why I'm here.

And how do you see -- how are you going to run manufacturing differently than it's been run? I think last night, we talked a little bit about -- you were talking about building a little more to, what you call, demand certainty. Can you just talk about that?

Yes. I -- and I didn't address your last part. I'll dovetail on it, which is, what I've observed is, there's a significant cultural change that needs to happen within Intel for us to transition from being an IDM 1.2 to becoming a foundry. And even not just a foundry, but to be successful in semiconductor, there's different aspects how TD and manufacturing work together. TD is technology development. I see there's a relay race, where there's 4 laps or how many overall laps. And it doesn't matter how one does in an individual lap. The real result is who wins the race. And it doesn't matter what happens in TD, what's in manufacturing. It's the continuity, all the way to how we deliver to our customers. And that's a change that we want to drive. Part of what I see happening today is TD is driving the technology, but manufacturing doesn't have the mindset of continuous improvement, year-over-year changes, constant innovation. Innovation doesn't mean it's only backside power, but small changes in process and equipment that drives cost reduction, performance improvement. That mindset is not there. As a company, when we had monopoly, and we were IDM 1.0, we were building to inventory. But now we have to change ourselves, build to order. That's a very different mindset. The other mindset that I'm seeing is, we are very driven towards no wafer left behind. That means you cannot miss any demand. You're okay to have built out extra capacity, believing that there is going to be some demand. And in a monopoly, that's okay. But now you have to go to low capital left behind where you're eking out every wafer out of a tool and trying to drive efficiency further. That's a cultural change that needs to happen. So a lot of changes where the team operates as one team, continuous improvement and a big focus on customers. That's another change that needs to happen is having a mindset of customer focus. All of those, easier said than done. There's going to be challenges, but all those changes need to happen culturally.

Good. Thank you. So I wanted to ask about progress on 18A. I know Pat put this -- which is now famous D0 number of 0.4 out, and I've written a couple of notes on this. Just trying to put it into context like what that means, and it depends on the die size to translate the yield. But can you talk a little bit, a, about where 18A is versus where you think it needs to be to sort of intersect the second half of '25 ramp? And b, the thing that I hear from some of the customers is that -- or some of the prospective foundry customers is that 18A is still a bit more geared towards HPC. And as a broad foundry node, the customers that I talk to are sort of like 18A is great if you have an HPC application. 14A might be the node that's more broadly applicable to external foundry customers. Can you talk about that as well?

Yes. So when Pat announced the defect density D0 less than 0.4, it was a point in time, and it was to give the indication that we are progressing as expected. If I look at it today, we are progressing. There are several milestones that we have met. And there are still many milestones ahead for the technology development. And if I wear my technology development hat for a minute, there's always challenges when you're introducing new technologies, and there's ups and downs. But what I would say is, there's nothing fundamentally challenging on this node. Now it is about going through the remaining yield challenges, defect density challenges, continuing to improve it, improving process margin and getting it ramped. Will there be challenges? There will be, but I think we are progressing. And next year, as I look at it, primarily the first half will be getting the node into engineering samples into our customers' hands and getting the feedback and starting a ramp in Oregon. And the second half of 2025, our milestone is certifying the node, getting it ramped in Arizona, and getting the product on the shelf so that customers can buy it. So that's the milestones, and we are working towards meeting all those milestones over the next year. It's very critical for us. 18A, to your second part of the question, when we said we are going to be foundry, 10, 7 was way past, and then Intel 3 also had several decisions already made. And even 18A, to some extent, decisions were made. So you're absolutely right. There are certain aspects of 18A that's extremely powerful for compute applications. Especially the backside power, it's going to be very beneficial for compute applications. It can benefit mobile, depending on how the designs are done. But because the customer engagement is more later, it doesn't address the full TAM. And 18A, our biggest customer for the next 2, 3 years is still Intel products, which goes back to what Dave was saying. The Intel products, we know the demand. We know what needs to happen. And our focus is to ramp it and continue to get more customers on 18A. But all this learning is getting implemented into 14A. So as 14A comes in, there will be a broader market that 14A will address, including compute and mobile and other applications, and also how the PDKs are done so that it's not just for -- with Intel focus, but it's also focused on the broader ecosystem, taking 14A and applying it to their designs.

Great. Thank you. Dave, maybe I can ask you as the -- maybe I couldn't ask this question as the CFO, as much as I can, but as the interim co-CEO. But when you think about the transformational act that you're trying to pull off over the next few years, do you think that there's still an aspect of you're making decisions for the Product business that aren't the best thing for the Foundry business and you're making -- and vice versa. Because there -- and my question really revolves around, I know you've created a separation between the 2, and your -- and the Product business is keeping the Foundry business, honest, as you say. But at the end of the day, you're still part of one company. And so -- and at the end of the day, the Product business, namely the client business, is what keeps the fabs full. And so is there still a push to make decisions there? It seems to me like there's still a bit of a push where you're making decisions that might not be the best thing for the Product business to keep the IFS and manufacturing where you want it to be.

Yes. I mean, I might say it a little differently. I'd say that we are definitely guiding the Products business to drive a lot of volume into our Intel foundry, for sure. Because we need to keep the foundry full, we need to get the learnings and so forth. But we are giving them some ability. And obviously, some of the products that are coming out next year have heavy external foundry content. And so they do have that flexibility built in. They're also -- they're all Intel shareholders, too. They want to make sure the whole company is successful. So they're going to be biased towards driving volume into foundry. But that said, they got to sell good products. And so that's the tension, and that should make Naga and his team better. They'll drive to be better because they know they're competing against external foundries that -- one of which is world-class. And that only serves to make our processes better over time. And so I think it's a good model, actually. Ultimately, probably, there'll be more and more independents. But I think foundry will also be better and better and more competitive as time progresses, too. And so I think it works out.

And how do you think about just Naga's comment about the building or planning CapEx more to the high confidence part of demand. I think we can all debate how successful we think foundry is going to be. But as the CFO, when you're thinking about CapEx and now with sort of what the Board wants to do, how should we think about how you're planning CapEx? Because is this still too much? It seems like it could still come down quite a bit.

It can come down, you're saying? Yes. Yes, I would say, bring -- Naga bringing in this memory mindset to the company has been super helpful. And as I was leaving last night after -- to go have dinner with somebody, I think one of the guys that works for Naga came over to me and he said, oh, he would not believe the amount of detail we're going through on CapEx. We're going line by line through this stuff. And he's challenging everything, and even -- or like picking off things. And some of it is for reuse -- he's challenging the reuse assumptions. He's challenging whether it needs to even be invested in some specific tools. So...

That 360 is going to be really bad.

But the discipline is, I think, great. And so I think that we are starting to crack how we need to operate as a foundry is, you got to absolutely think about every dollar going into capital and scrutinizing it for sure. In addition, we're just thinking about how to invest differently, I think, which is Pat had talked about in prior earnings calls. We're really moving towards a model where we're going to assume a relatively GDP-type growth rate for the business. And by the way, it's not just capital, it's also operating expenses, too. We think -- we're going to invest based on those growth rates. And if things turn and we think they're going to be even stronger, maybe it requires us to have a little bit more investment, either on OpEx or capital. We'll make those decisions, but the fall-through should be quite good if we're modeling it that way. And so I think that's absolutely the right way to run the business, as Naga was already intimating. It's not the way Intel necessarily thought about capital investment in the past. And so what we should see is incrementally better ROIC for capital dollars to get deployed because we're just way more conservative around how we roll out capital.

So how did -- I mean how did you think? I mean you've been here for many years. So how did -- how is this -- I think it's still hard for some of us, and I've been getting this question a lot the last few days. This tone, how is that different than what it's been the last 2 years? Because it isn't like you've been throwing money up on a wall.

Yes, of course not. But we have been investing at a rate that's -- that assumes a rate of growth for our first customer that's higher than probably we should have assumed. Clearly, in the like '21, '22 era, that -- for sure, that was happening because we thought PC volumes were going to go up, not down, from kind of '21 level. So that clearly is a big change for us in terms of the mentality. I would say, also, you rely on the team to understand how to drive reuse. And if everyone only knows a certain kind of way of developing the lines, they're going to go with a certain way of doing that. And so I think it does take some fresh perspective. The one thing that Micron, I think, has done incredibly well, like even before it started to see this recovery is, they just knew how to squeeze every wafer out of a piece of equipment they could because they were competing against overseas competitors that had much lower cost of capital and much lower cost of operating. And so they just -- they're just very good at that, and that's kind of the culture that Naga brings to the organization that I think is just a refresh for us.

I would also say a couple of -- if I may add a couple of things. One is the technology development that had to happen in the last 3 years to catch up from being behind on 10-nanometer, to be on par and competitive required more investment into TD. So that's one part of the investment. Now as we look at getting to an on-par pace, after 18A, as you look at the next few nodes and getting into a regular cadence, there can be more rationalization of what CapEx needs to happen in technology development. And then when you take the space capital, there's been a lot of space expansion that has happened in the last 3 years. Of course, with the demand curve that was in mind and as you rerationalize the demand curve, you still have that space that you can put to utilization so you can meter how you're going to spend on space going forward that's more rationalized to the higher confidence demand. Until that space is fully utilized, you do not want to be continuing to go on a building space. And then the last part is the equipment capital. That's where some of the mindset changes and the cultural changes and how we run our business needs to come, which is back to being extremely capital-efficient. Don't starve the growth. We want to spend to this high-confidence demand curve, but eke out as much as you can to get the growth. So operationally, try to get more efficiency from the fab, but be prudent about it. And then have the right triggers, where, if more capacity, more demand comes in, then you can go spend the CapEx. I do feel there's efficiencies that can be gained as step 1, and that's where we are focused on.

Dave, when you sort of think about, in this new world that we're going to see the next 6 months or so at Intel, what's the part of CapEx that is sort of sacred? I mean, I would think that you wouldn't want to cut into technology development to that part of CapEx. The way I think, it's a pretty significant piece of CapEx.

Yes, and it is. The way I break it out is, I think there's 3 components to CapEx. There is the TD, just advancing the process-type CapEx investment. We clearly don't touch that. That's the crown jewels of the company. The second is shell ahead. We can flex that. We do want to be -- have some white space available so that if we do see upside, we can equip it. It's not certainly less than 50% of the total CapEx spend is shell. So it's -- and it's depreciated over 20 years. And so you're going to get a good ROI on it, almost, regardless. So you're willing to put a little in there, although we have adjusted it based on the demand profile. And then there's just a strict kind of capacity-level CapEx. And that's the thing that mostly Naga and the team are flexing to move the CapEx envelope down from where we were.

And just a question around like how much you can do with the manufacturing network given the SCIPs, both 1 and 2. We kind of read those documents in it, and it reads as, in some ways, there are certain milestones you have to meet in those fabs. And so does that limit your ability to do what you want with the fab -- with the fab network, the SCIPs you signed?

Not really. I mean, look, once you build a fab and you equip the fab, you want to fill a fab, regardless of whether there's a SCIP attach to it or anything. The worst thing in the world is to have a fab and have it running half full. So we are absolutely motivated based on the structure to fill the fab. It's not to 100%. We have -- it's a capacity that's very manageable for us. But we were going to have to do that anyway. And it is up to us to -- Naga has a complicated network of processes running in different factories, and we're always trying to optimize that to make sure that we're filling what we need to fill to drive the best cost per wafer possible. And so the SCIPs do allow us flexibility around that to be able to do that.

And Dave, how much -- I get asked this question a lot with the new administration coming in. There are some questions, maybe the CHIPS Act money probably doesn't get pull the grants, but there's some potential renegotiation of the milestones you have to hit to get that money. And I know you have the SCIPs, but the CHIPS grants are a fairly big piece. And of course, the credits are going to be not just as how do you spend the money, you get the credit. But the grant piece, is that a piece that you see as maybe at risk potentially?

I don't think so. I mean we signed an agreement. It's an ironclad agreement. It lays out all the milestones. And when the payments come, it's -- we're already actually 1/3 of the way probably through the milestones, quite honestly. So we should start -- as soon as we can get the payments processed, we'll start receiving them. There's always potential for some adjustment and thinking from the administration. And if that's the case, we'll work with them. But I -- my sense is that the new administration does value U.S. manufacturing. I think they do see the security risks of not having leading-edge manufacturing on U.S. soil. So I would assume that we're going to be aided by the new administration as we execute on the strategy. I'd also point out that when you look at the incentives that we're getting to invest in the U.S., 75% of it is actually investment tax credit. It's not the grant money. That's a little bit more straightforward in terms of how it comes to us. We make an investment. It somewhat depends on whether it's fab, space or equipment, but we make these investments. There's a time period in which an offset is triggered. And then we file it with our tax returns and the money comes back. So it's pretty straightforward, and I think we have good line of sight. It's going to be a pretty significant number for us and helps us a lot on the CapEx side. And also, we end up to -- it's an offset to depreciation, so it helps on the cost per wafer.

And Dave, how do you think about -- who knows what happens with tariffs, but how are you planning around the risk of tariffs?

Well, I mean, part of it is -- and Naga can chime in, too, but part of it is it's -- we have a global footprint for that reason. I think that puts us in a good place, quite honestly, relative to the others is just because we have a good geographic dispersion of our factories. We can move things around based on what we need. And in fact, actually, in the prior tariff that was hit in China coming back to the U.S., because we had this kind of global network, we were able to flex it. And actually, tariffs were a very minimal impact to us as a result.

That's right. And with the factory availability in China, where we can do local for local, and that's part of the strategy also. So we do have the flexibility.

Great. And then, I mean, the SCIPs are, basically, you're sharing the economics in Ireland and Arizona. So how do we think about like what the long-term margin potential is for the business? Because in some ways, does that cap what the long-term margin potential is for the company? And how should we think about the potential progression on margins? I know you're not very optimistic about next year. It's more sort of out into '26, where you can see a bigger inflection in gross margin. Can you talk to that?

Yes. Okay. So I was thinking you were talking about foundry, but you mean total company gross margins?

Total company, yes.

Yes. So on the margin front, I'd say the bigger challenge for us, SCIPs don't really factor in. It ends up being a noncontrolling interest item on our P&L. So what you kind of roll it down to net income, then there's a noncontrolling interest and then there's a net income with noncontrolling or adjusted for noncontrolling interest. So that's where we kind of see that cost show up. As it relates to margins, for us, I think the big thing that's influencing margins next year is Lunar Lake. We have Lunar Lake, which is largely fab outside. There is a component of it that is fab inside. It's got memory in the package, and we're just a pass-through. I couldn't get Naga to give me a good deal on memory. So it's a pass-through on memory. So that suppresses the margins. And depending on how that product goes, it's kind of a headwind to us on the gross margin front. That said, on the foundry side, their margins are going to be looking better in 2025. They'll start to see a lot of the cost reduction improvements that we've seen. They'll see more mix to EUV wafers, which have higher margins. It should improve their business. So I'm expecting their margins to improve, and it ends up just being how strong is Lunar Lake next year. Does that weigh us down? A little bit, and kind of suppress any sort of incremental margin we might see. So at the end of the day, what we were thinking was, hey, it's probably like a 60% fall-through or 40% to 60% fall-through that we'll see on margins based on how Lunar Lake goes. Now as you point out, the next year, then we start seeing some real improvement because the next product, major product on the product side is Panther Lake. Panther Lake is an 18A or has 18A component in it. So we start to see wafers come back. So we'll see this memory thing go away. We'll see more wafers going internal. We'll do better in terms of our cash cost per wafer. So that should be a nice tailwind for gross margins for us. And then we're obviously continuing to do the blocking and tackling type improvements on the foundry's gross margins. The product margins, I think, beyond just this memory issue, we do have a few product sites on the road map that are all kind of roughly in the same kind of range on margins. And so you'll note that margins are kind of in the low 50s. They'll slip into something with a 4 handle on it. That's likely to be a story on the product side for a couple of years as we start to work through towards the generation of products that we're really starting -- we were designing for cost, really focusing on the architecture, then those margins actually have some material improvement. In the meantime, what the Product business is doing, what we're trying to focus them on in terms of improving gross margin is all that kind of ancillary aspects of -- now that they're a fabless company, they can't rely on volume to be the variable for their margins. So they are not as worried about test times, which is not something they particularly spend a lot of time on. The packaging and what specific packaging they use, they're focused on that. So they'll do a lot of those things, which was the basis of creating this new reporting structure that will be the things that incrementally improve their margins.

Great. I have many more questions to ask you, but we're unfortunately out of time. So thank you to both of you.

Yes. Thank you, Tim. Appreciate it.

Thank you.