Intel Corporation (INTC) Earnings Call Transcript & Summary

Good morning, everyone. Let's get on to the next presentation. We're very honored to have David Zinsner, the Chief Financial Officer of Intel on stage. I'm going to read the safe harbor statement. It's second, and its excitement to the risk factors in your 10-Q, that actually would be more exciting, believe it or not, a little inside joke. But before we begin, please note that today's discussions may contain forward-looking statements and 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 our non-GAAP financial measures, including reconciliations where appropriate to the corresponding GAAP financial measures.

So with that fun stuff out of the way, why does the government own 10% of you guys now?

Yes. Unless you've been living under a rock here, you probably saw the news. The government has put $8.9 billion into the company for about 433 million shares, plus about $240 million -- $240 million warrants. Look, we had about $5.7 billion of grants still outstanding. We also had received $2.2 billion. There were certain concerns around whether we would hit many of those milestones. They also have clawback rights on the $2.2 billion, and then there's the Secure Enclave money. So there was a significant amount of uncertainty as to whether we've received that -- much of that cash. And the government came forward said, hey, rather than do this in the form of grants, what do you think about converting that to an equity holding? And we saw a lot of advantages. One, we were already thinking, hey, we likely will need a little bit more cash on the balance sheet, given that's one of Lip-Bu's core strategies is to solidify the balance sheet. And so this was a quick way of getting initially $5.7 billion in the door. By the way, we have received it. We got it last night. So that's on the balance sheet. So that was one thing. It eliminated the need to access capital markets in any other way in the near term. Also, like I said, given the uncertainty, this made -- this effectively guaranteed that we get the cash. So that was also pretty important to us. And then I think having the U.S. government invested in us, and invested in our success, is absolutely helpful. At the end of the day, we're going to have to bring out the processes and execute on the business, but to have their support and backing, I think, is helpful with customers. I think customers will acknowledge that, that takes us to a different level in terms of how they view us. And we don't need to get -- obviously, when you take the grant money and switch it over to equity, it is -- it does have a dilutive impact. We're getting a P&L benefit from the grants, and now we're issuing shares, which is also diluting us. But when you run the math, it doesn't take a lot of volume of Foundry wafers for us to make this accretive for us. And so we ran that math and as we were doing the analysis and said, hey, I think based on this ownership, we will see that level of business going forward, and thus, ultimately, should be pretty accretive to our existing shareholders.

What's the -- I've heard various interpretations of the warrant side that you mentioned and the 51% threshold and all those sorts of things. Describe why that occurred? Why is that mechanism in the agreement?

Yes. Well, I mean, I think initially, the government was thinking about this as some upside play for them. But when -- as we kind of work the negotiations, we ultimately made the -- it's a 5-year warrant for what was roughly about 5% of the shares outstanding. And we created a trigger that as long as we maintain a majority share of the foundry business, it would never trigger in that 5-year period. And so effectively, it reduced the cost of that warrant to something pretty nominal because we do have high confidence, we're going to have this foundry business. We might, as we've said before, we might take outside investors into the Foundry entity. We are structuring things in a way where we're separating ERP systems and creating a separate management board structure over time for Foundry. But I don't think there's a high likelihood that we would take our stake below the 50%. So ultimately, I would expect it to expire worthless. Now I think from the government's perspective, they were aligned with that. They didn't want to see us take the business and spin it off, or sell it to somebody. And so in some ways, you could view this as a little bit of friction to keep us from moving in a direction that, I think, ultimately, the government would prefer we not move to.

Do you expect the U.S. government being involved changes the probabilities all else being equal, and we'll get into some of the other triggers that are necessary. But all else being equal, improves the odds of your Foundry business, garnering external customers?

I think it's good endorsement. There's no question about that. But ultimately, most of what will make the Foundry business successful is really in our hands. We've got to execute on the process. We've got to delight our customers. We're going to make sure we've got capacity there when they need it. Those things, I think, are going to be primarily the reasons why customers come to us. But endorsement helps on the margin, and I think ultimately will be helpful for us.

And then you also had a $2 billion investment from SoftBank. How did that come about? And was there any interaction or relationship between the U.S. government and SoftBank, those two moves that you...

Yes. Yes, it was coincidence that they fell all in the same week. We have -- we have been working for a number of years with SoftBank on ways to partner, and we continue to have those conversations. They're very much invested in AI, as you know. And we're looking for opportunities where we can intersect with that, and provide solutions that either may be useful for them, or maybe in concert with them useful for others. And the conversation evolved to, hey, we might be interested in making an equity stake and ultimately, as we kind of work on the development of the relationship, the SoftBank wanted to somewhat fast track the investment. And as I said, we were looking to put some cash on the balance sheet. So it was a good opportunity for us to do it quickly, get a good quantum of capital, a good slug of capital in an one fell swoop with kind of a quality investor. So I think we'll continue to have conversations with them about how we can partner and do things together that can be beneficial to both companies.

Is this likely to be the end of these sorts of capital raising efforts now that you've gotten, whatever it is, $7 billion, $8 billion, I guess?

I mean this was -- actually, this was a great quarter for us in terms of cash raise because we sold almost $1 billion worth of Mobileye. We're within a couple of weeks of closing Altera. That will generate $3.5 billion. We had the $2 billion from SoftBank, and the $5.7 billion we just got from the U.S. government. So we're in a good cash position, I would say, I feel pretty good about where the balance sheet sits. And we're, as you know, in the process of delevering now. So we had about $3.8 billion of bonds maturing this year. Some of it, we kind of left the debt outstanding, effectively by kind of converting it to commercial paper. But ultimately, by the end of the year, we'll be down $3.8 billion in debt. And our intention is to do the same with the debt maturing in '26. So I think we're in a pretty good place. Now it's is an expensive business, obviously, and depending how successful the Foundry is there may be some capital needs as we kind of plan out our capacity build out over time. I wouldn't think it happens until we have pretty significant demand on 14A. And then as we talked about, there's likely going to be some opportunity for outside investors in Foundry, and that will probably be our second opportunity to raise cash to fund the growth on the Foundry side.

Earlier this year, you and I talked about the fact that oftentimes, you need a financial investor to set the value of a subsegment of your company before a strategic investor would come in. Has that already occurred with these two separate investments that we already discussed? I know it's in the company as a whole, not just the Foundry side. Or would we still have to have the kind of precursor be a financial before a strategic potential customer would put money into the Foundry?

This is in the foundry?

Yes.

I don't know. I think we're open to both ways. It depends on the strategic and how comfortable they are at determining their own valuation for the business, and whether that is relatively aligned with how we view the value of the business. Assuming that's the case, then the likelihood is we would take a strategic investor without financial. But we constantly talk to various firms out there about their level of interest on the Foundry side. And so I wouldn't dismiss the possibility that we might take investment in -- from financial sponsors as well. Now I would just tell you, we're probably a long way off from either of those things. We've got a lot of work to do to get the Foundry business to a level where we feel confident it can operate somewhat quasi autonomously. And -- first, we've got to get through 14A evaluation with customers. We've got to ramp our 18A successfully, which we're in the process of doing. Get through those things. I think there may be an opportunity at some point to take some outside money into Foundry, but it's -- I think we're years away from that.

Let's pivot over to the technology side of things. We'll get to 14A in a minute, but is success in ramping 18A, a prerequisite for 14A working? Or are they different enough that they're not completely codependent?

No. I mean we're taking all the learnings of how -- obviously, this was elongated in terms of our improvement on 18A. We would have liked to have gotten yield stabilized sooner. But as we were adjusting performance, yield tends to be what gets impacted. We're in a good -- really good place on the performance, and now we're making kind of steady incremental improvement on yields on 18A. And we'll take those learnings to help us on 14A. But there are differences. I mean with 18A, it was a process that we've intersected -- or intercepted early to make it a Foundry node. Whereas 14A from the ground up was always built to be a Foundry node. So the maturity of the PDKs is completely different in 14A. Just our level of rigor around the ecosystem is completely different versus 18A. So it's already out of the gate looking better than where we were on 18A at the same time. But we'll port learnings. I mean, with every one of these processes, you learn a bunch of things in the previous processes that you take into the new one to help improve defect density and improve performance.

And Panther Lake still on time?

Still on track. Yes, we look -- things are looking good. Our first SKU will be out by the end of this year. And then we'll have more SKUs in the first half of '26, and you'll really start to see the volume ramp as we kind of migrate through 2026.

And then the 14A side, on last quarter's 10-Q, you guys put in a risk statement, which we were joking last night, nobody ever reads, but this one actually was worth reading because you scared the pants off everyone. So you basically said 14A you need external customers. Otherwise, the return isn't there, and Lip-Bu kind of summarized that even on the call. What led to that risk factor being for the first time inserted in your documents?

Yes. I mean, look, the lawyers are always looking for areas where we should be elaborating in terms of our risks. And the one thing about the SEC filings is you put all the risk potential corner case risk factors that are -- that could materialize. You don't put any of the mitigating factors. You don't put any other things that might be upsides that might happen. I mean that's just the nature of an SEC document. So it's important not to read too much into a risk factor. We're constantly reviewing them and updating them. And pretty much every risk factor you read in there, sounds horrible if it were ever to happen. So it was interesting that this one got so much attention because a lot of them would be bad if obviously, if they materialize. But I think more than anything, Lip-Bu wants to -- he wants to execute on 18A. He wants to execute on 14A. But he wants to maintain financial discipline while he's doing that. And that's something. As he came in to be CEO, he really emphasized to the team. And so what we're trying to communicate is that the philosophy around why we're getting into the Foundry business. There's opportunity there. We think it's value creating for shareholders as well. But the volumes required at these new nodes in terms of the spending level, it's hard to get an ROI unless you've got more volume than we have. And we were able to do it with 18A. I think it will turn out to be a good node for us from an ROI perspective without Foundry customers. I do think that we have an opportunity in the second wave to get Foundry customers into 18A. But 14A is different. We -- there's enough expense associated with 14A, investment associated with 14A. And the volumes for us, we are going to have to really emphasize 18A, and we're going to be able to do that with the tile structure such that by the time we're ramping up volumes in 14A on our own is not going to be enough to drive an appropriate ROI for shareholders to make that investment. So we do need customers outside of our own products business to drive volume through that business to make sure that we get -- to get the right ROI. And we're just articulating that to the investors so they understand what we're trying to do. We're not going to put capital in place until we have firm commitments from customers that they're going to use 14A, and that we will get the requisite volume that drives a good return. Now Lip-Bu, I think if you ask him, every day, he kicks the tires on 14A. He becomes more and more confident around our ability to be successful there. The fact that 18A -- we already have made this point, but the fact that 18A is now making steady improvement on the yield. It's also giving us a high degree of confidence that 14A will be successful. So it's not to say that we have any diminished confidence around 14A, but we're just going to maintain discipline around how we manage the build out, to be able to get the right return.

The fact that Lip-Bu talked about it so proactively on the call, the risk factors and everything, and you put it in the 10-Q, and I know all the caveats that you just said, that you don't get to say, the mitigating side of the equation. I've heard people think that, or kind of posit the idea that you could scare potential customers away, or you could kind of get them off the sidelines that they have to step up now if they ever want to. Otherwise, they're going to deal with the monopoly. Which one ended up happening?

Well, I'd say it this way. I'd say -- I think customers for a couple of reasons, will get real value out of us as a Foundry. Number one, it helps diversify their supply chain, which is obviously helpful. But more importantly, it's always good to have multiple suppliers to help on the pricing side. And every customer -- or every supplier brings something unique, obviously, to the table. And I think that will be the case for us with 14A, and there will be opportunities where that is the differentiated technology that certain customers will require. And so that's how they'll make the evaluation and that to me is whether -- how we'll win the business. On top of that, they obviously have to get comfortable that our process is a good process. And we're in the early stages with customers working with them on the data. We didn't announce when we expect a 0.5 PDK, but it's coming in the not-too-distant future, that will be a key milestone for customers to evaluate our technology. And so it's -- to me, I don't think anything in our risk factor is really driving customers one way or the other. It's what we're doing on the field in terms of supplying them a technology that they need at a price that works for them. That will ultimately determine whether we're successful there with customers.