Intel Corporation (INTC) Earnings Call Transcript & Summary

All right. Thanks for joining us, everyone. It's our pleasure to host Intel. Man, what more can we say? It's got more subplots and characters than a Tolstoy novel and infinitely more fun to read about. We have one of the best CFOs in the industry, Dave Zinsner, I put that in print, so I'm not just BSing, because I definitely BS a lot. Again, Dave, thanks for coming. I do have to read a safe harbor statement. Hold on, I got this e-mail to me. You have the right to remain silent. Wait, wrong statement. Okay, before we begin, please note that today's discussion may contain forward-looking statements. Wohoo! I hope, 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 our non-GAAP financial measures, including reconciliations where appropriate to the corresponding GAAP financial measures.

Well, all right. Let's get to the good stuff.

Thank you for that.

Okay. So I have to ask the 3 or 4 obligatory government SoftBank investment questions before we get to the fun stuff. So the government recently took a stake in Intel, maybe give us sort of the synopsis of how and why that happened and the advantages and disadvantages?

Yes, sure. So the -- maybe stepping back for a second, I would call this a great deal for Intel. I think it's a great deal for the shareholders of Intel, but obviously acknowledge, it's also a great deal for the government, it's a great deal for the American people, a great deal for the taxpayer. So overall, I think this is one of those unusual situations where it's just kind of a win-win for everybody. But from an Intel perspective, what we had was roughly $5.7 billion of grants still to go along with $2.2 billion we had already gotten. Almost all of that was in an uncertain situation at this point. We weren't sure we were going to get any of the remaining $5.7 billion. But even the $2.2 billion we had been granted, had clawback rights to it. In addition, we had $3 billion plus on the Secure Enclave side that also had some uncertainty to it. So what we did with this transaction was eliminated all the uncertainty around all that -- those grants and then exchange that for an equity stake by the U.S. government. And with an equity stake, they are now somewhat an endorser of Intel and certainly incentivized to help Intel be successful. And I think that is a tremendous -- provides tremendous value to the shareholders of the organization of Intel. And we also get this money upfront. We were -- it was for the most part upfront, the $3 billion gets paid out over a couple of year period. But other than that, the rest of it, we all know we have and that allows us to support our balance sheet. Lip-Bu had talked about as he came in, he wanted to see a stronger balance sheet, he wanted to see us delever. This enables us to more easily delever and yet keep our liquidity at a level that we think it should be so we can manage through CapEx needs and so forth. So we feel pretty -- we feel very good about it. In addition, there were a lot of kind of milestones and handcuffs associated with the grants that go away as a result of this transaction, and that gives us more flexibility. It doesn't mean we're not going to do the things that the U.S. wants us to do in terms of building a stronger U.S. manufacturing presence within the United States because obviously, we are committed to doing that, but it does mean we have all the operational flexibility we should have at the company to run the business effectively for the best returns to our shareholders.

Okay. And is the government going to be a silent partner or is Donald Trump going to go on the board? Or what the -- what are you going to change?

So the shares ar e -- there's no governance associated with it. There's no operational input that's associated with it. And the voting is such that they signed an agreement that, for the most part, they'll vote with Board recommendations. There are a few exceptions associated with it. But for the most part, they will vote with how the Board is recommending votes are placed. I think if you look at them from just a shareholder perspective, they are very much aligned with the rest of our shareholders in terms of they want to see a return. They're looking -- they're looking to translate this into incremental value to the American taxpayers and be able to use it down the road for other purposes. And so they couldn't have been more clear about that as we were talking to them around their motivations for owning the stock. So just like everyone else, they're going to want to see the stock go up and that's what we're focused on doing.

Right. Well, you guys must be doing something right, because you got the government SoftBank, a lot of people want to give you money. Maybe talk about the SoftBank investment as well, how that came about, why do that?

Yes. I think for the most part, the way I would look at it is, I can't remember what the exact number Lip-Bu told me, I want to say he said, he and Masa have known each other for like 39 years or something like that. And so they go back a long ways. And of course, if you know Lip-Bu, his Rolodex is like no one else's. He knows everyone in the industry. And of course, he's -- as he's taken the seat as the CEO, he spent a lot of time talking to everybody about opportunities. And Masa is no exception. And I think through those conversations, Masa got a lot of conviction around Lip-Bu in terms of his ability to transform. They want to be -- SoftBank wants to be invested in areas that take advantage of AI and of course, foundry is one of those areas that can take advantage of AI. And so I think you just saw an opportunity to make an investment at what he thought was an attractive valuation. And again, we couldn't disagree with them there. And so we're excited about having them as an investor. I think at this point now, as we look at the capital we've raised, we feel pretty good about where our balance sheet is. We think we have now at this point strong liquidity. By the way, this quarter itself was a significant quarter in terms of incremental capital raise. We sold almost $1 billion worth of Mobileye stock. We're expecting to close Altera in the next few weeks, that adds another $3.5 billion. I think that the SoftBank money will come in by the end of the quarter, they have to do some regulatory filings and assuming that all of that is pretty clean, we should get that $2 billion. And then we got -- as I said, last week, we got the $5.7 billion from the U.S. government. So it was a good quarter for us in terms of cash inflow, our cash will be quite strong relative to last quarter and puts us in a great position now to do what we really wanted to do was delever the balance sheet. So we had about $3.8 billion maturing this year, and our intention is that all of that will mature, and we will not refinance any of it.

Can you just swipe it out because all this cash in here?

Essentially, yes.

Could other semi companies joined the investment parade, either straight in until now or the foundry whenever you spin out the foundry? Is that on the table?

Yes. Look, it's certainly a consideration. I think what you'd like to see. And one of the reasons we took foundry, and we set it up as a subsidiary of the parent company, was to enable -- partly was it to create operational separation a little bit because customers are going to want to see that. But in addition to that, it was to set it up in a way that, hey, we could take money into the foundry business separately. And there are customers on the foundry side that might like the notion of investing in the future of that foundry business. So it's not inconceivable that we do that. I think the likelihood is that it won't happen anytime soon because it's not quite investable yet. But at some point, down the road, I could see that happening. Obviously, the one thing I didn't mention in the structure of the government, financing is that they also got warrants associated with Intel stock and it triggers off of us selling below -- or selling more than 50% of the business. I think as long as we hold 51% essentially, it doesn't trigger, and it's a 5-year warrant. And so our motivation will probably be not to sell below 51% because that would dilute investors significantly unless it made economic sense for investors for us to do that. And so the likelihood is if we are selling stakes in foundry, it would be something less than 49% that would be sold off.

Now one thing -- one famous statement by Lip-Bu. He said, "No more blank checks if there's no 14A customers on the foundry side." So it obviously caused a big stir. What exactly did that mean. Will Intel, like, go fabless or...?

Look, I think -- I think as Lip-Bu has spent more and more time partly because of how 18A is now starting to make steady improvement on yields and partly because of the early data around 14A and then in addition, just now the customer engagements on 14A, he's getting increasingly more confident around 14A and his confidence was already relatively high coming into the job. And so our intention is to continue to engage with customers and be ready to build capacity when customer demand materializes. But what we wanted to do was make sure investors understood that, hey, it's not like we're going to do this without any real financial discipline. And I think you could argue that we spent money ahead of demand over the last few years, and that has not served us well. So what we were trying to articulate is we will build the capacity when we know we've got the demand for that capacity, and we will not do it before that. And that's just smart, right? And now is there a corner case where we don't get the customers and [indiscernible] go, we're not building out the capacity? Yes, of course, that's a possibility, and that's why we put that in the risk factor session. But I would say it's a relatively low likelihood that it goes that way. I think for the most part, we're pretty confident that 14A will get the right level of capacity or demand to justify the ROI on that investment.

Okay. Just a few clarifications. So when you said no 14A customers that's obviously just merchant, right? That's not Intel internal manufacturing, correct?

Well, I think what he's saying is if we do not get 14A customers externally, it's going to be hard to justify that node just generally. And so yes, Intel products will be a big customer on 14A, but it's the totality of that demand, and we need to make sure it's to the level that we can generate a reasonable ROI for shareholders.

Yes. And you've been saying that for a while. Can you just run us through the math what changes at 14A, where you need that extra capacity or that extra units to run through the fabs? Is there like something changing? And why doesn't it exist at like 18A or something like that?

Yes. I think a couple of reasons. One, the demand internally is pretty strong. And I think the challenge with 14A, at least earlier on, is we're going to be running 18A a long time. And so we have been working to transition faster off the older nodes because they don't perform as well. But now that we're on 18A, it's actually a good node for us. We're going to want to milk that node for our internal products as much as possible. So 14A doesn't flip on as significantly as early in the life cycle of 14A. So that means we got to fill in the gap with external customers on 14A to make sure that we get to the right level of wafer starts to justify that. So that's part of it. In addition, 14A is more expensive than 18A. It's not significantly in terms of investment. So it's a higher cost wafer for sure. And partly, that's because we are expecting to use high NA, UV tools in 14A, which was not the case in 18A, and part of it is just the steps and so forth along as we progress down lithography curve. There's just more steps. The spend -- the investment is more significant in that drives a higher requirement for the amount of wafers we produce.

Yes. And so you guys have -- are already using TSMC for tiles that sort of thing. I mean, certainly, a big change from 10 years ago. How do you see that dynamic or that relationship going forward? Will you use more or less? Or will it sort of vacillate depending on how Intel foundry does with Intel products or maybe give us...

Yes. I mean, I think in some ways, it will vacillate just because of which products do well and which ones don't because we will be putting products on TSMC forever, really. They're a great partner for us. Obviously, I think everyone understands that their support, their technology and so forth are great. And so we intend to continue to use them. Now we probably are at a relatively high level of outside wafers as we kind of progress into the back half of the year because a lot like Lunar Lake is almost all -- or actually, it's all TSMC. Arrow Lake is mostly outsourced as well. So those -- we wouldn't expect to be that significantly skewed to external wafers, generally speaking. And so it will probably normalize to something, but it's still going to be a significant investment that we'll be making for external wafers over the foreseeable future.

Can you give us a sense of roughly what percentage of your manufacturing is done at TSMC now? And what would be the reported range going forward?

I'd say we're probably 70-30 internal versus external at this point. Like I said, I would think the 30% comes down, but it's still going to be pretty high relative to, I think, where we were historically like 10 years ago, obviously.

Has that done anything to your capital intensity up for now?

Yes. I mean that's -- the reason we -- there's a couple of reasons, obviously, we do it. I mean there's -- we're giving the products business some autonomy around choosing the right process for the product. And so in some cases, they're making that choice to go outside. So a lot of times they're making the choice to go inside. So that's driving, certainly, part of the dynamic. I think in addition to that, we have this, what we call, Smart Capital model, where we -- and there was a number of different things that drove that to kind of keep the CapEx in check, recognizing that it's a fairly capital-intensive business to build out a foundry business. And one of those elements of Smart Capital was, "hey, we will flex around external foundry because demand has some volatility to it, and you need to be able to manage through that volatility." And so you always want to keep some flex external, so you're not building out capacity that you're not -- you don't end up using.

Okay. Just on the 14A and Lip-Bu's comments, when will Intel know if 14A is going to work or not?

Yes. I think it's sometime in '26, we'll have a good feel for how things are going.