Intel Corporation (INTC) Earnings Call Transcript & Summary

I am Srini Pajjuri, I'm the semi analyst here. And we're delighted to have Intel today, John Pitzer, who heads the IR team there and also the CVP of Treasury. Before we start, John asked me to read a forward-looking statements, so I'm going to try this. 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 Intel's non-GAAP financial measures, including reconciliations where appropriate to the corresponding GAAP financial measures.

Thanks for that, Srini.

Yes, that wasn't easy, but, hey, made it. Okay. Yes. Thanks for joining, John. So it's been about 8 months since Lip-Bu joined and a lot of changes gone through a major restructuring. I would say, the past 3 months, a lot of news flow, mostly positive. So maybe start with that now that the restructuring is done, the balance sheet is in pretty good shape. And also you got into a partnership with NVIDIA. That certainly has been quite positive. So let's talk about what's on the plate for the management as we look out to the next 6 to 12 months. Maybe we can talk about what are the top 2 or 3 priorities for the management going forward?

Yes, it's a good question. And by the way, thanks for inviting me and appreciate the time this afternoon with everybody in the room. I mean listen, I think at our core, what Lip-Bu is trying to drive as far as the transformation is really cultural. And so the top priority, there's a lot that we're trying to get done at the business unit level. but it all really is built on a foundation of getting the culture right. And I think Lip-Bu has talked about this in several settings. He really wants to get Intel back to being engineer-focused customer-centric organization. And I think as part of the restructuring, we've done, I think we've done a lot to really simplify the organization, take bureaucracy out, drive, I think, better, faster decision-making. And I don't think you're ever done getting culture right. And so I think if Lip-Bu were here, he would still stress that getting the culture right is really the foundation of changing a lot of what we need to change at the business unit level. Now I know that wasn't your question. Your question really was at the BU level, what are we focused on? I think priority #1 is really getting a good and successful launch of Panther Lake, which also coincides with yields and yield improvement. I feel really good about the fact that we're going to get our first SKU out by end of year. I'll put a plug in for people in Vegas in January at CES. You're going to hear the CCG team talk a lot about Panther Lake and our OEM partners talk a lot about Panther Lake, and we're really excited about that launch. I think sticking with Intel Foundry, clearly, landing at Intel A external customer is pretty critical over the next, call it, 6 to 12 months. And I'm sure you'll have some questions around that. And then as we pivot to sort of the business units, I think job #1 is to really, I think, establish a road map in both CCG and DC AI that drives both market share gains and gross margin improvement. I know you've got some questions there. So I won't elaborate. And then I think finally, it's really prosecuting our accelerator strategy in AI. That's both on the ASIC side of the house. and on the GPU side of the house.

Okay. That's a good start. Maybe we can start with the NVIDIA partnership because that gets a lot of attention. So NVIDIA is investing $5 billion in Intel. At the same time, you're going to be part of NVLink Fusion. Maybe talk about what's your current position is when it comes to AI, head node CPUs and how this might actually change it, maybe enhances it. And also, if you can kind of touch upon what sort of workloads are we talking here because NVIDIA seems to be doing quite well with their own ARM CPU and now they're entering a partnership with you. So how do you see that opportunity? Are there different workloads that target? Just anything you can tell us about the timing and the potential opportunity of that.

Yes. It's a really good question, and we couldn't have been more pleased to make the two announcements we made with NVIDIA in the calendar third quarter. One was the collaboration, both on data center and client. The other was the $5 billion investment, which we hope to close by year-end. Relative to the collaboration, I think it was really important to get that done, and that was the culmination of over a year's worth of work. And so there was a lot of back and forth between both companies at the core engineering level to really drive that collaboration. And I think it really is an endorsement of at least two things. One, really the criticality of the x86 ecosystem. As much as there are new applications around AI, AI still fundamentally sits on top of and leverages compute architecture that's been x86 for the last 40, 50 years. And I think NVIDIA saw value in getting locked into that x86 ecosystem. The other really important endorsement, this is a multi-generational agreement. And so you can imagine the amount of tire kicking that the engineers at NVIDIA did looking at our road maps, both in client and in data center over multiple generations. And quite frankly, they like what they saw, now to your specific question, what does it do for us? I mean, clearly, today, we've got a pretty strong position in head node CPUs going into AI accelerated servers. As NVIDIA did more with both Grace and what will be Avera, there were some questions that investors were asking about our ability to sustain that position. And I think the disadvantage we had prior to this collaboration is that both Grace and Avera I think, utilize the NVLink integration that we now have with this collaboration with NVIDIA. And so the way the data center side of the relationship is going to work is we will provide them with a custom Xeon part that they will then integrate into their system and they will have the responsibility of going to market, and we'll get all the benefits of having that NVLink fabric with our custom Xeon. If you look at the client part, I think that clearly, we have the opportunity to build really a new class of PC parts that we're pretty excited about. And the way that, that relationship is going to work is they will provide the graphics tile through bailment, which means that the customer will actually pay them for the graphic style. But we will be responsible for integrating that graphic style with our CPU and bringing it to market. And the reason why we had this bailment agreement is we didn't want to have the same economics around this NVIDIA collaboration that we have today, for example, with Lunar Lake, where we have the embedded memory which is really revenue at 0-calorie gross margin. And so that's why it works best for us to move down this bailment path. And we're pretty excited. We think that it's TAM expansive both in the data center and in the PC market, and we're looking forward to getting product out to market as quickly as possible.

Yes, it makes -- so just to be clear, so, this is a custom CPU that you're going to sell directly to NVIDIA? This is not going to third-party hyperscaler?

That's correct. And they will integrate it, and they had the go-to-market responsibility on the system -- at the system level.

Got it. And you haven't talked about the timing or potential?

We have not. I mean, I think clearly, this is a key focus. I actually think that Lip-Bu and Jensen are having meetings every other week with the team to do deep dives. And so our intent is to get this to market as quickly as possible, but we haven't set a time line.

Got it. Got it. And then on the PC side, client side, I mean you have your own graphics development, right? Today, you sell a lot of integrated GPUs. So I mean when you say you're going to kind of package NVIDIA's RTX into Intel CPUs. How does that mean are you targeting a particular market within video solutions? Or what happens to your own internal tailwinds?

Yes, I think we're going to continue to pursue our own internal strategy. Just like on the data center side, NVIDIA will continue to pursue their ARM strategy with Grace and Avera. Time will tell as to what portion of the market this will actually cover, but we are going to be able to bring, I think, a new level of performance on graphics to a notebook type class PC, clearly initially targeting the high end, but there are aspirations that we can broaden the market further as we develop this relationship more.

Okay. That makes sense. Maybe switching gears a little bit here. I mean, talking about the overall AI strategy for Intel, right? On one hand, you just mentioned -- there's a lot of opportunity on the x86 CPU itself. And then I guess on the PC market, you guys talked about potentially shipping 100 million ARPCs this year. But at the same time, when it comes to XPUs, it's supposedly a $1 trillion market and you're missing out on that. What's the strategy? I guess where do you think you can intersect that market? And what's the approach internally maybe anything you can tell us about?

Yes, I'm glad you asked the question the way you did because oftentimes, we over rotate to our AI strategy. Being really our accelerator strategy. And to your point, AI is driving a lot of what we're doing in the PC market today and in the traditional server market. It's also a big sort of driver in what's going on with the fab business on the wafer side and the advanced packaging side, which I'm sure you'll ask about later. But specifically, on the accelerator side, I think that we're still in the process of kind of bringing our strategy fully to market. Lip-Bu has talked about the idea that we're looking at really an inference specialized to go after the inference part of the market. If you look at sort of what's going on in the hyperscale training market, we think that market is already well served with NVIDIA and with ASICs. And so it's really the opportunity to go after a genic AI, physical AI and really optimized for inference is what we're targeting.

Okay. That makes sense. And then there was also a mention of customization and ACE again on the last earnings call. So just to kind of level set, are we talking ASICs similar to what Broadcom and Marvell are doing? Or is this something different? What's the approach here?

Yes. I think we are talking similar to what Broadcom and Marvell are doing today. I'd like to remind people, we're actually an ASIC company today. We have ASICs multiple wins more in networking than not that now fall under Srini's purview in the central engineering group. And so ASICs are not new to us. We have a lot of the building blocks we need to be a broader participant here. They haven't just been optimally managed. And I think that's one of the reasons why Lip-Bu Tan brought Srini in from Cadence, to...

Not me, right?

Not you. Just to be clear. Different Srini. To come in and really drive that business. And this will be across x86. It will also be in for accelerators. And quite frankly, it's sort of agnostic. Could it be x86, yes? Could it be ARM-based, Absolutely. Does it need to be built in our fabs, could be? Does it have to be built in our fabs, No. And so I think that there's a real opportunity here. And quite frankly, one of the first things that Lip-Bu did when he joined the company as CEO was go out on a listening tour to customers. And one of the things he identified is that while customers are doing a lot of ASIC activity, they're not fully satisfied with the suppliers that they have today. And so we think we have a real opportunity here. It will take time. And I want to be very clear, we earn a journey -- but we're pretty optimistic about the assets that we bring to this market.

What do you think is the differentiator here? Obviously, Broadcom would argue that they've been doing this for almost 30 years since the day I mean there's still a and Marvell, they come from IBM legacy. What is that Intel brings to the table that the market?

I think the two biggest benefits we have is one, the x86 ecosystem that we've been investing in for decades and decades. And there's clearly importance of that. I mean even if you look at the ARM server market today, ARM has been very successful for internal workloads at hyperscalers. It's been significantly less successful for some of the external workloads. No reason why there couldn't be an X86 base ASIC to try to address that market for some of the hyperscalers. I think the other real advantage we have here is just system know-how. And I think that that's going to become critically more important as you start thinking about some of the next-generation products that these hyperscalers want to bring to market.

Right, right. I mean there's a lot of chatter about even companies like Broadcom, potentially doing Iraq level solutions, right? I mean, you obviously have done historically some reference designs on that front. But do you feel that you have all the pieces that go into building a rack system at this point? Or do you think you need to acquire any of those?

Yes, it's a good question. I think that we have a lot of the IP blocks that we need. It doesn't mean that we have them all. doesn't mean that we have to acquire. It could be that we license. And so stay tuned on that front. And again, I want to be just clear. We're excited about this opportunity, but it will take some time for us to go off and execute.

Got it. And then obviously, we talked about balance sheet being pretty healthy right now. There was some speculation in the market about potential M&A. I don't expect you to comment on that. But I guess would you completely rule out M&A as part of your AI strategy? Because it looks like there are enough start-ups out there and have solutions out there that could be quite interesting.

Yes, it's a good question. And again, I'm not going to address any of the specific speculation that might be in the marketplace today. But I think clearly, there are a lot of strengths that Lip-Bu brings to the role as CEO. His turnaround at Cadence, his relationships across customers, suppliers and quite frankly, competitors and his knowledge of the ecosystem through his investments at Walden and I think that when the Board chose Lip-Bu to be CEO, they chose him because they wanted to leverage all of those strengths. And so as you think about our M&A strategy, I wouldn't rule it out. I think, quite frankly, tuck-ins could make some sense. I also think partnerships could make some sense. One of the things that I think Lip-Bu and Dave have plenty of is pragmatism, and I think they're going to be very pragmatic about how we go off and prosecute this strategy.

Makes sense. And then just switching gears a little bit to the near term. server demand, it's been pretty healthy despite the concerns about ARM gaining share or AMD gaining share, et cetera. You talked about supply constraints, et cetera. But talk to us about the road map on the server side. AMD hosted their Analyst Day and they gave us some targets about market share. They're targeting more than 50% share. So I'd love to hear your thoughts on how you think about it, not just this quarter or next quarter, but as you look out to the next 2 to 3 years, what's the strategy to kind of stop those share loss and maybe potentially regain some share?

Yes. We've been pretty front-footed and clear on this. We're not where we want to be competitively on our solar road map, and we have work to do. I'm sure you saw that we hired a new head of the data center group recently Kevork coming in from Qualcomm, prior to Qualcomm, NXP. I think he brings a lot of strengths and knowledge from transistor to SoC to system, which is going to be important as we rebuild sort of the road map on that on the product front. Having said that, I also want to make sure that it's clear that we say server market as if it's one market, there are a lot of different segments within the server market today. And quite frankly, we've been very pleased by the ramp of Granite Rapids. It's still early in the ramp. Quite frankly, if we had more wafers, we'd have more revenue. So we are going through a pretty tight supply situation. I think as you think about the road map from here, one thing I think it's important to highlight is, as you know, these product design cycles are -- take multiple years. And so as Lip-Bu came in the door in March and this year, a lot of Diamond Rapids was already baked from a design perspective. Clearly, I think he and Kevork are trying to make tweaks around the edges to do better there. And I think as you think about the different sort of flavors of Diamond Rapids, I think at the high end, we feel pretty good about where we are competitively. But really -- and I think Lip-Bu talked about this a little bit on the Q3 earnings call, it's really Coral Rapids, where I think we have the opportunity to really have sort of a clean sheet approach and implement some of the key, I think, IP blocks at Lip-Bu and Kevork think are necessary to bring our competitive product.

Got it. And then maybe we could touch upon a little bit on the margin side of things. Data center margins, if you kind of compare client margins are doing actually pretty well. On the other hand, data center is actually somewhat depressed versus history. So what is driving it? Is it more on the cost issue when it comes wafers? Or is it more R&D spending? Just any color on that.

Yes, I mean, listen, I would be very clear, I don't think we're satisfied where our margins are for either client or for data center today or for the overall company. And so we've got work to do. And I think we've got sort of a plan in place to show improving gross margins as we go throughout '26 and beyond. Having said that, on the data center front, I think that as we've been trying to catch up on performance, we've been over-rotating to performance over cost. And we haven't really been as cost-efficient as we could be. I think that's one of the, I think, muscles that Lip-Bu is bringing back to the organization. this notion that in order to be competitive, it's not just being competitive on performance, you have to be competitive on cost. And we think that our PC road map starts to get there with Panther Lake even more so with Nova Lake. And again, as I pointed out earlier, it's going to take some time on the data center side.

Right. Right. Yes. So just to follow up on the margin front. You did pretty well in the quarter. You did 40% better than expected, but your guidance suggests 3, 4 points of decline sequentially. And then you made some comments about next year, what are the puts and takes? Maybe we can kind of revisit them, right? So on one hand, the demand is very strong, your supply constrained. I think the pricing is generally pretty healthy. But on the other hand, you have new products ramping and you also have some mix headwinds. So as we think about next 4, 6 quarters, what are the 2, 3 puts and takes that are going to impact the gross margins?

Yes. Really good question. I'll start by reiterating, we only guide for 1 quarter out. But to your point, at the midpoint of our revenue, we did guide gross margins to about 36.5% in Q4, which would be down about 350 basis points sequentially. Let me kind of deconstruct that for the audience. About 50 basis points of that is just taking Altera out of the numbers. Now that we've completed the stake sale to Silver Lake, we've deconsolidated that. Gross margins at Altera were above corporate average. So 50 of the 350 is Altera coming out. Of the other 300 basis points, I would say it's plus or minus equally sort of distributed amongst 3 things. One, the early ramp of Intel 1A, which is always pretty expensive, especially as we're just getting wafers out of Oregon, it won't be until the beginning of next year that we start to get wafers out of Arizona with a much better cost structure. And then it's pricing action that we're taking on Aero Lake and Lunar Lake to kind of navigate through this tight supply situation. And I think the tight supply situation is going to be here for a bit. We talked about on the earnings call Q1 being the peak of tight supply, but it will persist beyond Q1. And as we try to navigate through this, we are taking actions that are both gross margin accretive and create incremental gross margin headwinds. On the gross margin accretive side of things, we are favoring sort of servers over PCs. And we're probably deemphasizing the low end of the PC market. And we are raising pricing on parts in 10- and 7-nanometer Raptor lake because of the tight supply situation. On the other end of the spectrum, because we know we're shorting the market, and we're trying to do what's right for our customers, we are bringing price points down on both Lunar Lake and Aero Lake to fill different parts of the PC stack so that we don't undership the market by too much. And those are sort of the puts and takes. I would tell you of all the things probably the most meaningful is Lunar Lake. As you know, we've got the embedded memory in Lunar Lake, and that does create some gross margin challenges. I would say at the end of Q2, we would have been pretty confident telling you that Lunar Lake volumes probably we're going to peak in Q3, be flattish sequentially in Q4 and then start to decline after that. Now with some of the demand shaping that we're doing, Lunar Lake is absolutely going to grow sequentially in Q4. and it's absolutely going to be up next year year-over-year. And that does create some incremental challenges, but we think that's the right trade-off as we try to do the right things for our customers.

It makes sense. When do you think Luna Lake will kind of peak out in terms of -- as a percent of the overall mix?

Well, I want to be clear, Lunar Lake is a very small portion of the mix. But given the embedded memory and the cost of that embedded memory, you don't need it to be a significant part of the mix to have a detrimental impact on margins.

Right. And there are no supply constraints on the Lunar lake front because it's mostly...

Well, it's a good question. I mean we clearly talked on our Q3 earnings call that we are having supply constraints. But I also think that there's some fly constraints in general across the industry, whether that be substrates with T-glass or quite frankly, some of the memory concerns that have popped up of late. And I think TSMC has done a fantastic job as a supplier getting us wafers, but they're tight as well.

Okay. So when you talk about supply constraints, we're not just talking about Intel 10, 7, which is in-house, but also the wafers that are coming from TSM are tight as well?

I think we have better availability of supply there because of some of the decisions we're making. Because remember, we are actively moving our internal supply away from PCs towards servers. In large part because we're undershipping the server market by a wider margin than the PC market. And so we want to make sure that we capture that opportunity.

Got it. Got it. And then obviously, Panther Lake and the yields, T&A, there's a lot of focus on that. Maybe looking at history, when you launch a new product like Panther Lake, how long does it take before that product kind of becomes I guess, a higher percent of the overall mix. When does that crossover happen?

Yes, it does take, I think, longer than people suspect. What I will tell you because we haven't been that explicit. As you look at the expected ramp in Panther Lake next year. And remember, Panther Lake is just a notebook part. And so if you compare that to the last 2 notebook launches that we had with Aero Lake and Meteor Lake, there's nothing unusual about the Panther Lake ramp as a percent of the mix. We clearly want to do better on the gross margin side. I think what's important is when Lip-Bu joined in March, he was unsatisfied by yields and he was unhappy that the progress on yields was sort of erratic. I think one of the things that's changed dramatically over the last 7 or 8 months, is we now have a predictable path for yield improvement. We've talked about in the past that the industry average yield improvement on a new ramp is about 7% per month. And we are now on that curve for Panther Lake, which is giving us some confidence as we launched the product this quarter. And like I said, if you go to CES in January, you can hear a lot more about that.

Okay. And then just to kind of follow up on the margin comments. I guess on the earnings call, you sounded optimistic about margins improving through all of next year and maybe by end of next year, kind of getting to at an accretive level. I think that was a term use. So I guess it depends on the yields and you talked about them right now. But longer term, given that this is a new process for you and assuming that the yield shakeout where you expect them to be. How should we think about your longer-term margin potential here? I mean, I don't know when the last time you guys gave us a long-term model. But are we talking a 5% handling front of gross margin? Is it a 6 handle? How should we think about that?

Yes, it's a good question. Let me first back up a little bit on the lead up to your question. When we think about Panther Lake, absolutely, as we go through next year, increasing volume will help us come down the cost curve. I'll remind you that initially on any new process, we take wafers from Oregon. Oregon is where we do all of our technology development and then move into quasi high-volume manufacturing. Those wafers tend to be pretty expensive. And most, if not all, of the Panther Lake wafers this year are coming from Oregon. As we transition into Q1, you'll start to see wafers coming in from Arizona has a much better and different cost structure, and that ramps throughout the year. As far as the more important part of your question, the second half of your question on the long-term gross margins, I'm not going to get ahead of Lip-Bu putting out a financial model we've discussed internally about when is the appropriate time to have an Investor Day. Stay tuned on that front. My guess is it's going to be some time in the second half of next year. But clearly, there's nothing in sort of the way we're thinking about our business. that wouldn't suggest that we should have industry comparable gross and operating margins with our fabless peers. And quite frankly, with the margin stacking of being an IDM, we should do a little bit better than that.

Okay. We'll definitely look forward to Analyst Day. I want to switch gears to the foundry side. Obviously, it's a challenging business. And I think you talked about A potentially leading to a breakeven point at some point. I think in the past, you said maybe 2027, I don't know if that's still valid or not. And then also, you made -- I think since Lip-Bu took over, there's also a comment that if you don't get a material customer for 14, you might actually stop process node development. So my question is, is 2027 still the target for foundry breakeven?

Yes. So what we've said historically is that the ramp of 18A, mostly on the back of internal products should be able to drive Intel foundry to be op profit breakeven on a run rate basis exiting 2027. And that is clearly where NAGA is still driving the organization. I will give you an important caveat though. When we win a customer for Intel 14A, we will have to layer on expenses well ahead of getting revenue. And so I do think for transparency purposes, as a sort of customer traction materializes, it's likely to push out that end I'm thinking though most investors will be okay with that because it will be confirmation that we can actually stand up an external foundry.

Yes. It's probably a good problem to have. We've got a couple of more minutes. I want to see if there are any questions from the audience. Okay. We'll keep going. So again, the 14A process node comment that caught a lot of attention, right? But at the same time, you also said until 2030, you're good with AT&A AAP for your internal product, so you don't have to. You actually don't need 14 for internal products, right? So talk to us about if you were to hypothetically give up 14 development, what does that do to your I guess, OpEx or CapEx? How does that impact the business model?

Yes. I always hate the hypothetical questions because they only get me in trouble. I want to be very clear. We are all in on the development of Intel 14. And we're feeling good with the early engagements we're having with external customers. And I do think it's important to point out that 14a is, in many ways, a very different node from an external perspective than Intel A. I mean I think simplistically, and I'm sure that the teams in TD are going to give me a hard time when I get back to the office. But I always think about any node having 3 phases. There's sort of a definitional phase, the development phase and then the high-volume manufacturing phase. On 18A, in the definitional phase, we were only engaging with Intel products. It really wasn't until the development phase that we actually started soliciting feedback from external customers. which meant that a lot of the choices we made at the transistor level was really to optimize for the internal product groups instead of external customers. In addition, it was really our first foray into understanding PDKs, process development kits. And we had some growing pains on getting our PDKs to be true industry standard. I think the big difference on Intel 14A is that we are in the definitional phase engaging with external customers. And what that means is we're getting earlier, more and better feedback on how we're doing from those external customers at 14A than we did at 18A, and our PDK maturity is much better. And we are now bringing to market industry standard PD both of which help tremendously. I'd also point out that at 18A, we were changing from FinFET to get all around. We were also adding backside power. We were making major changes. At 14, it's a second-generation gate all around. It's a second-generation backside power. And we have stated and been very clear. If you look at where we are today on 14A on performance and yield versus a similar point of development on 18A, we're significantly further ahead on 14. So we're feeling very good about 14. Now to answer your question, on the Q2 earnings call, when we first introduced the risk factor around 14A, Dave did mention that maintenance CapEx was sort of that high single-digit billions number. That's the way you should think about our capital spending as we get through the 18A capacity build-out, if 14A weren't going to happen, but I want to be very clear, we are all in on 14.

Got it. That's all the time we have. And thanks, John. Appreciate it.