Intel Corporation ($INTC)

Welcome to this session at our Bank of America Global Technology Conference. I'm Vivek Arya from BofA Semiconductor and Semicap Equipment Research Team. I'm really delighted to have the team from Intel join us this afternoon for this fireside discussion, David Zinsner, Executive Vice President and CFO -- just wanted to make sure, not exit Executive Vice President and CFO; and John Pitzer, Corporate Vice President of IR and Treasurer. And as always, I'll start with actually a disclaimer statement then go to my questions, but please feel free to raise your hand if you have a question. So I'll just start with the disclosure. Before we begin, please note that today's discussion 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. I'm glad I didn't have -- I remember all that.

Okay. Wonderful. So with that, really warm welcome to you, Dave and John. Really glad that you could join us. Before we kind of get into all the exciting stuff about CPUs and IFS, Dave, you've been on this almost a 14-month journey, right, when Lip-Bu joined the company. Maybe just walk us through what are kind of the strategic directions that you thought about at that time? What are the actions? Because one thing that we have been surprised us from the outside is when Lip-Bu joined is we thought Intel would go to a more product-focused company versus a manufacturing company. And it's actually been -- one could debate more of the right mix versus being more manufacturing focused, right, than before. But walk us through your perspective, right, at the same time?

Yes, I think when Lip-Bu started as he -- or maybe before he started as he's making the assessment around why does Intel exist, I think we saw 2 things. One, a legacy of building CPUs over decades in x86. And second, a prowess to call it in manufacturing, both in terms of front end and back end. And those are the things that we have done over the history of Intel. And obviously, execution issues are prevalent, but it's kind of the core underpinnings of the company. And as he comes in and looks at that, you look at -- it's largely just kind of treading along on those 2 aspects, you get a GDP, GDP-plus level revenue growth, then you get pretty good margins, and that's what you live off of. And by the way, that's how Intel operate, at least for the prior decade. But then there's 2 dynamics that are going on as he comes into the scene, and one felt earlier than the other. One is on the manufacturing side, there is this clear need for a resilient and more secure supply chain, and there's a need for a company that can provide that for logic that is based in the U.S. that does development and does the manufacturing in the U.S., which we have that position. And then as we progressed going through the month, earlier months of Lip-Bu's tenure, it became apparent that the CPU market, which ordinarily would be this kind of like bump and a long growth business is actually going to have explosive growth as a result of AI, and I know we'll go into those 2 things. And so the market is now moving in the favor of Intel. This then becomes, well, okay, why is Intel not being successful? And it's really an execution issue at its core. And if you step into, okay, it's an execution issue. Why is there an execution issue? And then there's a number of different aspects of it, but it is basic element it's a cultural thing. We had a cultural problem at Intel. And so I think more than anything, that's what Lip-Bu addressed early on while he was there, while he was still learning a lot of the things about how the business is run. He was working on culture from day 1. And you can kind of see it in the things that he did early on. We had 12 layers of management. He collapsed it into 6 layers of management. We had, I think at our peak, over 400 vice presidents, he collapsed that to 200. We had over 100,000 employees. He collapsed that to under 80,000 employees. And when he came in, he made a comment, which I think was maybe the biggest issue around culture at Intel, which is he said, "Hey, if we have a problem and you come to me, then we have a problem and it's something we have to work out. If there's a problem, and you keep it to yourself, then you have a problem and you're going to get fired." And that really drove -- that, combined with this restructuring of the organization and the collapsing the layers and so forth, really drove a level of transparency that we just didn't have before. And of course, when you're dealing that in the early months of that activity, it sucks because you are finding out a whole lot of information about stuff that's going bad that you never realize was going bad. But it allowed us to kind of work through a lot of the issues early on that has improved our execution dramatically as exemplified by the results of last quarter and guide for this quarter. And then on top of that, the other thing I think he really wanted to drive is kind of a financially disciplined company. And of course, music to a CFO's ears, that started with the balance sheet. We strengthened the balance sheet significantly in his early months in the company. And then on top of that, really worked the financials of the company to improve the cost structure, improve margins. We took a bunch of expense out on operating expenses that also kind of built it. So now we're actually in a little bit more of the blocking and tackling, quite honestly, of the business, which just drive relentless execution on the product portfolio, whether it be in terms of products coming out in client and data center or that's delivering process and improving yields at the right clip, bringing out the next process, improving those yields at the right clip. Maybe one last thing I think he did and actually, quite honestly, hasn't even put the finishing touches on it, but we're close is he was looking for the best out there in everyone's individual discipline come on to the company. And I'm sure, early on, it was a challenge for him to get recruiting. As the stock started to perform, that helped out a lot. But we have put a number of new people in seats at the CEO staff level, let's call it, people that are world-class in their specific area, a lot of them obviously coming from the outside with a kind of a unique fresh perspective. That said, there is plenty of talent inside and he identified the ones that had the talent inside, elevated those people into positions that allow them to improve execution, improve the company and so forth.

Got it. So big kind of culture change.

On the mix, I think it's pretty balanced, by the way, between products and manufacturing or foundry. In fact, I'm sitting on a lot of the meetings that Lip-Bu conducts and I would say it's probably 50-50 as to what we spend our time on, 50% of the time we're spending on things related to the product business, 50% of the time we're spending on things that are related to the foundry business.

Got it. So let's first talk about the product side. And as you mentioned, the CPU growth has kind of caught this industry, I guess, from the outside caught us by surprise. What I'm also surprised by is just the pace of how the TAM expectations have been upgraded, right, like 60 to 100 to 120, and now the latest is 200. But it is Intel call in this spectrum? And more important to that, Dave, how does one conceptually -- is there a simple unit time ASP math so we can understand that number?

Yes. I think I would say we have scenario planning that we do, and we have a few different possible scenarios as to how things play out in the CPU space, in particular in the data center space, which I think you're talking about. I think probably the easiest answer to that is probably hard to articulate exactly which number we're going to hit. I think it's going to be a big market. Obviously, the ratio of CPUs to GPUs is growing meaningfully as we get from training to inference, inference to agentic and multiagent and reinforced learning. So it's just going to drive a lot of CPU requirements. Quite honestly, big is enough. I mean we've got enough demand out there that if we can do a good job executing on the ramping of supply. We should have no issue with growing our revenue meaningfully in the data center space.

Got it. One thing that there seems to be at least some consensus on is that if one were to segment that server CPU market, right, there is kind of your traditional enterprise type market. then you have the sort of head note, what I would describe as within the AI cluster. And then you have the standalone agentic CPU racks. Is that the way you think about? And is there a simple way to kind of -- so how would you segment -- even if there isn't like an absolute number, whatever it happens to be $100 billion, $200 billion, is there a kind of percent by x percent, y percent segmentation?

Probably not something I want to kind of double-click into at this point. I would say as you look at it from an enterprise to hyperscale level, it used to be enterprise was above hyperscale. And obviously, that shifted meaningfully with what hyperscalers are doing in terms of AI workloads. And then as it double clicks, probably difficult to make the percentages or I should say, predict good percentages for the individual pieces. All of those markets are going to be big markets. There's no question about that. We're not segmenting it that way. We just want to sell CPUs into as many of those markets as possible. I would say what we are really good at is single-threaded performance. So things that operate better as a single single-thread performance are areas we're going to have, I think, a good position and a good participation in.

Got it. Now the CPU to GPU ratio, right, without going into the technical aspect of it, would you agree that the biggest part of the CPU growth might be in places where it is kind of bundled with the accelerator, whatever that accelerator happens to be, right, whether it's a GPU or CPU or whatever. So unless Intel has a competitive accelerator, does that limit -- is that a right pushback, you feel?

Yes. Well, we are bringing out Crescent Island. So we are in the accelerator business. We're also partnered with NVIDIA to operate with them. So I think that will clearly be a significant market, and we think we have a good position to participate meaningfully in that area. But there'll be -- there's a lot of work that CPUs have to do besides just what's going on in the core rack system around storage and orchestration that sits away from all of those -- that workload, and that's also going to be a significant market. It has to be because CPUs, in most cases, are the only way to efficiently manage that activity.

Got it. Now one thing, Dave, just because you were in other companies, right, where shortages really played a big part of showing the growth, but then over a longer period of time, as soon as the shortage went away, right? Pricing and other factors changed right very quickly. So from what we are seeing in the CPU market, right, today, if you can make a CPU, you can sell it, right? At least that's how we perceive it. But do you think it's easier to resolve shortages in server CPU because we're not talking about different kinds of products, right? We're just talking about capacity allocation type decision. So let's say your foundry competitor were to make a different capacity allocation decision. Does that impact your CPU opportunity? Like how much of this is just the here and now of a shortage phenomena versus a large secular growth market?

In terms of demand or in terms of pricing?

In terms of the demand and pricing, right. Also, that matters.

Well, I think demand, just talking to -- I talked to all the CFOs of the hyper scalers and look at, a, what they think in terms of their overall CapEx, what they think of their CPU percent of that total CapEx. One, it's clear over a multiyear period, they see demand going up meaningfully. And two, they also see the percentage of that CapEx going up. So I think I feel pretty comfortable that this year, next year, the following year, the demand is going to be strong. I'm not worried about that. On the ASP front, I mean what we try to do is we want to give the customer a product that performs to a level that they give us commensurate pricing that goes along with that, and that's mainly our focus. I mean, this isn't the memory Market. My last company, where things supply understrips demand and pricing spikes and it goes the other direction. That's not this market. I'd say we do see some inflationary pressure. So we are seeing ASP increases. That is obviously going to impact the top line over the course of the near term. But largely, we're not driving our ASP decisions off of supply/demand imbalances. What we are doing is trying to drive more long-term agreements with customers. So we're locking in a price, for sure. We're locking in a volume commitment. And then that enables us to do a better job of planning out our capacity and making sure when we're investing in capacity, we're going to see customers take that supply when it comes off the line.

Got it. So in Q1, what we saw was your server CPU business grew, I think, in the 20%, 25% kind of range, mostly through ASP. I think that's the data we got. So some of these LTAs and other discussions, do you think that kind of goodness and pricing that is still to come? Or have you already seen it?

Yes, there will be price -- I would say, keep in mind on the data center side, core count is going up. So ASPs, by virtue of that go up. You know what I mean? Everything you put more -- if ASP per core is roughly stable, you're going to see ASPs go up in data center regardless just because of the core count. But that said, even on an ASP per core basis, that had generally been a dynamic of falling pricing. It has certainly stabilized. And in certain cases, we are seeing like-for-like ASP per core pricing going up. And I think that has a solid path towards realizing that over the longer term.

Got it. Now the competition, right, first, within the x86 price side, I think your competitor has outlined a growth rate of almost like 70% for this year. And they are saying that almost 2/3 of that is units rather than pricing, and they are talking about preferential allocation from their foundry. And then on the ARM side, and I realize you can participate in ARM through IFS, and we'll come to that question. But how do you think about the competitive landscape, Dave? Like does Intel have a good competitive part that can withstand competition in x86 and ARM? Or do you think that is still under...

Yes. I think you said it best. You could -- if you just stamped something and called it a CPU right now, it probably would sell. So in the near term, it's all about supply. And we are ramping supply as we speak. There will be a meaningful increase in supply of 3 and 18A over the course of the next, call it, quarters or so. That will ramp up to meet what we're seeing from a demand perspective. We're even actually this year going to see Intel 7 go up in terms of wafer starts, at least initially and then probably next year, I think we can start to wind it down a little bit in '27 and allow Intel 3 and 18A to pick up the slack. Longer term, it's going to be about products. We have to deliver products that are performing. On client, I think we're in a stellar shape. You could argue right now, maybe we were a little bit weaker on the desktop side. But 18A on the notebook side is ramping, it is ramping as fast as -- I mean I think it's the fastest ramping product we've had at least in the last 5 years.

5-plus years, yes.

On the client side. So I mean, it's selling as much as we can produce. And our ramp in general has been quite good, mainly because 18A is now making really good progress. on yields month-to-month, which is helping a lot. And we also are ramping facilities now both in Oregon and in Arizona, which is helping us, I guess, a lot. And then what was the other part of the question?

Yes, just competition versus ARM.

Yes, right. Yes. And then on the data center side, I would say we have. In certain cases, we have a very strong product. In other cases, particularly in multi-threading, not as good. And when you look at Diamond Rapids, which is the product after Granite that will come out, that does not have multi-thread, SMT basically. And so we will have it back in Core Rapids, which will be the next product. So this was back to kind of cultural changes. This was Lip-Bu listening to customers, hearing what their needs were and then adapting the product portfolio and product road map to what he was hearing. This is an example of that. We've made steady progress in terms of improvement. I think Granite is certainly better than prior retention core will definitely be better than prior products. And Diamond, in its swim lane, not counting the SMT, will be better than Granite. So we'll make steady improvement. I think we have a really good road map. We brought in a new person from the outside, what was it like 6 months ago or something like that, Kevork. He's doing a good job like tearing things down and making sure that we're back to executing at a high level. It helps that we have leveraged our own nodes in that area. And now those nodes are becoming more performing to 18As, what they call PPA price. Our power performance area is much better than Intel 3. So as we kind of migrate our process nodes, we should see continually better performance.

Recently, we saw NVIDIA also announced their client portfolio at Computex with the N1X that they are designing but with MediaTek. Do you think of that as kind of competition at the high end of the market? I know a lot of it was kind of advertised in advance, so it should not have been a surprise one way or another but do you see that as kind of incremental competition in the demand?

Yes, of course we always look at ARM-based solutions nice competition in the client space. I think we've shown we can do pretty well against those solutions given our share and performance. So I feel really confident about our portfolio. but we take all competition seriously. And we aim to always bring out the next product to be better than the product before.

I just might add on remember last fall, I validated the x86 ecosystem with their collaborative agreement with them across both client and data center. And as we made that announcement last fall, we kind of told the investment community. This isn't going to stop us from wanting to bring our own discrete GPU to market. just like it's not going to stop NVIDIA from wanting to bring their own discrete CPUs to market. You should really think about it as an additional arrow in their quiver. But to Dave's point, we feel pretty confident about not only the value of the x86 ecosystem but our road map there as well. I think the other really important point as you think about the client market is all of the buzz that we've been talking about today is really around server CPU. Client is going to have a big statement to make in the AI infrastructure as well because we sort of on the last earnings call, we talked about CPU density, we stopped at agentic and multiagent. Beyond agentic and multiagent, you're going to have physical AI and you're going to have AI at the edge. And a lot of that demand is going to be serviced by client-based CPU platforms, and that's going to be a significant growth -- a new growth opportunity for us. And we would expect that because it's such a great growth opportunity to see additional competition over time.

And by the way, we're already strong in the edge. We've been doing edge for a while. So that obviously gives us an advantage. And I would just say Panther Lake's already in physical AI solution.

And you recently made a hire, right, from Qualcomm, right?

Alex.

From that market, okay. Let's talk about IFS. If you could just help us guess at the record straight, Dave, which is where is 18A in terms of its yield on an absolute basis? Is it comparable to where your foundry competitors are? If not, when can it get to that level where you can say, no questions asked, this is as competitive as you can find?

I would say it this way, I don't know, early last year, I think the challenge around 18A was 2 things. One, we tried to do too much at once. And it took a while to get that settled, and we heard that from customers. And I think second is we were trying to play performance and yield and trying to improve both at the same time. It was like trying to fly the plane and fix the wing at the same time basically. And what we -- when I was king for a day, I took Naga and I put him over TD and Manufacturing. And then they really just focused on first, stabilizing performance. And so they stabilize performance. Then once you've got your performance stabilized, then all you do is you work yield every month. The second thing that we did when Lip-Bu joined is we really opened up our data to our vendors to really help us learn things that we could do to improve yield and that made a dramatic difference. Surprisingly, it seems like 101, but there was a resist back to the culture thing, there was a cultural resistance towards providing significant amount of data. to vendors. Once we fixed that, we really started to get some feedback into what we could do to improve. And then it was just our team just grinding it out every month. And probably was a little bit up and down in the first couple of months. But after that, we made basically what industry standard improvement over month would look like we were seeing that improvement. And then, of course, we extrapolated that okay, at the end of '25, we want to be here; at the end of '26, we want to be here; at the end of '27, we want to be here. And I would just -- and ultimately, the goal is to get to the yields that generate great margins is kind of out in this end of '27 time frame. I would tell you that based on the progress we've made to date now, we are likely going to pull in those milestones by at least a quarter. potentially even a little more. So that, I think, is a testament to, hey, things are actually going better than planned and have been over the course of the last the last several quarters. That said, there's more in front of us, and we've got to do more to drive the right level of margins. Right now, we look at Panther Lake kind of on a consolidated basis, those margins aren't to the level that they're at least neutral, if not, hopefully, over time, accretive to gross margins of the total company. So more work to be done. But the progress to date has been very good, and the yields are actually at a respectable point at this point.

Got it. So just to understand, pulling by a quarter means that if in the past, your yield progress would have led to achieve breakeven in IFS by the end of '27. Now you can pull it by a quarter. Is that...

Yes. Relative to the milestones we set forward set forth right, exactly. Now I would just say we have a more aggressive plan for 14A than 18A. And when you look at -- kind of it's obviously early and it's its maturity. But when you look at kind of yield and performance measures at this point in time and maturity of 14A compared to that same moment in time for 18A, we're ahead. So we're already ahead on 14A. This is a way more an industry standard PDK that we're bringing out for 14A. So now the advantage is it all the stuff that I said that we bit off more than we can chew on 18A, and it really took some time. Now it's just a little bit of a rinse and repeat. I mean engineers are going to hear this and go bonkers on me, it's a lot -- it will be a lot easier to do 14A because it's just using a lot of the gate all around and backside power and so forth that we implemented in 18A.

Understood. One thing I heard recently is apparently, the thought of targeting Intel's financial model to the Rule of 45. Did I hear that correctly?

Absolutely.

And if I were to look at just where consensus expectations are, right, well this and next year, it's low double-digit kind of growth. and kind of high single-digit, low double-digit kind of operating margins. My simple math suggest you're not getting to that. So what is the right time frame in which Intel can strive to those kind of aspiration?

It's a multiyear aspirational goal. I'd start with that. But there are a number of things that we should see that improve the profitability of the business. Already, I think we got OpEx to a level where we can grow revenue at a faster rate than OpEx growth. maybe we can even hold it more flattish and that should drop leverage. And of course, as you grow revenue in a business that's largely fixed on the cost of sales, we have an opportunity to improve margins over time. And then on top of that, I would just say that as we execute better and products come out on time performance, we have an opportunity on the pricing side to drive better margins. And we've talked about this on the foundry front that we'd like to get to breakeven as we exit 2027. The only reason at this point, we see that we would not get to breakeven on the foundry side is we're just so more wildly successful than we expected on foundry, and that just drives a whole bunch more fixed start-up costs to the business that could impact it. But I think there's a great opportunity to drive this Rule of 45, and we have the advantage of having both the manufacturing and the product margins and margin stack goes in a way that should give us a real opportunity to hit that. I would just -- Lip-Bu's been pretty focused on this measure and his expectation is those that are doing these longer-range plans have a probable path towards getting to this Rule of 45.

I just might add, I think the important part of the Rule of 45 is I think Lip-Bu's philosophy on creating value for owners is growing profitably with stress on a growth profitably. If you look at our long-term CAGR, and I'm sure you've looked at it, it's like 1990 to 2020, we were a 3% CAGR top line company. If you look at the opportunities that we have in front of us today, not only with the resurgence of the CPU TAM but quite frankly, the opportunities we have in ASIC, the opportunities we have in advanced packaging, the opportunities we have in foundry, we are going to be a solid double-digit growth business structurally going forward as we execute. And I think that's sort of the key point thinking around the Rule of 45. It's not just about the profitability you can drop to the bottom line. But I think Lip-Bu is really intent on driving a much better growth profile for the company.

Got you. The last question, I'll actually try to jumble in 2 questions, let's see if I can. So first, Dave is that -- most successful kind of foundries have capital intensities, right? That could be in the mid-30s or even higher. So that's kind of one part of the equation because if your operating margins get into the 30s, I mean, CapEx intensity might be there. So that's one aspect of the question. The second is that with the fab buyout, your leverage ratio has now gone back up to, I think, close to 4x. So how are you managing these different trade-offs there you would like to grow faster but that had involved much higher capital intensity and takes you away from free cash flow, right, John mentioned. So how are you kind of balancing all these factors?

Yes. I mean, it could be in those intensity levels. I actually think we should, probably longer term, operate more in the 20s in terms of CapEx intensity. That's what we talked about in the last couple of years as we were looking at it. In the near term, CapEx intensity could rise. And again, it will be a high-class problem because it will mean that we have a lot of growth opportunities, particularly on the foundry side that would drive that level of CapEx intensity. We do have the advantage as a company of -- again, with this margin stacking, that gives us an opportunity to generate good cash flow, irrespective of the fact that we have to have a significant amount of CapEx outlays. That's different than many other companies that have to fund their CapEx through just the wafer revenue. But again, in the near term, could it be affected because we're successful, and we're winning more customers on the foundry side that require more CapEx, yes, possible. I would say the one thing that we have coming into this what is hopefully a really good growth period is we've already made a lot of the investments on the space side. So we have multiple clean rooms that are within a year or 2 of being ready that felt like a boat anchor there a year ago, and now feels like glad we have that because now all that we're talking about is equipping it. And we've done, I think, a pretty good job of giving suppliers on the equipment side good line of sight as to what kind of range we might be looking for in terms of equipment. So we've got the right -- we're in our right place in line to make sure that we get all the equipment we need to manage upswings that we might experience on the demand side.

We'll have to close it there. I could have gone on for another 45 minutes, but thank you so much. Thanks for joining.

Thanks. Appreciate it.

Thanks. Bye.