Intel Corporation (INTC) Earnings Call Transcript & Summary

Why? We should have a rule never to ad. We have 4 letters to an acre because I was doing it on the earnings call, and I could not get CCPG out take my life, but -- but anyway, it is the new acronym.

Yes. somewhere in there -- I think there's an edge business. Somewhere in between the CC and PG. And it's something you called out on your call is edge and some of the trends that you're seeing. -- obviously didn't get as much attention to some of the other points of the business. But can you talk a little bit more about what you're seeing there?

Well, because it's small right now. But we've had a long-term business with a lot of customers in that space. And it just wasn't -- it was very profitable because we took products that we were developing for the client space, use them in edge. So very little R&D associated with it. the margins are very good in there, and so profitability is very good. But it wasn't really growing that much. It was a relatively stable business. But now with AI, as AI becomes more distributed and heterogeneous across a lot of different applications, the edge is going to start to be an area that's going to be very interesting. Of course, everybody knows humanoid robots will be one of them. But the humanoid robot is that going to be a small portion of the overall robotic requirements. I mean a lot of the robotics is an arm or it's like -- or some kind of other like just one single motion that needs to be more intelligent, quite honestly, for businesses to take better advantage of the physical AI space. And so we think there's a tremendous opportunity there. We also think there's going to be a lot of opportunity in AI just in compute in industrial applications at Gentech and so forth. So we think this market is going to grow significantly. And I think we said it on the call, we could see this market being the same size as the client space, quite honestly. And over a period that's not that long. And so here we have this tremendous opportunity. We just -- we have to take the capabilities that we have in client and bring them to the edge and physical AI. And we also have to think in a more system way about how to bring those devices. It needs more than just the component. You need to think about the software stack and things of that things of that nature. That obviously was not a skill set necessarily we had internally. So Lip-Bu made the decision to bring in Alex, who does have a lot of that experience to think about how we can build out this capability so that we're better positioned to take advantage of it. We already have all the customer contacts. We're engaged with them in a way that I don't think any other player in the marketplace is. It's about making sure that we've got the right applications, the right products, the right software stack, the rate system-level thinking that those customers can take advantage of. And that's what Alex is working on. We've been having some of the conversations in the last few weeks, and I'm super excited about his strategy and the way he's thinking about it and how he's going to take a lot of the existing capabilities that we have within the company and kind of rebold them into solutions that will -- I think will be pretty compelling in that space.

I think -- I mean, since he became CFO, like he's injected a lot of like creative thinking and a lot of these new initiatives. So I guess, as he -- before we get to the financials, as he's thinking about his product lines? Like where is most of his energy being spent at this point in it?

I would say like in the near term, just as a side joke now we're in we're in a transitionary period where our new sales leader, Dean hasn't come on yet. And so we're without a sales leader. So Lip-Bu now is actually spending a lot of time on sales because he is the interim sales leader right now. I'm sure he's anxious to get Dean onboard, so you don't have to think about that as much. What Lip-Bu spent a lot of his early month doing was just kind of getting the culture to where you wanted it to be. I mean I think if you look back at Intel and the challenges we've had over the last decade plus, a lot of it can be boiled down to culture. And Lip-Bu, I think, understood that. He understood that at the Board level. And as we were talking about him coming on, I mean, I think you knew right away, you had to fix that. And so part of the way he fixed that was management change. He brought in a lot of people that he trusted that thought differently, more aggressive kind of take no prisoners mentality, but also knew how to operate in a leaner environment, be more successful the first time out, those kind of things. So I think that was one kind of thrust he was working on. The second was really just eliminating a lot of bureaucracy. And he did it in two ways, which was the collapsed the number of layers of the organization. You took it from 12 down to 6. And in doing so, kind of pulled a lot of middle management out, which bogged down a lot of the decision making. There was a lot of beta power across that organization. So a lot of things got slowed down. And it just led to suboptimal outcomes where we do product spins or before a product was ready instead of getting it out the first time -- like lots of start-ups that can get products out to start to Lip-Bu founded or invested in a lot of them. And we just weren't seeing that in a company that should be executing a way better kind of pace than anybody that's got 50 people in a shop, and yet we weren't. So he did that. And then the second thing he did was he eliminated a lot of the VP layer. And so I think we had probably at our peak like 450 EVPs, and we're down to, I don't know, maybe 200. So I mean, it is a massive, massive change. And you see already some of the improvements in that, like, like I said, we weren't getting products out in what they call a stepping like the first approach to the product. we now have had multiple products out in a stepping. The execution around the process we talked about way better since he's been here. So that was a key component. Then the third thing he did that I thought was brilliant was he really elevated the need for transparency. And it seems like a very simple thing, but amazingly, amazingly Intel fell down a lot on transparency. A lot of people at one level knew what was going on. And by the time the PowerPoints got modified to where it was getting presented to the CEO is an entirely different story. And I think they thought they were doing the right thing, "Hey, I'm not going to admit to feed or whatever. But man, did it lead to a lot of bad decisions. It had the management team thinking we were going one way when we were actually going another way. And so fixing all of that, and I can go into all kinds of anecdotes how do you fix the transparency, some of which was I think pretty painful for the people that were not being transparent at the time, but it really has made a lot of difference in the organization. So I think fixing culture was his #1 job. And of course, that's an ongoing thing. You're never quite done with it, but I think he has really moved the needle on that as a company. So now it's about like Okay, so things got that done. Then the second thing was, hey, I got to get these processes right. And so he went out and focused on that. And now we're on a good path there. Now he's in the third phase in my view, which is on the product side, how can I bring winning products to the marketplace that are super compelling to customers, make a big difference in their own business applications, what have you. And he has these thrusts, right? Obviously, data center, we're not where we want to be, but he's now identified coal Rapids as the product that he wants to put his fingerprints on to really make a difference. He's building this ASIC business to make customized silicon for customers, listening to customers figure out that. He's working on that. Some of that, by the way, is just cobbling together all the IP capabilities we have. to bring them to market. Some of it is going out and finding other IP blocks that we need. And so one of the great things about lipid was he so plugged in to every small startup company out there that he knows where everything is getting developed, how it's getting developed, which ones are compelling and thinking about how to -- what it could -- I mean, some could be acquisitions, but it's -- it could be partnerships. It could be like joint go-to-market type approaches. He's working a lot on that stuff to really make the ASIC business super compelling within Intel. And then, of course, I already talked about all the like edge and fiscal AI and so forth, things we're in. So I'd say a lot of what he's doing is now geared towards getting the products, right?

You gives us a little nugget at the end of the call last quarter about some interest in memory. I assume you're not going to become a memory maker. But any more comments you can make on any like aspirations from the memory side?

I would put it this way. Yes. I mean I like escape the memory space. So I was hoping you wouldn't say we're getting back in the DRAM say. But he -- I think his view is that memory is going to be -- play an important role in AI workloads across all workloads, quite honestly. I mean, you're feeling it a lot, obviously, in the data center, in the hyperscaler space. But it's a challenge across the whole space. And there are ways we can approach our products that can help customers in terms of the memory bottlenecks and the costs associated with memory. And so I think he views us as being a key player in making that all work, that includes working with the 3 major memory players out there, and he has great relationships with all 3 of them, and he is in regular contact, and we're in regular conversations with them on things we can do together. And then there's just wait, you can develop product, architect the product, the products we have to be better in memory. And I think that's the way he thinks about it. There probably will be compelling products that really address this in a way, and I think that's when he said stay tuned at the end, if I'm not mistaken. He's got some thoughts around how we can go out there and be differentiated and really help customers. And so -- guess, stay tuned.

Well, another thing we're staying tuned for it. I just want to make sure we ask this before we get into the financials. Analyst Day, you haven't had one in a long time, a lot of changes are happening. Any plans to...

That's a good question. Definitely, we have plans to do one. The question is when to do it. And I would -- I'm somewhat scarred from my -- from the first Analyst Day I had at Intel because if you remember, I think I started midway through January, and I was doing an Analyst Day in February. That's not a great dynamic. You need time to get a sense for the business. And come up with your thesis and your strategy. And he is in the process of pulling in all these people that to have any of them like a month in, like go and present to investors. I just don't think it's fair. So I think he is putting his finishing touches here with Dean coming in, in September. So we have a couple of people that are relatively new in the company that are in leadership positions that we'd want to put in front of investors. Alex would be another one. And so I want them to all get their sea legs, make sure they have the story down as to really what they want to do with their particular function or business, and then we'll be ready. And so I don't think it's this year, for sure, it's not this year. I think it's sometime next year. We just got to -- once we feel confident. The other thing is it boots in the middle of driving a transformation at s really riding the team hard to go make those changes. And it's fairly time-consuming to do at Investor Day. So I just want to make sure we're past some of that. The team is all settled. And then Peter and I will -- John Pitzer and I will work out a date that makes sense and will come out. We're not hiding it. It's something that we want to do. We just want to make sure it's the right time. And maybe one other thing I'd add on the Investor Day is because I think investors are correlating this in some way with wins on the foundry side. It's not. In fact, even when we have the Analyst Day, you can rest assured Lip-Bu not going to announce a customer because he's been very clear that he does not want to be announcing customers on the foundry side that's not done in the foundry industry, and we're not going to be an outlier. So obviously, if customers want to make announcements, they can do that, but we're not going to do that. So it's not in any way correlated to that, and you shouldn't expect, even when we have it, that we're going to come out and talk about customers in that space.

Yes. That's helpful. And I think I speak for all of us in the room that -- we'd rather have a go to Analyst Day rest on.

Yes, of course.

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Mostly most of all.

So on the financials, gross margins there. A lot of moving pieces, a bunch of different things to track. I think you just printed 40-ish -- above 40. Would you say you're now comfortably in the 40s? Or like how do we think about stability of gross margins from the...

Yes. Good question. And let me just say, when you came into the year of '26, we -- I think like a lot of companies, there's a plan and then there's like, okay, let's try to push ourselves a little bit to do more. The plan submitted by the businesses was something with a 3 on it, it was a 30 -- high 30s gross margin. And I I've in my career, always been hyper focused on margins. I've improved margins in all 3 other semiconductor companies. I've been CFO at -- so this was like to say that we were in the 30s with -- we've got check. So one of the things I was really pushing on the team to do was to outperform that and to get ourselves into the 40s in terms of gross margin. So I'm actually pretty pleased with the execution that the team -- some of it is things that were outside of our control. Revenue is obviously done better and we've had some opportunity to do pricing, and that's obviously helped as well. But most of it was real roll up your sleeves, hard work to get gross margins to where we have them. So I'm really happy that -- and I can safely say, I think, that we're now kind of comfortably in the 40s in gross margin, low 40s, but we're comfortably in the 40. And now it's about improving from there. We're going to get into the mid-40s and the high 40s and ultimately something that starts with a 5. That is absolutely the goal. On the plus side of this thing, the things that we're really driving to drive -- to improve margins, one of which is we have to get a better cost structure just across the board. On the product side, that's about just better use of silicon, less silicon as much as we can, make the packaging as cost effective as possible, think about all the components and test times and stuff. So we're working all of those things to drive a better cost structure for products and get improvement there. Obviously, as we move from older nodes that aren't that great nodes that are more competitive, have better yield profiles to them. We can do better in terms of throughput. We get margin lift from there. The things that foundry is doing to get -- to move down the node curve and improved scale are absolutely going to help on gross margins as well. So those two things are, I think, going to be the positive. The one thing that could weigh it a little bit and why we maybe are a little bit more reticent to throw out, we're going to be above 50% at X date is some of our businesses actually don't get 50-plus percent gross margins. But they are really high-growth businesses. The foundry businesses, both from the front end and the back end, advanced packaging are probably 40% gross margin businesses, at least for now. Maybe foundry over the front end over time does better as we become more competitive. But I think we've got to recognize we got to earn our keep there here first. And so I think it's right to think about that as a more like a 40% gross margin business. It still has great operating margins still be in the 30s or 30%, but still, like, I think, weighs down the overall corporate gross margins a bit. The other is the ASIC business, depending on the products you win, some of them do have a higher margin profile, but a lot of them actually are kind of 40, 40-ish kind of gross margin type products. And so depending on how successful we are there, that also could put some pressure on gross margin. So we thought about -- Lip-Bu I have been thinking about this and okay, well, we obviously want the most profit possible. We also want the most growth as possible. How do we drive each business to do the optimal level that we can get out of them. And so Lip-Bu comes from cadence like more of a software thinking and software space, they have this rule of 40 kind of thing. So we said, okay, well, we should have a rule of then for ourselves. So why don't we call it the Rule of 45, we kind of backed into what should be reasonable to expect over time. And so that just -- so that then allows hey, if you're a kind of a low GDP plus type growth business, okay, then you better be delivering really great gross margins, really great operating margins to get to the Rule of 45 because we're adding the revenue growth plus the operating margin to get to a 45 number. But if you're a business that's growing like a weed, then, okay, fine, we can make some investment both in terms of maybe pricing or in the cost structure to get the product to where we want it to be or we'll invest more in terms of operating expenses to drive better growth, buying, you can yield a better growth rate than you can yield a higher spend level and still get to the Rule of 45. So we've really told every business unit, this is the way we want you to think about it. Is every business out of the gate next year going to be hitting the Rule of 45? Probably not. There are some things that have got to be fixed in certain cases. But every one of them has embraced it. Every one of them has shown me a long-range plan that achieved it. And so I think we will be driving the rate behavior across the businesses and holding them all accountable to this number. And when we talked about this in a capital raise, this was one of his main slides. I think, was the Rule of 45. So he's embraced this. He's super supportive of it. And of course, it's the best thing as CFO can hear is that everybody is going to be tasked this kind of measure.

In the last couple of minutes that we have, the timing to found to be breakeven. Can you remind us --- what the -- how you guys think...

Yes. Okay. So we got to hope that none of the foundry guy because I'm going to give a little bit of a double answer to this. We are driving the foundry business to go breakeven by the end of '27. And so that's their internal target. That's what we're driving to them, driving them to. When I talk to Naga and his leadership team, that's all he hears is me telling him this. That's it. I do recognize that if you are more successful on foundry, it has a cost to it. We have got a the more customers have got a port over that requires some investment on our part. The more demand we have, the more start-up expenses, we will likely see that could elongate at the time. to breakeven. There's no question about that. So I could see us going into '28 and not being there yet, and maybe it's the end of '28 even that we get there. But it will have been for a good reason because it will be that they're more successful or go, they need to make the investments associated with that. That said, I think as you look at operating profit, like in absolute dollar terms, it's been running at like a $2.5 billion loss or so per quarter. And what we're also doing is just regardless of whether you cross over at the end of '27 or you cross over sometime in '28, I want to see relative steady improvement every quarter. And I think you will see that it could be lumpy, obviously, not every quarter is going to work out exactly this way. But in general, I want them kind of just fighting it out to get better profitability every quarter. And I think that also will be helpful in value creating for investors. So the combination of we win a bunch of businesses, maybe that elongates those the time to break even. And -- but you see the steady improvement in operating profit, and I think that alone should be helpful.

Last couple of seconds that we have that I have to squeeze in CapEx. Any guidepost how to think about how you're thinking about a...

Significantly. Yes. I mean, I said it so significant. I'll be honest with you, we haven't like completely locked the number in for next year. It doesn't get done until towards the end of the year. And quite honestly, they of course, they come out with a number. They've told me what the number is. They think they should spend and I've told them now. So they're going back to rethink like how they can be more efficient. I'd rather hold them to that, drive more efficiency. And then hopefully, by the end of the year, we'll figure out exactly how to be as efficient as possible, and I can give us a better indication of the number.

Thank you so much.

Thanks, Melissa. Appreciate it.