Intel Corporation (NASDAQ:INTC) Morgan Stanley Technology, Media and Telecom Conference 2022 March 7, 2022 2:30 PM ET
Company Participants
Patrick Gelsinger – CEO & Director
Conference Call Participants
Joseph Moore – Morgan Stanley
Joseph Moore
Good morning. We’ll get started. I’m Joe Moore. Very honored to have with us today the CEO of Intel, Pat Gelsinger. I was asked by Intel to read a quick Safe Harbor before we start.
So today’s discussion includes forward-looking statements, which are subject to risks and uncertainties. Please refer to Intel’s SEC filings at intc.com for more information on the risk factors that could cause actual results to differ materially.
So Pat, I’m really glad to have you here on the heels of your Analyst Day, and a lot to talk about. I know — maybe you could just start a little bit about summarizing that Investor Day for us, the priorities that you put forward for the company.
Patrick Gelsinger
Sure. And if you think about it, the Investor Day came right on my one-year anniversary. So, sort of summarized the year of transformation for the company. And we started it by laying out our new IDM 2.0 strategy, opening the doors to the fab to foundry, doubling down on manufacturing.
We laid out the 5-years and 4 nodes road map, laid out the new product strategy, the open strategy, reengaging with developers, laying out the Moore’s Law is alive and well for the decade and how we’re making that true, and then summarized it all together with the 6 financial business units, clear accountability, how we achieve both the financial as well as growth targets that we laid out and brought it all together at Investor Day and what I think gave a whole lot of clarity on how we’re going to manage the business, clear markers for the industry to see and a lot of proof points along the way.
And we do think that we’ve given good solid proof points over the first year, but we’ve also laid out this isn’t a 10-year journey that you just trust us. We have a lot of proof points that we’ve laid out with very clear breadcrumbs of what the Street and the market can expect to see from us this year as well as into the next couple of years.
Question-and-Answer Session
Q – Joseph Moore
Yes. There’s a lot there. It was a really good meeting and a lot of detail. Maybe we could start with the server road map. One of the things that you talked about was this dual-track server road map. Can you talk us a little bit more about that? And there was a change in the Granite Rapids timing, but you actually enhance the process node that Granite Rapids will be using. And then where you see Sierra Forest in that mix as well.
Patrick Gelsinger
Yes. And obviously, a lot of scrutiny on the data center road map, and we get that, an area of competitiveness for it. And we did lay out this dual track road map. And this definitely allows us to leverage the E and the P core, right, the performance core and the efficient core, just like we’ve done very successfully with Alder Lake.
So to some degree, we sort of de-risk the strategy with Alder Lake, which is now E&P cores, and something that we have a dual path road map, which our competitors don’t have.
So we can start to leverage those and laying out — and this is one of the things I think that didn’t get as much uptake coming in out of the investor meeting as I would have thought that we now have a well-optimized road map for the broad server market as well as for the unique requirements of the cloud. And that’s where Sierra Forest is going to be a great product.
And if you think about it from a cloud operator perspective, what are they selling? They sell different instance types that they want to maximize the TCO on those instance types. And there are big instance types. But for the most part, hey, they’re running some Linux container, that’s a fairly generic scale-out environment. While with the efficient cores, per unit area, we’re able to get three to four cores in the amount of area that we had for a P core. It’s a very efficient power-optimized solution that really satisfies the TCO generational requirements that the cloud vendors have.
So we introduced that with Sierra Forest, right, in early ’24, roll it through the road map going forward, but it’s a common platform with Granite Rapids. So essentially, the server guys get to do one design that they’re able to meet all of the general enterprise and edge requirements as well as now an optimized solution for the cloud. This really meets their requirements.
We did change the timing of Granite Rapids, and we had a big internal debate show on should we even keep the Granite Rapids name because it was the same platform, but it was a new core on a new process. So to some degree, it was a very different product. But some said, hey, you delayed Granite Rapids. Hey, I say I enhance Granite Rapids, with a much higher performance product, a much — 18% process, a major new core, that’s 10-plus percent in the core. So a much better product and aligned to the customers’ timing. And they said, hey, Sapphire Emerald Granite was too compressed.
Giving them about 2-year cadence in the platform is exactly what the major customers have been asking us for, give us more life of the platform, and then being able to deliver that with the — to the parallel road map of Granite Rapids with the P-cores and Sapphire Rapids with — or Sierra Forest with the P-cores, a great road map. Customers have responded super well to it.
Obviously, we’ve got work to do between now and then. Sapphire Rapids, we’re starting the production shipments of that this quarter, ramping throughout the year. Next year, we’ll refresh that platform with a good upgrade with Emerald Rapids, and then getting into the Granite Sierra Forest solution. Good solid road map, good response from customers. And as we said in the financial updates on it, hey, this is a solid growing business for us that even though it’s going to be a market share compete environment, we’re ready to compete. We have the products that gets more competitive over time, and we see it as a double-digit grower over the horizon.
Joseph Moore
And I would say one of the things I really like is the visibility that you guys gave us in the road map. And of course, the unfortunate part of that is when there’s some small change like that two-years out, we’re going to call it something, call it a delay, call it improvement, whatever. But I think the clarity is really important, I think, especially given where Intel is coming from.
And maybe on that note, talk a little bit about process. I mean you’ve talked about the 5-node transitions in 5 years. You gave us updates on each of the 5, which I thought was pretty helpful. I guess people are sort of saying, okay, it took several years to get through the one node transition. Where do we get the confidence in those kind of 5-node transitions?
Patrick Gelsinger
Yes. And we clearly tried to lay out that perspective at the Investor Day, five nodes, one year, five nodes, four years. One is we said, well, one’s done. Intel 7 is now in volume ramp with Meteor Lake. And we gave solid proof points on Intel 4 3 20A and 18A.
We also laid out that we’ve — what I call Tick-Tock [ph] the process development. We have one team working on 4 3 and another team working on 20A, 18A, very much a Tick-Tock like development methodology. We’ve paralleled those teams, so put capital into it, put engineering into it to de-risk them.
And hey, I’m reviewing the defect densities on these every week. We reorganized that group. So I’ll say we’ve reorganized that we brought in new leadership. We’ve capitalized on the new ways, a new development methodology.
And so far, it’s looking pretty darn good. And I can sit here and say, hey, five nodes, four years, all of them are on or ahead of schedule compared to when I made that statement — when we laid out the strategy nine months ago. Pretty spectacular and comparatively, I think the gap between us and competitors is closing more rapidly than I would have forecast when I made that statement a year ago.
Joseph Moore
I think a lot of the things that you dealt with 10 have actually solved some of the important problems like [indiscernible]
Patrick Gelsinger
Yes. And obviously, the aggressive embrace of EUV now, meeting with Peter and Martin Friday of this week. I think we have our next call. We’ve had a whole team of people engaging — the best people. As I said, hey, the best people that I need from you, Peter, they go to Portland before they go to Asia. And they said, well, that’s easy. They don’t let new people into Asia anyway right now in COVID.
So sort of — so all of — that energy that we’re getting and the deep partnership, we took away some of the hesitance that Intel had in terms of engaging with suppliers and leaning into those relationships in very deep and fundamental ways. And if you go ask ASML, tell Applied Materials, hey, this is a new Intel, and we’re leveraging those partnerships quite aggressively.
Joseph Moore
I mean a number of times recently, I get the conversation with an executive and they’re like, I just talked with Pat last week. I think you’re everywhere. It’s very clear that you have a lot of energy around this.
Maybe talk a little bit about the foundry then as it pertains to that. And one of your passion really shows through here in terms of your enthusiasm for it and really the degree to which you think this is a no-brainer. Can you talk about that? And maybe in the context of some of the reasons that investors have sort of seen you struggle in the past, why we should feel better about it this time around?
Patrick Gelsinger
Yes. A number of aspects of the foundry strategy. And one of them is I’ve said IFS makes IDM better, IDM makes IFS better. What do I mean when I say that? The integrated design to manufacturing, it was always fairly proprietary internally. Well, when I become a foundry, I’m no longer proprietary. Industry PDKs, industry design tools it’s forcing us to fully leverage and align with those industry standards. It also forces a daily benchmarking, I mean I have foundry customers who are testing Intel 3, Intel 18A every day.
They’re telling us, well, on this parameter, on this corner, I think I get better characteristics on a competitor’s process technology, I mean we’re getting that kind of feedback every day to make us better. And the engagement, [indiscernible] from the CAD tool providers, wow, this is a different Intel. We’re engaging and how to go make this better?
But IFS also benefits from IDM, essentially, they get $10 billion of free R&D, LTD, oh, it’s all available to them. All of the IP libraries, design flows, we’re making those all available to foundry customers. So it really drives the synergy of both sides of the business.
I’ve also — and to me, this is such an important thing. And I was — I had the honor of being — this was like, you haven’t seen a company called out as explicitly as powerfully as you saw in the State of Union address last week and probably the last two to three decades. This is a big deal. We must rebalance the supply chains for the most important thing for humanity,
The last 15 years have been dominated by the geopolitics around where the oil reserves are. Every aspect of your life is going digital. Everything digital needs semiconductors. Where the fabs are is more important than where the oil reserves have been. It is that critical, and that’s why you’re seeing nations come behind in a very fundamental way. We need rebalanced supply chains. And that’s why I made the statement at the Investor Day, a bet on Intel is a hedge of the world geopolitics.
Is that important? And that’s why you’re seeing U.S. and Europe come behind us in a very substantial way to say, absolutely, we’re going to help to capitalize the build-outs of foundry. We got the RAMP-C program as essentially, they’re paying us to build a government foundry right now. We’re seeing the early engagement of the foundry customers in a very positive way.
And some people say, are they going to trust you? Well, there’s two aspects to this on trust. One is, hey, if I give them supply chain and better transistors, committed supply chain. Okay, now we can talk at that level because today, they’re not getting better transistors and committed supply chain from their alternatives. There’s a worldwide semiconductor shortage, we’re a hedge of that shortage as well for everybody who uses foundry capabilities.
Furthermore, as we lean into it, we said, I do need more foundry DNA. So I acquired tower. I just added 5,000 people to our in 30 years of experience to our foundry strategy. This is going to be a great deal. And we’re finding great synergies, great opportunities.
I was just in Israel the week before last, right, spending time with that team. This is going to be a great deal to fill in that portfolio of technology offerings. But more importantly, it gives me hundreds of foundry customers already. They were an undercapitalized company that we can come behind accelerate their build-out, and it fills in all of those DNA and experiences that I needed to be a world-class foundry as we’ve committed to. This is going to be great.
Joseph Moore
And the customer engagement, I think, is probably the most important element of that. I feel like it is impressive, the recognition you got at the State of the Union and things like that. Clearly, the government is kind of getting aligned behind how important this is. Where are the customers? I mean you have an awful lot of market cap that is sole-sourced Taiwan at this point. Are they — does that give you an opportunity? Does that give you the benefit of the doubt? Or does that give you clarity that for sure, there’s a revenue opportunity?
Patrick Gelsinger
Yes. I’d say some of those customers, they’re ready — they’re going to make bets on us. The A team is going to design on us. Some of them, hey, we’re the hedge play. Hey, 70%, we’ll keep with their Taiwan partner, and we become 30%. 30% of some of them is a big number. So I mean is it still, we’re talking about large capacity plays.
We’re getting a lot of, I’ll say, the tail design starts. These aren’t big things, but these would be Intel 16. Some of those are in automotive. Some of those industrials were starting to build up a good portfolio. And as we said, I think we said 30, I think we’re now up to 40 design starts this year.
So we’re seeing a good amount of that design momentum come our way. And this is where Tower helps us a lot. I’ve probably been on a dozen customer calls with Tower since we announced the acquisition, where they’re saying, hey, can we go bigger? We would have committed more to Tower, but they weren’t big enough. And all of a sudden, I can make them big enough.
And now we’re seeing a large portfolio of those customers saying, wow, this Intel-Tower partnership allows us to make much bigger and more rapid commitments. And when we think about some of the capital investments today, hey, these are proven customers from a proven supplier that I just get to make a bigger quicker. This is a pretty good deal for us and one of the lower risk capital investments I have in the foundry area.
Joseph Moore
Great. Maybe pivoting to the overall revenue growth. You’ve outlined the path to double-digit growth over time, sort of starting slow and then accelerating to that. Can you talk about your confidence in that road map that you described it as a conservative one relative to your…?
Patrick Gelsinger
Yes. And with that, what we said is, hey, don’t believe the aggregate, believe the subparts. We said, hey, here’s the six businesses that we’ve laid out. We’re going to give you transparency in the six businesses. On the client business, nothing heroic, but we do see modest growth like we’ve done for the last six years. The products are getting better, and we have more supply. So we believe we’re going to be a share gainer.
Data center, we already talked about it. The road map is getting more competitive. We have supply coming behind it. Compelling new capabilities in Sapphire in areas like AI. Third, we said NEX, right, our network in an edge business. And if you were at Mobile World Congress last week, a couple of the analysts there said Intel’s hidden gem.
Well, part of what I did was it was sort of hidden under data center. So nobody ever really understood how powerful this asset was. So I unhit it and created a separate business unit under Nick around network and edge. And we are the de facto leader in FlexRAN Open RAN right, to be that new edge architecture as inference starts emerging in the edge, we said, hey, this is a solid double-digit grower.
Fourth is AXG and obviously walking off the stage from NVIDIA, but hey, we’re going to be a big player in accelerated computing and graphics going forward.
There’s an insatiable demand for us to enter the market to provide a good, credible alternative. Those products are starting to ramp this quarter. We said we’re going to go from $1 billion this year to $10 billion over the 5-year period. We feel very comfortable that we’re lining up the products and the capacity corridor to go do that.
We just talked about foundry. It’s number 5, and then Mobileye is number 6 and a clear leading asset with Mobileye. Today, we announced that the S-1 — the confidential S-1 was filed today for the public offering. So we said, hey, we’re not only going to give you visibility in the revenue and the business characteristics, but we’re going to start to create shareholder value around that asset with the IPO as well add to our balance sheet.
And then when we looked at those 6 together, we said, boy, we gave you 6 conservative business plans, right, which de-risks the overall Intel business plan, and we gave you the financial metrics against it. So I’m very confident in that growth profile. And you’re going to see that every quarter. We’ll give you the updates on the 6.
And next quarter, as we do our next earnings call, you’ll see the first clarity around each one of them. And hey, I think we’re in great shape to deliver those growth profile that we laid out to you collectively. We’ve already de-risked it across the 6 business units, and I think you’re going to be pretty impressed by how we perform.
I’m a meat beat raise kind of guy, and that’s exactly what I expect these businesses to perform. They’re going to be accountable and transparent to you all.
Joseph Moore
Great. And then the economics of that new revenue, and I guess in the context of building a foundry business and you’ve sort of talked about a little bit of a lower gross margin during the investment phase of this and then getting to high 50s longer term, can you just talk a little bit about those dynamics of balancing the needs of the businesses?
Patrick Gelsinger
Yes. And for it, we’ve given you — I’ll say these aren’t forecasts, these are guardrails of how we’re going to manage the business. And with that, when we say 51 to 53, I’m going to manage a business to that. And we’re going to be driving our businesses forward on the CapEx pictures, the capital intensity pictures that we’ve laid out.
And with that, the next couple of years, our investment. Their investment because we have underperformed the last decade. We’ve underinvested the last decade. Part of it is I got to go catch up, and I have to get more capital in the ground. We’re enormously short of factory capacity in a semiconductor shortage. We have to go invest in TD to catch up. We’re also investing in shells, so we have more flexibility as we look into the future so that we can scale.
And the beautiful thing about shell capacity is you take the first four years to build out a new factory, the first 2.5 years are cheap. It’s all the shelves and so on where you put the first $1.5 billion or so in, the latter 1.5 year is where you put all the expensive equipment in it. So it’s a very de-risked investment that way because you’re only then putting the expensive capital in place when you have firm demand signals to go with it.
So as we’ve laid that out, we feel very confident that we’ve given ourselves the flexibility to go execute against those financial guidelines. We do see the margin profile getting healthier over time as the products get healthier and I’m not having to invest so aggressively in new undepreciated capacity to catch up. Now you start getting into the healthy phase.
Also, as we say, the gross margin of the product should be drifting back to the 60s, and we’d expect an ROIC of that being in the comfortable 20s. At the same time, as they start to leverage more mature process technologies, I get a very healthy ROIC in my foundry business, but it has a lower profit profile in the — around 50 where you see in the industry.
So we’re combining a very healthy ROIC with a good but not as strong gross margin with a very strong gross margin business with not as good of ROIC because we’re always leveraging those undepreciated leading-edge fab assets.
And we think that complement gets you to what we said where, hey, we get to those growth rates, we get to the capital intensity, about 25% of revenue, and we get to ROICs that are very healthy over time and that upper 50s gross margin as we mix the foundry and our IDM business together. I think it’s a very coherent model at that level, and we have plenty of room to meet beat and raise against those guidelines.
Joseph Moore
Great. And then the CapEx, I think you’ve talked about $25 billion to $28 billion this year. And I feel like in October, there was kind of a sense of that’s just going to keep going up. At the meeting, there was a little bit more of a kind of the guardrail conversation around that. But generally, do you see this as this is kind of the foundational level of CapEx? And then if we’re able to hit the other elements of this plan that, that number will keep rising?
Patrick Gelsinger
Yes. When you think about the CapEx through two different lenses, one is, what does it take for us to satisfy our IDM business? And then how much is it associated with the IFS business? And we try to get some clarity associated with that. And we said, hey, we said about — where do we want to get to? We’re in a more capital-intensive phase.
Part of that is catching up. Part of that is building shell capacity like we just said. And so now we’re in the upper 30s on capital intensive, but we expect that to moderate into the 25-ish-percent range. But that’s our best view of where it is right now. We’ve built all of the financials and gross margin profiles, et cetera, against that.
Now we also said that, hey, that $25 billion, hey, I’d like to put more capital in the ground. If we start getting a lot more foundry customers showing up, we will put more capital in the ground, but we’re only going to do it against our smart capital strategy where as we get demand signals, we go start getting investments to go support it, prepays from customer.
We also said that, hey, we expect about 10% of our CapEx, and the modeling that we gave you is a result of capital offsets from states, from governments, et cetera. But we think there’s a lot more potential in that. And that’s why we said, hey, that 10% could easily get to 25% or 30% over the horizon. So we do expect that there’s a lot of upside for us to overachieve.
As CHIPS Act gets done, we expect the European CHIPS Act as well, right, to come through. So a lot more potential there. And we think that we’re sort of in the pole position for those efforts as seen by the State of the Union address last week, and you’ll be hearing more about our European activities shortly.
And then finally, we said, hey, we’re going to be super creative in how we think about the capitalization of this business overall. And we talked about new capital investment models with Brookfield, that we announced our MOU against, which could be a further mechanism for us to get capital leverage. And while nothing formally is announced there yet on what that looks like, hey, that’s going very well at this point.
So we’d say that 10% capital offset, hey, we are working to make that a much, much bigger number and to well not only get back to 25% but even overachieve against that as a percentage of our revenue. So I feel very good for the model that we’ve laid out and plenty of room flexibility to both execute within those guardrails, but comfortably overachieve.
Joseph Moore
Great. And then just generally on this execution, I mean, I feel like if you have the best CPU for a given workload, a lot of these questions go away. If you have the best process technology, a lot of these questions go away. Your general sense of where you are executing to that, I know you brought in a bunch of new Intel fellows and a bunch of new talent in that regard. Where are you in that process of building things out?
Patrick Gelsinger
Yes. And as we look across the six businesses, Mobileye, the best. We’re now back to being the best in the client space with Alder Lake, unquestioned getting the best performance, the best results. NEX, absolutely the best. We’ve talked about the foundry business profile. Data Center more challenged. Sapphire Rapids, when we introduce it, is the best product. Again, hey, we expect AMD is going to respond, but it’s going to be a pretty close race, and when we get into the Granites and Sierra Forest, unquestionably, the best again at that point.
We’re going to go from a deficit in process technology to a leadership in process technology in the server space in this horizon as well. So unquestionably, best products, best process technology, best capacity profile. So that’s the area that we’re still most challenged, but the execution every day.
We rolled out OKRs across the company, all of these operational stuff. We lost the grovian disciplines as I like to describe, but we’re getting the mojo back of how we’re executing. And hey, you go look at the people that we are bringing back to the company, I mean, leaders from AMD, from NVIDIA, from Google, from Microsoft, every place, people want to be part of the mission that we are on, Joe. And that’s why we’re getting the top-tier technologists in the company, wanting to come back to the company, wanting to join the company. And I feel we have the best leadership team, is well underway in the industry.
And, hey, I just closed a couple more candidates this weekend. So the good news on the talent flow is alive and very healthy, and you’ll see that across every aspect of what we do. We are going to be innovative leaders in the products that we bring forward. We’re the company that’s going to keep Moore’s Law alive and well for the decade to come.
We’re going to have the best products that we’re putting against them. We’re going to have the best capital structure that we’re creating. We’re innovating in new financial mechanisms. We’re going to become the unquestioned Western choice for technology in both U.S. and Europe. We’re going to have the best supply chains across the world. This is a pretty powerful asset that we’re putting together. And of course, it all begins with having the best people to go do that.
Joseph Moore
Great. And then maybe on the financials a little bit, and Dave Zinsner is somebody that I think you gave people a lot of confidence as well that you brought in. It’s my fourth…
Patrick Gelsinger
It’s giving me a lot of confidence, too.
Joseph Moore
It’s my fourth date into the company now. And — but I guess given what you’re going through the next couple of years, you’ve talked about kind of minimal free cash flow, but also 100% commitment to the dividend. And I wanted to ask about that because I do think it’s very important to the stock in this interim phase that the dividend sustained. So how do — it doesn’t seem like that’s entirely consistent with becoming one of the best growth companies in five years, and it is tremendously important. How do you balance those priorities?
Patrick Gelsinger
And I’d just say, hey, it’s very simple in the near term. This is a story that people have to be confident in the multiyear horizon. As I said at the Investor Day, the turnaround train has left the station. Get on board. But we also realize that, hey, these materialize over the next couple of years. And we’ve had very faithful dividend investors for a number of years. I have no desire for them to get off the bus, continue. We want to reward them significantly as that growth story starts to materialize over the next couple of years.
And this is a very — if you look at this company, we have an extraordinary cash flow from operations. Even in this period of time when these new revenue streams haven’t been fully materialized yet, man, this generates a lot of cash and to be able to go to investors and say, that’s right, we have a 3-plus percent dividend yield. It’s a very turbulent market overall, as we’ve seen. Right now, we’re 1 of the best-performing semiconductors year-to-date. SOX is down 22%, 23%, we’re down 10% on the year. Others are down 30% or 35%. This is a turbulent market.
So we’re just saying, hey, dividends, absolutely. We’re committed to a stable and growing dividend, healthy yields that as we get through this investment period, we want to reward as we create more and more of a profile of growth investors that are coming into the stock over time. And we’re confident they will, and we have no reason to not include those dividend and portfolio investments. So we’re quite committed to a healthy and growing dividend.
Joseph Moore
Appreciate that. Well, we’re just about out of time. Any closing remarks?
Patrick Gelsinger
Well, I do — as we finish the Investor Day, we realized that, hey, there’s a lot in this story, and the company, after 10 years of some challenging decisions, other things, under investments and so on. We have had what I’d like to say a torrid year. We have laid — we’ve added a new word to the Intel vocabulary this year torrid. We’re going to move rapidly with decisiveness, build out our strategy to the future. And we are getting so much momentum against that. This is a old new company that’s coming forward here.
And as we finish the Investor Day, hey, I realize there’s some skepticism. Maybe even a little bit on the stage here with me. But against that, right, we are so confident that we are playing an essential role for this iconic brand, for the technology industry broadly, for the Western nations of the world. We need semiconductors. We need more semiconductor capacity.
We know that semiconductors create a foundation of technology innovation in every segment of human experience going forward. And we are the company that’s going to make that happen for the world. And we are so committed and passionate about that, if there’s a few investors along the way that don’t believe in it, okay, but we are going to make this happen because it is so critical for the world. And this team is committed to that occurring. And I’m proud to be able to be the CEO in this period of time for this iconic company.
Joseph Moore
Great. We’ll leave it there. Thank you very much. Thanks, Pat.
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