Intel Corporation (NASDAQ:INTC) Credit Suisse 26th Annual Technology Conference Call November 30, 2022 9:35 AM ET
Company Participants
Dave Zinsner – Chief Financial Officer
Conference Call Participants
Christopher Caso – Credit Suisse
Christopher Caso
Good morning, everyone. Welcome back to the Credit Suisse Technology Conference outside in the cold. With us this morning is from Intel Corporation, Dave Zinsner, CFO. Dave thanks for coming. Thanks for…
Dave Zinsner
Thanks for having me.
Christopher Caso
Yes. We did say in – we are going to give you the afternoon keynote, but I think John Pitzer said that you liked early and cold.
Dave Zinsner
Yes. He would be wrong on that. This will be the last time I let Pitzer schedule anything for me.
Christopher Caso
Just kidding, just kidding. But thanks. Well, we have the heaters that are socially distanced several feet away. I was asked to read this on your behalf for this.
Dave Zinsner
Thanks.
Christopher Caso
So today’s discussion includes forward-looking statements, which are subject to risks and uncertainties. Please refer to Intel’s SEC filings available at intc.com for more information on the risk factors that could cause actual results to differ materially. So we are doing that on behalf of you.
Question-and-Answer Session
Q – Christopher Caso
So why don’t we get into it? And obviously, Intel is – it’s in the midst of a transformation. You joined on as part of that transformation. I think you are joining on and actually, John is joining on too is kind of endorsement of your view of that. Maybe you can start out by giving us some view of where you stand in that transformation as sort of an overview, and we will dig into some of the specifics?
Dave Zinsner
Okay, sounds good. Yes. So I think the way I look at it, the transformation covered really I guess three major buckets: one was get process technology back to leadership; one was to get product to leadership; and the third was which fundamentally kind of got the core businesses to a better place and then the third was to get into some markets that we thought were good, had good synergy with our core capabilities like graphics, like the foundry business. As I was coming in, I think the diligence I did was mostly around the process technology because I think that solves a lot of the other things. It makes the products better. It makes the foundry business more successful. And so most of what I was doing as I was thinking about coming in was to understand where we were on that. And while we were still behind on a process node basis when you look at – when I looked at kind of the rigor put back in place under Ann Kelleher, the team she has assembled underneath her, many of you have probably talked to Sanjay, who works for her, really capable executive. And so I felt like we were on a good path there. I think when Pat came in, that was the first thing he really focused on getting right. So we are obviously not there yet. But when you look at kind of the milestones we have been hitting in terms of process technology, we will have I think a good sense this quarter on our 18a, which is one of our leading foundry nodes. To me, I think we are on a really good path there.
The second piece was to get the product part of the business back to a good place. When you look at the client business with Alder Lake, we will have Raptor Lake here, Meteor Lake coming out next year we are actually in a good product position with good performance, very competitive leadership in terms of technology. And when you look at kind of our – the share gains on the consumption side, that looks to be in a really good place. The datacenter space is still a work in progress, no doubt about it. But getting Sapphire Rapids out, which in certain workloads is in a leadership position. And so I think we are on a good path although really until we get to Sierra Forest and Granite Rapids, we won’t be all the way to where we want to be. But Pat was spending so much time in Washington. I think this area was probably an area, given that he was so focused on process technology that wasn’t getting as much attention. He has really doubled down on that since CHIPS Act was passed and I think we are in a really good place there.
And then the last is obviously the new product areas like foundry and graphics and so forth. And I think we are making good progress. And then for me, the last thing to do beyond that was get the cost structure, to be the right cost structure, to generate good operating margins, cash flow on a go-forward basis. I think we made a good step there with the $3 billion savings we talked about for ‘23. We talked about ultimately that being more like an $8 billion to $10 billion cost savings both in the form of cost of sales and in OpEx. I think we have got a pretty good line of sight actually to half of that through our kind of reorganization of the business towards an internal foundry business. But the rest of it, I think we will find is going to be pretty achievable. And so that’s where I am spending most of my time on the transformation is getting that to get in the right place.
Christopher Caso
Okay. And I want to dig into all of those things. And it’s starting to get out the way some of the near-term stuff. And maybe you could talk how some of the near-term conditions have kind of changed the approach, changed what you do. Obviously, the cost savings are one part of it. I might argue that might have happened anyway regardless of the near-term conditions. So how does that change your approach?
Dave Zinsner
Yes. Although never missed the opportunity to take advantage of a crisis.
Christopher Caso
Absolutely.
Dave Zinsner
I think that certainly was part of it. Well, okay, let me step back a little bit on the near term. When we announced the second quarter and it was a pretty decent miss from what our expectations were coming into that quarter, I think we probably didn’t have the greatest visibility into how much of it was our own execution and how much of it was really macro related. I think now, as we sit today, it’s pretty clear. It was a pretty decent macro headwind. We were kind of the first, but we have seen a lot of different companies report since then. And clearly, the macro has been a huge headwind. I mean, the markets – pretty much every global market, as everyone knows, has a pretty significant issue to it. Europe, clearly, with the war; Asia, given supply chain disruption from COVID-related actions; and then the U.S. with inflation and interest rates, clearly, every market is having an issue.
And so when you look at our business, the area that really got hit significantly starting in the second quarter was the client business. Our expectation was, yes, it would be down year-over-year from ‘21, but not significantly. And clearly, now we are talking sub 300 million units for this year and a further – either flat or declining in ‘23. So clearly, that’s been a challenge. I think I would just point out that back to this $3 billion part of what we are seeing is a challenging environment in the back half of the year will likely be no better than seasonal in the first quarter. And so I really wanted to get our spending and our cash flow into a place that we could manage through that. So this $3 billion was really a function of the outlook of Q3, Q4 and into Q1. On the datacenter side, we have the added challenge of under growing the market in addition to the macro headwinds. But as I said, the product portfolio is getting to a good place. And I think by ‘24, when hopefully, things are in a better place from a macro perspective, we’ll have a – we should have a better position in terms of share.
The other thing is given the challenges in terms of demand we have also had to be pretty proactive on loadings as well as the spending. So when you look at Q4, we have taken down our loadings to a level that probably we are seeing a 300 basis point or so, maybe slightly higher than that gross margin impact on under loadings just to be smart about working capital and cash flow as we progress into Q1. So, visibility is not great beyond Q1. Visibility is foggy at best in Q1. And so the best thing we can do is do what we can – or essentially do the things that are in our control to manage through this. So, that’s manage loading, manage OpEx, reduce spending on the capital side to manage through this and stay within our models. And then after that, of course, we will start to see the benefits the cost improvements that we are…
Christopher Caso
I mean – and I think there is a perception, as I have rolled out new coverage and spoken to people that there is certainly an investor appetite for semiconductor stocks, but the feeling is we want it to be derisked and not have another shoe to drop. And do you have an ability to do that now with foggy visibility past Q1?
Dave Zinsner
Yes, I don’t know. I mean I will be honest with you, the – there is probably a few scenarios that could happen. And one of them is some meaningful macro hit overall to the economy that is significantly worse than where it is today. And we would certainly not be immune to that. So we will have to manage through it. The other thing – clearly, cycles go two directions. And we will obviously come out of this at some point. And I think the best thing we can do is focus on the areas that we want to – that we believe in, that have good NPV, that have good ROI and – but take advantage of this to really scrutinize the rest of the portfolio and go kind of methodically through all the product set and make sure that we’re getting the appropriate level of return for our product investments. And we’ve been doing that exercise. That’s kind of part of how we got to the $3 billion that we have. We’re continuing to do that. We will do another round of that this quarter to make sure that every investment we’re making is we expect at least to yield a good return. We are also doing that on the capital side. We’re taking a long-term view of overall wafer demand, what our share of wafer demand will look like and modulate our CapEx. I mean this is one of the benefits of having some learning in the memory space, and this is like all you do every day in memory. And so this is something that we’re going to take a page from that industry and manage ourselves accordingly so that we don’t find ourselves in an overcapacity situation. And we’re kind of managing through this with the appropriate level of focus on cash flow.
Christopher Caso
Okay. I’ll pivot over to process because one of the things you said is one of the things you did your own due diligence on speaking – and maybe a CFO explaining process to do a finance crowd is…
Dave Zinsner
Hopefully no one from the TD department is listening.
Christopher Caso
But maybe you can speak to milestones. And what is it – when – and Intel achieves and hits a milestone that gives you a higher degree of confidence? In my mind, EUV would be one of them, right?
Dave Zinsner
Yes. Yes. Well, I mean, that clearly is – I think more than anything, it’s taping in and taping out products on a given node. Meteor Lake will be Intel 4 of 3. That will be out next year. So we’re already running material through the fab, and things look good. So I think we are in a good place on that process technology. We’re also – I think one of the major advantages of being in the foundry business is you have third-party confirmation of whether you’re on the right path or not. And as we deal with customers at the leading edge on 18a, and they run us through our paces on material, I think we have a good sense of how that’s performing relative to what they are seeing in competitors. And the feedback is – and the progress has been quite good at 18A. So that also helps. Now I didn’t have the advantage of that when I was coming into the company. But now as we’re really getting our sea legs on the foundry business, we’re engaged with seven of the 10 largest customers in foundry. And we’re at obviously at different varying levels of engagement, but the ones that are really engaged, believe me, are really analyzing this thing. And I think that gives us a really good sense of where we stand.
Christopher Caso
Right. Under the assumption that you achieve that road map, and what Pat has said is getting to transistor pay, I think it’s the end of ‘24 to a superiority by ‘25, how do you use that to regain the share that you lost in data center, and then secondly, to hold what you’ve got in client? Because with Moore’s law slowing down, the gap between nodes is less and less now, so superiority is not as a big of an advantage than it would have been 10 years ago when you would have doubled performance from node to node. So how do you achieve that?
Dave Zinsner
Yes. I mean I think – well, I mean, obviously, client and data center are a little bit different. But in data center, there is going to be, obviously, a heightened focus on total cost of ownership. For them, given the volumes and the level of investment and their need to be power efficient and so forth, tiny improvements actually are pretty meaningful and magnified when you look at the analysis that they’ll do on an apples-to-apples comparison. And I think as we get to leadership – parity and then leadership, I think we will find the performance is going to be quite good. Sierra Forest will be very competitive relative to even the ARM solutions in terms of Power and so I think as we as we get to that stage, I think we will find that our ability to manage and gain share is going to be very much within the offerings for us.
The – on the client side, we always have the leadership in terms of technology. I think about – I think in that space – I mean that’s true in the data center space. But certainly in the client space, it’s all about kind of customer engagement, fulfilling customers’ requirements, being there when they need us. And while others have struggled in the near-term prior to the macro correction to deliver everything, our ability to have full control over a lot of the wafer manufacturing in our internal fabs allowed us to, I think, to better support customers through a choppy environment. And so I think that will obviously pay dividends.
I think the other thing that we will have an advantage is as we get to process technology leadership. I think we are competitive on the cost side on process as well. And that, combined with the fact that we’re an integrated model, gives us a lot of cost advantage, I think, in the marketplace as we progress into ‘24 and ‘25. And so that I think we will be able to leverage and allow us to manage our share and get to the share levels we want to have in both the data center space and the client space.
Christopher Caso
Okay. I want to speak a bit about how you’re financing the transition in that. And that’s certainly something you spend a lot of time on. We discussed part of it at dinner last night, and I think there was an interesting kind of work through about, one, the project financing that you’re doing through Brookfield as well as some of the investment credits and CHIPS Act and such that helped to carry a large burden of the capital cost that you have. So maybe you can walk us through there and kind of why you’ve chosen that path with Brookfield?
Dave Zinsner
Yes. So I’ll start on the incentive part and then go to…
Christopher Caso
Sure.
Dave Zinsner
Yes. So as – when you look at the cost differential just in terms of differences in labor costs, construction costs and so forth, there is a meaningful, obviously, premium in the U.S. to build a fab relative to what you see in Asia. And Asia also provides incentives. So in order to get that to an equilibrium state, their incentives are going to be necessary. I think Pat did an amazing job getting the CHIPS Act or helping to get the CHIPS Act across the finish line with the U.S. government. He also did probably underappreciated an amazing job at getting the CHIPS Act in Europe over the finish line. And when – as we get those funds that will definitely get us to a level where we’re on – assuming our assumptions are correct in terms of what the investment tax credit, plus the CHIPS money gives us, that should get us to a reasonable parity in terms of cost. But nevertheless, when you look at Arizona, just in round numbers, it’s – to get to mods is a $30 billion investment. And so yes, the investment tax credit is helpful. Yes, CHIPS in U.S. and Europe are helpful, but there is still a funding requirement.
Now we do have strong cash flow from operations. So it’s not like we can’t fund some of that as well. But I think it was important for us to make sure that we were tapping into other pools of capital beyond what our traditional pools would be with bank – cash flow from operations bank debt and investment bonds in order to fund the – what is a pretty significant level of investment, particularly when you are thinking, okay, that was just Arizona, and we need to do Ohio, and we need to do Germany. And so we worked with an adviser to think about something that was not necessarily used incentives, but have been used in other markets, which were fairly capital-intensive and oftentimes required a partner and deal like the energy market. Those kind of markets leverage these vehicles to help fund and offload some of the risks. So, we worked with Brookfield. We are going to co-invest in the fab with Brookfield. It’s kind of a 50-50. We have the majority. They have the minority, but it’s pretty close to 50-50 investment, which allows us to kind of re-jigger the cash flow such that the cash outflows roughly tied with the cash inflows. And so that provides help not only in terms of just tapping into a good pool of capital, but also smooths out the cash flow challenges associated with making these clean-room investments and equipping the fabs in a – in the near-term without having the revenue income until the long-term. So, this will be our first one. We expect to do multiple we call them SCIPs, semiconductor co-investment program. So, we expect to do multiple ones. They may be with the existing partner. They may be with other partners. We have had a ton of interest from other partners about participating in other projects. And we have also had a number of other advisors approach us also looking to help and create capital. So, so far, pretty successful. We are pretty happy with it. The fact that it’s the first kind of structure, I think is – kind of shows that we are not only trying to be innovative in our approach to technology, but also being innovative in our approach to funding the business.
Christopher Caso
Okay. We got about five minutes left. We will probably open up for a question or so if there is one out there. Somebody…?
Unidentified Analyst
Hi. Thank you very much for the presentation. Just wondering for the two fabs you are building in the U.S., do you see any risk not finding enough skilled qualified people to make them running at full capacity?
Dave Zinsner
Yes. It’s a good question. I mean obviously, that is always a challenge to get the people that are – that have the capability to run these fabs. We put Ohio, in Ohio for a reason. It’s tapped into a number of different universities that have really good skills, like I will say Carnegie Mellon first because that’s where I went, but Carnegie Mellon and Ohio State and Michigan and Michigan State and Purdue is in close proximity. So, we have – I think we have a good ecosystem of talent that wraps around the Ohio site that I think will allow us to get the talent when we need it. And we are obviously making investment as well to facilitate developing that talent in Ohio. In Arizona, it’s a little bit different because we already have a structure and an infrastructure in place. And we have had a good program of recruiting in Arizona. So, I don’t expect that to be a challenge given our current significant presence in the Arizona market.
Christopher Caso
Okay. We just have a couple of minutes left, but maybe I wanted to ask for the investor that’s willing to wait a bit. And I think admittedly, data center is going to take a little bit of time for you get the process together. It takes time to get that process together. What’s the end game? So, what do you see? You have achieved the process roadmaps. You have got competitive superior product in data center. How will this turn out in terms of revenue growth, margins? How do we ultimately get paid…?
Dave Zinsner
I mean I look at it, I just – we have already shown we can regain our footing. We did it in client. I think you will see the same outcome in data center. No doubt, it takes a bit longer. But Sapphire Rapids, I think was a really good first step. And when we start to look at the milestones we are hitting in the other products, I am pretty optimistic that you won’t see the same kind of delays that you saw in Sapphire Rapids. I think we are going to outperform in our execution going forward. So, I think as you think about just establishing ourselves in terms of our core markets, we are in a really good position with that given where we stand on technology and product. We are making good progress in the markets that are kind of transformational. Product areas like graphics, there is good execution. I think Arc was well received. We have the foundry business, as I have said, engaged with 7 of the 10 largest customers. It’s clear that the whole environment of supply chain disruptions and what’s going on in the world has really played to our position on the foundry side. So, I think we will – you will see good progress there. You will see breadcrumbs coming out around customer wins. MediaTek, obviously being the first one that we announced. So, I think we have got core business doing – improving now going forward. You see the emerging businesses starting to get traction and take shape. I think probably not well recognized for its value, but this move to kind of create a bit of separation between the foundry business and the product business, I think is going to unlock a ton of value in terms of a better cost structure that we are already starting to see some really meaningful opportunities in that space. And we haven’t even really started to run the business that way where we are driving and holding people accountable and driving transparency. So, I think that is going to be tremendous. There is going to be tremendous value creation on that side. Pat threw out a nugget I thought in the earnings call where he said that, hey, the best companies out there are getting 60% plus gross margins, and we aim to be a best company. So, we clearly think that there is lots of opportunity to have an improving margin structure within the business. And then I think the company is starting to really create some discipline around product choices and being very ROI-focused, and that’s helped – of the $3 billion, $2 billion of the cost savings is in OpEx, and a lot of that is just really being smart around where we are deploying dollars and to get the best return, whether it’s in the product side or in overhead support and sales and so forth. So, I think that when you step back and look at it, the opportunities now to really start to see some real value creation from the P&L, I think are there. The macro, of course, right now, sucks. And we got to get through that. But there is always another side to a cycle, and I think we are going to set ourselves up to really perform well once we get past the macro whenever that kind of subsides.
Christopher Caso
Alright. With that, I think that we are out of time. And Dave thanks for your time and thanks everyone for attending.
Dave Zinsner
Alright. Thanks.
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