All right. Welcome back, everybody. I'm Joe Moore, Morgan Stanley semiconductor analyst. Very happy to have with us today the CFO of Intel, Dave Zinsner. Under somewhat better circumstances than last year. I upgraded the stock this time right before the conference, so that was good.
You learned your lesson.
Exactly. I just wanna read our quick hedge, and I think Dave does as well, and then we'll go right into it. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.
Now I'll read mine.
Yeah.
Okay. Which is not there. He gets to read mine. I have to do it by heart. we may make forward-looking statements, and to the extent we do, please refer to the SEC filings, most recent 10-Q and 10-K for risk factors that relate to those disclosures.
Great. With that out of the way, you know, I guess I'm gonna kinda go. There's a lot to go through here. I wanna talk about the recent dividend decision, near-term results, your cost-cutting strategy, and then kinda come back to the general growth initiatives. In terms of the dividend, you know, the decision to reduce the dividend by 60%, I know that's not something you took lightly. Can you just kinda walk me through the decision-making process, both in terms of cutting it, but also in terms of maintaining the portion that you're maintaining now?
Maintaining, yeah. Yeah, I mean, you know, we talked a lot to the board about this over the course of a few months. Obviously, we did not expect the macro to be as weak as it turned out to be in the first quarter. You know, while we have a lot of confidence around our roadmap, our strategy, you know, how we're progressing in terms of our milestones, you know, I gotta manage the balance sheet in a bit of a more conservative fashion. When you looked at the amount of investment we needed to make to drive the transformation, and you stress-tested that and looked at, you know, what that did in terms of leverage ratios, it just got to numbers that I didn't feel real comfortable with.
I talked to the board about it, and then there was a debate as to what made the most sense. I think the board generally felt like a competitive dividend was important. I mean, we certainly have the financial wherewithal to pay a dividend. It's just, does it make sense to pay the level of dividend we had been paying when we have significant investments to make to drive the transformation? They ultimately got, you know, to this number that, you know, was, you know, a reasonable reduction for us to manage the balance sheet, but, you know, was still competitive as it relates to, you know, the peer group within the semiconductor space.
Yeah, I mean, you have a long-term plan that -
Mm.
- if you can execute to it, the dividend is a very small component of the value that you'll have.
Right.
It kinda makes sense to me. Can you talk about, you know, how you're thinking about cash flow and balance sheet objectives? You know, what are the boundaries of gross cash, credit ratings, and things like that you're, you know, as you go through this investment phase of your, of your transition, that you're thinking about?
Yeah. I think, you know, from a ratings perspective. It's super important for us to maintain, you know, an A rating kinda category. We've been able to do that, and that's, you know, again, that's partially what, you know, went into the decisions around the dividend, was to drive this A rating kind of, you know, kind of characteristic of the balance sheet. You know, we're in a period, I think, through 2023, 2024, and 2025, or sorry, 2022, 2023, 2024, where we expect to make meaningful investments to drive the transformation. You know, obviously that is gonna affect our cash flow. We really see these next, the last year plus these next two years as really, you know, more of an investment as opposed to generating free cash flow.
After that, though, you know, as we get back to leadership on process technology, that drives a lot of goodness in terms of, you know, what we can command in terms of pricing, what we get in terms of cost. You know, we're kind of through the knothole of having to invest a lot, you know, to drive these five nodes in four years. We pull back and drive to a more normalized cadence. As you mentioned, you know, I'm driving a lot of cost reduction initiatives in the company. We'll drive about $3 billion of cost reductions, spending reductions this year on the way towards $8 billion-$10 billion, as we exit 2025.
I think all those things mean that as we get out of this, what we call the investment period, you know, we should be back into a place where we're generating very good cash flow. Our model is to be in this kinda 20% cash flow generation as a percentage of revenue.
Great. And on that topic, you know, can you talk about Smart Capital and your ability to recapture some of the CapEx, both through some of the investment initiatives that you've done with partnerships as well as through government actions?
Smart Capital's gonna be a key component of this because, you know, obviously we've got to build out, you know, we've got to get through these five nodes in four years. We've got to get, you know. We had underinvested in clean room space, and you never wanna be caught flat-footed in terms of not having enough clean room space, so we have to make a significant amount of investment to catch up to stage clean rooms. You know, obviously that drives a lot of CapEx intensity. We have, you know, kind of followed this approach of Smart Capital, which, you know, is actually several different strategies kind of bundled in one. One is, you know, to secure government incentives, government offsets.
CHIPS Act was a big, you know, big part of our strategy. Happy to see that get approved, now it looks like some of the, you know, kind of the mechanics of how to apply for that is now starting to become clearer. It also included the investment tax credit. You know, 25% of our CapEx invested in the U.S., you know, our expectation is we get that back in terms of refundable tax credit. You know, there's a European version of the CHIPS Act, you know, we're already in discussions with our European partners on offsets there to help, you know, contribute to the capital investments. Then we have things like Brookfield. That was a key part of the strategy that we introduced this year.
We'll spend about $30 billion building out the next Arizona fab. About half of that will come from Intel. About half of that will come from Brookfield. It will obviously come with an expectation for Brookfield that they get a return, but the return is actually pretty modest with respect to our cost of equity and cost of capital. You know, that's another component of how we will, you know, kind of offset that. When we, when I talked about it at Investor Day, you know, we thought that we'd have, you know, a relatively modest year this year, 2023, in terms of capital offsets measured in the single billions kind of level.
You know, I think at this point now we're thinking that the capital offsets for this year should be in the 20%-30% of gross capital, which is what enables us to not only hit the kind of mid-30s% CapEx intensity, which is where we thought we would be during the capital intensive period of 2022, 2023, and 2024, but even perhaps, see it go a bit lower than that. Our outlook now is kind of in the low 30s, and that's all despite the fact that, you know, revenue obviously is at a different level than we expected it to be when we were talking about it at Investor Day last year.
Yeah, that makes sense. In terms of just thinking about the CapEx, you know, obviously the five nodes in four years is something that you're gonna do, and I have a lot of faith in your guys' ability to execute to that. You know, how much of the CapEx is just going to be required to get that done versus building out capacity of those nodes? You know, you mentioned having shells.
Yeah.
You know, do you have flexibility to flex that number up or down depending on your progress -
Yeah
... with foundry and other initiatives?
I would bucket in, like, three components. Where there is the investments necessary to drive the five nodes in four years, that absolutely we don't wanna touch. That's important for a number of reasons, and it really drives the entire strategy. Five nodes in four years has to happen. We will make the capital investments necessary to go make that happen. The next bucket of CapEx is the cleanroom space. That also, we have a heavy bias towards wanting to invest there because, you know, it's always cheaper to build a cleanroom than it is to equip it, and there's a really long lead time to actually building a fab. You know, you're talking about a four or five-year period to have construction done.
You know, it's hard to say what will happen in four to five years. Having a few empty shells ready to be equipped when we need it, our bias will be to drive that investment. The rest of the capital, which is equipping those cleanrooms, is really where we flex. You know, we're essentially looking at wafer demand out over, you know, five, 10-year periods, node by node and looking at what percentage of the share we expect to get of those nodes, both from an internal perspective in our own products and from an external perspective in terms of foundry customers.
We kind of plot that out and, of course, you know, we have some scenarios, and that's what we use to determine and flex our CapEx and our what I would call our capacity level CapEx. You know, that's what we have constrained in the near term. You know, obviously demand has changed, so we have, you know, we have constrained that a bit more. That's enabled us to stay within the envelope of the CapEx intensity number that we promised.
Great. Shifting to the nearer term environment, you know, I think when you announced the dividend change, you reiterated Q1 guidance. I know this is kinda not where you wanna be from a revenue standpoint. I guess as you look at the challenges you're seeing now, it seems clear to me that you're under shipping in demand, and that you're burning inventory. I kind of thought that in Q4, but I guess maybe not in every market at least. Can you just talk to that? You know, what's your line of sight to how much inventory there is and when it might be burned off?
Yeah. I mean, it's different by market, for sure. We have varying levels of visibility into the inventory levels of customers depending on the market. Where we have the best view is in the, you know, kind of PC OEM space, because we get, you know, somewhat detailed views of what the inventory looks like. It has been burning, you know. Actually in the second quarter of last year, we had a meaningful burn. You know, the third and fourth quarter were more modest, but definitely burning. This quarter, we expect a pretty meaningful burn.
Mm-hmm.
you know, likelihood is that it continues to burn into the second quarter. I think at that point we're probably through inventory burns. I mean, a lot has been somewhat dependent on what we have thought the end demand -
Mm-hmm
- looked like. Obviously we weren't expecting, you know, kind of the client unit volume to come down, like it has, this year. You know, what looked like good, you know, good level of inventory suddenly becomes not so good, when demand has softened. I think demand has, you know, generally stabilized. You know, based on talking to OEMs, I think we feel pretty confident that this will be a very big quarter in terms of burn and then, you know, maybe a bit more modest in the second quarter, and then I think we will be through it. There's probably there's a little bit more to go in the data center space, versus the client space.
You know, I think largely, you know, through that for the first half of the year as well.
In the data center, particularly in the hyperscale space, that's a matter of budget cuts or inventory or both?
Yeah, I mean, I think the budget cuts have actually, you know, certainly muted the growth for this year. It hasn't, like, you know, that hasn't been coming down. Like the, you know, the clients, I think, you know, depends on the number you quote, but it was roughly, call it a 300 million unit market last year. It's, you know, certainly, we've given a range of 270-290 with a heavy bias towards 270. It's definitely biased towards the 270. that's been a totally different dynamic than the data center space, which is more of a, what I call, kind of tap the brakes kind of market.
In that context, I mean, I think it makes sense that you didn't guide the full year revenue. I mean, it seems like there's a general shape of, you know, the first half is where the difficulty is kind of concentrated.
Yeah, I think that's fair to say. I mean, our expectation would be, you know, first half is, you know, likely to be tough, as we guided in the first quarter. Our expectation is that, you know, the back half of the year, if, you know, the macro kind of, hangs in there, we know that some of our markets, we're more exposed to China, we're more exposed to enterprise in the data center space. Those two markets got more impacted, than some of the other parts of the cloud space.
You know, as those markets come back, as, you know, we start to normalize back to what end demand looks like, you know, the expectation would be, you know, we'd have a better back half of the year than the front half of the year.
Okay, that makes sense. Again, in terms of the cost cuts now that you guys have talked about for this year and then long term, you know, the headline has been $3 billion of cost cuts this year and $8 billion-$10 billion exiting 2025. Understand there's a lot of moving pieces now with the depreciation terms and things like that. What, what's the benchmark of that savings? I mean, am I looking at here was your cost in 2022, and we're gonna reduce that by $3 billion? Is that versus the trajectory that you were on before? Just how should we think about measuring that?
Okay. To be clear, the depreciation change does not in any way -
Right
- count towards our savings. Our savings has to be real cash-
The $3 billion was net of a depreciation increase, and now that's gone.
Yeah. Yeah, exactly. We do.
Right
... in that regard. Yeah, I would say, the way we kind of looked at it is, we looked at the first half of 2022, kind of how we were running, both in terms of cost of sales and in terms of OpEx. We said, "Okay, from that point we wanna see a $3 billion saving." We actually did start to make some progress, on the savings even in the back half of 2022. The lion's share of it is really coming in 2023.
Okay. That's $3 billion of net reduction in kind of, if I take cost of sales plus RP.
Yeah. It's roughly about $1 billion in cost of sales.
Yeah.
About $2 billion in OpEx is roughly the way I would look at it. On the cost of sales, I would say it's a lot of, you know, kind of blocking and tackling, just, you know, tightening the screws on various areas of the spend. The team there has, you know, looked at opportunities to, you know, kind of reduce at least in on a temporary basis, reduce the labor count, which has, I think, driven, you know, some of the more meaningful parts of the savings. On the OpEx side, we looked at all of our overhead functions, and we set a target to reduce them by about 25% year-over-year, or, you know, from the baseline of first half of 2022.
We've gone really program through program and looked at, you know, areas where we felt like we, you know, the investment was not justified by what we thought the return looked like, and we've, you know, kind of jettisoned those. In some cases, that's been shutting it down. In some cases, it's been selling it. I think as many people know, there's, you know, there's some, you know, some news out last week around a more streamlined graphics roadmap. That was part of it. You know, we went through the graphics in excruciating detail and looked for, you know, what were the areas that made sense and what were the areas that didn't and, you know, kind of streamlined that saving.
You know, we're not done with it to get to the full $3 billion. We still have more work to do. You know, we're, I think, well on our way to getting that. Now my attention is really kind of shifting to, okay, you know, got good line of sight on the $3 billion, but that's only a slight down, you know, a down payment on the $8 billion-$10 billion.
Mm-hmm.
In the $8 billion-$10 billion, you know, the rest of the, call it the $8 billion-$10 billion, so roughly the $5 billion-$7 billion, that is, you know, more biased towards cost of sales than OpEx. You know, that's important because obviously, and I think important for investors because it improves the gross margins, but not as easy to come by. You know? This is gonna have to be really where we break the company reporting into two pieces, one that really reports a P&L based on a kind of a foundry model, and the rest that reports all the business units by product, because we're gonna really drive efficiency in this foundry that is, you know, both supporting our internal needs and supporting our external customers and foundry.
Just to make sure we understand that $8 billion-$10 billion exiting 2025 is relative to what? Like, so $8 billion-$10 billion-
Same thing.
... less cost.
Yeah, same thing.
... than.
Yeah
than same thing meaning-
Well, obviously, there's a variable cost component.
Yeah
... you know, when revenue goes up.
Right
... you know, variable cost that I, you know, we're not gonna-
Yeah
... obviously see that go away. It's, you know, it's maybe hard to compare it, but it's really looking at the kind of the non-variable aspect of our cost of sales and driving efficiency-
Yeah
out of that spend.
'Cause I feel like if we have a detailed cost of sales model, which is a lot of guesswork, but, like, you know, there's labor, there's overhead, there's depreciation. All those things are kinda going up, all those people.
Yeah. Yeah.
Both headcount and labor costs going up, overhead going up-
Yeah
... raw materials costs going up.
Yeah.
that amount of cost reduction is a very.
Yeah. I think about it more on, like, on a wafer cost basis.
Yeah.
You know, we're trying to drive a certain amount of wafer cost improvement.
Yeah. Okay. Okay, great. Shifting to the growth drivers, you know, maybe just start with market share. I know you don't wanna get into forecast, but in your core businesses, PC and server, you know, how do you guys feel set to defend your market share going forward?
I think on the client side, we're doing pretty well. Alder Lake was a good product. It's performing really well, as is the follow-on product, Raptor Lake, you know, we'll have Meteor Lake out this year on Intel 4. I think we feel really good about our product position in the client space. You know, I think we picked up a little bit of share in 2022 when you look at it on an end consumption basis, and my expectation is we probably will, you know, do at least as good as we're currently at, if not improve it a little bit in 2023. You know, for all intents and purposes, I think we've righted the ship there on our product performance.
On the data center side, obviously, it's been a lot more mixed. Sapphire Rapids is out and ramping, which was important, and, you know, I recognize that it was not at the time we originally expected it, or the second time we revised it was at the time we originally expected. Something that probably wasn't really, you know, felt by the external community was we actually in our last reset of this thing kind of reset it to the end of the year, and we pulled it in a quarter, and I thought, you know, that was actually somewhat of an important step in the right direction that, you know, suddenly we were beating a commit date that we set with, you know, external customers and our own internal expectations. You know, Sapphire will ramp here.
I think it's gonna be one of our fastest ramping, if not our fastest ramping product, that we've ever, that we've ever had. Now we look towards, you know, the follow-on products. You know, we'll have Emerald out, of course, but the real, you know, important products that I think make a meaningful difference is Sierra Forest and Granite Rapids, both out in 2024, and, you know, they make a meaningful difference in terms of our competitive position. The way Pat characterized it is he said, "Hey, you know, we'll have a falloff in market share in the first quarter. We're expecting that to stabilize through the year." I would not call that victory.
I would call that, we're slowing down, the share loss and taking advantage, I think, of, you know, some of our markets being very depressed and seeing recovery through the year. You know, and mix, you know, with mix will help us through the year and the, and the net result of that will probably keep us in a, on an aggregate sense, relatively stable. But really, you know, it won't be till Sierra and Granite that I think we have real products that really kinda stabilize it. You know, for a couple reasons. One, you know, the performance of Granite, relative to, what customers need and what the competitors will have is going to be fantastic.
Also, we will have our first E-core line, you know, a real efficient core that answers, you know, the needs of customers that really, you know, have, you know, kind of a power crunch issue that really need a more efficient core. So a combination of those two things I think will be really important. We're actually gonna have a webinar. Hopefully you won't mind, I give an advertisement. We're gonna have a webinar on March 29th on data-
As long as you're not advertising a competitor's conference with it.
Yeah. No, this is just for us, so it's not. Data center. Sandra and John will go through, you know, the entire roadmap and give you, I think, a lot of good breadcrumbs to understand what the position then is and how we think we will, you know, perform over the course of the next couple years.
Can you talk to just the reception of Sapphire Rapids? I mean, it seems like right now, when everyone's in kind of a budget cut environment, sitting on excess inventory, there's a lot of focus on the current generation, I guess?
Yeah.
The cost increases at a platform level for both you and your competitor seem to be kinda slowing down some of those transitions. Is that fair, do you think?
This, I mean, I think the reception's been quite good on Sapphire Rapids. You know, I think in certain workloads, it actually performs extremely well. You look at AI, security, you know, these are workloads where, you know, are smaller but growing, and Sapphire Rapids is particularly well suited for that. You know, I think, you know, we're pretty pleased with how things are going.
Great. I'll ask one more data center question, then we can open it to the audience if there are questions. You mentioned AI, and I think you mentioned on the call generative AI and some of the enthusiasm around that. How do you see that affecting Intel? Is that primarily some of the Gaudi assets and some of the specialty AI stuff that you have? What could there be impact on the core server business? Do you see opportunities that as people sort of say, "Hey, we're gonna reorient our budgets towards these new workloads.
Yeah
You know, how does that affect Intel?
I think anything that is a catalyst for requiring more computing is goodness for us, quite honestly. Obviously, we have the Gaudi asset, which, you know, is gonna be, you know, helpful in terms of our ability to address, the needs of AI workloads. You know, Sapphire Rapids will support and be, you know, from a CPU perspective, I think an important part of the product offering and for AI. Then, you know, we also, you know, have our own, you know, graphics product roadmap and, you know, to the extent that it requires, you know, that level of, you know, compute, the parallel compute, then, you know, we'll have offerings as it relates to that.
I think AI of course is, you know, super helpful to help drive the business, drive the growth rate, and create a catalyst for it.
Yeah. I feel like there's a real opportunity in the sense of, you know, three months ago, the conversation of inference cost was kind of a nerdy semiconductor dialogue-
Yeah
Now it's suddenly Google and Microsoft.
Everybody now.
figuring about it.
Yeah.
That there ought to be. Particularly when cost is the focus, there ought to be a lot of opportunity.
For sure. I mean, there you know, there are obviously things that, you know, only parallel computing can handle. You know, it's expensive, you know.
Mm-hmm
... and they're gonna look at the most cost optimized solution that they can drive and, you know, CPU, you know, offloading to CPU, I think is, you know, absolutely something that architecturally they're gonna wanna go after.
Great. I do wanna get into foundry a little bit if there's time, but, can we first see if there's questions from the audience? There's one up in the front here. Somebody have a mic? Okay. Is it over there?
Thank you. I guess considering the large amount of capital that's required to do such a really fast and transition through so many nodes, what is the strategic rationale to continue to own Altera and the stake in Mobileye?
Well, let me Without talking about businesses we haven't discussed, whether they make sense to monetize, but let me talk about Mobileye. you know, and I'm limited obviously at what, to what I can say, but we do view Mobileye as being particularly well-positioned in what we think is a pretty exciting market. you know, we will take, of course, opportunities to monetize some of that. You're right, that is helpful in terms of funding the needs of the core business. That said, you know, there's, you know, we don't wanna leave too much on the table either.
You know, we will make those decisions, when we think it maximizes the value creation, and, you know, then leverage it to fund what is, you know, the core strategy of the business. I would say, you know, as it relates to any non-core asset within the business, we're and I don't think Pat probably gets enough credit for this, quite honestly. We're super pragmatic around this particular topic. Anything where we think there's a good opportunity to create value for shareholders, in excess of what we can create fully under the umbrella of Intel, we will go out and do. I'll leave it at that for now, but, and update you as, you know, the dynamics change.
I think all of these are good businesses on their own, including the potential for foundry, but is it distracting to own all of these businesses rather, relative to the goal of let's just make the best CPU on planet Earth?
Yeah, I mean, I think focus is absolutely, you know, a good strategy to have. Yeah, of course, some of these things, like, you know, I think Mobileye is a perfect example. It's now kind of off running on its own. You know, we obviously pay attention to how they're doing financially because we gotta roll it all up but, you know, they're executing it now. They can be less of a distraction for the senior leadership team of Intel and, you know, there'll be, like I said, likely there'll be other opportunities to get more focused.
I, you know, for sure our key focus is get five nodes out in four years, get our product portfolio back to righteousness, and leverage what we think is a real core competency of ours in terms of, you know, process technology and manufacturing at scale to deliver to a set of customers in ways that we haven't in the past. Those three things are the main things that we're trying to drive, and everything else, you know, we'll kind of, you know, be flexible around how we approach them.
Okay. Thanks. One more here.
In your mind, what are the key milestones that Intel needs to hit to prove that the strategy of jumping five nodes in four years is working?
Well, I mean, it's really getting products out on those process technologies. You know, Intel 7 is out and running. We've already checked the box on one of them. We're really close on Meteor Lake will be Intel 4. We're super close on that one. All things point to that one being in really great shape. We're on to Intel 3, which is 2024. You know, we've and you'll without stealing too much of the thunder of John and Sandra, you know, I think you'll hear some things about, you know, our level of progress on those products, would suggest that we're, you know, well on our way.
On 18A, I think probably the best evidence to investors that we're really on track is announcing an 18A customer on the foundry side, which our expectation and hope will be that that happens in 2023. If that happens, you know, they are putting us through the paces, I can tell you that right now. If we can execute on that, I think it's a good endorsement of the 18A process.
All right. On that note, we're out of time. We'll wrap it up there. Thank you.
All right. Thanks. Appreciate it.