Intel (INTC) Presents at Credit Suisse 20th Annual TMT Conference (Transcript)

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Intel Corporation (NASDAQ:INTC)

Credit Suisse 20th Annual TMT Conference Call

November 29, 2016 10:00 AM ET

Executives

Stacy Smith - EVP, Manufacturing, Sales & Operations

Analysts

John Pitzer - Credit Suisse

John Pitzer

Good morning. Why don’t we go ahead and get started in the interest of time. Again, my name is John Pitzer, I am the semiconductor analyst at Credit Suisse. It is my pleasure this morning to introduce Stacy Smith. Many of you know Stacy as the CFO of Intel. And he is on stage here today for the first time in his new role and I reminded him last night at dinner that I think his key notes conference began here about 10 years ago. I think this was the first conference he did as CFO. This is now I think the first conference you are doing officially as ex-CFO in your new role.

Before we start the fireside chat, I do want to read the risk factor disclosures. I don’t know if we have a slide on that in the back. We do, perfect. Today’s presentation contains forward-looking statements. All statements made that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to Intel’s most recent earnings release, Form 10-Q and 10-K filing available for more information on the risk factors that could cause actual results to differ. If they use any non-GAAP financial measures during the presentation, you will be able to find that on their website at intel.com and the required reconciliation of the most directly comparable GAAP financial matters.

Now that we’ve got that out of the way, Stacy, thanks for joining me this morning.

Stacy Smith

Thanks.

John Pitzer

It might be helpful given that this is the first keynote in your role to help us understand exactly what the new role is kind of what do you hope to accomplish in the role? Is this sort of a traditional sort of sea sweet role within Intel or there something different that you are trying to accomplish?

Stacy Smith

Good morning, everybody.

So, my new role is leading Intel’s sales, manufacturing and operations. And when I think about that portion of the Company, I think that it has been a big part of our competitive advantage over the last decade. Our manufacturing advantage, the ability to drive Moore’s Law faster than anybody else, the ability to bring the complex products into high value manufacturing at high yields and good margins, and then our relationship across the ecosystem and in particular our deep relationship with customers that are doing innovative work.

That said, those capabilities have been very finely tuned over 20 years for the PC market. And as I think about the next 10 years, it’s taking that suite of capabilities and having that same level of depth and competitive advantage as we think about a much more complex heterogeneous world in which we now are competing, so into the data center and to the automotive space, into the Internet of Things. These are different capabilities that we need from the standpoint of how we work with customers and the standpoint of our manufacturing capability. And so, it’s really driving that transformation. And the nice thing -- and it is interesting that this is where I started and then this will be my first time when I’m starting in the new role, you can kind of reflect back of the Company over the last 10 years .

When I became CFO at Intel, our revenue was in the $30 billion, low 30s; our margins -- gross margin was in the low 50s. Today, we are on a path to be a $60 billion Company. Our gross margin is very consistently between 60% to 65%. But more importantly, you see the transformation and the business model. So, 10 years ago, we were almost entirely dependent on the PC market for a growth in our profitability. Today, more than half of our profits come from the Internet of Things, and the data center and the memory business and things like that. So, it’s a very different Company from what it was 10 years ago and it will be a very different Company 10 years from now.

Question-and-Answer Session

Q - John Pitzer

You and I talked about this at dinner last night. To the extent that your new role involves a pretty significant overhaul of the sales force, you talked about data center and autos, and I think most of the audience understand the discreet nature of both of those markets. IoT is more sort of a catch phrase, because there is a lot of different sub buckets inside of IoT. And in a lot of ways, if you think about your historical go-to-market strategy, you’ve sold relatively -- lots of units to relatively few customers. If you look at the IoT landscape, you could make the argument, that’s much more maybe of a channel strategy where you are going to be selling relatively few units to lots and lots of customers. How do you reorganize the sales force to be able to go after that market effectively. In IoT, what are the biggest sub buckets that we should be thinking about and that you are thinking about along sales force realignment?

Stacy Smith

So, first, I just want to go back and point to something. When you look at our PC business, actually we’ve had a broad and deep channel program for 20 years. It actually has been a big part of our success. And we touched directly 10,000 customers in the PC business, which I think surprises a lot of people because of the concentration of some of the big OEMs and there is a lot of local innovation that happens, a lot of it is on cost but there is a lot of local innovation happens that that channels is critical for us to hit Tier 3, Tier 4, Tier 5 cities in emerging markets and drive our scale. And we’ve had a thriving embedded morphing into an IoT business over the years where we have had a very broad channel strategy and we’ve had literally hundreds of customers across dozens of vertical markets. That business last quarter was pushing $700 million for the quarter in revenue and almost 20% year-on-year growth rate.

That said, our sales force has been designed over the years to be a very efficient functional model. And what we’re toggling towards is a sales force that’s actually aligned by vertical markets. And so, we will have a dedicated sales force, for example for automotive that has very deep skills in that space and can go in to a customer like a BMW or a Delphi which was announced [ph] this morning, and do a solution sale that touches all of the different parts of Intel. So, when you look at the BMW ADAS announcement, I believe we won that A, because we can put great compute into the car, but I think even more importantly to them was the fact that we can work with them on the connectivity of that car to the server infrastructure; we can work with them in terms of bringing in other partners that are doing sensors and things in the car; we can work with them in terms of that data center infrastructure that’s doing the data analytics and the scoring of the data that’s coming in, in high def mapping systems and things like that. So that’s end to end sale and it’s a very different skill set from what we’ve historically had. And so, we’re toggling the sales force to be some functional model to be vertically aligned with a much more solutions orientation than what we’ve historically had to do.

John Pitzer

Taking a step back, Brian, the Board, and you have always consistently said that the life blood of Intel is innovation. And when you look at sort of your cash resources, first and foremost, you’re going to invest in the business. And you’re doing that for the tune of about $12 billion a year in R&D, about $10 billion a year in CapEx. What I find fascinating is on the R&D front, you spend more than any other tech Company on the planet except for Google. And when you throw in both R&D and CapEx, you’re probably the largest spender in those two categories in the world. And I guess a lot of the questions I get back from investors are how do we gauge whether or not that spend is being done responsibly, it’s being done efficiently. Again for that much spend, what should the returns and growth be for the business or how do you think about returns and growth relative to that R&D and CapEx spend?

Stacy Smith

Yes, it’s a great question. So, first, at the very highest level, I think you can just look at the financial performance of the Company and get a sense of how that model works in terms of the spending that we’re doing on innovation and then how that ultimately translates to financial return. And again the advantage of the ten-year history as CFO is I can look back across that time period where we’re running gross margins that are consistently in that 60% to 65% range. And that is not because of anything other than the fact that we can bring great products to the market and that’s a result of that R&D spend.

Over this ten-year horizon, we’ve returned almost a $100 billion to shareholders in terms of cash generated to the model, and that’s cash generated after we spend on CapEx, after we spend on R&D, and it’s broken out about half between the dividend and half between buyback. The average buyback price over that time period is in the low 20s. So, we’ve also benefited from the fact that the stock price has been appreciating. So, when you when you zoom out, you can see in the financial model the impacts of the investments that we make.

When you get into what’s the model going forward, I think you have to think about it differently for different businesses. in the PC business, the traditional PC business and in the SOCs that are going into mobile, we’re pulling back on a lever there, we’re reducing investment, we’re going for segmentation, we’re going for financial return. You can see in the results of that business operating margin increase last quarter that was almost 40%, as we harvest some of the investments that we’ve made and drive for more segmentation and sell outs.

And then in areas like the data center and Internet of Things and memories, those are places where we see long-term growth opportunities, we see strong and potential financial returns, and we are making significant investments. And that’s where we are increasing investments. Even with all of that -- so, it’s the long-term model of the Company; it’s something that my successor Bob Swan will talk about in the investor meeting in February. But even within that, I believe we can maintain high gross margins, we can generate some operating profit at leverage as we bring down spending as a percent of revenue, will be down a point this year, will be down another point next year. And I think we still have room to go from there.

John Pitzer

Stacy, how important is benchmarking when you look at how you are doing versus peers? And if you do benchmark, is to the semi industry, is it for the large cap tech engine? [Ph] The reason why I ask is historically, you’ve always been in sort of the top deciles of operating profits for the semiconductor industry. If I look at today and sort of all the consolidation and optimization that’s going in the semi space, you’re barely to top quartile. Is that something that bothers [ph] you guys or something you just don’t worry about?

Stacy Smith

So, we do a lot of benchmarking. Now, it’s hard for a company like Intel because we’re kind of the last Company standing that still invests in technology development factories and products. And those products range from kinds of things as Rich [ph] was talking about earlier to high-end data centers Xeons and Xeon Phi and Silicon Photonics. So, it’s difficult for us to find two or three companies that make a benchmark for us. Specifically we would create some [ph] benchmark that would include like a TSMC and companies that we compete with. And yes, you will see that benchmark. So, we are spending a little higher in terms of our spending as a percent of revenue and that benchmark is spending significantly lower in terms of spending as a percent of revenue.

I would tell you that we believe that we create the most shareholder value by innovating, by investing. We see opportunities which has caused us to kick up the investments level right now. I think other companies are taking a different approach, and it will be interesting to see how that plays out over a five-year horizon.

John Pitzer

On that point of increasing investments, I want to talk a little bit about the restructuring announcement that you made earlier this year in April. You are clearly ahead on the restructuring, but as you pointed out, you’re finding more things to invest in from those savings. And so, net-net, these are my numbers, not yours. If you look at kind of the implied 2017 OpEx, it’s about $600 million to $700 million higher than I think most people thought going into the calendar third quarter earnings. And I guess the biggest question I get is that’s a lot of money, what exactly are you investing in? And there is this I think concern or narrate about there that gee, is Intel just seeing something in one of their businesses that they are not willing to discuss that’s kind of scaring the heck out of them and forcing to spend at these elevated levels. How do we kind of respond to that?

Stacy Smith

Yes. So, first, let me just give you the perspective from the Company. We are ahead of what we had said in terms of the restructuring. It’s been painful but the Company I think has executed really well. For a large company, I think we’ve done about as fast as any company I’ve seen from. When we announced this six months ago to today, our employment level is down on the order of 7,000 employees, pretty much everybody has been notified; there will be some reductions still to happen. But these are people that now know their status and sites are being closed and things like that.

We are down in terms of our OpEx spending from where we started to where we are at today by about $700 million over three quarters in 2016. That puts us on a run rate at about $1 billion dollars of savings net of the reinvestments that we are making. And we had said that the goal was a couple of points spending as a percent of revenue. We’ll deliver a point of that this year; we’ll deliver a point next year. So, we’re on track to all of that. And within that, we are making investments. To your question, are there things that scare the hell out of me, I’d say no, but there are real opportunities that are out there that are worthy of investment. When you look at where our big investments are going right now, we’re going down in SOCs for things like phones; we’re going down in the PC segment of the business; we’re going up in the data center; we’re going up in IoT specifically and automotive which is a long-term investment for us that will we believe payoff but will take some time. And we’re going up in places like through the cross point memory where we believe we have a disruptive memory that has some tight ties to our server platform and alternatively to other platforms in the Company where we can get a very good return on that investment. And so, we’re taking majors like that. We’re going down; we’re delivering what we said in terms of the structuring and within that we are hitting the lever on some investments on places where we think will generate returns.

John Pitzer

The other big concern coming off the quarter was just the data center growth rate, actually data center growth rate and profitability. Maybe you can address profitability first, because with those increased investments, you cannot have this odd dynamic where your PC earnings are going up, and your data center earnings are going down.

Stacy Smith

Yes.

John Pitzer

And so, give us some comfort that this is really either an issue with OpEx that you control, an issue with the Broadwell launch on gross margins and not something more in the areas like pricing competition or something else in the marketplace that’s a little bit out of your control, specifically in data center profitability?

Stacy Smith

Yes. So, within the data center, so just take Q3 as the most recent quarter. Revenue growth was circa 10%, I think operating profit was relative flat in the quarter. Within that revenue growth, what we saw was very strong growth in cloud, networking, some of the adjacencies starting to kick in, things like Silicon Photonics. Relatively weak and weaker than expected enterprise segment of the data center. Within that we are -- there is always competition in segments, but there is no real change from where we were in Q1 and Q2 to Q3. So, we’re not seeing that as being a driver of the business. It really is just a weaker enterprise market that led to us being below what we had as we get into the back half.

On the operating profit piece of it, there is a couple of things that are going on. So, we’re talking about the increase in some of the OpEx investments. Those are levers that are firmly within our control that we can toggle up and down as necessary. But, I think more importantly is what we’re seeing the first 14-nanometer products coming in for the data center and those have a higher cost structure than our 22-nanometer products. So, the 14-nanometer cost, we’re coming down that cost curve rapidly but it’ still is higher than prior generation products. And so, as server -- as the data center starts to ramp those products, we’re seeing cost associated with that that’s impacting the product margin. That will be a temporary blip within the data center.

John Pitzer

And then within DCG, I think the two I think most prevalent sort of concerns out there is one, although you guys always worry about your market share position, there hasn’t been really any viable competition in the marketplace for several years. As we look out to next year, you’ll have AMD reemerged with their Zen processor; you’re also hearing more about your customers trying to be more internally. How do you think about that competitive threat either from a third-party or from your own customers?

Stacy Smith

Yes. So, first, we know that this is a fast-growing, big profitable business. Everybody in the world is going to come at this from different angles. That’s actually good for us because it makes us get up every day hungry and paranoid. But, I would point out that I think in prior years, you would have asked that same question starting with Samsung bringing ARM into the data center, Qualcomm bringing ARM into the data center or IBM with Power. So, we have competition in this segment. We consistently have competition in this segment. You can argue they’re just teeing up a little bit, but it’s not a new phenomenon for us.

The way that we then work with our customers to ensure the growth of the businesses, first and foremost and coming back to my new role, we have to deliver just overwhelming performance per watt per dollar equation to the customers. At the end of the day, in every market that we serve, if we can do things that are higher performance, lower cost, more energy efficient than what anybody else on the planet can do, we win. That’s how we win in the high end of the PC market, that’s how we win in the automotive space, that’s how we win in low end IoT applications and that’s how we win in the data center.

Second is we need to have the capability to work with our customers in a way where we can address any kind of workload that they want. And therein, you see the strategy in the data center where through the Altera acquisition, we now have the capability to integrate in FPGA, so we can deal with whole class of workloads. In that manner, we have Xeon Phi, which gives us a great graphics architecture in the data center. We have -- with the Nirvana acquisition, we’ll have some ASICs for machine learning where we can speed up machine learning significantly in the data center. So, we’re going to have a suite of products that allow us to deal with different workloads in the data center that we can actually go work with the big customers and do almost custom solutions for them depending on their workload where we can provide, again back to the prior point, the best performance per watt per dollar equation. If we do that, then, we’ll participate in fast growing segments of the business.

John Pitzer

But Stacy, just by the matter of fact that you’re putting effort into Altera, into Xeon Phi, into Nirvana, doesn’t that just reinforce the notion that perhaps a lot of the workloads that are emerging in the data center are just not the workloads that an updated [ph] Xeon chip is optimized for? And can you talk a little bit about these new workloads? What percent do you think they’re going to represent over time, because really the concern out there that the Xeon is just losing value inside of the data center?

Stacy Smith

So, today, they’re actually very small, but they’re growing fast. What percent will it ultimately be, I don’t know that I’m smart enough to predict, but they’ll grow and it’ll be you can argue 10, 20, 30% of the overall data center/high-performance computing market could be with those kinds of workloads. But at the end, the common denominator of all these workloads is they’re performance hungry. We don’t win in the traditional Xeon market because we come in and we’re -- the best working or whatever, we win because we provide a solution that no one else can touch. We’re going to do the same thing in these other spaces, and it’s going to be because of our manufacturing advantage, the ability to do these very, very complicated chips taking advantage of our Moore’s Law leadership. I believe we’ll have products that will be market-leading products and that ultimately will win.

John Pitzer

Can you talk about some of the optionality, positive optionality inside of data center, specifically what you’re doing around Rack Scale architecture, what you’re doing within networking, what you’re doing with next generation memories? How important -- now, you’ve talked about in prior analyst days that relative to your old growth rate of 15%, I think the new adjacencies are going to be 300 basis points of that 15%. Is that still the right at least magnitude to think about or what’s the opportunity there?

Stacy Smith

Yes, that’s the right magnitude. And we’ll talk more about expectations for long-term growth when we get to February update. But you should still think this is being a significant contributor to the long-term growth CAGR for the business. And it comes back to the prior question. And what we see is that ultimately we have a series of capabilities that range from FPGAs to obviously Xeon to Xeon Phi, which is graphic to accelerators to high bandwidth memory that can dramatically speed up the performance of the system to fabric and whatever. We have the series of capabilities. And we have the technical confidence that we can go and work with a cloud service provider, future cloud service provider and help them to architect a solution for their data center that gives them a situation where one plus one plus one plus one equals way more than four. And that’s the strategy with how we’re working with our OEMs to deliver Rack Scale architecture is we can go in through the OEMs, provide something where we can architect something in the data center, bringing that series of product, some of them are our products, some of them are other people’s products that provide a dramatic improvement in performance of the datacenter. And we believe that’s a win for our customers; it’s clearly a win for us because we expect to expand our share of wallet.

John Pitzer

Can you give us an update on cross point? I mean you talked about on the conference call 3D NAND deals at Dalian in and progressing very well. Where are we sort of in cross point? I think you guys have some targets for some consumer SSDs coming out late this year, some more enterprise class memories coming out next year, is that still on track, how do we think about this market evolving over the next two to three years?

Stacy Smith

Yes. So, what we said on the call was we’d be sampling through the cross point this quarter and will be ramping it next year; so, in the range of what you just said. In terms of Dalian, the strategy with Dalian is it’s starting off as a 3D NAND factory and later will convert to be a 3D cross point factory. And as I said on the call, I was just out there and I was very impressed, their first full loop production inside the Dalian matched the production from the mature Intel Micron JV factory, which is a phenomenal accomplishment for a new team and the new factory.

John Pitzer

And the business model here longer term, because you’ve been -- -you’ve said that this is not about building a fab and finding a clearing price but the memory you bring into market is actually very valuable and high IP. So, how do we think about this business model, because it is a segment that you are actually losing money in today? But if we look out over a five-year period, is this something that’s going to look again the corporate average margins over time?

Stacy Smith

So, yes, first, I’ll take the losing money today, I’d say little bit low. [Ph] So, first, the last 12 months have been kind of a -- it’s the bad part of the cycle for memory in general. It looks like we are moving a bit more into the sunshine as we go forward. But, certainly we’ve seen prices coming down; that’s been a part of it. But the bigger Intel specific issue is that downturn hit us at the time that we were investing and bringing Dalian up, so significant start up cost in a factory that wasn’t in production. And we’re still making significant R&D investments in 3D cross point. So the combination of that moved us from a relatively nice profit position within the memory business to a loss. We think that’s a temporary phenomenon. We fully expect that we are going to make very good money in that space.

In terms of will it be at the average corporate margin? Highly unlikely; it’s memory at the end of the day. So, I think we’ll make good margins; we’ll make better than industry margins but it’s not likely to do the same margin as the Xeon processor. I’d give you the same answer that Rich gave you on that, which is it’s not really how we look at the business. We’re not trying to truncate growth in certain segments that hit a corporate average. What we want is that every business is growing, every business is expanding its operating margin. And if some business is growing faster than others and is causing the average to go down, that’s okay, because we’re generating more cash, we’re generating more return for our shareholders.

John Pitzer

Can you spend a little bit time talking about the IoT opportunity? I think when I bring up IoT in Intel, I usually glaze over because there is perception that IoT is about this 50 billion dumb devices on the edge that are pushing data back to the smart center. Everyone understands you play at the smart center. I think people are confused about what the IoT opportunity is. So, how do you frame that for us?

Stacy Smith

So, our business is not the low price devices at the edge. We have some segments where we go that far, but in general when you look at the majority of our IoT business, it’s what you just called the smart centers. So, it’s the compute intensive or the hub, the communications hub intensive, relatively high prices, relatively high technology and where compute and connectivity become important. And so, we do have some products that move out of the edge to get into that very low prior pace, but that’s the vast minority of our business, not the majority.

And so, then, when we think about it going forward, industrial application where somebody is taking a factory and building in sensors and data analytics and control systems, we view more on the data analytics and control systems, not so much in the sensors. In a car, as you’ve seen through several instances [ph] come out, we’re going to be more in the automated driving, the high compute portion of that, the high connectivity portion of that, we’re not in the brake controllers or the brake lights or things like that; that’s not our business.

John Pitzer

You bring up cars, and I wanted to touch upon a couple of things. First, you had an announcement this morning with Delphi and Mobileye. Maybe you can just elaborate on that and talk about that announcement. But more importantly, when you look at the market opportunity, and we talked about this last night at dinner, DCG today is selling, what about 20 million units roughly of chips into the data center. If you think about level five autonomous driving cars, basically wheels [ph], the endpoint for this market could be a 100 million units a year, which implies that the auto market could be five times larger than your data center opportunity today. I’ve already given you hard times for spending too much; now, I’m going to give you a hard time for not spending enough. How do you ensure that you get Intel like share in that auto market? And what are you doing today trying to positioning yourself for that?

Stacy Smith

So, as you mentioned, it wasn’t our announcement, Delphi did an announcement last night that they’ve partnered with us, I was actually little surprised by it. So, it’s a good timing that we’re partnering with them in terms of ADAS platform that they’re going to take out broadly to automotive customers. Prior to that, there has been a series of announcements but I think a most flagship announcement was the partnership with BMW to drive an automated driving platform for all BMW models starting I think in 2020, 2021, which is important because it does talk to I read [ph] on the opportunity but it also points to the design and cycle, and how long it takes these things to get to market. We’re sitting here on crust of 2017; we’re three to four years away from the BMW platform coming to the market.

When I dissect why I believe the one BMW, why believe the one Delphi, it’s partly about how efficient our products are there due to traditional compute, but I think it’s more about the fact that we bring a series of capabilities to these customers that that they value us as a more broad technology partner to help them develop a platform. So, in the case of BMW, it is the fact that we can provide unparalleled compute in the car. We have the capability to work broadly with other people that are doing sensors and vision systems and things like that. So we know how to work in an ecosystem. We have the capability to provide high-bandwidth compute in the car with our efforts going on in 5G that they look out. So, we’re seeing actually having a high bandwidth, highly reliable communication protocol that lets us do high def maps and get data to them from the car in a very secure way becomes important.

And we have the expertise in the infrastructure ranging from the traditional data center infrastructure to the high-performance compute infrastructure that will be necessary to do the scoring and analytics on data that’s coming to them from the car. And when you add all that up, they look at us say, Intel has the elements that we need and they know how to work with the ecosystem to help us develop a platform. I think that’s why we win.

Are we making enough investments in that space, the answer is yes, but there’ll be more investment coming I think in that space. It is one of the places we called out that as we generate efficiencies in one side of our business, this is the place where we’ll be making increased investments because this as a long term opportunity. And I agree with your math. Even if you take a very cautious view of the market out four or five years, if it’s 1 million to 10 million units, a $1,000 of compute per car, it’s an enormous market for us and we’re treating it as such.

John Pitzer

Historically, if you look at both the PC market and the server market, you were probably one of the biggest beneficiaries of standardization in those markets. Is the Delphi announcement this morning a step towards standardization in autonomous driving, or do you think it’s going to be a much more fragmented market? And I guess within that Tesla had a pretty public announcement around Nvidia, AMD and you where they chose Nvidia, said AMD was a close second, didn’t have much to say about you. I know you don’t like to talk about customers specifically but is that a situation where a company has a lot of internal knowledge and so you’re less valuable to them, and so, we really do need to see standardization for you to be able to dominate this market or how do you think about that?

Stacy Smith

So, I think actually when you replay the history of the PC market, part of it was -- I wouldn’t say standardization. It was, if we developed a high-performance relatively low cost platform that allowed people to innovate on top of it. If you really go back to the history of the PC market, that was why we’re successful; proof of that is why we’re successful in the data center as well. We did a high-performance relatively low cost platform that let people innovate on top of it and in that we created a very compelling economic equation that allowed us to win in the markets. I think the same thing’s going to play out in the automotive space. Our work with BMW’s very different from the work with Delphi. And with BMW we’re trying to create a relatively low-cost platform that lets them do their IT innovation on top of it. We’re going to do the same thing with Delphi that’ll be a little broader in terms of some of the other players. We’ve got announcements really across I’d say most of the automotive customers that have some level of automated driving content to them. And I think we’ll build on it from there. You don’t win all of them but I think we’ll win our fair share.

John Pitzer

I want to touch a little bit on what’s going to be a major responsibility in new role which is the manufacturing network TMG group. Help me understand a couple questions. One, I think there’s a concern out there that as you guys have toggled from tick-tock to now what looks tick-tock-tock that perhaps your relatively lead on Moore’s Law has somewhat diminished. So, how do you answer that question, one? And then secondly on the foundry, it’s clear that you are taking a more offensive view of foundry. I think SCARM [ph] had their user event in San Francisco a few weeks ago with the first user event you spoke at, it was a pretty similar presentation that you gave with all RMS IDF [ph] this year. When you think about sort of the foundry model, there is a view out there that you are still going just to way too high costs and not flexible enough to be able to serve the needs of multiple foundry customers, how do you address those questions?

Stacy Smith

Yes. I think there are kind of three things there. So, first, in terms of our relative Moore’s Law leadership, as measured by again cost per transistor, it’s -- from everything that we can see, it is still significant; it still is a generation lead over anybody else. It clearly is getting harder to advance Moore’s Law, there is no question about it. If we get into the world of multi-patterning lithography, it becomes really complex. I think everyone is struggling with the yields in the early phase of a ramp for everybody or a little less than what they’ve historically been. But that’s okay as far as we saw that relative leadership because that ultimately translates into leadership product.

It also with 14-nanometer has taken us longer to get to the node. But within that, we actually took a bigger step function in terms of the density that we normally take. And so, even though it took a little longer to get the node and to get yields, that larger step function keeps us right on the historical cost per transistor curve. Actually 14-nanometer is little ahead of the curve from what the prior 30 years of the industry would have predicted. So from that perspective, Moor’s law alive and while harder, taking a little longer but we’re taking bigger step functions. And so, we stay on the curve while it looks like others fall off the curve.

Now, within that, to your point of tick-tock-tock or whatever you want to call, as it -- 14-nanometer, as it takes this longer and as we are getting that bigger step function in terms of densities, it made sense for us to add in another wave of our products to take advantage of that node for little bit longer, which is what you’ve seen with some of the products that are coming to the market and as we speak. And that’s actually a good model for us, it’s a good model for our customers because it’s pretty predictable for them. And they get to take advantage of performance benefits that we can provide them as we bring in that third wave of products. So, 14-nanometer, that’s a good model. What we said is we think this cadence continues to be in the kind of range that we’re seeing today up until we get to EUV at which point it might reset it back to something shorter, it might not and we’ll have to see how that plays out.

John Pitzer

Any update on the EUV timing?

Stacy Smith

As always said is that there will be some level -- we would expect that somewhat we are seeing today is some level of EUV and 7-nanometer and we haven’t said any more than that.

John Pitzer

And then secondly, on the foundry side of things, and so clearly you are taking a more offensive view on foundry. There is a lot of I think view out there in the investment community that kind of you are stringent design rules, your higher cost of manufacturing just can’t compete with the flexibility and lower cost you need for a boarder based foundry. How do you address this?

Stacy Smith

So, first, I’d say if we were honestly characterizing our capabilities over the last three or four years in this space, it’s a stretch to call it foundry, call it semiconductor. [Ph] And it was evidenced by the work with Altera. It’s not -- they are not coming in to an organization that has that frontend of design tools, IPs, things like that that the smaller customers need. And so somebody like Altera that’s performance hungry can come in and say, actually we know how to do this. We do the [indiscernible] at foundries all the time, let us come in and work with you. We don’t need that handling. In turns out there was some that we’re still lacking but figure that out pretty quick But let us come in and we’ll do that work in and take advantage of the transistor benefit that you give us. Where you see the transition of that organization and you’ve seen us through a series of announcements that we are and to a large extent now have built that frontend to be a much more what the rest of the industry needs to be able to work with us as a foundry partner.

We are working ARM to have hardened IP on that side; we’re working with other IP vendors to have a smooth hardened IP. It’s good for us from the standpoint of the ability to work with third party customers; it’s also really good for us from the standpoint of the organization that’s trying to deliver SOCs, because they can work with us -- they can work internally with us in enormous foundry like way to deliver products much more quickly to the marketplace that takes advantage of IPs that already exist out there. And that’s part of the transformation the manufacturing organization needs to go through as we think about the next 5, 10 years as a company.

And just one last thing, in terms of the cost, what we see when we engage with the third parties and from our own knowledge is, our cost when we’re talking leading edge, because of the Moore’s Law benefit when we get the design rules right, we can deliver a die cost that actually is better than the cost through the third party foundries. It’s not a wafer cost, it’s die cost and that’s because of the fact that we have higher density, we have better scaling, we have the ability to frankly have better yields. So, we can be very competitive on a cost basis, but it has to be at the leading edge, when you’re talking about n minus 2, and fully depreciated factors and things like that that really is our business model.

John Pitzer

Can you help set expectation on how quickly you might gain some success within the foundry model? To-date, you haven’t really had dedicated CapEx for foundries. When might we actually see on a January conference call, you guys give us a CapEx number with a little addendum that x is foundry?

Stacy Smith

On that one, it would be as we had won somebody big enough to drive CapEx. If you look at Altera, it wasn’t full factors [ph] worth of volume. So, these are still relatively small today, but it’s the capability that’s important; it’s capability that I think has a lot of option value to us as a company. And my expectation is that there are customers that we’re talking to design wins that are kind of working a way through. There will be more significant and this will grow over time. But I also don’t want to minimize that the capability to flip it around and show that foundry face to our internally SOC organization is absolutely a case. One of the things that Murthy and I spend a lot of time thinking about to make sure that SOC team can land a product very quickly and take advantage of our Moore’s Law benefit. A lot of the investment is applicable into our own execution on that side as well.

John Pitzer

We’ve gone almost 43 minutes without asking a PC question, but I got to ask this one, PC question. So, you talk about with the restructuring in April, and I think you’ve reiterated this a couple of times that you’re kind of restructuring that CCG business to kind of reflect in a normal year PC unit sort of down low to mid single digits and in the bad year down kind of high single digit type unit declines. At some point, does this market bottom out? And I know you guys don’t really want to call that. But how do you kind of view this market over the next 5 years to 10 years? And what you’ve been very successful at as units have come down is mixing up. Where are you in your ability to continue to try to move the consumer higher up into the stack?

Stacy Smith

Yes. So, just to make the observation where I started of how our business has changed. I was reflecting after the dinner last night. I’m not sure we had a single PC question at dinner. And again, relative to 10 years ago at my first conference, it all would have been what’s happening in Taiwan, what’s happening in the channel, how’s the PC market? It was just remarkably different and it does show that how different we are as a company today. In terms of the PC market, the napkin math that are shown in a couple of different investor meetings is even in a market where the PC market’s down in that kind of mid single digits, if we’re doing a good job of segmenting the market, a good job on our cost and OpEx side, we can grow the company. We can grow the company at the top line and we can certainly grow the company at the bottom line. We’ve proven beyond a reasonable doubt that we’re pretty poor at calling the PC market and we’re pretty poor at calling the bottom and the top and growth rates. So, we’re just biasing our planning to be relatively cautious to drive for a market that kind of looks over the next several years how it’s looked over the past several years, probably the best insight that we have, and then to make sure that we’re investing in things where we can drive that segmentation. And that becomes really important in a market like this. And it means that we can outperform the overall PC TAMs pretty dramatically as we have been doing. So, we’re investing in gaming and VR and things like that for a very high end in PC segment. There’s some products come to the marketplace that that my kids love to have.

We’re investing in having super thin and light, two in ones and convertibles and things like that that are coming in to the market this Christmas selling season. So, rush out and buy them now that are really sexy machines. We’re investing in cost innovation such that we can start addressing even more first time buyers and low cost or more price-sensitive emerging markets. So, those are the places where we’re making investment. But overall, we’re banking on a market that continues to decline. We’d love to be positively surprised in that. My personal view is that there’s an installed base to the machines out there that are being actively used. And there’s some limit to how old those machines can get. And as long as we’re driving appropriate innovation, there will be some point at which that curve starts to flatten back out, but we haven’t seen signs of that yet. We’re not planning for but that’s my long term view. There is a point where that happens whether it’s next year or five years from now, we’ll just have to see.

John Pitzer

Great. With that, we’ve ended our time here at this session, but I really want to thank Stacy for spending time this morning. Stacy, thank you.

Stacy Smith

Thank you.

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