Intel Corporation (INTC) CEO Pat Gelsinger Presents at Credit Suisse 25th Annual Technology Conference (Transcript)

Nov. 30, 2021 1:58 PM ETIntel Corporation (INTC)40 Comments
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Intel Corporation (NASDAQ:INTC) Credit Suisse 25th Annual Technology Conference November 30, 2021 9:35 AM ET

Company Participants

Pat Gelsinger - CEO

Conference Call Participants

John Pitzer - Credit Suisse

John Pitzer

Good morning. Why don't we go ahead and get started? I'm going to give some opening comments before our first keynote address from Pat Gelsinger, the CEO of Intel. But my name is John Pitzer, I am the semiconductor and kit semiconductor capital equipment analyst here at Credit Suisse. And it's been my job for the last I think 15 or plus years to start off the conference with some welcoming remarks.

And I think, along with myself and all of my colleagues, I'll run through that list, it's Phil Winslow, it's great to have him back at Credit Suisse on the software side, with his partner in crime, Fred Lee. We also have Doug Mitchelson and Sami Badri. In the telecom services and equipment space, Stephen Ju doing internet and then Tim Chiodo on the FinTech side. And we're all just couldn't be more thrilled to be able to host this conference live, it's great after a one year hiatus to be able to get owners and companies back together face to face.

I think I had four consecutive dinners last night in the semi space. And both investors and companies were just ecstatic to be able to actually sit down in a room, read body language and have real deep conversations as much as I love Zoom, we've all been zooming for the last sort of 24-months. It is great to finally get back on stage.

As I was thinking about my remarks this morning, I was thinking back to the last time I was on stage here and just how much things have changed. And I always tend to look at things through the semiconductor lens, it's sort of an occupational hazard. But, again, back in sort of 2019, the last time we were here, the S&P was at 3200, on its way to 2200, sort of at the peak of the COVID fears in March of 2020. We're now about 45%, higher than those December 19 levels. Same thing with the NASDAQ, was it sort of 8500, on the way to 7000. We're now approaching 16,000 on the NASDAQ. So clearly, tech has done extremely well kind of over the last 20-months.

If I look at my space, the index that's nearest and dearest to my heart, it's the semi index, and I think we're up about 125% from December ‘19 levels. We're up almost over 200% from the March lows of 2020. And so clearly, the last 20-months have been trying for all of us. I think, in general, we've been arguing is COVID didn't really change the tech trends that were going on. But they did codify and accelerate a lot of the trends that we've been trying to showcase at this conference over the last several years. And we've always sort of position this conferences well timed, we think it gives you the last look into company's calendar, fourth quarter.

But most important, it kind of gives you the opportunity just to sort of recap what happened year-to-date, and even more importantly, what's best fit for your portfolio next year, and in the years to come. And it really is the intent of this week to kind of get a more personal setting between investors and managers to really get those touch points that allow you to think a little bit more deeply than what stocks might do over the next sort of one to two weeks.

I think the key question we're all trying to figure out is what's the new normal? I think that that's going to be I think topical on people's mind this week. I know, as I think about the semiconductor space, we spend a lot of time thinking about supply chain, supply chain constraints. Whether or not COVID will mark the end of 20-years of globalization, what supply chains might look like going forward?

We've sort of argued that they're likely to become a little bit more sovereign, a little bit more redundant as a result, probably a little bit more automated and a little bit more intelligent, that clearly plays well into the semiconductor capital equipment space. Because one of the things that's happened and whether this is U.S.-China tensions or just some of the vulnerabilities that COVID exposed on the supply chains, is world governments are now much more focused on actually domestic production of semiconductors. And that is driving things like the Chips Act here in the United States.

There's similar legislation going through the EU right now. And it's going to be sort of a brave new world about where supply chains are actually going to migrate sort of over time.

The point of this conference this week is just to give you guys opportunities to talk with management. If there's anything that I or my colleagues can do to help facilitate that, don't hesitate to ask, I'd be remiss not to also thank the Events Team at Credit Suisse. This is an incredibly complex conference to put together even more so in a year like this with COVID. And so they deserve a big sort of thank you, as does the Phoenician staff here, which always does a great job.

And with that, I think I'm going to end my opening comments there and probably welcome Pat Gelsinger onto the stage, so we can go through the first fireside. Pat? Good to see you.

Pat Gelsinger

Good to see you. [Indiscernible].

John Pitzer

I’ll put you in the middle.

Pat Gelsinger


John Pitzer

So Pat, the format here is pretty straightforward. We're going to have a conversation near the end, though, there will be a mic going around the room, so if anybody in the audience has any questions, please feel free, raise your hand and we'll try to get you the mic. I know that I needed to read a housekeeping item for you, so I will do that. Today's discussion includes forward-looking statements, which are subject to risks and uncertainties. Please refer to Intel's SEC filings available at, for more information on the risk factors that could cause actual results to differ materially.

With that out of the way, Pat…

Pat Gelsinger

I feel so much safer.

Question-and-Answer Session

Q - John Pitzer

I always like to kind of make my first question a little bit open ended. You're almost I think 10-months on the job, officially, a lot of changes have happened sort of over those 10-month period. Maybe you can give yourself an assessment of the changes, the direction you're trying to put the company. And importantly, as you answer that question, what is the real value proposition you see for Intel for investors?

Pat Gelsinger

Yeah, obviously, it's been, as we like to call it inside of the company, a torrid pace over the nine and a half months since I've been back. And coming in, we laid out a clear new strategy, we said, “boy, we're going to be an IDM 2.0, we're going to redouble on manufacturing, we're going to open the doors to Intel intellectual property and Intel fabs to become a foundry, we're going to reorganize the company. We have our six business units now.

We'll be laying out a clear strategy for each of those.” We'll certainly talk more about those at the coming Analysts Day. We’ve brought in new talent to lead those business units. So we reverse the talent trends internally. We've given a clear, I'll say roadmap of how we're going to execute to the industry. We've redoubled our investments in process. Packaging technology has gotten that back on a solid footing maybe the most negative indicator of our poor execution over the last couple of years. And now that's on or ahead of schedule, as I said, on the last earnings call, Intel 7, Intel 4, Intel 3, Intel 20A and Intel 18A on or ahead of schedule.

We are working on rebuilding the culture of the company for it, and all those things are well underway. And at the last earnings call, we chose to proactively come out to the street and say, here's the financial model that's consistent with that strategic model that we laid out.

We didn't have to come out that aggressively. We said, no, we want to come out, lay that out, so investors know exactly what the strategy costs, but also a picture for the return model associated with that over time. And, I feel good now. Our stock went down 10%, and I feel great. CEO should never say something like that. But now we have coherence between the financial model, the strategy and the execution of the company.

And over the nine and a half months, we've just been firing one after the other. We laid out the strategy. We laid out our process roadmap. We laid out our innovation strategy. We have launched major new products along the way. We ought to say we've just been giving breadcrumb after breadcrumb, after breadcrumb, and that's what we're going to keep doing between now and the Analyst Day and beyond, so that we rebuild the investor confidence in this iconic company.

And for it, this is a tremendous opportunity for investors as I look at it, because, hey, this is the lowest multiple semiconductor company by far. We have this extraordinary set of assets. We've laid out a strategy going into the future that builds on those assets. And hey, you know, we're out not to increase the value of this company, but dramatically increase the value of this company, as we've looked forward. It's got to take some investment, but pretty clear minded view of the strategy and execution to get there. That's the path.

John Pitzer

Well, Pat, you know better than almost anyone that the cornerstone of Intel's historical success has been the manufacturing muscle. That's also been the muscle that's led the company down over the last sort of five plus years. One of the questions that I get asked most frequently is hey, you're barking on a sort of a Moore's Law mission of five nodes in four years in the wake of having very difficult times at 14, at 10, and at seven. From the outside looking in, how can you give investors’ confidence that you can execute to this strategy, on the manufacturing side alone?

Pat Gelsinger

Yeah. And for that as we've talked about the yields on 10 are now looking healthy and you're seeing those volume ship very well. At 7, Alder Lake is now shipping, great product, getting great reviews in the marketplace, the clear leadership product and client. We said Intel 4, our Meteor Lake product is looking good. And I've said Intel 3, 20A and 18A are ahead of schedule. And also maybe as a point of affirmation there, we're having our foundry customers like Qualcomm, we're looking at these leadership nodes, who are very discerning customers.

You don't get a design like that arbitrarily, right, they take us through our paces, and our technology teams through our paces to be able to say, yeah, we're going to start using that as a foundry customer on the Angstrom Era 20A, 18A process technologies. So I think we're giving the market solid proof points. Now, again, many years of bad execution don't make up for in nine months. But I think that's a lot of proof points in a short period of time that the manufacturer machine is back on track.

Also, I'd say that this team is now working for their pride. Here is the most iconic technology development team in history. This is the team that created strain silicon that created High-k metal gate that created FinFET. Every major innovation that's happened in semiconductor transistor technology for the last 30-years came from this team. They screwed up big time, they are now back to restore their honor in the marketplace. They are so fired up. If I told them they had to take a day off, I couldn't get them to do it. It just is impossible at this point, because we said, we are betting on them big time.

We also laid out, you sort of, say, five nodes in four years, what are you freaking nuts, Moore's Law has never done this. And, what we've done is essentially, we've created a tick-tock model in the process development team, where the Intel 10 and 17 is distinct from the Intel 43 team, is distinct from the Intel 20A, 18A team. So I now have tick-tock teams. We've capitalized them, we've given them more engineering capacity running more experiments, so we don't have the serial impact that we've had.

When we came out boldly at our innovation conference, and I said, we're going to maintain, if not go super Moore's Law, based on four things. One is EUV, we now have lithography headroom, as we haven't had for the next decade. Second, we have the new transistor structure with RibbonFET right, and new power delivery and metallurgy framework with PowerVia so we can now deliver power, extract it, be able to do it, and 3D packaging.

And with that today, and I happen to just bring along, fancy that I actually have a show and tell this is the $100 billion transistor Ponte Vecchio, right. And what we said is we're going to maintain, if not go super Moore's Law, such that we will have our first trillion transistor chip, by the end of the decade. Just think about it, trillion frickin transistors on one package. But we're going to do so by leveraging two and a half and 3D packaging technology. So not only is it increases, right, in the per transistor, per die transistors, but in the number of transistors possible in advanced packaging as well.

So we're laid out a path between now and 2030, to have a trillion transistors. And as I'll say, the bearers of Moore's Law, we are committing to be the standard bearers for it, and let the industry catch up, right, because we're on an aggressive mission to be able to I’ll say back to the heritage of technology development, and manufacturing capacity.

John Pitzer

Pat, you mentioned sort of in your opening comments, the reset off of the Q3 earnings call. And I think a lot of the reset was welcomed by the investment community. The gross margin reset, I don't think was a surprise. The CapEx numbers that you put out for next year of $25 to $28 billion, I don't think was that much of a surprise. I think what kind of rubbed investors the wrong way was the long-term growth rate that you threw out there 10% to 12%, given that that's sort of been a growth rate that you've really only hit once or twice in the last 10 to 15-years. Can you perhaps unpack sort of how you get to that long-term CAGR of 10% to 12%? What's coming from what I would call the core businesses today, versus some of these new businesses that you're getting into?

Pat Gelsinger

Yeah, and if you look at the 10% to 12%, obviously, we gave out five year guidance so it's on the back-end of the five years, that we expect to start seeing those numbers. But you can put it essentially into the two buckets. I’ll call the core businesses and the growth businesses. And if you unpack the 10% to 12%, it's about half and half, right, between -- I'm not trying to be too precise.

We're going to give more clarity on this at the Investor Day in February. But then if you look at the core business, PC and servers for that, there is nothing dramatic in the PC business. We do believe that we have a systemically the larger PC business, and every day we have a new COVID variant, I think it reinforces this. Just the industry isn't going to dip, right, it's going to maintain a structural larger.

We also see that we have market share opportunities in the PC, as we have more of this capacity come online, and we have more bomb opportunities as well. So we'd say, hey, you know, I mean, it's going to be a growing market, but nothing dramatic for that. The data center business is a stronger growth market. And again, we've had some market share losses, so we see those stabilizing.

And over the horizon, we see our opportunity to regain share, and the data center market is estimated over the five year period to be a 10% to 15% grower. So in that, hey, we're going to see some amounts of recovery as we gain share. So essentially, half of the 10% to 12% is in those two business areas, with more of that growth being in the data center business, but stability and modest growth in the PC business.

But then I have four growth businesses, and our position of accelerated graphics, and high performance compute very low. Essentially, I'm starting at 0% share with a good product, good to gain share, grow rapidly. Our Mobileye business, we've had 35% growth rate in that business for multiple years in a row, it's now approaching $2 billion. This is now getting to be a real growth contributor for us.

Our networking business, we have a very substantial position. And with 5G Edge Computing, we see very solid growth there. And finally, the foundry business, we don't see a lot contributing in the next couple of years, it takes years to get designs. But as you get to year four and five, it's going to be a contributor. So about half of that growth comes from these new growth businesses that we've laid out.

The last thing I'd say there is, if the process of the manufacturer machine is good, it's a rising tide for all of the boats, for the core business, and for the growth businesses, as well. And when we put out a number like that, hey, I'm going to drive the team to be significantly better than that number as well. We're not arbitrarily putting it out, we built a five year plan. We believe it's achievable, or I wouldn't have said it.

John Pitzer

Well, Pat, just to follow-up on that. The $25 billion to $28 billion, I think the easy sort of concern out there is that you're spending and building out capacity to a demand curve that looks very aggressive. And if it doesn't turn out to be right, you've kind of straddled the company with a lot of structural costs that are going to hurt margins for years to come.

I thought it was interesting at our dinner last night, when you kind of talked about what was driving the CapEx for next year, it sounds like a lot like the core business is trying to catch up with the current lack of supply in the industry. So maybe you can talk about next year's CapEx and how you see CapEx trending over multiple years, as you go after that 10% to 12% growth rate?

Pat Gelsinger

Yeah, if you think about the $25 billion to $28 billion, that's a net number. We hope to do more than that based on capital offsets from government investments, as well as customer prepays and other investment criteria for that. But the vast majority of the $25 billion and $28 billion is just to feed the core business. We have -- in some regards, I haven't lost share to AMD, I've given share to AMD, because they didn't have capacity, right. So a lot of this is just catch up to our growing market and years of under investment. So the bulk of the $25 billion to $28 billion is just driven by the core business and catching up to the demand curve in the core business.

Now, on top of that, we are over investing for the five nodes in four years, very conscious decision to get back in front of it. And as you said, it's a rising tide for all boats. And then we're building some flexibility and capacity. But that's the smallest of those three components for the long-term. And shells are very effective things to do.

If I create a shell, I invest essentially $2 billion in the first two years of a project to create the opportunity to fill it with the second $8 billion of equipment build out at the end of it. So it's actually a very capital efficient way to start creating optionality in the business, so we call that Smart Capital.

And if I had some free capacity today, I would be building it out. And I'd be one building more share today. One of the on standard rules of the road of Intel is you always have to spell a spare shell. We don't, that's part of why we're in the semiconductor crisis today. Nobody had any spare capacity around including us. So we're going to create some of that option value over time.

Now, as we're on this journey, as I like to say, boy, I would lust for one way for a spare capacity, much less any reasonable amount of spare fabs in the future. But let's pretend for a second that we actually have overshot, what am I going to do with spare capacity in ‘25 if in fact I've overshot the market. And I'll just say there's no way that we have spare capacity in ’22, ‘23 and ‘24. But let's get to ‘25 and ‘26 and we say we've overshot a little bit.

I have three uses for that spare capacity, one is go get more market share. If I have leadership products, the leadership process, I'm going to do so with good margins, gain market share back. Second is, I've also built into our business model that we use foundries, external foundries as well. So if I have too much capacity, I'm going to pull wafers back from the external foundries and run them internally at better margins.

Third, I go win more foundry customers, and these are good margin foundry customers as well, just like we're seeing the leading edge foundry market. So in the off chance that I have any spare capacity, I have three tremendous uses of that, that are highly margin and capital and cash flow efficient as well. So to me those concerns I’d lust after the day that one of those might actually materialize.

John Pitzer

But, I've got a bunch of questions around the buckets of revenue you have. And I'll start with kind of the core business and within that, the PC market. I think there's a lot of investors out there that look at the tremendous growth we've seen in PC units during the pandemic. I think we've gone from 260 back in 2019, I think we'll be going to be close to 350 million units this year.

Pat Gelsinger

No one in the industry today.

John Pitzer

And there's sort of a view that that's got to be the PC market over earnings. Now, that's not a view that the industry holds. You look at Dell’s earnings and HP’s earnings a couple of weeks ago, still very, very solid. I like to joke that before COVID, work from home and logging on doing emails, but not a lot else. During COVID, we actually had to do real content creation. And so maybe the value of that book, that PC just became much more significant in that environment. Help us understand why you don't think that this is sort of an overearning environment, but maybe a new kind of structural floor for the PC unit market.

Pat Gelsinger

Yeah. And we do believe that sort of 353, that's the floor, if you would for this market. And what you see, there's your several factors inside of it. One is the refresh rates have been elongating. And now we're starting to see sands the demand pressure, we're actually seeing a desire to pull those back. And lots of that's driven by this dramatic increase use cases in the COVID environment. We're also coming into a Windows 11 refresh cycle as well. Corporations are way overdue on their refresh cycle. So we're seeing a lot of things pent up for the refresh us.

We're also seeing that this PC density, as we call it, is a very real. Moms working from home, dads working from home, kids are schooling from home as well, that you're seeing that pressure for increased density, and you have the lowest retail channel inventory levels in history. Ever in the PC industry, we're at zero to minus one day of inventory through the entire channel structure. And all of the OEMs are saying the same things, they see no perishability of the backlog that they're seeing as well.

And you've heard that from all of the majors as well. And that's before they start really delivering on any of the corporate or Windows 11 upgrade cycles associated with it. And we're also seeing globally, that there continues to be more penetration for markets in second and third tier markets as well, as they need to be educating online and learning online. And I think the continuing COVID comment will continue to increase those market penetration points, as well.

So that's why in our models, we've assumed IDC now is at 2%-ish for next year. We're slightly better than that for next year, but we see a sustainability to that I'll say slightly positive growth rate against that 350 plus baseline for multiple years into the future.

John Pitzer

Against that industry backdrop, it seems like you also have perhaps a stronger product suite. Alder Lake is the first sort of big little core on X86. You've got the desktop part out, the notebook part is coming. It's nice to see, I think it's the first time in several years that I've seen third-party sources like Tom's Hardware doing benchmarks where that's kind of excelling vis-à-vis your competition. Can you talk a little bit about how important the Alder Lake product cycle is? And what your expectation is for share position in PCs over the next year or two?

Pat Gelsinger

Yeah, we do believe and I think the market indicators that we were slight positive share gainers for the last two quarters in a row, so we've stemmed the share losses, we started to regain share, and that's before Alder Lake right. Now with Alder Lake, we now have unquestioned leadership products, some of the benchmarks, it's anywhere from 10% to as much as 50%, 60% advantages.

This is like the heydays of Intel where we have the best product, we have capacity, we go win share. And that's exactly what we're going to do with the portfolio of the Alder Lake products coming on and the launch has gone super well. All of the analysts have said this is a killer product. We also expect with that, that some of the graphics and media capabilities of that are comfortably better than the alternatives. And that's before we add our discrete graphics products that are coming in Q1.

So overall, we just see as we're coming into a good cycle for PC market share growth. And again, I expect there's no limitation other than our capacity to grow market share in the next year or two.

John Pitzer

Switching gears to the core data center business, a bunch of questions here. One, how do you think about the share outlook there over the next year or two? It seems like that unquestionable leadership, it’s perhaps maybe the second-half of ‘23 into ‘24? Correct me if I'm wrong, but how do you see Ice Lake and then Sapphire Rapids sort of rolling out? And how should we think about share over the next 12 to 24-months?

Pat Gelsinger

Ice Lake wasn't our greatest product, but it closed some of the gaps. Sapphire Rapids closes all the gaps. So we're now ahead with Sapphire Rapids coming in Q1 of next year. And on some of the benchmarks it's close to AMD, on other benchmarks, it's unquestionably the best product. And like the AI performance of Sapphire Rapids is now 50% of the highest end Nvidia specialty processor, right. It is dramatic, it's hundreds of percent better than AMD’s alternative at this point. So we're clearly having some very strong points of advantage with it.

But, AMD, we expect them to respond next year. So it's going to be a little bit nip and tuck over the next couple of years. And, as you suggests, it's going to be out a couple of years until we're back to unquestioned leadership in the data center. It takes a bit longer in the data center side, the development cycles are longer. And as our process technologies get better and better, our server roadmap takes a little bit longer to take advantage of that. We’re on a path for capacity and for product leadership. It's going to be a more of a market share battle over the next couple of years. But we're limited in capacity and so is AMD.

So in that, I think it's going to be a fairly, I’d say, stable market in terms of share and price points. But we do see ourselves able to start regaining our footing in that market. And, we've gone through many quarters of share losses, I see that flattening, and then a recovery cycle in front of us as the products get stronger. And, we have a solid roadmap after Sapphire Rapids to build on those strengths and bring more of the product capabilities into the market.

John Pitzer

And Pat, I think investors focus almost exclusively for good reasons on the share shifts that are going on in the data center. But I think we lose sight of the fact that that you're still shipping eight and a half out of every 10 servers into the marketplace. I'd love to get your perspective, just on the overall market for next year. It seems like, Ice Lake being delayed did perhaps create some pent up demand in the market. How are you viewing just the server market for 2022 and beyond?

Pat Gelsinger

Yeah, we see the market as a double digit grower, right, in the teens, in a sustained growth rate, looking forward, more and more penetration of cloud going forward, we are in a very healthy cycle of enterprise upgrades now for enterprise data centers. But the third market is what I'm actually most excited about is edge as we start seeing 5G edge. And, a little quiz question for you is what share of the inference market does Nvidia have?

John Pitzer

Relatively small.

Pat Gelsinger

Relatively small and our share is very high. And right now, the inference market is about 1.5 times bigger than the training market. As edge computing emerges, that grows faster. And we expect to see the inference market to grow substantially faster than the training market over the next couple of years. And that's an area of strength, area of strength for our products, like FlexRAN, 5G and edge area of strength because we're a much better inference platform.

You don't need these special purpose, high power expensive accelerators. You get it off of your standard Xeon platform. So we see that being an area of strength for us, as we look and will be part of our network and edge business going forward for that area of the market.

So overall, we see the data center market in the three aspects, the cloud, the enterprise and the edge to be very healthy growth rates. And given the breadth of our portfolio, many of these investments in the open platform, we feel like we're pretty nicely positioned.

John Pitzer

We talked about X86 competition and servers. You mentioned a little bit about accelerator competition in the data center market. One of the questions I often get asked is the idea of general purpose compute versus more customized silicon. You're seeing a lot more hyperscale companies trying to build their own specialized silicon optimized silicon for certain workloads. I'm wondering if you can help us kind of understand your view of how big this customized silicon market might become. And, what's the risk and quite frankly, what's the opportunity for you?

Pat Gelsinger

Yeah, to some degree with our foundry strategy, we've taken the debate off the table. You want to do innovation yourself in silicon, come on down, we're happy to give you the richest portfolio of technologies, both ours and what you would do to co-optimize and co-innovate together. So the first thing is we've taken any religious discussions or premonitions off the table, right. And we're actually like, Amazon is one of our early foundry customers for exactly that, come on down, let's go innovate together.

That said, where does a cloud guy want to invest their capital, their best engineering capacity? It's not in silicon, it's in software and services. That's where they get disproportionate value differentiation. So this is actually a lousy use and multiple of the top cloud guys have said this, I don't want to do this kind of investment, the only reason I did it, is I’d lost confidence. And you, Pat, Intel, delivering a sustainable TCO value proposition to us over time. And in that, we have engineers, I can go to engineer this myself. And, if the only way that I see to give TCO value at my massive cloud scale is to do some of the engineering myself, great, I'll go do it. And that's exactly what they've done with some of their custom programs. But it's actually a pretty lousy use of the capital and engineering if I'm doing my job.

So what we have to do is reprove them, that we're going to do our job, right, we're going to give nice steady roadmaps of TCO improvements on the core platform. And I'm going to give them the opportunity to co-innovate a design with us on our foundry services. We've opened up X86, something we've never done before. It's very much a Microsoft Satya like, move. We said, hey, we're no longer religious about this, foundry supports RISC-V arm and X86. And for the first time in history, we've opened the X86 architecture up, that will go co-innovate with the industry and customers as well. And we're getting great response to that strategy.

Obviously, new designs like that will take a couple of years to materialize. But the response and probably of the 100 plus foundry customers that we had, somewhere between a third and a half of them are interested in using X86 as part of their design, very good indicator.

John Pitzer

That's helpful. You've mentioned foundry now several times, and I've got a bunch of questions. As you know, there's some level of skepticism, I think there's also some level of confusion about what the strategy really involves. I think, first to take the confusion off the table. There seems to be some out there that view the foundry strategy as sort of if we build it, they will come. And it worries people that you're going to go out and build a giant fab for foundry and wait for the customers to be there.

Can you talk about how you plan to grow this business? I mean, from my perspective, I could be wrong, this is almost like commingling foundry wafers with IDM wafers to start. And if at some point, it gets large enough, perhaps it deserves its own dedicated fab. Help us understand how you're going to grow that business from a capital perspective?

Pat Gelsinger

Yeah, and I think you framed it well. The $25 billion to $28 billion, we already talked about, the vast majority of that's for the existing business, some of that's for the catch up. And some of that is to create more flexible capacity, which may get used for foundry at that point. But, we also see the Smart Capital perspective that, hey, I'm not going to build it without some expectations. We also see a lot of interest from customers to pre-invest, governments to support that business model, so we get capital efficiency for it over time.

And the design cycles that are associated with foundry are fairly long. It takes a couple of years for design to come on board. So create some shell capacity, start engaging in designs, both of them start to come together in two years from now, whether we know at that point we'll be making bigger commitments of capacity, but we're already going to have design commitments as well.

So I actually consider it a fairly low risk strategy at this point, because I just need more shells, get more shell capacity put into the ground as quickly as possible, giving us more market share flexibility, more foundry flexibility, and more flexibility to bring wafers back from our foundry customers as required. So a lot of I'll say strategic optionality in it.

Now the foundry business as well, there's only three companies in the world that can do leading edge process technology, and there's not going to be a fourth. The capital requirements and the R&D requirements are so extreme, it's not like somebody else is going to come running by and say, John, I got a great business idea. All I need to do is have a $5 billion R&D stream, and on the order of an invested $25 billion of capital, and I'll start doing foundry services five years from now. It's so extreme at this point.

We're now in the cycle of basic business 101, that it's a consolidation cycle, not an expansion cycle in the number of players in the foundry business. Samsung, TSMC, Intel, the only three that can do it. And we've gotten tremendous geopolitical reinforcement in the U.S. and in Europe for the desire for Western fab. And that's why we're seeing Chips Act, the European equivalent of Chips Act and customers as well. As I was flying down here yesterday, the Wall Street Journal reported that there were 27 Chinese planes in Taiwan airspace yesterday.

How do you feel about having your sole source foundry capability in Taiwan right now? I mean, this is a geopolitical risk. And as we've argued since the beginning of my 10-year, the world needs a more resilient, geopolitically balanced supply chain. So we're seeing a lot of enthusiasm to support us moving into that market.

I went into a major customer, one of our early foundry customers, and they produce on the wall made in USA with our two logos on it. Not me, because they're like, please give us some optionality in this environment, right. And there is a lot of geopolitical concern around TSMC, and single source concerns, so a lot of support for that. But we of course, got to do a good job. We have to create a good process technology, good foundry technologies. And I've also said that foundry makes our IDM better, and IDM makes our foundry better.

And how does foundry make IDM better? Well, it's getting us the leverage more industry standard IP, which makes my design teams more efficient, industry standard PDKs, which makes the EDA tools more efficient, I get more efficiency in my internal design. But my internal design and process technology, TSMC has to fund all this R&D for the foundry business. My foundry business gets it for free, I'm making all that IP available, of IP blocks, they get it for free. So I get to monetize existing investments at a scale that they don't.

And as we look at the fab network back to your beginning point, I expect that it's going to be quite a number of years until I have dedicated foundry fabs, most of them are going to be flex fabs, running a lot of our product wafers and intermingling it with foundry customer wafers to optimize. The best way to run a fab is 7 by 24, 101% loaded. So if I'm better positioned by being able to do that, that will be a better financial outcome as well.

Finally, foundry fixes a perpetual bug in the Intel business model. Because just about the time a factory was highly optimized, depreciated, running great, we'd flip it to a new process technology, and destroy the capital efficiency and cash flow cycle associated with it. Well, now, I’m fixing the bug, I'm getting more monetization on the back-end of those capital capacities in that rich. This is what has always funded TSMC’s businesses that rich long tail of foundry. So I'm now fixing a bug in the Intel business model. And I think as we get into the second-half of the decade, it becomes a very rich cash flow opportunity out of those depreciated leading edge capacity.

John Pitzer

Pat, you somewhat anticipated my next question when you talked about the EDA and the software libraries. But the perception out there and perhaps the misperception is that the DNA at Intel is building relatively few parts in really large volume across a network of fabs. And the DNA you need to be successful to be a foundry is running relatively few parts in a single fab really, really well. So how do you convince the investor that you actually have the core talent you need to properly run a foundry business?

Pat Gelsinger

Yeah, and some of this is five, six, seven years ago, when Intel attempted foundry before we were so proprietary, that we required the foundry customers, so essentially jump this massive over it into our tools, into all of our proprietary things. There was no industry standard. And over the last several years, this predated me, I've accelerated it, but we've standardized many of the EDA flows, the PDKs associated with a process.

We've essentially got ourselves almost aligned with industry standards. And, that enables this alignment of the industry forces with us. This is part of the reason, hey, it makes my internal design teams more efficient as well, because they get to cherry pick from these tool vendors and these IP blocks across the industry.

At the same time, the thesis that you laid out is a myth at least for the big foundry customers. These are big customers. You're running one, two, three fabs worth of material. It feels more like a microprocessor, when you look at a Qualcomm or somebody like that, running a very few number of skews at very high volume, in some respects, even more so. They have less skews running their business than I have running the Xeon business today.

But there is a long tail, right. Essentially, you can take foundry customers and put them in these big, massive customers, very front-end focus on the long tail of customers. And I do think there'll be learnings for us on getting better at that long tail. But we've already industry standard eyes, as we've already said many of our capacity, many of our tool chains, many of our customer and supplier relationships, so I don't see that as an insurmountable problem. But there will be learning there for us.

John Pitzer

And if I want to go back to something you said earlier, and I don't want to overstate it, because I think it's still a relatively small number. But you mentioned customer prepays to help fund foundry CapEx. Is that in that $25 billion to $28 billion net number next year? And I'm assuming, as you execute you would expect that number to get larger over time. How meaningful could that be as a source of capital to help fund this business?

Pat Gelsinger

Yeah, the $25 billion to $28 billion is our capital net of any prepays or government incentives. And we've taken a fairly modest view in that $25 billion to $28 billion. Obviously, as we get into ‘23, and ‘24, Chips Act, European Chips Act it's funded, we would certainly hope that those numbers become more significant, and was half of the U.S. semiconductor industry today in terms of capacity. I'm going to be fighting for my unfair share of the Chips Act as we look -- I mean, my fair share for that. But we're going to be aggressive in our pursuits of it.

Prepays of capacity, for instance, you saw the Global Foundries deal with Ford just a couple of weeks ago. I mean, it's become de jure to be expecting some level of prepays on these very large capital investments for the large foundry customers as well. I expect my practices will match the industry practices.

What's TSMC doing, what's Global Foundry doing, we will do similar. And if you look at the Global Foundries deal, for instance, this is what we're seeing generally in the industry, approximately a third of the capital is being covered by the prepay requirements. So, our simple math would be, hey, the Chips Act will fund up to 30% of a fab, typically their states incentives at 10%-ish.

We'd expect similar numbers in EU and member states in the EU, so 30% plus 10% plus potentially up to the third for prepays, those would be the numbers that we're working to, to give more capital efficiency as we go build out that network. But, obviously, there's a lot of work to do to get there.

John Pitzer

And then Pat, you mentioned Ponte Vecchio and getting back into the discrete graphics market. And, again, some of the early benchmarks look really good around Ponte Vecchio. But the concern I always get is this isn't your first rodeo into the discrete graphics market. Why is it going to be different this time?

Pat Gelsinger

A couple of things, one is when Intel was, I'll say dithering with being in and out of the discrete graphics market, it was before AI. Now there's a much, much broader market implications associated with that movement of accelerated computing, from integrated graphics, where the unquestioned market leader to discrete graphics, to high performance computing. And that continuum creates a much bigger business impetus, and essentially, that's what Nvidia has done, without integrated graphics, but they've sort of followed that continuum of accelerated computing to leverage the platform, leverage the IP blocks. And we're going to follow a very Nvidia like playbook there.

We're going to do so with much more openness, industry standard. Customers are very frustrated with proprietary CUDA, so we're going to drive many of the open software standards, open data, Python, parallel C++, other things like that. That'll be entirely open approaches, and we're getting a tremendous interest.

I think there's almost an insatiable demand for us to come into the marketplace now. I don't think I can catch up to the demand requirements that we've seen from big OEMs from markets for at least two years, as we ended up market. And like you said, early indications for I'll say, undefended, unsupported leaks and rumors in the industry are quite positive.

John Pitzer

And I want to talk a little bit about Mobileye. It's probably one of the better AI assets you have inside of the company, if you view autonomous driving as an AI application, which obviously is. There are a lot of investors out there that would argue the best way to monetize that asset is actually just spit it out. It's the most profitable, self-sustaining sort of autonomous driving company in the world that people have pegged the valuation there $30 billion, potentially. Why keep it inside of Intel? Why is it more valuable inside of Intel than outside?

Pat Gelsinger

Yeah, clearly, we bought it for $15 plus billion. We've clearly created value by giving it more capacity, more credibility in the market. And I see a strong value creation cycle for it over the next couple of years. And a couple of examples of that clearly, right now, the auto industry, as everybody knows, has had extraordinary supply chain issues. Well, Intel gets to come in and fix the supply chain issues for Mobileye. We have the capacity to do that, nobody else does. If I go to when I call up Jim Farley, Mary Barra, Oliver Zipse, or something like that and say, capacity, not an issue, we got it covered. That's a pretty powerful statement, as they're making their decisions into the future.

So, we see the supply chain benefits. We're also -- while, we haven't announced anything specific with regard to Mobileye, we have said that we will have an automotive grade foundry capability, as well. So we're clearly building out our foundry capacity for the automotive segment, which, by the way, just one quick little factoid. The premium car segment today, which represents about half of auto revenue, today is about 4% semiconductors. By 2030, it will be 20% semiconductors, a 5x increase in semiconductors in autos, as they move to AB and EV, wow, and we expect it to be one of the fastest-growing segments for the semiconductor industry overall.

And of that 20%, what percentage will be leading edge technologies, almost all of the increment. So I mean, this again, just reinforces leading edge capacity, leading edge AI vision performance, 5G, 6G conductivity, all of it reinforces strength for ours. So we see a very strong value creation cycle. And then some of our unique technologies like LIDAR, we're making those immediately available. And I expect that we're going to have a very strong position in the LIDAR car segments overall, based on Intel technology. So those would be some of the examples where we see a lot of value creation over the next four or five years for Mobileye from being part of the Intel asset.

John Pitzer

Now we're coming to the end of the session, but I wanted to give you the opportunity, in case you think I missed something in my Q&A, that you think is pretty critical to the overall narrative of Intel, especially as it pertains to the investment community, any sort of concluding remarks.

Pat Gelsinger

Yeah, thank you for the opportunity to be here today. What we'd say is investors are looking today and sort of saying, is this dead money or is this huge multiple money as we look forward. And I think over the nine months, we've made a lot of progress. We're starting to give very substantial proof points to the marketplace, that this is going to be a great -- not a little expansion, a major expansion.

When I took the job, it's like take over to pivot a company, an iconic company that puts silicon in Silicon Valley, okay, that's a tough job, do it in the middle of a pandemic, and in the middle of a global semiconductor shortage, that's going to last several years, rebalance the global supply chain of the world around semiconductors across Europe and U.S. soil, and put us on a trajectory that we have both economic and national security interest satisfied over time.

What do you think? Is that a big enough job? Yeah, I mean, this is such a massive assignment. At the same time, we need it. I mean, this is so critical for the planet and for the industry. And over the nine months, we made a tremendous amount of progress. We're seeing talent come back into the company. These six business areas that we've laid out are gaining real traction, we're delivering proof points.

When I make statements like we're on or ahead of schedule on Intel 7, 4, 3, 20A and 18A, over the same period of time that the competitors have slipped their process technology. The gap is closing faster than I forecast at the beginning of the year for this. And we're seeing good products like Alder Lake and the proof points coming here. We're seeing this enthusiasm for graphics and what we're doing in network and edge.

Three years ago Huawei was going to be listening to everybody's phone. Today that's all happening on open rebrand based on the Intel platform. We're opening up, now we're delivering the best benchmarks and AI performance for inference and for training. Before we gave Nvidia a decade advantage, we gave market share to AMD, and we're going to start getting it back, as we look to it. These things are starting to build a cadence of deliverable.

And maybe the last comment is, I mean, we push the Investor Day to February, we did so very consciously. We have a very clear set of things that we're trying to get done. And we're going to give you a lot more clarity. These are going to become reportable segments, as we look to next year, so that we're going to give you the investor a lot more understanding of the business areas, respectively, so that you can really judge us and the business that we're laying. But so far, it's been an incredible journey. It is that important for Intel, its iconic heritage, for the nation and the industry, and we are well on our way to making it successful.

John Pitzer

Great recap. And, Pat, I really appreciate the time you spent with us this morning and everyone in the room. Thank you very much.

Pat Gelsinger

Thank you.

John Pitzer

Good to see you.

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