Harlan Sur   JPMorgan Chase & Co

Okay. Good morning, and again, welcome to the first day of JPMorgan's 53rd Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Dave Zinsner, Executive Vice President and Chief Financial Officer of Intel here with us today. Dave, thanks for joining us this morning.

David Zinsner   Executive VP & CFO

Thank you for having me.

Harlan Sur   JPMorgan Chase & Co

Yes. I think a good place for us to -- to start off with is with Lip-Bu Tan, Intel's relatively new CEO, has been in place now for about 60 days. Prior to that, he was a Board member at Intel for 2 years. Obviously, widely respected in the industry as a successful venture investor. Spearheaded the turnaround at Cadence Design as CEO for 12 years. Dave, as interim CEO prior to Lip-Bu joining and CFO for the past 3.5 years, you've obviously been working very closely with Lip-Bu. From an outsider looking in though, it does appear that Lip-Bu is not making any massive changes to the strategic direction, product or manufacturing road maps that were in place before he joined, right?

He acknowledges Intel's historical profile as a technology and compute powerhouse and wants the -- from my perspective, number one, return Intel to that leadership position in core compute with best-in-class client and server products; number two, expand the leadership in compute to take advantage of the rise in AI compute workloads; and three, from a manufacturing perspective, return Intel to a leadership position in advanced leading-edge manufacturing, but then leverage that, right, to grow a world-class foundry business. Is that a fair assessment of the strategy so far? And through his first 60 days, I know you've been working closely with him, what are the key observations, strength and weaknesses of the organization?

David Zinsner   Executive VP & CFO

Okay. All right. Well, just since I might be making forward-looking statements, I ought say just the safe harbor that we are -- if I do make forward-looking statements, you should refer to all the risk factors in the SEC filings as filed.

Yes. Look, I think it's a fair assessment that Lip-Bu isn't thinking about massive changes. I think when he looks at the business, what he feels is the biggest issue at this point is a lack of execution and he is attacking that in a number of different ways. He is really flattening the organization, and we're going to go through a process to flatten the organization in aggregate for Intel, but he's already done that at the executive team level. I mean he's, I don't know, like 15, 17 direct reports. He's got a lot more engineering leaders reporting directly to him as opposed to having an intermediary report between them.

I think this is like flattening the organization is important to him because what he wants is the lowest level in the organization to be closer to him and so that he's hearing the good, the bad, the ugly of what's going on so that he can help address those.

And I think through that, I think we'll see a lot of improvement in terms of the execution. He is also spending a lot of time with customers, Lip-Bu's Rolodex is like nobody else's, I think, in the semiconductor industry. And I think what he feels was lacking in addition to execution was not enough listening to the customer in terms of what they really need and then going and developing products to meet their demand, their requirements on a long-term basis.

And so he is all in on that. He's -- I think he was telling me like his longest day was 22 meetings, I think he said he had, and I think it was on a weekend. So he's working really hard to go address all of that. Maybe perhaps the one area where I think he will spend more time that could potentially evolve to a different strategy or at least a pivot on the strategy is in AI. I think as I look at the leadership of the organization, we all have our roles. But I think as it relates to AI, I think of Lip-Bu is actually the leader of our AI initiative, and he spent a lot of time investing in that space through his venture fund. And so he understands it at a level that I think is unique for a CEO in the semiconductor space. And so he is really rolling up his sleeves to make sure he's -- we're developing products that uniquely meet what isn't getting met today from an AI perspective.

And obviously, power is a big issue right now. The cost is a big issue. As you move away from training into inference, as you move away from cloud to on-prem to edge, there are different requirements. And what he wants to do is find those opportunities with the customers where we can uniquely develop solutions that meet what they need. That's probably the only area where I see a meaningful change in how he -- how he thinks about that part of the business. Outside of that, I think you're right. I think the strategy is the strategy. It's -- we got to execute better.

Harlan Sur   JPMorgan Chase & Co

Yes. And I think as you mentioned, and he mentioned this on the call last month as well, was one of the biggest takeaways learnings was the need to fundamentally transform the culture and the way in which the organization run, eliminate excess bureaucracy, the need for a flatter organization, smaller teams, stronger decision-making authority, very strong focus on execution, right, which implies accountability and transparency. As you mentioned, Phase I of the strategy resulted in lower OpEx targets for this year, $17 billion, 16 billion next year, also cut the net CapEx outlay by $2 billion to $18 billion. But on the organizational side, how is he implementing a more nimble execution-focused mindset across the organization, right? What division teams are reporting to Lip-Bu? What has he changed in terms of KPIs, targets, incentives? Because from my perspective, historically, like this is where prior Intel CEOs have faced challenges with.

David Zinsner   Executive VP & CFO

Yes. Yes. So part of it is what I already said. He's -- he's flattened his organization. So he now has -- he's got the two major businesses, data center and client reporting to him. He has three different engineering leaders on the product side reporting to him. He has sales reporting to him. He has operations separated from sales now reporting to him. He'll have government affairs actually reporting directly to him. We have a leader over top of manufacturing and TD that runs, let's call it, 90% of the foundry business, that person reports directly to him and then the host of the G&A functions. That's different in terms of the structure rates. It's way closer to decision-making and he wants to -- he wants to be able to understand at a very detailed level exactly what's going on at any -- in any part of the organization.

So that's kind of, I think, the first cultural step in the culture change that he's implementing. The second, which is I also said, he's collapsing the number of layers in the organization. And that has that benefit that I talked about, which is greater transparency, but it also forces kind of less overhead, less bureaucracy in the decision-making, which is part of what has plagued us is a lack of quick decision-making. When you have less layers, you have less people that have to check and sign off on something, things move more quickly. I think we're more nimble in terms of our approach.

And so the cost -- while the cost reduction, I guess, was, in some ways, important in terms of improving the P&L, it had more to do with the cultural change. It's like, hey, we're going to reduce the amount of people making decisions. We're going to reduce all the check-the-box activities that happen in the company. We're going to get rid of all of those things. We're going to operate more like a really big start-up as opposed to this big goliath of an organization that just crumbles under its own weight.

So he's gone through a lot of that. It will take this quarter to kind of work through what functions need to streamline, what areas are not value added. Another thing that he did, which I know a lot of companies have done so it may not seem that transformational, but actually is pretty important for Intel in my view, is he has this return to office. We did have a number of the team that was not working on site full time. And I think to some extent, that has inhibited us and impacted our ability to execute on road maps and process.

And so just forcing that mindset that we're all going to be back in the office rolling up our sleeves to get things done, I think, was an important message to the organization. And then -- what I also think has hurt us is -- and this has been kind of like the Intel model is we've somewhat developed the technology independent on what we're hearing from customers and with kind of an assumption around what we think is needed. And we heard a lot from customers that we were bringing out products that weren't addressing all of their needs. And probably, we're not taking enough of the information that customers were telling us back to inform us in terms of how to -- what we should do from a development perspective.

And he has leaned in a lot. And it's partly him going. He is going to see customers. He's going to see CEOs and the major systems engineers in the company to understand what their requirements are. That, of course, is something he's doing and that's important. But it actually goes beyond that. We have generally been kind of a 3 layer to customers. We have a sales force, then we have like a product management team and then we have the engineers behind them. And it was not the default to send engineers to customers. And I've seen that in my past and other companies I've been CFO of that when you allow the people designing to go talk to the customers, they hear information in a way that the sales team for all their strengths just don't pick up.

And it's like actually, customer told me that we need A, B and C. But based on the way they were talking about their system and the road map, they actually don't know they need E, F, G. And I'm going to develop E, F, G into the product because that's going to actually meet their requirements in a way they weren't even expecting. And so moving the engineers closer to customers, I think, is a big cultural move for us.

Now as it relates to KPIs, which you asked about, obviously, what we'll be looking at is can we develop products in first silicon, A steppings. We have not done that in the past. Is the process yielding in a way that follows along the curve that we expect? Is performance of the wafers following along the curve that we expect? We'll be measuring all of those things clearly. But I think most importantly, we're going to measure that we're actually meeting what customers are asking for, and they're excited about the products that are coming out.

Harlan Sur   JPMorgan Chase & Co

Normally, I would start off the discussion on your product portfolio. But I want to start off with manufacturing because the challenge here for Intel is twofold. One is drive back to a leadership position in leading-edge process technologies, right? Because leading-edge process technologies drives a big part of the performance of the core compute portfolio, right? But number two is that you can then take your leading-edge technology to build and then leverage that to build a world-class foundry business, right?

And again, it looks like no change to process technology road maps that were laid out by Lip-Bu. But what is he doing differently to accomplish this twofold strategy, right? And maybe use 18A process technology. As an example, what is the team doing to drive differentiation better economics on your core products like your upcoming PC client CPU product called Panther Lake? And what are you doing to attract more external foundry customers to adopt 18A?

David Zinsner   Executive VP & CFO

That's a fulsome question. Yes. So look, in a lot of ways, this is blocking and tackling, the foundry business. And while it's felt relatively challenging as we progressed to get caught up on process, we've actually made a lot of headway. Unfortunately, to get from where we were to get to a point where we were -- where we have 18A ramping in the fab is a painful process that requires a lot of capital investment. It's never a straight line. I've been through this before in my prior company, catching up on process is a really hard undertaking.

And I -- and while it's not to where we were driving, it's -- when you look back, it's actually a fair amount of progress that we have made. And when you look at 18A, it has differentiation in it, which is to your question, how are we driving differentiation. Having gate-all-around what we call RibbonFET, together with backside power which we call PowerVia, that's actually a pretty innovative solution. And when I -- for the split second, I was acting in CEO and they actually let me talk to customers. I heard a lot of positive aspects about that -- about backside power with gate-all-around and how integral it's going to be in the future, particularly in high-performance compute. And one customer told me, we will never go back from backside power that the fact that, that technology is available to us is critical to our road map.

So -- so I think we are making the progress we need to make on process. Now the one thing about 18A was it was developed initially as just something for Intel. And we intercepted it relatively early, and it allowed us to develop PDKs for the industry, but it still was not from the grounds up developed as a foundry node. 14A is developed from the grounds up as a foundry node. It will have PDKs that are exactly comparable to what the industry would expect from us. 1.0 PDK for 14A is going to look exactly like a 1.0 PDK to our competitors at that given process. So I think we are at a point where we have driven a lot of maturity.

Lip-Bu, what he will spend a lot of time on and maybe something that has always been a challenge at Intel is as information filters up to the CEO, it gets filtered a lot and tends to have been presented in the most positive light. And even when Lip-Bu was on the Board, he was really good at kind of filtering out some of that spin and really understanding at the detailed level, exactly where we stood, where we stood on yields, where we stood on performance, how we felt like the wafers would ramp, when we would get to mature yields and so forth. He spent a lot of time understanding that even at the Board level, at the CEO level, it's like to the power of 10, basically what he's doing. So I think there -- we will all have a very clear understanding of where we stand.

And when you have a clear understanding of where you stand, you have a clear understanding of what you need to do to improve the process. So I think that to me is the major focus of Lip-Bu's as we get into the Intel Foundry.

Harlan Sur   JPMorgan Chase & Co

Yes, it was good to see the good participation at your recent direct foundry event, I think, held in Santa Clara. And it was also good to see, to your point, right, that Intel has always had a strategy of we develop our processes for our products, right? And then we take this process and whoever wants to use it as external foundry customer go ahead and use it, right? It's never been with a view of what do our customers really want, right? What really wants, right? But now it's you can see the strategy shift, right?

You're developing, like you said, for 18A and for 14A, you've got several different flavors, right, low power, high performance and so on. The same type of offerings as your world-class foundry competitors. So the services aspect of foundry is moving more and more towards like what your customers would expect. That being said, on 18A, you've had some traction, right? And previously, I think the team articulated that you were on track to tape out your first external design on 18A in the first half of the year. Did the team execute to that? And then whether it's 18A or 14A, I mean how many customers -- external customers have committed to Intel Foundry? And are they a mix of fabless semi customers, cloud and hyperscalers, OEMs? Like any color there would be great.

David Zinsner   Executive VP & CFO

We also have, I think, really good packaging, and we tend not to talk about that as we think about foundry, but we'll have revenue in the back half of the year on packaging, advanced packaging. And I think that's a great opportunity for us, the technology is differentiated already, it's mature in a way that we still have work to do on the wafer side. And it's a good vehicle to get customers in the door working with Intel Foundry in an area they have a lot of trust with us and then kind of work them into foundry deals over time.

I'd say the other thing is the challenge of being a foundry player in our construct is that the products business competes against many of the customers that could be potentially customers of foundry. And so what we have to do is make sure they feel confident that IP is getting protected, but maybe more importantly, that supply is protected, that we're not going to disadvantage them relative to products in terms of supply.

I think Lip-Bu in that regard is a real asset. He's trusted. He does the right thing. If he commits to a customer, he delivers on that commitment and customers trust that, that he will do that. And that, I think, has changed the dynamic of the conversations we've had with potential foundry customers, but just literally based on walking in the door and making them feel at ease about those concerns.

Harlan Sur   JPMorgan Chase & Co

From a financial perspective, I believe the target is still to drive Intel Foundry to operating profitability breakeven exiting calendar '27. Remind us on the parameters needed to achieve that, right? Mix of internal versus external customers, process technology mix. And by calendar '27, like what do you anticipate your external wafer usage as a percent of total wafer shipments will be? I think today, it's about 30%.

David Zinsner   Executive VP & CFO

Yes. Okay. So we still feel on track to hit breakeven sometime in 2027. I think when we committed to it in '24, we said, hey, it's going to be somewhere between '24 and 2030. Most people kind of settled in that, that must mean '27. And that's generally kind of what we're thinking is we can be breakeven. It doesn't require a ton of revenue for foundry. It's somewhere in the single digits, call it low to mid-single-digit billions of revenue that foundries got to get from external sources. But I would just remind you that some of that's going to be our partnership with UMC, some of that is going to be our partnership with Tower, some of that's going to be packaging. And some of that's going to be 18A, some of that actually is going to be older generations, like, for example, Intel 16.

So it's not a ton that has to come from 18A for it to work. What's important is that we drive the right amount of volume from Intel products through foundry. But we're fairly optimistic that we'll be able to do that. So I feel highly confident that we'll break even in 2027 on the foundry side.

What was the other question...

Harlan Sur   JPMorgan Chase & Co

The other one was about Intel on your core products, external versus internal mix, yes. Today, I think it's...

David Zinsner   Executive VP & CFO

It's peaky, but I would tell you that we will have a fair amount of volume at external, mainly TSMC on a go-forward basis. Products has some latitude as to where -- how they design products. We go through all of that as a team. And of course, we want to see a fair amount of the volume come from Intel Foundry. But we also recognize there are unique situations and performance requirements that would drive you to another source of the wafer and we want that. We want that because we want to drive the best products ultimately for our customers. And we also feel like it's a healthy dynamic to have foundry feel like it's competing for every wafer with Intel products. And I think that drives better performance out of Intel Foundry as well.

And then I'd say lastly, when I was at Analyst Day, and was that '22, '22 when I came in, we had this concept. We don't talk about it a ton now, but we have this Smart Capital concept. I remember, Harlan, and it had like all these things that we would use to kind of enable us to stand up a foundry business given the capital requirements to do that. And one of them was we would have a balance of internal and external wafers from -- for Intel products. We would leverage the foundry network beyond Intel Foundry to provide supply, and that helps offset some of the capital spend and keeps us in a good place from a cash flow perspective. So it's somewhat aligned with our capital strategy on a longer-term basis.

Harlan Sur   JPMorgan Chase & Co

So is the right way to think about the mix maybe 20% to 30%...

David Zinsner   Executive VP & CFO

Yes, something like that.

Harlan Sur   JPMorgan Chase & Co

Okay. Let's turn over to the core products. On core internal CPU products and internal product development efforts given Lip-Bu's familiarity and expertise on chip design implementation, has he assessed Intel's chip design and verification flows, IP development capabilities, software development execution, right? Where does he see the opportunities to improve the quality, efficiency, execution of Intel's chip design infrastructure?

David Zinsner   Executive VP & CFO

Yes. I think what Lip-Bu recognizes coming in is the strong x86 franchise that we have. I mean, in a lot of respects, you could argue that our share should be a lot lower than it is. And it's not because we have a really strong ecosystem and the moats around this business are quite significant. And I was talking to one of my banker buddies and he was telling me that, that bank has -- doesn't even think about moving away from Intel given the network and the ecosystem and the support that they get.

And so I think that is our advantage that we have that. And quite honestly, it's a little bit embarrassing that we develop products that haven't met customer requirements to the level that we should because it would be really -- we could roll out a bed and win market share.

So what -- what Lip-Bu now is trying to make sure we do, which I somewhat talked about before is make sure that we are developing products that meet customer requirements because we have a strong ecosystem, where customers want to be engaged with us and we're developing products that are meeting their requirements. We're going to do quite well over time. And so that's primarily what he's focused on is making sure we're taking customer input to develop products. I would say beyond that, one of the things that he has identified is, which we've known about is that we do not put products out on an A stepping, on the kind of first attempt at a product.

In fact, I think Sapphire Rapids came out on an E stepping, which is -- that's a significant amount of time going back and forth between design and production to bring out wafers to figure out, to get a wafer that actually worked for customers. He wants to shift left significantly. He basically has mandated, we are not bringing out products that aren't ready, that haven't been simulated and tested. Because we spend -- partly it's just quality, partly is we spend a whole bunch of time then fixing it afterwards on the back end when the products aren't out, first time with success.

So we're shifting left significantly in terms of the development. I think you will see and maybe back to your KPI question on what should we be looking for, I think one thing you should look for is that he's attracting talent. It's well written and I think there is some truth to the fact that we have lost talent at the company, and we do need to rebuild that.

And the great thing about Lip-Bu is he is a magnet for talent. And so I think you will start to see people come into the organization at the senior engineering level -- levels that are world-class that will help us in terms of improving our design process and ultimately, the architecture of the products. That, to me, I think, is the biggest thing you'll see in terms of change.

Harlan Sur   JPMorgan Chase & Co

In client PC, the big intro this year is the ramp of your lead 18A product for PC client called Panther Lake. It was clear that the team slightly downticked this last earnings on the ramp of Panther Lake from what used to be second half of this year to at least 1 SKU exiting this year. What happened? Is this more of a product delay? In other words, design-related issue side or is just more that the 18A process technology and manufacturing node will be quite ready?

David Zinsner   Executive VP & CFO

Yes. Well, it's -- I think it's a combination -- first of all, the market usually in the way you work this is -- and what we've done in prior generations as we brought out our first product towards the end of the year in advance for CES. And then you see a bunch of other products ramping through the first half of the following year. And that's kind of the way we did Meteor Lake. That's the way we did Lunar Lake. So Panther Lake is kind of somewhat following along our typical process in that regard.

Now probably if we could have driven harder to get products out more quickly, we would have -- we had a drive to that was a bit more aggressive, which is somewhat why we left it open to back half of the year and it could be any time back half [ of the year ]. We knew we'd at least get some products out or a product out by the end of the year. And in some ways, hoping that we could bring some things out earlier, but just didn't happen in the way we were expecting. That said, we feel pretty confident that 18A will be out with a product this year. And I feel very confident that as we progress through next year, we'll see that ramp in the mix drive towards more Panther Lake. That will be helpful next year from a margin perspective, by the way, because we get a twofer for that.

One, we move wafers that were mostly done externally, we moved some of that back internally. So obviously, Panther Lake has 18A, that's internal. That helps us a lot in terms of the profitability over time. But maybe even more importantly, Lunar Lake because of the way it was designed has memory in the packaging, and we essentially pass that through. We buy it at the same price we're charging the customer. That's not the architecture in Panther Lake. So as we move into Panther Lake, the margins just pick up from that perspective too.

Harlan Sur   JPMorgan Chase & Co

On server CPU product and platforms, launch of Granite Rapids last year was a very good step in the right direction, right? You're shrinking the competitive gap between you and your competitor, but there still is a gap, right? And next in the lineup is Diamond Rapids. What's the timing on Diamond Rapids? What's the early feedback from customers? And -- when does Intel really fully expect to sort of close that server performance gap with your competitor?

David Zinsner   Executive VP & CFO

Yes. So we haven't talked about a date for Diamond Rapids, so I'll hold off on that. The product marketing people like to wheel that out at a particular moment in time, and they get mad at me if I jump their gun here. The early feedback has been good. It does close the gap more in terms of the performance. I would just say our ability to maintain the share we have gets back to that same comment around the ecosystem. I mean the fact that it has -- we have maintained a significant amount of share has been a function of the fact that we do have great support, great ecosystem, great stack and so forth in the data center space.

But we still have work to do, I would say, on data center. We've -- at the end of the day, we've got to develop something that gives customers the best perf per watt really. And that's the measure. And so we're -- every iteration of the product has gotten us closer. And there's a far along product after Diamond Rapids that does an even better job at driving better performance.

Harlan Sur   JPMorgan Chase & Co

Last year -- on the financials last year, you guys talked about free cash flow breakeven this year, then you push -- kind of pushed that out free cash flow breakeven exiting. This year, last earnings, you talked about focusing more on operating cash flow. So how should we think about your operating and/or free cash flow potential this year? And how do we think about it over the next few years?

David Zinsner   Executive VP & CFO

Yes. We have backed off a little bit on the cash flow for this year, mainly given the uncertainty with tariffs and so forth, it's just a little unclear as to how things will play out for the year. We are very focused on that, I would just say. And so areas that are in our direct control, like capital spending, like operating expenses, like working capital, we are driving to improve the cash flow.

We also are going to augment our cash flow this year with the sale of 51% of Altera, so that will help out and allow us to delever this year on the balance sheet. Beyond that, my expectation is, as we -- like I said, as we move into Panther Lake, there's a better cost structure for Panther Lake from the standpoint of margins, as we drive better execution on the product portfolio and see that translate into growth. And as we move more and more to the advanced nodes, which have a cost structure that isn't that different from the cost structure of the older nodes, but yet carries a much higher ASP on a per wafer basis, we see a meaningful improvement there. We get the OpEx down, we drive CapEx efficiencies, our cash flow should meaningfully improve.

Harlan Sur   JPMorgan Chase & Co

Perfect. Appreciate your participation, Dave, today, and look forward to monitoring the progress of the team this year.

David Zinsner   Executive VP & CFO

Thank you, Harlan.

Harlan Sur   JPMorgan Chase & Co

Thank you very much.