Intel Table Set for Change: Focus, Frugality, ...And Fabless? Upgrade to Hold Rating | Target Change January 21, 2020 NORTH AMERICA | Semiconductors

EQUITY RESEARCH Intel Corporation (INTC)

Intel Table Set for Change: Focus, Frugality, ...and Fabless? Upgrade to Hold Rating | Target Change January 21, 2020 NORTH AMERICA | Semiconductors

Key Takeaway HOLD RATING Share loss, a transistor transition disaster, changing of the mgmt guard, and a CEO bonus (FROM UNPF) that inflects with the stock in the low $60s tell us the table is set for change at INTC. We PRICE $59.60^ increase our price target to $64 assuming that the company divests memory (Focus) and MARKET CAP $264.2B cuts OpEx (Frugality). Fixing its manufacturing or moving to a Fabless model potentially PRICE TARGET (PT) $64.00 (FROM $40.00) addresses our share concerns, but we assess a low probability of either... for now. UPSIDE SCENARIO PT $85.00 DOWNSIDE SCENARIO PT $45.00 Focus = $5 to the Stock. We estimate that divesting the memory business could add $0.16 of EPS, 200bps to gross margins, 260bps to op margins, and 1.0x to the P/E ^Prior trading day's closing price unless otherwise noted. multiple due to $2.3bn in higher annual capital return and focusing on core story. FY Dec Frugality = $12 to the Stock. Based on its sales level, we estimate that INTC's SG&A USD 2018A 2019E 2020E should be between 1.7% and 6.5% of sales. At the midpoint (4.2%) vs. INTC's current EPS 4.58 4.60 3.80 levels of 8.5%, we estimate an incremental $0.63 of EPS, 430bps to op margins, and 1.0x FY P/E 13.0x 13.0x 15.7x to the P/E multiple due to $2.5bn in higher annual capital return. *EPS changes reflect lower estimates and change from GAAP to non-GAAP estimates Fabless = $19 to the Stock (Low NT Probability). We estimate that if INTC sold its factories at book value, and transitioned to a fabless model that enabled it to close the Chart 1 - INTC Stock Price

90 New Base Case @ $64 transistor gap with AMD in servers, it could increase EPS by $0.74 due to a lower share assuming high probability of restructuring $19 80 EPS: $4.61; P/E: 13.8x EPS +$0.74 count and expand P/E multiple by 2.0 turns due to $6.6bn in higher annual capital return. FCF - $18.2bn 70 P/E +2.0x $12 60 EPS +$0.63 $5 P/E +1.0x Timing. We see three catalysts that set the table for dramatic change in 2020-21: 50 $46 EPS +$0.16 Bull Case @ $85 P/E +1.0x Fabless Model 40 Base Case - ex EPS: $5.50 P/E: 15.5x 1) Changing of the Guard: over the past six years, 10 long-standing senior execs with 30 Restructuring @ $46 FCF: $24.7bn 23-to-42 years of experience have left Intel, while more recently at least a half-dozen ($) Price Stock INTC 20 EPS $3.80 new seniors have joined - largely from fab-lite/less backgrounds. Similarly, 39-year Intel 10 P/E 12x 0

veteran and Board Chairman, Andy Bryant (~69 yrs old), indicated that he would not stand

Divest

- ex -

Fabless

Move to Move Memory

for re-election after serving his current term through May 2020. SG&A

Discipline Base Case Base . Restructuri Source: Jefferies, company data 2) 10nm Delay and Pending Market Share Crisis. Intel's 10-12 quarter delay of its 10nm transistor means for the first time in decades INTC has ceded transistor leadership in The 4th Tectonic Shift in Computing the industry, which we think will lead to 1,000-2,000bps of share loss in 1-to-2 yrs. 10nm Enigma 3) CEO Bonus Plan, indicates a performance bonus of $30m kicks in should INTC's stock hit $62 for 30 days, which scales to $180m at a $95 stock price by Jan 30, 2024. FCF and Capital Return Handbook - 2018

A Fabless INTC: Sacrilege, or Inevitable? It looks like INTC's 10nm server MPU is at least Mark Lipacis * Equity Analyst one full year behind AMD, and we expect INTC to lose 2,000bps of server share to AMD (415) 229-1438 over the next two years. Because the cost to run a server MPU (includes power to both [email protected] operate and cool the server) can exceed its price, a company that falls far enough behind Vedvati Shrotre * may not be able to give its MPUs away for free, so if INTC doesn't fix its manufacturing Equity Associate problems fast, it may be splitting the MPU market 50/50 with AMD before long. A deal (415) 229-1574 where INTC sells its fabs and outsources to TSMC is difficult to imagine politically, but it [email protected] looks like INTC's transistor lead is lost for good, and a fabless INTC would be positioned Natalia Winkler, CFA * to both stem share loss and turn itself into a cash flow and capital return machine. We Equity Associate assess a low probability near term, but will monitor developments closely. (415) 229-1511 [email protected]

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 26 to 31 of this report. * Jefferies LLC / Jefferies Research Services, LLC EQUITY RESEARCH Intel Corporation (INTC)

INTEL (INTC) The Long View | Scenarios Estimates Base Case USD 2018A 2019E 2020E Rev. (MM) 70,848.0 70,956.0 67,112.0 • Management divests memory and streamlines SG&A expense. Previous • INTC continues to face secular challenges with a shift Consensus EPS 4.58 4.62 4.66 in computing’s center of gravity away from x86 to parallel processing. Previous 4.39 4.46 • Share loss to AMD in desktop and server and NVDA in EPS datacenter. Q1 0.87 0.89A 0.99 • Decline in PC unit shipments. • 2020 EPS: $3.80; P/E FWD: 16.8; Price Target: $64 Previous Q2 1.04 1.06A 0.97 Upside Scenario Previous • Base Case plus moves to a fabless model. • Corporate PC refresh cycle. Q3 1.40 1.42A 0.98 • Design wins in datacenter for parallel processing and Previous accelerator products (Xeon Phi, Nervana, Altera). Q4 1.28 1.24 0.87 • Better OpEx management improving margins. • AMD mis-executes. Previous • 2020 EPS: $5.50; P/E FWD: 15.5x; Price Target: $85 FY Dec 4.58 4.60 3.80 Previous Downside Scenario • Reaccelerating decline in PC unit TAM.

Valuation • Continued share loss to AMD, NVDA, XLNX and homegrown solutions from hyperscale players. 2018A 2019E 2020E • Mis-execution of manufacturing process technology P/Rev 3.7x 3.7x 3.9x transitions. EV/Rev 3.9x 3.9x 4.1x • Gross margin compression due to under-utilization. • Valuation compression associated with lower growth FY P/E 13.0x 13.0x 15.7x outlook. *EPS changes reflect lower estimates and change from GAAP to non-GAAP estimates • 2020 EPS: $3.00; P/E FWD: 15x; Price Target: $45

Market Data | Investment Thesis / Where We Differ 52-Week Range: $60.97 - $42.86 • We argue there is a tectonic shift in computing toward a parallel model, and as the incumbent with dominant Total Entprs. Value $276.3B share, we think INTC has the most to lose. Avg. Daily Value MM (USD) 1,153.47 • Our "4th Tectonic Shift in Computing" thesis argues Float (%) 98.1% that parallel processors will take share from x86 MPUs in the data center going forward. We also expect AMD will take x86 server MPU share from INTC in the data center.

| Catalysts • Breakthroughs in manufacturing process technology or chip design. • Corporate PC refresh cycles. • Design wins for its parallel co-processor (Xeon Phi) or artificial intelligence products (Nervana, Movidius). • Adoption and ramp of 3D XPoint memory. • Design wins in Networking products for virtualized network appliances.

January 21, 2020 2 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Table of Contents

Section 1: Executive Summary...... Pg 4 Section 2: Timing - INTC Set-up for Change...... Pg 6

Section 2.1: 10nm Delay + Share Loss...... Pg 8

Section 2.2: Management Change - Changing of the Guard...... Pg 9

Section 2.3: CEO's Bonus Plan...... Pg 10

Section 3: EPS P/E Add Stock Opportunity...... Pg 11

Section 3.1: Focus - Divest Memory...... Pg 13

Section 3.2: Frugality - Drive SG&A Discipline...... Pg 15

Section 3.3: Fabless - Shift to Fabless Model...... Pg 17

Section 3.4: Estimated Impact of Implementing All Three Scenarios...... Pg 19

Section 4: Capital Return Framework...... Pg 20 Section 5: Financials...... Pg 23

January 21, 2020 3 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 1: Executive Summary

INTC Has Secular Challenges. Our upgrade to Hold notwithstanding, we continue to believe that Intel faces the secular challenges that we outlined in our 2017 note "The 4th Tectonic Shift in Computing," namely that the center of gravity in computing is drifting away from x86 both at the edge (to IoT devices from PCs and cell phones) and in the data center (to parallel processing architectures). Since the new computing devices are not centered on x86, Intel is simply becoming less relevant. Unfortunately, Intel has compounded these secular challenges by fumbling its long-standing transistor lead. The Intel transistor execution machine that used to deliver a new transistor every eight quarters like clockwork, two years ahead of everyone else in the industry, is a shadow of its former self. The transition to 14nm took 11 quarters, and the transition to 10nm took close to five years - and the 10nm version of its server MPU likely won't ship in volume before 4Q2020, at least a full year behind AMD. Given those dynamics, it is not surprising that over the past five years INTC materially underperformed the Philadelphia Semiconductor Index, SOX (62% vs 173%), and its processor peers AMD and NVDA (up 1,800% and 1,100%).

The Company Appears Poised to Make a Change. All that said, we do think that there is a short window of opportunity for Intel to halt its stock's underperformance, and it seems to us that the company is positioning to do so. We think that the impetus for change will naturally stem from: 1) continued push outs of its 10nm server MPU ramp, 2) a changing of the management guard at both the C-suite and at the Board of Directors level, and not least of which, 3) a CEO bonus plan structured to award a $30m kicker should the stock hit $62 for 30 consecutive days, which scales to $180m at a $95 stock price.

Three Vectors for Improvement: Focus, Frugality, Fabless. We assess a high probability for the company to execute on the Focus and Frugality vectors, and a low probability to execute on the Fabless vector, at least in the near term:

1) Focus, $5 - We estimate that divesting the memory business could add $0.16 of EPS, 260bps to op margins, and 1.0x to the P/E multiple due to $2.3bn in higher annual capital return and return to its core competencies

2) Frugality, $12 - Based on its sales level, we estimate that INTC's SG&A should be between 1.7% and 6.5% of sales. At the midpoint (4.2%) we estimate an incremental $0.63 of EPS, 430bps to op margins, and 1.0x to the P/E multiple due to $2.5bn in higher annual capital return

3) Fabless $19 - We estimate that if INTC sold its factories at book value, and transitioned to a fabless model that enabled it to close the transistor gap with AMD in servers, it could increase its EPS by $0.74 due to a lower share count and expand its P/E multiple by 2.0 turns due to $6.6bn in higher annual capital return.

Of these, we believe the first two (Focus and Frugality) are more easily doable, but don't address INTC's share loss challenges. We think that the Fabless option would the most challenging, both politically and operationally, but we think would fundamentally address its current transistor handicap and potentially stem share loss. We summarize the incremental stock potential from these activities in the chart on the following page.

January 21, 2020 4 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 2 - INTC Stock Price We estimate that:

90 New Base Case @ $64 1) Divesting memory could add $5 to INTC's $19 assuming high probability of restructuring stock price, 80 EPS: $4.61; P/E: 13.8x EPS +$0.74 FCF - $18.2bn 2) Lowering SG&A to sales-adjusted industry 70 P/E +2.0x $12 norms could add $12 to INTC's stock price, 60 EPS +$0.63 and $5 P/E +1.0x 50 3) Moving to a fabless manufacturing model $46 EPS +$0.16 Bull Case @ $85 P/E +1.0x Fabless Model could add $19 to INTC's stock price. 40 Base Case - ex EPS: $5.50 P/E: 15.5x 30 Restructuring @ $46 FCF: $24.7bn INTC Stock Price ($) Price Stock INTC 20 EPS $3.80 10 P/E 12x

Divest

- ex -

Fabless

Move to Move

Memory

SG&A

Discipline Base Case Base . Restructuri Source: Jefferies, company data

*Base case of $64 and bull case of $85 is greater than sum of the individual restructuring vectors due to synergies associated with compounding lower share counts

January 21, 2020 5 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 2: Intel's Table is Set for a Change

Chart 3 - INTC Relative Performance Over the past five years, INTC has materially underperformed TSMC (64% vs 136%), the Philadelphia Semiconductor Index, SOX 5 yr. Performance (179%), as well as its processor peers AMD 50x AMD: +1807% and NVDA (1,800% and 1,100%). NVDA: +1143% SOX: +179% AMD TSMC: +136% INTC: +64% SP500: +62% NVDA 5x TSMC SOX INTC

INTC Relative Performance Relative INTC SP500

Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Aug-16 Aug-17 Aug-18 Aug-19 . Aug-15 Source: Jefferies, company data

Chart 4 - INTC/TSMC Lead on Nodes Intel used to deliver a new transistor every eight quarters like clockwork, typically, at TSMC overtook INTC in least two years ahead of everyone else in the 45nm 12 qtrs transistor leadership industry.

However, the move to 14nm FF transistors 10 qtrs took 11 quarters, and the move to 10nm took nearly five years. AMD is now shipping 32nm 11 qtrs a server MPU with smaller transistors than 6 qtrs Intel, and we don't expect Intel to close the gap with AMD in servers until 4Q20 at the 22nmFF 6 qtrs earliest.

Server Chips with smaller transistors can have 14nm FF Consumer huge advantages over chips with larger 10nm FF transistors, as smaller transistors are normally cheaper, have lower power 8 qtrs 8 qtrs 11 qtrs 18 - 23 qtrs 5nm EUV requirements, and can be faster. These are advantages that we believe Intel lost when it

lost its transistor leadership to TSMC.

Jul-10 Jul-11 Jul-21

Jan-10 Jan-11

Jun-12 Jun-13

Apr-16 Apr-17

Feb-09 Feb-20 Feb-21

Oct-15 Oct-16

Sep-17 Sep-18

Dec-11 Dec-12

Mar-08 Mar-18 Mar-19

Aug-08 Aug-09 Aug-19 Aug-20

Nov-13 Nov-14 May-15 . May-14 Source: Jefferies estimates, company data

January 21, 2020 6 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 5 - INTC vs. TSMC - CapEx as a % of COGS Chart 6 - INTC vs TSMC ROIC % 100% 45% INTC's CapEx as a % of COGS TSMC's ROIC exceeded INTC since 2003 90% TSMC converged with TSMC in 2018 40% TSMC

35% 80% 30% 70% 25% 60%

20% ROIC % ROIC 50%

15% CapEx % of COGS of % CapEx 40% 10% INTC INTC 30% 5%

20% 0%

2010 2012 2014 2016 2018 2009 2011 2013 2015 2017 2019

2018 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2019 . . 2000 Source: Jefferies, FactSet and company data Source: Jefferies, Bloomberg, company data

TSMC's CapEx Intensity has been improving over TSMC has sported a higher ROIC than INTC for the past 15 years, the past 10 years, while Intel's has been increasing and it appears that the distance between the two is increasing

Chart 7 - INTC Capex + Capex Intensity Chart 8 - INTC vs TSMC Market Capitalization 18 25% 350 Intel's capex intensity has increased TSMC's market cap 16 500bps since 1Q17 23% exceeded INTC in 2019 300 14 21% 19% 12 250 17% INTC 10 200 15% 8 13% 150 6

11%

Capex as % of sales of % as Capex Capex, billions of US$ of billions Capex, 4 9% 100

2 7% ($bn) Capitalization Market 50 0 5% TSMC

3Q10 2Q11 1Q12 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 4Q18 3Q19

Net capEx (TTM) Net capex as % of sales

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 . . 1998 Source: Jefferies, company data Source: Jefferies, FactSet

Despite the fact that Intel's CapEx intensity has TSMC's market cap eclipsed Intel's for the first time ever in 2019 increased to the highest levels in 15 years, the company is still undersupplying many of its customers

January 21, 2020 7 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 2.1: 10nm Delay + Share Loss

Chart 9 - AMD Unit Share vs. INTC Gross Margin AMD's share gain vs INTC accelerated shortly 35% F'cast after INTC lost the industry's transistor leadership to TSMC in 2018. Since AMD and INTC's share loss 30% NVDA outsource their chip manufacturing to 30% accelerated after it lost TSMC, we believe they are better positioned transistor leadership to compete against INTC today than in the Desktop Unit to TSMC in 3Q18 25% Share past. We expect Intel to continue to lose share to both. 20%

15% 14%

NB Unit Share 13%

AMD Unit Share (%) Share Unit AMD 10%

5% Dual Server Unit Share

1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19 4Q20E . 1Q20E Source: Jefferies, Mercury research and company data

Chart 10 - AMD Server Unit Share vs. INTC GM Chart 11 - Datacenter Processor Revenues - $ 30% F'cast 70% 9.0 Data Center Sales CAGRs: INTC data center revenues 66% 1yr: 1.7% INTC GM 8.0 are below trend-line of total 3yr: 18.5% 25% DC processors revenues for 5yr: 14.0% 62% 7 of the last 9 qtrs 7.0 10yr: 15.5% 58% 20% 6.0 XLNX 54% INTC's losses 54% ALTR/PSG 15% transistor leadership 50% 5.0 NVDA to TSMC 13% AMD

46% 4.0 INTC 10% (%)GM INTC Series6 8% 42% AMD Unit Share (%) Share Unit AMD 3.0 Server Unit Share 38% 5% Dual Server Unit 2.0

Share 34% Quarterly Sales, Datacenter bn) $ (US 0% 30% 1.0

0.0

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19

1Q20E

3Q08 3Q19 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 . 1Q05 Source: Jefferies, Mercury research and company data . Source: Jefferies, company data

The last time Intel lost material server share to AMD, its gross In the data center, Intel's share of total processor dollars has margins dropped by 1,000 bps. We forecast AMD to continue declined from 99% to something closer to 85%. We expect Intel will to take server share from Intel in 2020 and 2021, and expect continue to cede share in the data center to NVDA, AMD and XLNX Intel's gross margins will be negatively impacted as it does

January 21, 2020 8 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 2.2: Management Change - Changing of the Guard

Chart 12 - INTC's Old Guard Leaving Chart 13 - New Guard Enters Date of INTC Executives Tenure Recruitment INTC Executives Prior Experience Resignation Date Oct-13 Dadi Perlmutter, Exec. VP & GM 34 years Nov-15 Murthy Renduchintala, Group Qualcomm Intel Architecture Group President Technology, Systems VP of Qualcomm Technologies, Mar-15 Mooly Eden, President & GM 33 years architecture & Client Group Inc. & Co-president of Intel Israel Qualcomm Mobile & Jul-15 Renee James, Group President 28 years Computing Manufacturing, Operation & Sales Nov-17 Raja Koduri, SVP & GM AMD (ATI) Feb-16 Bill Holt, Exec. VP 42 years Architecture, Graphics and VP and Chief Architect Radeon Technology Manufacturing Group Software Technologies Mar-16 Kirk Skaguen, SVP & GM 24 years Apr-18 Jim Keller, SVP & GM Tesla, VP of Autopilot Harware PC Client Group Silicon Engineering Group Engineering Feb-17 Kim Stevenson, COO 5 years AMD, Zen Chip Architect CISA Division Jan-19 Bob Swan, CEO Ebay, CFO Aug-17 Stacy Smith, President 30 years Apr-19 George Davis, CFO Qualcomm, CFO Manufacturing, Operation & Sales, CFO (prior role) Sep-19 Karen Walker, CMO Cisco, CMO Jan-20 Archana Deskus, CIO HPE, CIO Dec-17 Diane Bryant, Head 32 years . Data Center Group, CIO (prior role) Source: Jefferies, company data Jun-18 Brian Krzanich, CEO, COO (prior role) 36 years Sep-18 Doug Fisher, SVP 23 years Software and Services Oct-18 Sohail Ahmed, SVP & GM 34 years Technology Manufacturing Group Oct-19 Dan McNamara, SVP & GM Network & Custom Logic 4 years SVP & GM Programmable Solutions Group (prior) 2020 Andy Bryant, Chairman, CFO (prior role) 39 years . Source: Jefferies, company data

Over the past six years, Intel has lost about a dozen senior Over the past four years, Intel has been replacing many of managers, mostly with 20-40 years of experience, that grew its departing home-grown senior managers with executives up at Intel when it was a manufacturing powerhouse. We from outside the company, many of whom come from think a lot of process-know-how, institutional knowledge companies with fabless semiconductor operations and culture left with these executives, and that this is one of the root causes of Intel's recent manufacturing challenges

January 21, 2020 9 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 2.3: CEO's Bonus Plan

Chart 14 - Value of Bob Swan's Bonus Intel CEO's performance bonus is structured 200 so that he is awarded a bonus in stock If INTC’s stock exceeds $62 for 30 consecutive days before Jan 31, options and units that is equal to $30m, 180 2024, the CEO would be awarded a performance bonus equal to should INTC's stock price exceed $62 for 30 $30m in value, which could scale to $180m at a $95 stock price consecutive days. 160 That bonus would increase in value to $180m 140 should INTC's stock price hit $95.

120 INTC's stock price is approaching $60, and the CEO has a clear and obvious motivation 100 1.3x Closing Price as of Grant Dt (1/31/19) = $61.8 to drive the stock above $62. We think 80 the company will take some restructuring Closing Price actions that translate to higher EPS.

60 1/17/2019 $59.60 PSO + PSU Payoff ($ m) ($ Payoff PSU + PSO 40 Closing Price as of PSO Grant Dt (1/30/19) 20 $47.5 PSU 0 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96

. INTC Stock Price ($) Source: Jefferies, company data

January 21, 2020 10 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 3. Three Scenarios for Increasing Intel's P/E, EPS, FCF and Stock Price

We identify three scenarios where Intel could restructure, and estimate an EPS savings and impact to the stock. Our assumptions on EPS savings are explained in detail in sections 3.1-3.3, and we assume that cash saved in the first year is used to buy back stock, and then in the second year returned to shareholders via dividends and stock buybacks. Our assumptions on P/E expansion are based on the FCF and Capital Return analyses we published in 2016 and 2018, and updated recently in Section 4 in this note, that show that P/E multiples in semis typically expand when companies consistently return a higher percentage of their net income to shareholders - said another way, "investors pay more for earnings when it is returned to them!" The three scenarios are:

1) Focus, $5 impact to the stock - We estimate that divesting the memory business could add $0.16 of EPS and 1.0x to the P/E multiple.

2) Frugality, $12 impact to the stock - By lowering its SG&A to sales-adjusted industry norms, we estimate an incremental $0.63 of EPS and 1.0x to the P/E multiple.

3) Fabless, $19 impact to the stock - We estimate that if INTC sold its factories at book value, and transitioned to a fabless model, it could increase its EPS by $0.74 due to a lower share count and expand its P/E multiple by 2.0 turns due to $6.6bn in higher annual capital return.

Chart 15 - INTC Stock Price

90 New Base Case @ $64 assuming high probability of restructuring $19 80 EPS: $4.61; P/E: 13.8x EPS +$0.74 FCF - $18.2bn 70 P/E +2.0x $12 60 EPS +$0.63 $5 P/E +1.0x 50 $46 EPS +$0.16 Bull Case @ $85 P/E +1.0x Fabless Model 40 Base Case - ex EPS: $5.50 P/E: 15.5x 30 Restructuring @ $46 FCF: $24.7bn INTC Stock Price ($) Price Stock INTC 20 EPS $3.80 10 P/E 12x

Divest

- ex -

Fabless

Move to Move

Memory

SG&A

Discipline Base Case Base . Restructuri Source: Jefferies, company data

*Base case of $64 and bull case of $85 is greater than sum of the individual restructuring vectors due to synergies associated with compounding lower share counts

January 21, 2020 11 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 16 - INTC: Scenario Analysis Gross Margin Operating Margin EPS FCF Sale of PPE Share Count Scenarios Δ GM 2020 GM Δ OM 2020 OM Δ EPS 2020 EPS Δ FCF 2020 FCF Δ Cash 2020 Δ Shr Total Flow Cash Count Share o/s Flow Scenario 1: Divest Memory 2.0% 57.5% 2.6% 30.5% $0.16 $3.96 2,268 15,707 3,928 3,928 (103) 4,136 Scenario 2: SG&A Discipline 0.0% 55.5% 4.3% 32.2% $0.63 $4.44 2,493 15,932 - - (42) 4,197 Scenario 3: Move to Fabless -5.0% 50.5% 1.2% 29.1% $0.74 $4.55 6,552 19,990 25,866 25,866 (540) 3,699 All 3 Scenarios . Combined -3.4% 52.1% 8.5% 36.4% $1.70 $5.50 11,313 24,752 29,795 29,795 (685) 3,554 Source: Jefferies, company data

January 21, 2020 12 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 3.1: Focus - Divest Memory Products: Intel's memory product includes Intel Optane technology and 3D NAND flash memory, primarily used in solid-state drives

Manufacturing: Fab 68 Dalian, Liaoning China. Capacity 70,000 wpm per Gartner

Chart 17 - INTC Memory Segment Operating Losses ($ bn) Intel's memory business has been a money- $5.0 120% losing venture over the past five years. By divesting this business unit, we believe that 100% INTC would not only realize higher earnings, $4.0 margins and ROIC, but we also believe that investors would afford INTC a higher P/ 80% $3.0 Revenue E multiple as the INTC investment thesis would simplify to be centered around its core 60% $2.0 competency in processors, instead of around both processors and memory. 40% $1.0 20%

$- Operating Margin (%) Margin Operating MemoryTTM bn) ($ 0% Operating $(1.0) Operating Income -20% Margin

$(2.0) -40%

1Q19 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2Q19 3Q19 . 4Q15 Source: Jefferies, company data

January 21, 2020 13 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 18 - What If INTC Shuts Memory Business We estimate that if INTC were to divest its 2020 EPS Accretion 2020 2020 memory business, it could raise $4bn from Jeff Estimates Delta Ex - Memory the sale of its PPE (our estimate), repurchase Revenue $67,112 ($4,865) $62,247 103m shares of stock, improve its gross and operating margins by 200-300bps, and add Gross Profit 37,254 (1,459) 35,795 $0.16 to its EPS. We also estimate that its Gross Margin 56% 58% P/E would expand by one turn due to $2.3bn Operating Expense 18,535 (1,750) 16,785 in incremental FCF that could be returned to Operating Margin 18,719 291 19,010 shareholders (see Section 4), and due to the Operating Margin 28% 31% simplification of its business model around Net Income 16,125 253 16,378 its core competency of MPUs. Share Count 4,239 (103) 4,136 EPS $3.80 $0.16 $3.96

2020 Cash Flow Statement 2020 2020 Jeff Estimates Delta Ex - Memory Net Income $15,090 $253 $15,343 Depreciation 9,140 (1,021) 8,119 Other Non- Cash Charges 3,368 3,368 Working Capital 840 840 CFO 28,439 (768) 27,671 Capital Expenditure (15,000) 3,036 (11,964) % of Revenue -22% -19% FCF - Steady State $13,439 $2,268 $15,707 Sale of PPE 0 3,928 3,928 Cash Flow after Sale of PPE $13,439 $6,197 $19,635 . Source: Jefferies, FactSet, company data

Chart 19 - Our Assumptions Assumptions Commentary Income Statement Assumptions Revenue $4,865 Visible Alpha 2020 NSG segment rev estimates Gross Profit 30% Micron's average Gross Margin Operating Expense (291) Visible Alpha 2020 NSG Segment estimates Cash Flow Statement Assumption Depreciation - % of Sales 21% Micron's average depreciation range 16%-27% Capital Spending $3,036 Per Intel's 10k 20% of capex relates to Memory PPE $3,928 Jeff analysis assuming 20% of capex relates to memory from 2016 - 2018, depreciated over 5 years . Repurchases $6,198 Buyback 100% of Incremental cash flow at $60/shr Source: Jefferies

January 21, 2020 14 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 3.2: Frugality - Drive SG&A Discipline

Chart 20 - INTC SG&A Compare A curve fit of SG&A expense vs sales 25% of our coverage companies indicates that y = 0.1449e-3E-05x Intel's SG&A expense is well above the R² = 0.5962 sales adjusted industry norm. The curve fit 20% LSCC suggests an appropriate SG&A level of 1.7%, while the closest semiconductor company in MRVL sales is AVGO at $25bn and an SG&A of 6.7%. For purposes of this exercise, we use a target 15% MXIM

% of Sales of % SG&A of 4.2%, which is the average of the XLNX - ADI AMD curve fit and AVGO's SG&A. TXN 10% IPHI INTC ON NVDA QCOM

NXPI 2019 SG&A 2019 5% AVGO, 6.7% SG&A Range 1.7% to 6.5% Curve fit determined SG&A Benchmark for $70bn sales company 0% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 Sales 2019 ($bn) . Source: FactSet, Jefferies, company data

January 21, 2020 15 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 21 - What If INTC Streamlined its SG&A Expenses We estimate that if INTC drove its SG&A 2020 EPS Accretion 2020 2020 to 4.2%, that it could save $3bn in annual Jeff Estimates Delta SG&A Discipline expenses, and generate an incremental Revenue $67,112 $67,112 $2.5bn of annual FCF. Gross Profit 37,254 37,254 If it used the first year's FCF to buy back Gross Margin 56% 56% stock, and then returned the following year's Operating Expense 18,535 (2,866) 15,670 FCF to shareholders, then we estimate that Operating Margin 18,719 2,866 21,584 it could generate an additional $0.63 in Operating Margin 28% 32% EPS, and improve its P/E multiple by 1 turn based on higher sustained capital return (See Net Income 16,125 2,493 18,618 Section 4). Share Count 4,239 (42) 4,197 EPS $3.80 $0.63 $4.44

2020 Cash Flow Statement 2020 2020 Jeff Estimates Delta SG&A Discipline Net Income $15,090 $2,493 $17,583 Depreciation 9,140 9,140 Other Non- Cash Charges 3,368 3,368 Working Capital 840 840 CFO 28,439 2,493 30,932 Capital Expenditure (15,000) (15,000) % of Revenue -22% -22% FCF - Steady State $13,439 $2,493 $15,932 Sale of PPE 0 0 0 Cash Flow after Sale of PPE $13,439 $2,493 $15,932 . Source: Jefferies, FactSet, company data

Chart 22 - Our Assumptions Assumptions Commentary Income Statement Assumptions Revenue n.a Gross Profit n.a SG&A - % of Sales 4.2% Mid-point of our 1.7% - 6.5% range Cash Flow Statement Assumption Depreciation - % of Sales n.a Capital Spending n.a PPE n.a Repurchases $2,732 Buyback 100% of Incremental cash flow at $60/shr . Source: Jefferies

January 21, 2020 16 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 3.3: Fabless - Shift to a Fabless Model

Chart 23 - INTC Commentary Suggesting Use of External Foundries & Justifying Memory A shift to a fabless manufacturing model Investments would be the boldest of the three scenarios Source Comments we present, and would also likely be the most Investor Conf Venkata Renduchintala Dec 10, 2019 - " first of all, I think we regard companies like TSMC and Samsung as strategic partners.. difficult to implement due to the political and ...something like 20% to 25% of the wafer volume that we source comes from outside of the operational challenges of shifting US-based company and we don't see that changing in any major fashion going forward" manufacturing to an overseas operator. "By engaging with the external foundries and the third-party ecosystems that fuel that However, given the magnitude of Intel's foundry ecosystem, we learn a tremendous amount that makes us a better IDM" operational mis-execution on its 10nm Investor Conf Bob Swan transistor transition, this may be the most Dec 3, 2019 - "First, for a long time the company has always looked at using other people's capacity for a range of the diversity of products that we do and I would say historically it bumps around, but important step that the company could take historically it's been about 20% of our capacity we leverage third parties foundries. That to ensure its future competitiveness. generally, philosophy of using outside foundries won't change, if anything I think we'll be maybe more open minded about looking at when it makes more sense versus less sense" Recent management comments indicate Intel's increased willingness to use foundries "So engaging more and more with the ecosystem which may mean a little bit more goes into for outsourced chip manufacturing. other people's fabs is strengthening our knowledge about what goes on in the ecosystem which in turn strengthens the IDM advantage that we put in place. So our engagement with the outside we see as, there'll be more of it. We'll learn from it, we'll be better at our IDM advantage, and it'll open up our aperture about the things that we can do down the road to have a bigger and bigger impact on our customers"

Intel's Letter "In response to continued strong demand, we have invested record levels of Capex increasing to Customers our 14nm wafer capacity this year while also ramping 10nm production. In addition to & Partners expanding Intel’s own manufacturing capability, we are increasing our use of foundries to Nov 20, 2019 enable Intel’s differentiated manufacturing to produce more Intel CPU products."

3Q19 Earnings Bob Swan Call - "as you know, with the other foundry players, they've been a source of our capacity over Oct 24, 2019 the years, and our expectation is to the extent that they can do something to support our growth better and/or for peak kind of demands, we're always going to look at how do we evaluate the opportunity set that's going to position us best to meet our customers' demand for the growing diversity of products that we have in our portfolio." 4Q18 Earnings Bob Swan Call - "In terms of the – just the CFO lens of having a commodity in the portfolio, I'm not too Jan 24, 2019 excited about it. And that's why the investments we're making in memory are for what we believe differentiated technology, both in the manufacturing process capabilities of 3D NAND but also the differentiated technology for Optane and the role that it plays both on the PC side, but most importantly for us on the data-centric side.

So, we're not particularly excited about commodities. When we make these investments, it's really geared towards products and technologies that are increasingly important and those technologies that are differentiated from kind of the core memory space that help us, in conjunction with the CPU, solve customers' problems." . Source: Jefferies, FactSet, company data

January 21, 2020 17 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 24 - What If INTC Goes Fabless We estimate that a move to a fabless 2020 EPS Accretion 2020 2020 manufacturing model would have a 500bps Jeff Estimates Delta Fabless Model negative impact to Intel's gross margins, Revenue $67,112 $67,112 however, that this would be offset by R&D savings the company would realize Gross Profit 37,254 (3,356) 33,899 by terminating its process technology - Gross Margin 56% 51% fabless companies need nominal process Operating Expense 18,535 (4,151) 14,385 technology R&D (our estimate, not given by Operating Margin 18,719 795 19,514 Intel). Operating Margin 28% 29% We also assume that the company would be able to sell its factories at book value, and Net Income 16,125 692 16,817 would buy back stock with the cash received Share Count 4,239 (540) 3,699 from the PPE sales. EPS $3.80 $0.74 $4.55 We also estimate that the company would save about $10bn annually in CapEx, which it 2020 Cash Flow Statement 2020 2020 could put to capital return. Jeff Estimates Delta Fabless Model Net Income $15,090 $692 $15,782 Netting it out, we estimate that a move to a fabless model could add $0.74 of EPS and Depreciation 9,140 (3,771) 5,369 translate to $6.6bn in annual incremental Other Non- Cash Charges 3,368 3,368 FCF which would positively impact its P/ Working Capital 840 840 E multiple by 2 full turns if consistently CFO 28,439 (3,079) 25,359 returned to shareholders (see Section 4). Capital Expenditure (15,000) 9,631 (5,369) % of Revenue -22% -8% FCF - Steady State $13,439 $6,552 $19,990 Sale of PPE 0 25,866 25,866 FCF $13,439 $32,418 $45,857 . Source: Jefferies, FactSet, company data

Chart 25 - Our Assumptions Estimating the financial impact to Intel for a Assumptions Commentary 100% move to a foundry model requires a lot Income Statement Assumptions of educated "guesstimates" on our part, and Revenue n.a therefore, of the three scenarios we present, Gross Profit ($3,620) INTC loses 5% margin advantage by going fabless we view our estimates for this scenario as R&D Savings ($4,151) TSMC's average R&D spend 2018-2019 is $2.8bn having the widest confidence levels around Cash Flow Statement Assumption our estimates. Depreciation - % of Sales 8% In-line with capital intensity assumption CapEx - % of Sales 8% Higher end of range of capital intensity of AMD, NVDA We attempt to make our largest assumptions and XLNX over last 5 years transparent in this table. PPE $25,866 80% of Intel's net PPE as of 2018 Repurchases $33,242 Buyback 100% of Incremental cash flow at $60/shr . Source: Jefferies

January 21, 2020 18 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 3.4: Estimated Impact of Implementing All Three Scenarios

Chart 26 - All 3 Scenarios Combined We estimate that if INTC implemented all 2020 EPS Accretion 2020 2020 three scenarios, that it could lower its share Jeff Estimates Delta All Together count by 685m shares, increase its EPS by Revenue $67,112 ($4,865) $62,247 $1.70, its annual FCF by $11.3bn, and its P/E multiple by 3.5 turns by increasing its Gross Profit 37,254 (4,815) 32,439 captial return (see Section 4) and focusing Gross Margin 56% 52% its business model around its long-standing Operating Expense 18,535 (8,767) 9,769 core competency of MPUs. Operating Margin 18,719 3,952 22,670 Operating Margin 28% 36% Net Income 16,125 3,438 19,563 Share Count 4,239 (685) 3,554 EPS $3.80 $1.70 $5.50

2020 Cash Flow Statement 2020 2020 Jeff Estimates Delta All Together Net Income $15,090 $3,438 $18,528 Depreciation 9,140 (4,792) 4,348 Other Non- Cash Charges 3,368 3,368 Working Capital 840 840 CFO 28,439 (1,354) 27,085 Capital Expenditure (15,000) 12,667 (2,333) % of Revenue -22% -4% FCF - Steady State $13,439 $11,313 $24,752 Sale of PPE 29,795 29,795 FCF $32,917 $41,108 $54,547 . Source: Jefferies, FactSet, company data

January 21, 2020 19 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Section 4: Capital Return Framework

In our 2016 and 2018 versions of our "FCF and Capital Return Handbook," we showed a high correlation between large-cap semiconductor stocks P/E ratios and the three-year average of the percent of net income returned to shareholders. The correlation is intuitive to us, as it implies that investors pay more for earnings if companies give it back to them.

Chart 27 - 1Q 2016 Regression: P/E vs Net Cap Return/Net Income Chart 28 - 1Q18 Regression: P/E vs Net Cap Return/Net Income 3yr Avg. 3yr Avg. 26

y = 7.8165x + 11.989 R² = 0.9249 XLNX 22 MXIM

TXN 18

MCHP ADI

14 INTC Price / Earnings (ntm) Earnings / Price ON AVGO

10 0% 50% 100% 150% . . Net Capital Return / Net Income - 3 Year Avg. Source: Jefferies, FactSet, company data. Net Capital Return is dividends Source: Jefferies, FactSet, company data. Net Capital Return is dividends plus share buyback minus cash from share/options issuance. plus share buyback minus cash from share/options issuance.

January 21, 2020 20 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 29 - P/E vs. Net Cap Return/Net Income 3yr. Avg. Intel's ability to return a large portion of its net income has been handicapped recently by its 30 increasing capex intensity. y = 7.2327x + 16.534 XLNX R² = 0.3782 We believe that if Intel implemented any of the three restructuring scenarios it would 26 TXN MXIM have more FCF to return to shareholders ADI on a sustainable basis, which, based on the regressions in this section, should also 22 translate to a higher P/E ratio. We believe STM that the P/E expansion could be especially profound if it moved to a fabless model, 18 relieving itself of both its annual capex Price / Earnings (ntm) Earnings Price / MCHP requirements and process R&D expenses. NXPI ON We believe that if Intel executed all three

14 restructuring scenarios its P/E could expand Potential PE Expansion PE Potential INTC All Together to 15.5x, or a 15% discount to the market. Ex Memory & SGA Between 5-and-10 years ago, INTC traded at a Fabless Model Discipline 20% P/E discount to the market, however that 10 discount has expanded to a 30% discount 0% 25% 50% 75% 100% 125% 150% more recently, we believe due to lower capital Net Capital Return / Net Income - 3 Year Avg. . return, its loss of transistor leadership, its Source: Jefferies, company data. Net Capital Return is dividends plus share buyback minus cash from share/options issuance. move into memory, and several large $15bn acquisitions (Altera and Mobileye).

January 21, 2020 21 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 30 - P/E vs Net Debt / EBITDA(ttm) We also observed an inverse correlation 30 between P/E and leverage ratio. Intel's leverage ratio is below 1.0, and we don't XLNX y = -2.2323x + 23.367 believe investors view its leverage ratio as a R² = 0.597 risk. 26 TXN MXIM ADI

STM

18 MCHP Price / Earnings (ntm) Earnings Price / NXPI ON

14 Potential PE Expansion PE Potential INTC

10 (2) (1) - 1 2 3 4 Net Debt / EBITDA (ttm) . Source: Jefferies estimates, FactSet, company data

Chart 31 - INTC Potential Dividend Yield If INTC implements all the three restructuring 6.0 scenarios, and returns 50% of its FCF to shareholders in the form of a dividend, we estimate that its dividend could increase to 5.0 Fabless, 5.2 $3.08 annually, which would translate to a 4.2 5.2% dividend yield at its recent stock price. 4.0

3.1 2.8 2.8 3.0 SGA Discipline, 3.1 Ex Memory, 2.6 2.0 1.8 Dividend Yield (%) Yield Dividend 1.8 Median 1.8 1.5 1.4 2.1 1.1 1.0 0.9 0.3

0.0

ADI

TXN

INTC

NXPI

SP50

XLNX

MRVL

MXIM

AVGO

NVDA MCHP . QCOM Source: Jefferies, FactSet, company data

January 21, 2020 22 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC) Chart 32 - INTC Income Statement FINANCIAL STATEMENTS (FYE December) 2019E 2020E 2018 2019E 2020E millions of $ except per share and % items 1Q19 2Q19 3Q19 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E TOTAL REVENUE ($MM) - GAAP $16,061 $16,505 $19,190 $19,200 16,826 16,826 17,267 16,192 $70,848 $70,956 $67,112 % Change Q/Q -13.9% 2.8% 16.3% 0.1% -12.4% 0.0% 2.6% -6.2% % Change Y/Y -0.0% -2.7% 0.1% 2.9% 4.8% 1.9% -10.0% -15.7% 12.9% 0.2% -5.4% TOTAL COGS - GAAP 6,972 6,627 7,895 8,275 7,495 7,664 8,030 7,709 27,111 29,769 30,897 % Sales 43.4% 40.2% 41.1% 43.1% 44.5% 45.5% 46.5% 47.6% 38.3% 42.0% 46.0% Amortization of acquisition-related intangibles 281 287 288 288 260 260 260 260 1,105 1,144 1,040 TOTAL COGS - ex amort, acq chg 6,691 6,340 7,607 7,987 7,235 7,404 7,770 7,449 26,006 28,625 29,857 % Sales 36.7% 40.3% 44.5% GROSS PROFIT- GAAP 9,089 9,878 11,295 10,925 9,331 9,163 9,237 8,484 43,737 41,187 36,214 Gross Margin - GAAP 56.6% 59.8% 58.9% 56.9% 55.5% 54.5% 53.5% 52.4% 61.7% 58.0% 54.0% GROSS PROFIT- ex 1x's 9,370 10,165 11,583 11,213 9,591 9,423 9,497 8,744 44,842 42,331 37,254 Gross Margin - ex amort, acq chg 58.3% 61.6% 60.4% 58.4% 57.0% 56.0% 55.0% 54.0% 63.3% 59.7% 55.5% R&D - GAAP 3,332 3,438 3,208 3,259 3,217 3,217 3,260 3,158 13,543 13,237 12,852 % Sales 20.7% 20.8% 16.7% 17.0% 19.1% 19.1% 18.9% 19.5% 19.1% 18.7% 19.2% SG&A - GAAP 1,533 1,589 1,486 1,516 1,423 1,423 1,441 1,396 6,750 6,124 5,683 % Sales 9.5% 9.6% 7.7% 7.9% 8.5% 8.5% 8.3% 8.6% 9.5% 8.6% 8.5% OTHER CHARGES 50 229 154 100 45 40 35 30 128 533 150 % Sales 0.3% 1.4% 0.8% 0.5% 0.3% 0.2% 0.2% 0.2% 0.2% 0.8% 0.2% TOTAL OPEX - GAAP 4,915 5,256 4,848 4,875 4,685 4,680 4,736 4,585 20,421 19,894 18,685 TOTAL OPEX - ex amort, acq chg 4,865 5,027 4,694 4,775 4,640 4,640 4,701 4,555 20,293 19,361 18,535 OPERATING PROFIT- GAAP 4,174 4,622 6,447 6,050 4,646 4,483 4,501 3,899 23,316 21,293 17,529 % Sales 26.0% 28.0% 33.6% 31.5% 27.6% 26.6% 26.1% 24.1% 32.9% 30.0% 26.1% OPERATING PROFIT- ex 1x's 4,505 5,138 6,889 6,438 4,951 4,783 4,796 4,189 24,549 22,970 18,719 % Sales 28.0% 31.1% 35.9% 33.5% 29.4% 28.4% 27.8% 25.9% 34.7% 32.4% 27.9% NET INTEREST & OTHER (GAAP) 373 107 272 554 (46) (46) (46) (46) (83) 1,306 (184) Ongoing mark-to-market on marketable equity securities (253) (9) (114) (700) (1,076) NET INTEREST & OTHER (Non-GAAP) 120 98 158 (146) (46) (46) (46) (46) (402) 230 (184) PRETAX PROFIT- GAAP 4,547 4,729 6,719 6,604 4,600 4,437 4,455 3,853 23,233 22,599 17,345 % Sales 28.3% 28.7% 35.0% 34.4% 27.3% 26.4% 25.8% 23.8% 32.8% 31.8% 25.8% PRETAX PROFIT- ex 1x's 4,625 5,236 7,047 6,292 4,905 4,737 4,750 4,143 24,147 23,200 18,535

TAXES- GAAP 573 545 729 991 598 577 579 501 2,264 2,838 2,255 Tax rate 12.6% 11.5% 10.8% 15% 13.0% 13.0% 13.0% 13.0% 9.7% 12.6% 13.0% TAXES ex 1x's 577 451 758 852 638 616 618 539 2,653 2,638 2,410 Tax rate ex 1x's 14.0% 11.5% 10.8% 13.5% 13.0% 13.0% 13.0% 13.0% 11.0% 11.4% 13.0% NET INCOME- GAAP 3,974 4,184 5,990 5,613 4,002 3,860 3,876 3,352 20,969 19,761 15,090 % Sales 24.7% 25.3% 31.2% 29.2% 23.8% 22.9% 22.4% 20.7% 29.6% 27.8% 22.5% EXTRAORDINARIES, Net of Tax 50 229 154 100 45 40 35 30 128 533 150 N.I. Non-GAAP (ex amort, acq chg) 4,048 4,785 6,289 5,440 4,267 4,121 4,133 3,605 21,494 20,562 16,125 SBC 389 470 431 431 431 431 431 431 1,546 1,721 1,724 N.I. - Non-GAAP (ex-1x, ex-SBC) 4,413 4,883 6,575 6,144 4,478 4,331 4,342 3,813 22,643 22,015 16,964 EPS - GAAP $0.87 $0.93 $1.35 $1.28 $0.93 $0.90 $0.92 $0.81 $4.46 $4.42 $3.56 EPS - Non-GAAP (ex amort, acq chg, Incl. SBC) $0.89 $1.06 $1.42 $1.24 $0.99 $0.97 $0.98 $0.87 $4.57 $4.60 $3.80 DIVIDENDS PER SHARE $0.32 $0.32 $0.32 $0.32 $0.32 $0.32 $0.32 $0.32 $1.20 $1.26 $1.26 AVG. SHARES - Diluted 4,564 4,523 4,433 4,378 4,322 4,267 4,211 4,156 4,701 4,474 4,239 . AVG. SHARES - Basic 4,492 4,466 4,391 4,336 4,280 4,225 4,169 4,114 4,612 4,421 4,197 Source: Jefferies, company data

January 21, 2020 23 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC) Chart 33 - INTC Balance Sheet FINANCIAL STATEMENTS (FYE December) 2019E 2020E 2018 2019E 2020E millions of $ except per share and % items 1Q19 2Q19 3Q19 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E BALANCE SHEET Cash and cash equivalents $ 3,154 $ 2,867 $ 3,935 $ 3,908 $ 4,443 $ 3,390 $ 691 $ (2,092) $ 3,019 $ 3,908 $ (2,092) Short-term investments 2,698 2,414 1,849 1,849 2,788 1,849 - Trading assets 6,181 6,663 6,241 6,241 6,241 6,241 6,241 6,241 5,843 6,241 6,241 Accounts receivable 6,957 6,233 6,880 6,918 5,609 5,422 5,372 5,834 6,722 6,918 5,834 Inventory 7,765 8,696 8,638 8,078 8,348 8,515 8,786 7,525 7,253 8,078 7,525 Raw materials 789 808 803 813 - - Work in process 4,758 5,612 5,945 4,511 - - Finished goods 2,218 2,276 1,890 1,929 - - Deferred tax assets - - - Other current assets 2,305 2,366 2,414 2,214 2,214 2,214 2,214 2,214 3,162 2,214 2,214 Assets held for sale - Total current assets 29,060 29,239 29,957 29,208 26,854 25,782 23,304 19,722 28,787 29,208 19,722 0 Property, plant and equipment, net 50,040 51,377 53,563 54,853 56,409 57,903 59,336 60,713 48,976 54,853 60,713 Marketable securities 5,254 4,629 4,819 4,819 4,819 4,819 4,819 4,819 6,042 4,819 4,819 Other long-term investments 3,465 3,577 3,428 3,428 3,428 3,428 3,428 3,428 3,388 3,428 3,428 Goodwill 24,521 24,583 24,727 24,727 24,727 24,727 24,727 24,727 24,513 24,727 24,727 Intangible assets, net 11,457 11,249 11,019 10,608 10,197 9,786 9,375 8,964 11,836 10,608 8,964 Other assets 5,661 6,105 6,255 6,255 6,255 6,255 6,255 6,255 4,421 6,255 6,255 Total assets $ 129,458 $ 130,759 $ 133,768 $ 133,898 $ 132,689 $ 132,700 $ 131,244 $ 128,628 $ 127,963 $ 133,898 $ 128,628 0 Current portion of debt 2,750 3,726 5,200 5,200 5,200 5,200 5,200 5,200 1,261 5,200 5,200 Accounts payable 4,059 4,682 4,809 4,259 4,364 5,414 4,891 3,967 3,824 4,259 3,967 Accrued compensation and benefits 1,984 2,554 3,220 3,222 2,823 2,823 2,897 2,717 3,622 3,222 2,717 Other liabilities 10,118 8,743 11,835 11,835 11,835 11,835 11,835 11,835 7,919 11,835 11,835 Total current liabilities 18,911 19,705 25,064 24,516 24,222 25,273 24,824 23,719 16,626 24,516 23,719 - Long-term income taxes payable 4,781 4,847 4,974 4,974 4,974 4,974 4,974 4,974 4,897 4,974 4,974 Contract Liabilities 1,775 1,558 1,413 1,413 1,413 1,413 1,413 1,413 2,049 1,413 1,413 Deferred tax liabilities 1,521 1,783 1,696 1,696 1,696 1,696 1,696 1,696 1,665 1,696 1,696 Long-term debt 25,737 25,089 23,707 23,707 23,707 23,707 23,707 23,707 25,098 23,707 23,707 Other long-term liabilities 2,797 2,583 2,506 2,506 2,506 2,506 2,506 2,506 2,646 2,506 2,506 Total liabilities 55,522 55,565 59,360 58,812 58,518 59,569 59,120 58,015 52,981 58,812 58,015 - Stockholders' equity: - Common stock 25,346 25,140 25,290 25,290 25,290 25,290 25,290 25,290 25,365 25,290 25,290 Accumulated other comprehensive income (813) (622) (722) (4,722) (8,722) (12,722) (16,722) (20,722) (974) (4,722) (20,722) Retained earnings 49,128 50,429 49,674 54,352 57,437 60,397 63,391 65,878 50,172 54,352 65,878 Other 275 247 166 166 166 166 166 166 419 166 166 Total stockholders' equity 73,936 75,194 74,408 75,086 74,171 73,131 72,125 70,612 74,982 75,086 70,612 . Total liabilities and stockholders' equity $ 129,458 $ 130,759 $ 133,768 $ 133,898 $ 132,689 $ 132,700 $ 131,244 $ 128,628 $ 127,963 $ 133,898 $ 128,628 Source: Jefferies, company data

January 21, 2020 24 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC) Chart 34 - INTC Cash Flow Statement FINANCIAL STATEMENTS (FYE December) 2019E 2020E 2018 2019E 2020E millions of $ except per share and % items 1Q19 2Q19 3Q19 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E CASH FLOW STATEMENT Net Income (loss) $ 3,974 $ 4,184 $ 5,990 $ 5,613 $ 4,002 $ 3,860 $ 3,876 $ 3,352 $ 21,053 $ 19,761 $ 15,090 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 2,229 2,150 2,268 2,318 2,194 2,256 2,316 2,373 7,520 8,965 9,140 Stock compensation expense 389 470 431 431 431 431 431 431 1,546 1,721 1,724 Restructuring and impairments - - - Excess tax benefit from employee stock awards - - - Amortization of intangible assets 396 404 411 411 411 411 411 411 1,565 1,622 1,644 (Gains) losses on equity investments (274) 174 (295) 155 (395) - (Gains) losses on divestures, sales of assets (497) - - Deferred taxes 18 - - Other 260 - - Changes in operating assets and liabilities: - Trading assets - - - - - Accounts receivable (235) 725 (646) (38) 1,309 187 50 (462) (1,714) (194) 1,084 Inventory (512) (931) 67 560 (269) (168) (271) 1,261 (214) (816) 553 Other current assets - - - Accounts payable 196 235 297 (550) 105 1,051 (523) (924) 211 178 (292) Accrued expenses (compensation and benefits) (1,620) 608 647 2 (398) 0 74 (180) (260) (363) (505) Deferred Income taxes payable and receivable 440 (455) 450 (1,601) 435 - Other operating assets and liabilities (24) 28 1,091 200 - - - 1,408 1,295 - Cash provided by (used in) operating activities $ 4,959 $ 7,592 $ 10,711 $ 8,947 $ 7,784 $ 8,028 $ 6,364 $ 6,263 $ 29,450 $ 32,209 $ 28,439

Cash flow from investing activities: Purchase of property and equipment (3,321) (3,554) (4,672) (4,608) (3,750) (3,750) (3,750) (3,750) (15,181) (16,155) (15,000) Proceeds from sale of property, equipment and software - - - Purchases/sales of available-for-sale investments (872) (849) (307) (4,717) (2,028) - Maturities and sales of available-for-sale investments 940 963 1,215 5,965 3,118 - Purchases of trading assets (1,869) (2,629) (1,271) (9,503) (5,769) - Maturities and sales of trading assets 1,554 2,254 1,659 12,111 5,467 - Investments in non-marketable equity investments 1,077 254 83 - 1,414 - (Acquisition) divestitures 1,000 358 1,000 - Other (231) 273 (617) - (272) (575) - Cash provided by (used in) investing activities $ (2,722) $ (3,288) $ (3,910) $ (3,608) $ (3,750) $ (3,750) $ (3,750) $ (3,750) $ (11,239) $ (13,528) $ (15,000)

Cash flow from financing activities: Increase (decrease) in debt 821 (257) (557) (2,143) 7 - Proceeds from stock option exercises and ESPP 290 15 492 555 797 - Repurchases of common stock (2,530) (3,049) (4,521) (4,000) (4,000) (4,000) (4,000) (4,000) (10,730) (14,100) (16,000) Payment of dividends (1,414) (1,414) (1,386) (1,366) (1,348) (1,331) (1,313) (1,296) (5,541) (5,580) (5,288) Other 731 119 239 (748) 1,089 - Cash provided by (used in) financing activities $ (2,102) $ (4,586) $ (5,733) $ (5,366) $ (5,348) $ (5,331) $ (5,313) $ (5,296) $ (18,607) $ (17,787) $ (21,288) Effect of exchange rate fluctuations on cash and cash equivalents . Net change in cash and cash equivalents $ 135 $ (282) $ 1,068 $ (27) $ (1,315) $ (1,052) $ (2,699) $ (2,783) $ (396) $ 894 $ (7,850) Source: Jefferies, company data

January 21, 2020 25 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Company Description Intel Intel Corporation is a semiconductor chip maker company. The company develops advanced integrated digital technology products, primarily integrated circuits, for industries, such as computing and communications. The Company designs and manufactures computing and communications components, such as microprocessors, chipsets, motherboards, and wireless and wired connectivity products, as well as platforms that incorporate these components.

Company Valuation/Risks Intel Our $64 PT assumes a c.17x multiple on our 2020 non-GAAP EPS forecast of $3.80. We believe a higher multiple is justified with 1) high probability of INTC streamlining SG&A costs, 2) divesting Memory business and 3) recovery in data center spending. Risks: decline in PCs; mis-execution on 10nm; and greater competition in servers and PCs.

Advanced Micro Devices, Inc. Our $56 PT assumes P/E ratio of 28x on our 2021 EPS of $2.00. A P/E of 18x is in the 14x-50x range during its last major server product cycle. Risks include weaker sales of PCs, mis-execution and more aggressive pricing from Intel and Nvidia.

Analyst Certification: I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Vedvati Shrotre, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Natalia Winkler, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Investment Recommendation Record (Article 3(1)e and Article 7 of MAR) Recommendation Published January 20, 2020 , 11:16 ET. Recommendation Distributed January 21, 2020 , 00:00 ET. Company Specific Disclosures Jefferies Group LLC makes a market in the securities or ADRs of Intel Corporation. Within the past twelve months, Jefferies LLC and/or its affiliates received compensation for products and services other than investment banking services from non-investment banking, securities related compensation for client services it provided to Intel Corporation. Within the past twelve months, Jefferies LLC and/or its affiliates received compensation for products and services other than investment banking services from non-investment banking, securities related compensation for client services it provided to Advanced Micro Devices, Inc.. Explanation of Jefferies Ratings Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.

January 21, 2020 26 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period.

NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.

Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value. Risks which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report • Advanced Micro Devices, Inc. (AMD: $50.93, BUY)

January 21, 2020 27 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Rating and Price Target History for: Intel Corporation (INTC) as of 01-17-2020

01/27/2017 BUY:$45.00 03/13/2017 HOLD:$36.00 04/27/2017 HOLD:$38.00 07/10/2017 UNPF:$29.00 07/27/2017 UNPF:$30.00 10/27/2017 UNPF:$32.00 65 60 55 50 45 40 35 30 2017 Q1 Q2 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020

01/26/2018 UNPF:$38.00 04/27/2018 UNPF:$42.00 07/27/2018 UNPF:$44.00 10/26/2018 UNPF:$40.00

Rating and Price Target History for: Advanced Micro Devices, Inc. (AMD) as of 01-17-2020

03/20/2017 BUY:$16.00 07/26/2017 BUY:$19.00 07/26/2018 BUY:$22.00 09/03/2018 BUY:$30.00 09/21/2018 BUY:$36.00 10/25/2018 BUY:$30.00 04/23/2019 BUY:$34.00 60

0 2017 Q1 Q2 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020

07/31/2019 BUY:$40.00 11/07/2019 BUY:$42.00 01/07/2020 BUY:$56.00

Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on a company, made a change to a rating or price target of a company or discontinued coverage of a company. Legend:

I: Initiating Coverage

D: Dropped Coverage

B: Buy

H: Hold

UP: Underperform Distribution of Ratings Distribution of Ratings

IB Serv./Past12 Mos. JIL Mkt Serv./Past12 Mos.

Count Percent Count Percent Count Percent

BUY 1215 52.57% 109 8.97% 15 1.23%

HOLD 937 40.55% 30 3.20% 4 0.43%

UNDERPERFORM 159 6.88% 1 0.63% 0 0.00%

January 21, 2020 28 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

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January 21, 2020 29 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

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January 21, 2020 30 Please see important disclosure information on pages 26 - 31 of this report. EQUITY RESEARCH Intel Corporation (INTC)

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January 21, 2020 31 Please see important disclosure information on pages 26 - 31 of this report.