Intel Faces Challenges: Revenue Shortfall, Job Cuts, and Strategic Shifts

Intel's sales slump threatens biggest share drop in 24 years

(Bloomberg) -- Intel Corp. is headed toward its biggest share decline in 24 years after giving a grim growth forecast and laying out plans to slash 15,000 jobs, signalling that the chipmaker is ill-equipped to compete in the artificial intelligence era. Sales for the current quarter will be US$12.5 billion to $13.5 billion, the company said Thursday. Analysts had projected $14.38 billion on average, according to data compiled by Bloomberg. Intel will have a loss of 3 cents a share, excluding certain items, versus expectations for a profit of 30 cents. Intel said it plans to cut more than 15 per cent of its workforce of around 110,000 people. It's also suspending dividend payments to shareholders starting in the fourth quarter, and will continue that until "cash flows improve to sustainably higher levels," according to the statement. The company has paid a dividend since 1992. "I have no illusions that the path in front of us will be easy," Chief Executive Officer Pat Gelsinger said in a memo to employees. "You shouldn't either." He called the moves "some of the most consequential changes in our company's history." Gelsinger, despite a massive spending plan to restore Intel to industry prominence, is struggling to improve the company's products and technology fast enough to retain customers. The results underscore a dramatic decline for Intel, which dominated the semiconductor industry for decades and is now forced to tout cost cutting measures and give reassurances that it can fund growth plans. Intel shares fell more than 22 per cent in premarket trading on Friday, after closing at $29.05 in New York. If the premarket decline holds, the company will be set for its biggest intraday drop since September 2000. The company has slipped more than 42 per cent so far this year through Thursday's close and is the second-worst performer on the Philadelphia Stock Exchange Semiconductor Index. "Revenue is not where we want it to be," said Chief Financial Officer Dave Zinsner in an interview. "Financials weren't where we want them to be." The job cuts were needed "to get us to a place where we have a more sustainable model for the business going forward." In the second quarter, the company had a profit of 2 cents a share, excluding certain items, and revenue of $12.8 billion, down one per cent. Analysts had estimated a profit of 10 cents a share and sales of $12.95 billion. Wall Street is projecting a modest increase in overall sales this year from 2024, still leaving the company more than $20 billion below its peak in 2021. Competitors who specialize in artificial intelligence are winning over some of Intel's customers. Nvidia Corp. now has more than twice its former nemesis' quarterly sales. Once a struggling rival, Advanced Micro Devices Inc. is valued more than $100 billion higher by investors and Taiwan Semiconductor Manufacturing Co. is widely recognized as having the industry's best production. Gelsinger remains confident that Intel is on the right track in the long run. He's argued that Intel's vital manufacturing is on course to catch and pass those of rivals and that'll attract outside customers, and justify the string of new plants Intel is building. He thinks Intel has paid what it needs to catch up to the industry, and now can focus on its finances. Some of Intel's best chips are manufactured by others. Over time, the company hopes to shift more of its chip manufacturing to its own plants, which are being upgraded. The company is also working to accelerate improvements in chips for AI PCs. But for now, the expenses are squeezing gross margins, Zinsner said. Gross margin, or the percentage of sales remaining after deducting the cost of production, was 35.4 per cent in the quarter. That measure will stay flat in the current quarter. At its peak, Intel regularly reported gross margin of well above 60 per cent. The company is reducing its spending on new plants and equipment in 2024 by more than 20 per cent, and is now budgeting between $25 billion and $27 billion. Next year, expenses will range between $20 billion and $23 billion. Most of the job reductions, needed also to remove bureaucracy and speed up decision making, will be completed by the end of the year, Gelsinger told staff. "Our costs are too high, our margins are too low," he wrote in the memo, saying he would take employee questions at an internal meeting. "We need bolder actions to address both -- particularly given our financial results and outlook for the second half of 2024, which is tougher than previously expected." Intel was forced to reduce its sales expectations in May after the U.S. government revoked its license to supply chips to China's Huawei Technologies Co., part of Washington's push to cut off that company for what it alleges are national security risks. The chipmaker is reporting earnings for the second time under a new business structure that shows the financial performance of its manufacturing operations. Gelsinger has said the restructuring was a necessary step to make operations more efficient and competitive. The company reports revenues divided between product groups and its manufacturing operations, with factories undergoing a massive upgrade and a build-out program that's weighing heavily on profits. Revenue is improving at what it calls its Foundry unit, gaining four per cent from a year earlier to $4.32 billion. PC chips also posted growth, up nine per cent from the same period a year earlier. Sales at the crucial data center unit, once the most profitable, again lost ground, declining three per cent to $3 billion. That unit hasn't yet achieved anything like the market presence of Nvidia in accelerator chips used in artificial intelligence systems. AI is proving a gold mine, and cutting into spending on the type of processor Intel makes.

Intel loses $1.6 billion as data center CPU and foundry divisions struggle

Gives uninspiring revenue outlook for the third quarter too. On Thursday, Intel announced its financial results for the second quarter of 2024, and they weren't favorable to the chip giant as the company's revenue dropped by 1% year-over-year while its losses totaled $1.6 billion. Perhaps worse is that Intel expects the second half of the year to be challenging for its business. As a result, Intel announced plans to cut its workforce by a rather whopping 15% this year. Intel's revenue for Q2 2024 reached $12.8 billion, a decrease of 1% year-over-year, a startling contrast to AMD's 9% year-over-year revenue growth in Q2. However, the company lost $1.6 billion, a stark contrast compared to its $1.5 billion profit in the second quarter of 2023. The company's gross margin for Q2 2024 was 35.4% (GAAP), which is down just 0.4% compared to the same quarter a year ago. When it comes to losses and profitability, Intel's product business units earned $8.5 billion (up 4% year-over-year), and all of them except Altera were profitable, so they generated $2.9 billion in operating income led by the company's Client Computing Group (CCG). By contrast, the company's Intel Foundry manufacturing operations earned $4.3 billion in revenue and generated a massive $2.8 billion loss as the company ramped up production of chips on its next-generation production technologies that use expensive EUV equipment. "Our Q2 financial performance was disappointing, even as we hit key product and process technology milestones," said Pat Gelsinger, Intel CEO. "Second-half trends are more challenging than we previously expected, and we are leveraging our new operating model to take decisive actions that will improve operating and capital efficiencies while accelerating our IDM 2.0 transformation. These actions, combined with the launch of Intel 18A next year to regain process technology leadership, will strengthen our position in the market, improve our profitability and create shareholder value." Intel's Foundry division, which makes over two-thirds of Intel's products and produces chips for third parties, earned $4.3 billion in the second quarter, which is slightly higher than $4.2 billion in the same quarter a year ago. However, the Intel Foundry unit deepened its loss to $2.8 billion, higher than $1.9 billion in Q2 2023 and $2.5 billion in Q1 2024. Considering the fact that Intel's manufacturing unit always has to invest more than other units, it is not surprising that it generated massive losses, especially when it ramps expensive server products and gets no revenue while they are formally sitting on its balance. Intel's Client Computing Group continues to be the company's leading business unit, with revenue totaling $7.4 billion in the second quarter, up from $6.8 billion in the same quarter a year ago but slightly lower than in Q1 2024, which is in line with expectations. CCG's operating margin was 33.7%, while its operating profit was $2.5 billion. Unfortunately, the company says that the market has not yet recovered as significantly as it once expected, which is why it expects the second half of the year to be more challenging for CCG and other units. Intel's data center and AI Group (DCAI) revenue in Q2 2024 ended up at $3.0 billion, flat compared to the first quarter but down from $3.2 billion in Q2 2023. The unit's operating margin dropped to 9.1%, and the operating profit declined to $0.3 billion, which is negligible for a unit that sells expensive processors for data centers. The good news for Intel is that its Xeon 6 'Sierra Forest' processor is in volume production and is about to start shipments for Xeon 6 'Granite Rapids' CPU, and Gaudi 3 AI accelerators are projected to ramp up in the second half. Intel's NEX products unit, which focuses on 5G, edge, network, and telecommunications products, generated $1.3 billion in revenue in Q2 2024, representing a decrease from $1.4 billion in Q2 2023. Despite the decline in revenue, this segment did not incur losses, instead achieving a profit of $100 million. Mobileye's revenue for the second quarter skyrocketed to $440 million, up from $239 million in the first quarter. Still, this is a bit lower compared to $454 million in Q2 2023. The division posted an operating income of $72 million, down from $129 million in the same quarter a year ago but a significant improvement from a $68 million loss in Q1 2024. However, Altera's performance was less favorable. Altera's revenue dropped significantly year-over-year, dropping $361 million compared to $848 million in the same quarter the previous year. The division also experienced a loss of $25 million, a sharp decline from a $346 million profit in Q2 2023. For the third quarter of 2024, Intel expects its revenue to be between $12.5 billion and $13.5 billion, which means it is going to be around $1.2 billion lower compared to the third quarter of 2023 and that despite the fact the company believes that it has better products this year. Furthermore, its GAAP gross margin is expected to drop to $34.5%, a troubling sign as its profitability plummets.

Intel announces cost reduction plan, expects to reduce tile production outsourcing to TSMC in 2026

Intel has unveiled a cost reduction plan involving significant layoffs, substantial cuts in operating expenses, and a sharp reduction in capital expenditures (capex). The announcement comes as the company projects a weak financial outlook. Intel plans to ramp up in-house chip manufacturing and decrease its reliance on outsourcing to TSMC in 2026. Intel has announced its second-quarter financial results, with revenue totaling US$12.83 billion, down 0.9% YoY. The gross margin decreased to 38.7%, compared to 39.8% in the same period last year. Total revenue for Intel Products at US$11.80 billion, falling short of the US$12 billion estimate. Client Computing revenue reached US$7.41 billion, below the anticipated US$7.53 billion. Datacenter & AI revenue was US$3.05 billion, while Network & Edge revenue came in at US$1.34 billion. Intel Foundry reported revenue of US$4.32 billion. Additionally, Altera contributed US$361 million, and Mobileye generated US$440 million in revenue. According to Intel CFO Dave Zinsner, Intel's gross margin fell short due to three main factors: the rapid ramp-up of AI PC products, a costly transition of Intel 4 and Intel 3 wafers to a high-volume facility in Ireland, and increased period charges for non-core businesses and unused capacity. Additionally, competitive pricing and an unfavorable product mix also impacted margins. The company has projected third-quarter revenue between US$12.5 billion and US$13.5 billion, missing analysts' average estimate of US$14.38 billion, according to Bloomberg data. The gross margin is expected to be 38%, down 7.8 percentage points from the previous year. According to Bloomberg Intelligence, Intel's significant sales, margins, and EPS shortfall for both second-quarter results and the third-quarter outlook indicates that turnaround challenges may last longer than expected. The suspension of dividends and planned headcount reduction further reflect a lack of confidence in a swift recovery in sales or improvement in cash flow pressures. Cost reduction plan Intel CEO Pat Gelsinger outlined plans to boost profitability and capital efficiency by over US$10 billion by 2025. The company is targeting a reduction in headcount of more than 15% by the end of 2025. Operating expenses (opex) are expected to drop to approximately US$20 billion in 2024, with a further reduction to US$17.5 billion in 2025 -- over 20% below previous estimates. Additional opex declines are anticipated for 2026. Intel will suspend dividend payments beginning in the fourth quarter to bolster cash flows. The company has consistently paid dividends since 1992. Gross capex for 2024 is now forecasted to range between US$25 billion and US$27 billion, reflecting a reduction of over 20% from earlier plans due to anticipated softer demand in the second half of the year. Gross capex for 2025 will be lower at US$20-23 billion. Segmental outlook Gelsinger indicated that the third quarter will be impacted by inventory adjustments in the Client Computing Group (CCG) and weaker performance in the Data Center and AI Group (DCAI), Network and Edge Group (NEX), Altera, and Mobileye, with results falling below initial forecasts. Despite these challenges, the outlook for the fourth quarter remains positive, with revenue expected to grow at the higher end of the typical seasonal range, aided by improved client inventory levels. In the Intel Foundry division, the company is progressing with the ramp-up of Intel 4 and Intel 3 technologies and preparing Intel 20A for production next quarter. The Intel 18A Process Design Kit (PDK) was released last month, with manufacturing-ready status expected by year-end and production volumes anticipated in the first half of 2025. However, Intel Foundry reported a sequential increase in operating losses, totaling US$2.8 billion. The company anticipates these losses to continue at a similar rate in the third quarter, primarily due to high costs associated with pre-EUV nodes and significant investments in advanced technology development, including the Intel 4 and Intel 3 facilities in Ireland. Increasing in-house production starting from 2026 UBS analyst Timothy Arcuri inquired about Intel's foundry strategy following a recent reduction in capex. He questioned how Intel plans to execute its strategy with lower spending, especially with conflicting reports about increasing in-house wafer production versus outsourcing to TSMC. In response to the Intel Foundry strategy following a reduction in capex, Gelsinger said Intel's overall foundry strategy remains unchanged despite the capex reduction. He said capital investment plans have been adjusted to reflect current market forecasts, shifting from aggressive expansion to optimizing existing investments. This involves refining capital utilization and enhancing efficiency with equipment suppliers. The company is concluding its aggressive build-out phase, including investments in EUV lithography, and is now focusing on effectively leveraging these investments through 2024, 2025, and 2026. Intel is seeing early success in advanced packaging with foundry customers, a sector requiring less capital compared to wafer production. This aligns with Intel's strategy to lead in advanced packaging technology. The foundry capacity will primarily support Intel Product needs. Significant benefits from bringing external wafer production in-house are anticipated to emerge in 2026, with improvements in process technology and product leadership expected from 2025. AI PC Gelsinger said that Intel's next-generation AI PC, Lunar Lake, achieved production release ahead of schedule and is set to drive a major device refresh. Lunar Lake offers superior performance with 50% better graphics, 40% more power efficiency, and 3x more TOPs compared to its predecessor. Microsoft has certified Lunar Lake for over 80 new Copilot+ PCs from over 20 OEMs, with shipments starting this quarter. Following Lunar Lake, Intel will launch Arrow Lake next quarter to bring AI advancements to desktops, and Panther Lake is set for release next year to further extend Intel's leadership. Gelsinger added that Intel's Gaudi 3, launching in the third quarter, promises to significantly enhance performance while being two-thirds the cost of competitors. Gaudi 3 is expected to deliver twice the performance per dollar compared to H100 and has strong support from major ecosystem partners like Dell, HP, Lenovo, and others.

Intel's drastic cuts will not fix its fundamental flaws

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. Can Intel spend its way back to chipmaking relevance? That was the question on investors' minds when Pat Gelsinger took over as chief executive in 2021. Fast-forward three years and the answer appears to be an emphatic "no". Intel once dominated the $600bn chip industry as a designer and maker of cutting-edge processors. But production issues and strategic mis-steps allowed rivals, including Taiwan Semiconductor Manufacturing Company and Samsung, to take the lead. Under Gelsinger, the company has sought to overhaul its business model with a push to become a major foundry player, committing tens of billions of dollars to build new factories to make chips for other companies. The factories are still years away. But the spending spree has pushed up Intel's costs and hurt profitability. The foundry unit generated sales of $18.9bn last year but reported an operating loss of $7bn. At the same time, Intel's other two main businesses -- providing chips that power personal computers and data centres -- have been respectively hurt by falling PC sales and a shift in spending that prioritises artificial intelligence chips dominated by Nvidia. Adjusted free cash flow was negative $11.9bn last year. The company's finances are now too stretched to keep funding its expensive turnaround plan. Intel on Thursday announced a drastic plan to cut costs by $10bn. It is slashing its workforce by 15 per cent, scrapping its dividend and reining in capital spending. Intel shares, down 40 per cent so far this year, tumbled another 19 per cent in after-hours trading. As recently as January 2020, Intel was worth more than AMD and Nvidia combined. Today, those competitors are collectively worth nearly $2.6tn, while Intel's market value could fall below $100bn at Friday's open in New York. Intel's second-quarter results underscored its predicament. Sales are too weak, costs are too high and margins are too low. Net sales for the June quarter fell 1 per cent to $12.8bn as its data centre business continued to lose ground. The foundry business remains in the red. Things will get tougher still after the US government revoked Intel's license to supply chips to China's Huawei Technologies in May. Third-quarter revenue could fall by as much as 12 per cent, Intel said. Its gross margin is forecast to decline by 8 percentage points to 34.5 per cent. Intel's emergency cost-cutting will help liquidity. But firing 15,000 workers when you could be getting $8.5bn in government funding is never a good look. Nor will it solve Intel's fundamental problems: how to compete against TSMC and Samsung in chip foundry and how to reclaim its lead as a designer of cutting-edge processors from Nvidia.