While Intel eyes future prize, the present pain is getting worse

Last March, President Joe Biden appeared at an Intel construction site in Arizona along with Intel CEO Pat Gelsigner to tout up to $8.5 billion in CHIPS Act money being awarded to the company to help fuel its massive, long-anticipated expansion in U.S.-based manufacturing capacity.

Less than five months later, Intel, coming off a second quarter financial performance that badly missed estimates, announced a $10 billion cost-cutting plan that will slash its workforce by 15,000 jobs, or 15%, among other moves.

Could the optics be any worse?

After Intel’s second quarter 2024 earnings report this week, it does not get any better anytime soon, and likely only will get worse, at least in the next several months.

In a note to employees as the Q2 earnings report posted, Gelsinger explained the need to pursue cost reductions and job cuts, which initially will occur through a retirement offering and “voluntary” departure program, as well as a 20% capex reduction this year, with another reduction from previous projections in capital spending next year.

“Simply put,” he wrote, “we must align our cost structure with our new operating model and fundamentally change the way we operate. Our revenues have not grown as expected – and we’ve yet to fully benefit from powerful trends, like AI. Our costs are too high, our margins are too low. 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.”

Overall Q2 revenue was down about 1% year-over-year to $12.8 billion, below most analyst estimates. Intel Data Center and AI revenue was down about 3% to $3 billion at a time when segment competitors Nvidia and AMD are seeing the quarterly revenue and future guidance skyrocket on AI demand. So, if, as Gelsinger noted, Intel has yet to benefit from the AI explosion, when will it?

“What we’re seeing is a major move in investment at especially hyperscalers, but also in enterprise, and away from the Intel sweet spots,” Jack Gold, president and principal analyst at J. Gold Associates, told Fierce Electronics by email. “AI investment is sucking up a lot of buying decisions as the market re-adjusts to the new world of AI models and training. Intel does not have a significant capability in that space, other than in CPUs that are powering the GPU processors. But Xeons [CPUs] don’t cost $30K-$40K each like Nvidia and AMD GPUs do, so Intel is not reaping the benefits that the others are in that space and selling hundreds of thousands of them. How long that goes on is an interesting discussion… If you're buying big on AI, you’re going to move towards Nvidia and AMD. Intel will have a trailing share in that part of the market, at least until we move towards a more edge-leading AI processing environment.”

Here’s a closer look at how Intel business and product segments performed in the second quarter, along with their year-over-year increases or decreases.

The bright spot there is the strength of Intel’s performance in a rebounding PC market that also is starting to transition to AI PCs, a product segment which already has been generating sales for Intel and in which the company could further benefit from the planned September launch of its Lunar Lake chip. However, Intel also recently has been slammed by reports of problems with its 13th and 14th-generation CPUs for PCs, and the full impact of those issues may not yet be known.

While Intel Foundry revenue was up slightly (about $100 million) year-over-year, it was down sequentially for the second consecutive quarter (from $4.4 billion in Q1 2024 to $4.3 billion in Q2. The operating income loss in that segment amounted to about $2.8 billion in Q2. Though losses have been expected as Intel spends to ramp up its manufacturing capacity (Foundry business losses reportedly hit $7 billion in 2023), the second quarter loss was much steeper than the $1.9 billion Foundry op income loss for the same period last year. These losses also came a few months after Gelsinger essentially admitted that Intel should have invested more aggressively in extreme ultraviolet lithography technology for its Foundry business.

On Intel’s earnings call, CFO David Zisner said, “We expect operating losses to continue at approximately the same rate in Q3, with more than 85% of wafer volume still coming from pre-EUV nodes with an uncompetitive cost structure and power performance and area deficits reflected in market-based pricing.”

On top of the Q2 revenue woes, reported CPU problem, job cuts, and Foundry losses, there’s more: Intel issued a third quarter forecast for $12.5 billion to $13.5 billion in total revenue, which would be more than $1 billion less than Intel achieved in the third quarter of 2023. Intel also announced it will suspend its dividend in the fourth quarter this year, giving investors even more reason to bail on its stock–and they did that almost immediately and continued to do so well into Friday, the day after the earnings report, as Intel’s stock price was down about 28% to $20.92 per share early Friday morning.

All of this has generated calls across social media for Gelsinger to be among those to be out of a job in the coming months. More than three years after Gelsinger’s hiring was hailed as the start of a comeback for Intel, the company is still falling back. Gelsinger’s latest effort to stop the bleeding involves further bleeding, not just the workforce reductions, but other operational changes, including removing layers of overlapping responsibility and trimming operational fat in other ways, including eliminating some products. 

His note to employees stated, “We will complete actions this month to simplify our businesses. Each business unit is conducting a portfolio review and identifying underperforming products. We are also integrating key software assets into our business units so we accelerate our shift to systems-based solutions. And we will narrow our incubation focus on fewer, more impactful projects… We will reduce layers, eliminate overlapping areas of responsibility, stop non-essential work, and foster a culture of greater ownership and accountability. For example, we will consolidate Customer Success into the Sales, Marketing and Communications Group to streamline our go-to-market motions.”

It is all being done in part to help support an expensive plan to build out a Foundry business that the company eventually plans to separate from its product business, something which Gelsinger and many company observers believe must happen for Intel Foundry to start reaping deals from companies it might compete with on the product side. The Intel chief has admitted–and reiterated during the earnings call–that the returns on this massive investment may not become apparent until around 2027, though analysts on the call questioned whether or not, amid the cost-cutting and capex cutting, the company will be able to keep its Foundry plans on track. Gelsinger’s answer to those question s carried a hint of caution.

“At the highest level, the Foundry strategy is unchanged,” he said. “We've built capacity for foundry customers. However, until we have committed orders, we're going to be modest on how much equipment we put against the shells and the sites that we have in place.”

The problem, again, may not be the long-term vision, but in the execution of Intel’s long-range strategy at the same time present-day competitive efforts in product segments like Data Center and AI are falling short. This is something several industry analysts have been saying for the last few months, and which Moor Insights & Strategy CEO Patrick Moorhead reiterated in an interview with CNBC this week.

“This was an execution issue,” Moorhead said. “I do believe this strategy is the only one. If you’re a company like Intel, you need strong design and a strong way to build it… Maybe in the future you could split the foundry from the design company, but not now.”

Gold said he expects Intel Foundry to eventually “do well, but it will take a couple of years to make it really profitable.”

While Intel trims away at its workforce, operations, and spending, it may have to lean on its strength in the PC market, and its somewhat weakened leadership position in CPUs, while Nvidia and AMD grab the GPU laurels.

Gold noted, “They are well behind in the AI high end processor market. Intel’s GPUs are just not in the same class. But they remain the leader in CPUs (with some share taken by AMD). And the same is true in PCs, even as Qualcomm tries to take share (I don’t expect them to grab that much share, especially once the new Intel Core Ultra chips come out). I think they have a few more tough quarters as they reduce costs and bring out new products. But I think they will do well long term.”