Intel’s 4Q collapse draws worries, hopes for ‘23 and beyond

Intel’s disastrous fourth quarter report was made worse by its surprise first quarter forecast of revenues $3 billion below analyst estimates, sending the chipmaker’s shares down 7% on Friday.

“No words can portray or explain the historic collapse of Intel,” wrote Hans Mosesmann, an analyst at Rosenblatt Securities.   “The fourth quarter was terrible, that’s for sure,” added Jack Gold, an analyst at J. Gold Associates.

Intel’s first quarter revenue forecast is $10.5 billion to $11.5 billion. Fourth quarter revenue was $14 billion, down 32% from a year earlier, while full-year revenue was $63 billion, down 20% compared to 2021.

 CEO Pat Gelsinger did offer analysts on Thursday's call words of explanation for what happened in 4Q—primarily a troubling macroeconomic climate-- and some optimism about what he hopes will happen in 2023 and beyond. He remained characteristically upbeat on the strength of Intel’s upcoming chip rollouts, with continued execution on five chip nodes in five years.

And, he touted the launch of Sapphire Rapids on Jan. 10, after multiple delays, earning support from major server and cloud customers such as Dell, HPE, Lenovo, Azure, Nvidia and Google Cloud.

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Other positives: Intel is moving ahead on growth of its foundry business and construction of multi-billion dollar chip fabs.  There was no mention of layoffs during the call with analysts on Thursday after an earlier confirmation of 544 layoffs in California. However, Intel is setting a cost reduction target of $3 billion in 2023 and up to $10 billion by the end of 2025. 

“Cost reductions almost always include layoffs,” Gold said. “I’m sure we’ll see more layoffs.”

Another cost-cutting move includes the shuttering of future development of the networking Tofino chip tech it acquired from Barefoot Networks in 2019.  Gold predicted more nonstrategic businesses at Intel could be closed as well.

Focus on servers

The second largest industry segment at Intel, behind client computing, is data center and AI, which saw $19.2 billion in sales in 2022, a drop of 15% over the prior year.

Asked by an analyst to describe what Intel foresees in the server share space against AMD and others, Gelsinger conceded Intel grew less than the overall market and saw some loss of share. “We see that stabilizing this year," he said. "The key factor is better products, right?”  Sapphire Rapids “is getting great response.”

“This year, we’ll be very much about ramping that and we’ll see the improvements in both market share position as well as ASPs as we ramp that product through the year. Customers are building it on an installed base,” Gelsinger continued.

“But do we have confidence in your long term? So I’d say we’ve reestablished a very credible road map. You’ll see lots of news coming from us this year as we start delivering on samples, etc., of the next-generation products, as well as the continued ramp of Sapphire Rapids with highly differentiated features and capabilities.

“So we feel like we’ve put the worst behind us, right? And now we’re coming back to the front foot in this business area.”

In response to another question, Gelsinger said the broader market sees data center overall demand softening throughout 2023. “We see all of them [data centers and cloud] weaker in the first half of the year,” Gelsinger added. “We are, a touch optimistic that China will come back and enterprise will come back more rapidly than cloud. And with our stronger exposure in those segments, we believe that is potential good news for us as we go through the year relative to competition."

Gelsinger’s leadership

After a long career in tech that started at Intel, Gelsinger was appointed CEO nearly two years ago, on Feb. 15, 2021.

While most observers have withheld judgment on his performance as CEO, much of his reputation will depend on how he handles chip rollouts and financials through 2023 and beyond.   

His performance thus far “is a mixed bag,” Gold said. “I think he is doing a good job on trying to get Intel back to the lean and aggressive company it used to be, but that entails making some hard decisions that many won’t like. His style may rub some people the wrong way, but I think he is doing what needs to done to right the ship.”

“It’s unfair to expect Intel to turn around in a quarter or two,” Gold added. Investments in new fabs and work on advanced nodes are all positives but proof of their value won’t be known for years.

“If I could take anything positive away from the Intel earnings, it’s that they are doubling down on regaining chip process leadership and it seems to be on schedule for them to excel in the next two to three years. That’s good both for their own product as well as the foundry strategy. And, they are investing in producing new products that, hopefully, once the market turns again, should make them very competitive.

“But, in the meantime, I’d expect to see less than stellar earnings for the next two to three quarters.”