For its big comeback, Intel needs to spend money – and it's making less and less of it
The party's over and the pain begins
Analysis For a company hoping to make a grand comeback in a few years, things are not looking great for Intel.
On Thursday, it announced plans to lay off staff and cut billions of dollars in spending after its third-quarter revenues fell 20 percent, year on year, and profit plunged 85 percent.
This comes after the American semiconductor giant reported similarly bleak results for the previous quarter, and the main problem areas were the same as they are now: Intel is suffering major losses with its two biggest moneymakers, server and PC chips.
In Intel's PC chip business, the Client Computing Group, revenue dropped 17 percent year-over-year to $8.1 billion in the third quarter while operating income declined 54 percent to $1.6 billion over the same period. As for the Datacenter and AI Group, things were even worse, with revenue declining 27 percent to $4.2 billion while operating income fell by 99 percent to an abysmal $17 million.
The main culprits for the dismal figures: individuals and educational institutions were buying fewer laptops while businesses significantly slowed down server purchases.
Intel made sure to put most of the blame for this behavior on a "deteriorating" economy, beset by "slowing consumer demand, persistent inflation, and higher interest rates," as it explained in its latest 10-K filing with the US Securities and Exchange Commission on Friday.
But it's also clear the chipmaker continues to face competitive pressure from x86 rival AMD as well as organizations that are making Arm-based processors, such as Apple, Amazon, and Ampere Computing.
On Intel's earnings call with Wall St analysts this week, CEO Pat Gelsinger admitted his company's server CPU market share was "not where we want it to be," though it was in line with expectations.
The precipitous drop in server and PC chip revenues prompted Intel to lower its forecast for 2022 revenue for the second time this year, from $76 billion in April, to a range of $65 billion to $68 billion in July, to range of $63 to $64 billion in the company's latest earnings.
That means in its worst-case scenario, Intel now expects to record $13 billion less revenue in 2022 than what it projected several months ago, and that's assuming the biz can successfully execute its current plan in the fourth quarter. At $63 billion in revenue for 2022, that would mark a 20 percent decline from the $79 billion Intel took in total sales last year.
These are sobering figures for a corporation that grew steadily and achieved record revenues for the past five years in a row, but they are at least partially the result of Intel's manufacturing missteps that allowed it to fall behind Asian foundry rivals TSMC and Samsung in next-generation process nodes.
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This is what makes Gelsinger's comeback plan all the more urgent and challenging at the same time: the company said it needs to spend several billion dollars over the next few years, as it outlined in February, to surpass its foundry rivals and return to "process performance leadership" by 2025 while facing increasingly immense economic and competitive pressures.
Investors are't keen on how Gelsinger's comeback plan will drag down gross margins and cause Intel to become cash-flow negative this year, then neutral the next two years, before the company expects to truly enjoy the results of its investments. They were, however, happy to hear that Intel now plans to ditch a "meaningful number" of employees and cut loose some products as part of a massive reduction in spending that may reach up to $10 billion annually by 2025.
But this all supposes that Gelsinger's comeback plan will work and that the x86 titan's chips will be much more competitive a few years from now.
For what it's worth, Gelsinger said on Thursday that Intel remains on track to achieve "transistor performance and power performance leadership by 2025." And sentiment already seems to be changing with Intel's latest CPUs for PCs, thanks to meaningful gains found in its just-released 13th-generation Core processors, also known under the code name Raptor Lake.
This is to say, Intel better hope it can fully execute on Gelsinger's comeback plan in the face of increasing misfortunes. Because if it can't, greater challenges may await. ®