Intel investor sues over Foundry flop, seeks to reforge corporate governance

Lawsuit demands big changes and a little transparency in reporting

Intel executives have been hit by a shareholder derivative lawsuit from an investor alleging that they and others were misled regarding the financial performance of the company's foundry business.

The complaint, (1:24-cv-00734) brought by Stourbridge Investments, alleges that Intel's management made "materially false and misleading statements" relating to the success of its foundry business in a period starting from January 25 this year.

It claims that Intel's stock price fell once the true picture emerged in April this year, and is seeking compensation for the financial damage it says it sustained as a result, plus a reform of Intel's corporate governance and internal procedures to protect shareholders from a repeat of the incident.

A shareholder derivative lawsuit is brought by a shareholder or group of shareholders on behalf of the corporation against the corporation's management, which is alleged to have breached its duties to the company and the shareholders.

In this case, as well as CEO Pat Gelsinger, the complaint names chief financial officer David Zinsner and nine other members of the company's board as defendants.

The case concerns Intel's reorganization of the company to separate out its semiconductor manufacturing operation so that it would be able to function as a contract manufacturer able to serve both Intel's own chip businesses and external customers.

This plan goes back to 2021, when Intel's Pat Gelsinger was newly appointed as chief exec and laid out a vision for the future of the company he called Integrated Device Manufacturing 2.0 (IDM 2.0), launching Intel Foundry to encompass its packaging and process technologies.

Intel later updated its foundry model so that from Q1 2024, all manufacturing services would come under a separate group, the complaint states. This would include foundry services manufacturing and technology development, plus a new financial reporting structure under which Intel Foundry would be responsible for its own reportable profit and losses.

These changes were expected to bring cost savings and thus improve the overall company's bottom line.

Stourbridge states that on April 2, after markets closed, Intel issued a press release revealing a revised version of the company's 2023 financial results under the new reporting structure. This showed that Intel Foundry experienced an operating loss of $7 billion on revenue of $18.9 billion, and that revenue was down $8.6 billion compared with 2022.

The complaint says that Intel's stock price fell by $3.61, or 8.2 percent, to close at $40.33 per share following this news.

When Intel announced its Q1 2024 results on April 25, it revealed that Intel Foundry had declined 10 percent compared with the same quarter last year to a revenue of $4.4 billion, and that this news caused Intel's stock price to fall by $3.23, or 9.2 percent, to close at $31.88 per share.

When it comes to the alleged misleading statements, Stourbridge claims that on the company's full year 2023 earnings call in January, Gelsinger said: "We expect sequential and year-on-year growth in both revenue and EPS for each quarter of fiscal year '24."

It is also claimed that Gelsinger said on the call that the "lifetime deal value for IFS [Intel Foundry Services] is now over $10 billion, more than doubling from the $4 billion we provided in our last update."

In the company's Annual Report to Security Holders in March, Gelsinger is claimed to have said in the introduction that "while still early in our foundry journey, we are seeing significant traction."

Stourbridge states that the above statements, and others, "were materially false and/or misleading, and failed to disclose material adverse facts about the company's business, operations, and prospects."

In particular, it claims that the defendants failed to disclose to investors that the growth of Intel Foundry Services "was not indicative of revenue growth reportable under the Internal Foundry segment," or that Foundry experienced significant operating losses in 2023.

As a result, the defendants' positive statements about the company's business, operations, and prospects were "materially misleading and/or lacked a reasonable basis."

Stourbridge claims that each of the director defendants were responsible for reviewing and approving the company's public statements made in press releases and financial filings with the Securities and Exchange Commission throughout the relevant period to this case. It has requested a jury trial.

Intel declined to comment. ®

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