Intel’s quarterly earnings were a major test for management, as the company was forced to cut costs and headcount, and revenue growth was disappointing for investors. By declaring the need to save money amid falling revenue, the company unwittingly sent its stock price down nearly 19% after the close to below $24 a share.
Image source: Intel
In fact, the “lesser of two evils” in this situation was the company’s revenue decline by 1% year-on-year to $12.8 billion. This is lower than the $12.94 billion forecast by analysts, which was an additional disappointment for investors. If a year ago the company ended the quarter with a net profit of $1.48 billion, then the second quarter of this year brought it a net loss of $1.61 billion. CEO Patrick Gelsinger tried to explain the losses by the company’s desire to quickly bring to market Core Ultra processors of the Lunar Lake family, which meet the current requirements of Copilot+ PC and provide a 60% increase in laptop battery life compared to their predecessors. Gelsinger is convinced that it was worth it, since the AI PC segment should grow from the current 10% of the PC market to more than 50% by 2026. Intel’s profit margin fell to 38.7% in the quarter from 45.8% last year. The company’s management said it had launched a program to significantly reduce production costs in response to unfavorable market conditions.
Second, Intel decided to move production of Intel 4 and Intel 3 technology chips from its experimental line in Oregon to a facility in Ireland more quickly. CFO David Zinsner explained that this would increase the company’s costs in the short term, but would improve profit margins in the long term. Another factor that worked against Intel in the second quarter was a “more competitive pricing environment in the market.” This meant that AMD and Qualcomm were making efforts to attract customers from Intel in their respective market segments.
The previous Intel management’s attempts to reduce the company’s dependence on the PC segment after Patrick Gelsinger took office were deemed inappropriate; the segment brought the company 58% of its total revenue last quarter. In dynamics, this meant that Intel’s revenue from PC component sales grew by 9% year-on-year to $7.42 billion and almost matched experts’ expectations. Specifically, in the AI PC direction, the quarter’s results were higher than Intel’s own forecasts; the company is still confident in its ability to supply more than 40 million PCs with the necessary processors by the end of the current year, although it has only managed 15 million so far. By the end of 2025, this number should exceed 100 million units in cumulative total. The volume of Core Ultra processor shipments more than doubled in the past quarter in a sequential comparison. Intel’s profit margin in the client segment fell from 35.3 to 33.7% over the year.
Next quarter, Intel promises to bring Arrow Lake desktop processors to market, which will offer AI acceleration features in this segment.
In the server segment, the company’s revenue fell by 3% year-on-year to $3.05 billion, below the $3.14 billion forecast by analysts. Intel’s presentation notes that the Sierra Forest family of processors are mass-produced and are the leading type of product manufactured using Intel 3 technology. In the second half of the year, the company expects to begin scaling up production of Granite Rapids processors and Gaudi 3 family of computing accelerators.
Intel’s plan to reduce expenses over the next year and a half, in addition to reducing the number of employees, implies a reduction in research and acquisition costs from the current $20 to $17.5 billion. This year, the company’s capital expenditures will fit into the range of $25 to $27 billion, which is 20% less than the previous level, next year the boundaries will drop to $20-23 billion. However, Intel expects to finance up to half of these amounts through partners and subsidies, so its own capital expenditures will not exceed $13 billion this year and $14 billion next year. In total, Intel plans to save up to $20 billion on operating expenses this year, next year the amount of savings will be limited to $17.5 billion, but in 2026 it will exceed this value. Previously, Intel expected to spend 20% more in 2025.
Intel Foundry, a division tasked with manufacturing products for both the parent corporation and third-party customers, increased its revenue year-on-year by 4% to $4.3 billion, while operating losses increased from $1.4 billion to $2.8 billion. More than 85% of the silicon wafers processed by Intel are manufactured using technologies that do not involve the use of so-called EUV lithography, and this negatively affects the cost of production.
The company expects to begin manufacturing products using Intel’s latest 18A technology in the next half of the year, thereby fulfilling its goal of mastering five new process technologies in four years. Gelsinger hopes that Intel Foundry’s financial performance will bottom out this year and then turn a profit. Kevin O’Buckley will lead the services division at Intel Foundry, while the newly appointed Naga Chandrasekaran, formerly of Micron Technology, will be responsible for manufacturing processes in the division. The company will begin shipping processors based on Intel’s 18A technology only next year.
The company plans to introduce Panther Lake client processors, which will be manufactured using these lithographic standards, in the second half of 2025. Panther Lake samples already allow test systems based on them to boot Windows. This family of processors will use the RibbonFET transistor structure, the PowerVIA back-side power supply, and an advanced spatial layout for the first time. The appearance of these processors will symbolize the return of more crystals to Intel’s conveyor belt, which are part of its own processors. Intel’s current chips are more dependent on TSMC’s services in terms of crystal production. Intel 14A and Intel 10A technologies will use High-NA EUV lithographic scanners. The company will begin mass production of chips using Intel 20A technology next quarter.
Intel expects to earn between $12.5 billion and $13.5 billion in revenue in the third quarter of this year, which is $850 million below the market’s expectations at the high end of the range. At the very least, the company expects revenue growth in the server segment in the second half of the year due to seasonal factors. However, demand in the client and server segments is not meeting Intel’s own expectations, especially in China, and the concentration of expenses in the server segment on AI solutions, which the company does not have a lot of, is forcing it to lower its forecasts for these areas of activity this year. Intel management expects that the company’s market position will not weaken significantly this year. The profit margin will be 38% for the third quarter.
Intel’s management has broken tradition by providing a forecast for the fourth quarter. Expecting a recovery from the glut, it expects the company’s revenue growth in the fourth quarter of this year to reach 5% on a sequential basis.
Intel is planning to suspend its dividend at the beginning of the next quarter, which makes sense in the current situation. In total, Intel intends to save up to $10 billion by 2025, but at the same time retain the ability to make investments that affect the company’s long-term performance.
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