Intel: The Path to Full Recovery is Product, Product, Product
Talking about Intel after this quarters news feels like it needs to be more a deep conversation than a post, but given this is probably the hottest topc in semis right now, there are a few points to get across.
First, the cost reduction plan is clearly necessary. There has been mounting evidence that Intel was not only not running as leanly as needed, but also had a range of cost efficiency problems. So dealing with that is sound and strategic. From the CFO commentary of Dave Zinser, it sounds like those cost efficeincies–which include all the way down the pre-EUV wafer level, are well understood and will now be dealt with. There should be some confidence there that managment does understand the structural issues.
Another big issue hitting the quarter and outlook is due to weaker recovery in the PC market in the second half than they expected. However, a huge positive, is they feel the need to ramp up Lunar Lake, which was initally being viewed as a more niche product and is now being ramped to volume. While that will have some negative impacts on gross margins, if AI PCs drive a meaninful cycle in 2025 then that is a positive for the client business.
As of now, I’ve simplified how I look at this to one single factor i’m watching. Can Intel regain product competitiveness as it feels like everything hinges on Intel having the best microprocessors again. If this happens then a lot of structural benefits in cost leverage, as well as back to underlying manufacturing will begin to work in Intel’s favor. So all eyes, for now, are on product, product, product.
In the below note, I tried to do a few things. Outline key highlights. Share the core elements on the restricting. Some analysis of the investor QA from the call and how managment answered with salient points. And, a roundup of investor sentment from my conversations with them and about a dozen post earnings broker notes.
Key Takeaways
- Intel reported Q2 2024 revenue of $12.8 billion, down 1% year-over-year but up 1% sequentially.
- Q2 profitability was below expectations, with gross margin at 38.7% and EPS at $0.02.
- The company announced significant cost reduction plans, targeting over $10 billion in savings by 2025.
- Intel is suspending its dividend to prioritize liquidity for strategic investments.
- The company is adjusting its capital expenditure plans, reducing 2024 gross CapEx to $25-27 billion.
- Intel reaffirmed its commitment to its IDM 2.0 strategy and process technology roadmap.
Details of the restructuring model
1. New operating model: Implementing a new structure with separate financial reporting for Intel Products and Intel Foundry to improve efficiency and decision-making.
2. Workforce reduction: Targeting a headcount reduction of over 15% by the end of 2025, with the majority completed by the end of 2024.
3. OpEx reduction: Aiming to reduce operating expenses to approximately $20 billion in 2024 and $17.5 billion in 2025, a 20% reduction from prior estimates.
4. Capital efficiency: Scrutinizing capital investments more rigorously and aligning them with market signals and foundry commitments.
5. Cost reduction in manufacturing: Implementing a $1 billion reduction in non-variable cost of sales in 2025.
6. Accelerated product transitions: Moving production of Intel 4 and 3 wafers from Oregon to Ireland to improve long-term cost structure and efficiency.
7. Focus on AI PC market: Investing in the AI PC category, which is expected to grow from less than 10% of the market to over 50% by 2026.
8. Advancing process technology: Continuing to invest in leading-edge nodes (Intel 18A, 14A, and 10A) to improve competitiveness and reduce reliance on external foundries.
9. Expanding foundry services: Growing the Intel Foundry business, with a focus on advanced packaging technologies.
10. Portfolio optimization: Each business unit (client, networking, data center, and foundry) is reviewing its product portfolio to maximize efficiency and profitability.
Analysis of the Investor QA from the Earnings Call
Below are some of the main themes and concerns asked from investors on the call and how Intel managment answered.
1. Competitive Position and Market Share:
Investors expressed concern about Intel’s competitive standing, particularly in the server market. There were questions about how Intel’s products compare to competitors and whether the company can regain lost market share.
Pat Gelsinger’s response emphasized:
– Stabilization of market share in the server space
– Positive early feedback on new products like Sierra Forest
– Optimism about Granite Rapids and Clearwater Forest
2. Gross Margin Trajectory:
A significant focus was on gross margin performance and future expectations. Investors sought clarity on the factors affecting margins and the timeline for improvement.
Key points from management:
– Near-term pressure due to accelerated ramp of AI PC products and external sourcing
– Expectation of modest margin improvement in 2025
– More significant margin expansion anticipated in 2026 with Panther Lake and internal manufacturing
3. Capital Expenditure and Foundry Strategy:
Questions arose about the reduced CapEx guidance and its impact on the foundry strategy.
Management’s response:
– Foundry strategy remains unchanged, but capital deployment will be more aligned with committed orders
– Focus on advanced packaging as an “on-ramp” for foundry customers
– Emphasis on capital efficiency and utilization
4. Restructuring and Cost Reduction:
Investors sought details on the structural changes and their potential impact on Intel’s competitiveness and long-term targets.
Key takeaways:
– $10 billion in cost savings targeted for 2025
– Headcount reduction of over 15% by the end of 2025
– Assurance that cost cuts won’t impede strategic investments or execution of key initiatives
5. AI Strategy and Market Opportunity:
Questions about Intel’s positioning in the AI market, both in PCs and data centers.
Management highlighted:
– Leadership in AI PC category
– Gaudi 3 accelerator for data center AI workloads
– Integration of AI capabilities across product lines
6. Data Center Market Recovery:
Investors inquired about the timing and potential for a recovery in the traditional server market.
Management highlighted:
– Current focus on AI build-out in data centers
– Potential for an enterprise refresh cycle
– Optimism about Xeon as the “head node” for AI clusters
View From the Street
Cautious Optimism:
While investors acknowledged Intel’s strategic vision and restructuring efforts, there was an undercurrent of caution. Many questions sought concrete evidence of execution and financial improvement.
Impatience for Results:
The tone of some questions suggested impatience for tangible progress, particularly in areas like market share recovery and gross margin improvement.
Skepticism about Competitive Position:
There was a noticeable concern about Intel’s ability to compete effectively, especially given the strong performance of competitors in similar market conditions.
Focus on Financial Metrics:
Investors showed a keen interest in near-term financial performance, suggesting a desire for more immediate signs of turnaround success.
Long-term Vision vs. Short-term Execution:
There was a tension between appreciation for Intel’s long-term strategy and concerns about short-term execution and financial performance. Investors are frustrated with areas of short-term execution and executive decision-making. There is concern that management keeps getting hit with structural issues they did not see coming. But despite the concern about short-term execution, it is clear investors still believe in the long-term vision.
Continued Interest in AI Strategy:
Investors showed particular interest in Intel’s AI initiatives, both in PCs and data centers, indicating recognition of AI as a key growth driver.
While we had hoped Intel was out of the “prove-it” phase, it is clear they are not and they still very much need to prove consistency in short-term execution, establish and maintain competitive products, and the full realization of IDM 2.0. Investors will still need to be patient but 2025 should deliver the sign posts that Intel will complete this turnaround before 2030.