Intel admits it hit rock bottom ended the second
Hardware

Intel admits it hit rock bottom — ended the second quarter with a net loss of $454 million

Intel’s share price fell 8.23% at the close yesterday as the company ended the second quarter with a serious decline in revenue, falling short of analysts’ expectations. A net loss of $454 million didn’t please investors either, but Intel’s CFO tried to reassure the public by saying the bottom has already been reached and the company’s financial performance will continue to improve.

    Image source: Intel

Image source: Intel

What’s more, Intel’s profit margin has steadily declined from 50.4% to 36.5%, a good illustration of rising costs as revenue falls. Intel’s total revenue fell 17% or even 22%, depending on how you calculate it, to $15.32 billion last quarter, down 14% from what analysts were expecting and breaking a record in terms of market expectations for the period since 1999 .

The company’s CEO, Patrick Gelsinger, said at a quarterly reporting event that the sudden and sharp drop in customer economic activity was the main reason behind the company’s revenue decline during the period. At the same time, Intel had to spend impressive sums on the development of new products, the development of new technologies and the introduction of discrete graphics solutions to the market. The shortage of semiconductor components still prevents Intel from fully supplying the market with its products, even if the bottleneck is not its own capabilities.

    Image source: Intel

Image source: Intel

By reviewing its spending priorities, Intel hopes to return profit margins and free cash flow to target levels in the second half of the year. Gelsinger insisted on talking about the company’s successes in the second quarter. To date, more than 35 million Alder Lake processors have been shipped with Intel 7 technology, which was considered the last generation of 10nm process technology in the old hierarchy. The company is ready to start serial production of products based on Intel 4 technology in the second half of this year. According to the head of the company, the development of the Intel 3, 20A and 18A technologies is proceeding according to plan or even ahead of schedule. In this six-month period, the company hopes to start creating digital projects for several products at the same time, which it will release in the future using Intel 3 and 18A technologies not only for its own needs, but also for third-party customers.

    Image source: Intel

Image source: Intel

Since Gelsinger’s return to Intel in February last year, the decision has been made to suspend operations in six areas, freeing up approximately $1.5 billion for investment in the strategic IDM 2.0 program. The currently tense economic environment does not detract from Intel’s desire to regain technological leadership by 2025 and to achieve lithography parity with its competitors as early as 2024.

The capacity of the PC market will decline by 10% in 2022, according to the Intel chief, although demand weakness will be less pronounced in the high-end and enterprise segments. In the second quarter, according to company management, Intel customers received fewer components than they would have needed without increased inventories. According to Gelsinger, they will dismantle them at a record pace, so that the supply of PC components could return to the growth path in the second half of the year. In general, the annual sales of personal computers should be maintained at the level of more than 300 million units, and the number of computers older than four years has already reached 600 million units and they will be modernized in the foreseeable future.

Overall, Intel’s client computing revenue fell 25% year over year to $7.7 billion, operating income fell 73% to $1.1 billion, and operating profit margin shrank to 14% from 39%. The company blames the consumer and education segments for the decline in demand for PCs, as well as the presence of increased inventories at manufacturers. Intel cites rising production costs as one of the factors that impacted the decline in operating income in the second quarter. At the same time, the processor’s average selling price rose 11% in the second quarter due to a shift in demand towards more expensive models in both the desktop and mobile segments.

The company hopes to begin shipping Raptor Lake processors in the current half year and launch Meteor Lake processors next year. The Raptor Lake family will make its desktop debut this fall and roll out to mobile later this semester, offering a double-digit percentage increase in performance over Alder Lake and compatibility at the processor socket level. Meteor Lake processors will be released on Intel 4 technology in 2023, their samples are already working both in the company’s own laboratories and on the part of its customers.

Intel has already begun digital designs for Granite Rapids chips built with Intel 3 technology, but this is a server product, not a consumer product. Technical samples of the first stage of Granite Rapids are planned to be introduced on a test bench in the current quarter.

    Image source: Intel

Image source: Intel

Things are not looking so bleak in the server segment yet. In the second quarter, the company suffered a 16% decline in server revenue to $4.6 billion, but over the long term, Intel management expects revenue in the segment to grow 15-16% annually. Operating profit in the server segment fell 90% to $0.2 billion in the second quarter, and its operating profit margin shrank to 5% from 38%. Among the negative factors, the company cited the decrease in the average selling price of server processors under the influence of changes in the demand structure and competitive pressures. The profitability of the activity is also reduced by the need to invest in the development of new products and the development of new lithographic standards.

Intel had to admit that the company will not be able to meet the previously planned numbers for the number of GPUs shipped this year, but that in terms of sales it will pass the $1 billion mark by the end of the year. Beginning in Q2, Arc Mobile Discrete Graphics Solutions will begin shipping to major laptop manufacturers. In the third quarter, the company will begin shipping the Arc A5 and A7 desktop discrete graphics cards. This year, Intel also expects to ship several million block-scale mining accelerators, although that wasn’t initially planned. In the graphics direction, Intel’s annual revenue rose 5% to $186 million, but operating losses rose to $507 million from $168. This type of activity is still unprofitable for the company.

    Image source: Intel

Image source: Intel

Demand for Mobileye’s active driver assistance system components allowed the company to grow core sales 41% to a record $460 million, while operating income rose 43% to $190 million. Mobileye is scheduled to go public later this year. Finally, the contracts division, which is isolated in the new reporting structure, brought Intel no more than $122 million in revenue in the second quarter, down 54% from a year ago. The company’s $155 million operating loss was due in part to high contract expansion costs and lower demand from automakers, which were struggling with shortages of other components.

But Intel can already boast that it has agreements not only with MediaTek, but with a total of ten leading chip developers, including customers for the 18A process technology. The company has already made $6 billion in contractual commitments, and more than 30 customers are preparing to receive initial development samples of their products from Intel. The company intends to complete the acquisition of Tower Semiconductor by early next year.

Intel CFO David Zinsner added that the company must not only limit hiring by the end of the year, but also reduce capital expenditures. By the end of the year, he said, a recessionary scenario could emerge in the global economy and the impact of the pandemic should not be fully written off. By the end of the current year, Intel expects revenue to be between $65 billion and $68 billion, down from the company’s previous guidance of $76 billion. In the second half of the year, Intel’s consumer revenue is likely to grow, albeit in general, by the end of the year, the market capacity is expected to decrease by 10%. The company will end the period with negative free cash flow of $1 billion to $2 billion.

By the fourth quarter, Intel expects to increase its profit margin to at least 51%, but it still won’t get past 49% by the end of the year. Finally, the company’s capital expenditures are expected to decrease from USD 27 billion to USD 23 billion. In the third quarter, the company expects a profit of USD 15 billion to USD 16 billion. The profit margin in the current quarter will be in the range of 46.5%.

According to Intel’s CFO, the second and third quarters of this year will represent a “bottom” in terms of financial performance from which further growth can occur. The company’s stock reacted to such statements and the release of statistics by dropping 8.23%.

About the author

Dylan Harris

Dylan Harris is fascinated by tests and reviews of computer hardware.

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