Intel shares fell 8.23% in after-hours trading yesterday, as the company ended the second quarter with a sharp drop in revenue that fell short of analyst expectations. A net loss of $454 million also did not please investors, but Intel’s CFO tried to assure the public that the bottom had already been reached, and the company’s financial performance will only improve in the future.
Furthermore, Intel’s profit margin has steadily declined from 50.4% to 36.5%, which eloquently illustrates rising costs and falling revenues. Intel’s total revenue fell 17% or even 22%, depending on the calculation method, to $15.32 billion in the last quarter. This was 14% less than analysts had expected and a record against market expectations since 1999.
The company’s CEO, Patrick Gelsinger, said at the quarterly event that a sharp and sharp decline in customer economic activity was the main reason for the company’s revenue decline during the reporting period. At the same time, Intel had to spend impressive amounts of money to develop new products, develop new technologies, and bring discrete graphics solutions to market. A shortage of semiconductor components still prevents Intel from fully supplying the market with its products, even if the obstacle is not the company’s own capacity.
With spending reprioritization, Intel expects profit margin and free cash flow to return to desired levels in the second half. Gelsinger did not miss the opportunity to talk about the company’s achievements in the second quarter. So far, more than 35 million Alder Lake processors have been shipped using Intel 7 technology, which in the old hierarchy was considered the last generation of 10nm process technology. The company is ready to start serial production of products based on Intel 4 technology in the second half of this year. The development of Intel 3, 20A and 18A technologies, according to the head of the company, is carried out according to the schedule or even ahead of time. This semester, the company expects to begin creating digital designs for multiple products at once.
After Gelzinger’s return to Intel last February, he said the decision was made to close operations in six areas, freeing up about $1.5 billion to invest in the IDM 2.0 strategic plan. The current tense economic environment does not diminish Intel’s desire to return to the technological leadership by 2025 and achieve lithographic parity with competitors as early as 2024.
The strength of the PC market will decline by 10% in 2022, according to Intel’s chief executive, although the weakness in demand is less pronounced in the high-end segment and the enterprise segment. In the second quarter, according to company management, Intel customers received fewer components than they would have demanded if there had not been an increase in inventory. They will cut them at a record pace, according to Gelsinger, and so the supply of PC components could pick up again in the second half of the year. Overall, annual PC sales are expected to remain above 300 million units, and the number of computers older than four years has already reached 600 million units and is due for an upgrade in the near future.
Overall, Intel’s estimated customer revenue fell 25% year-over-year to $7.7 billion, operating profit fell 73% to $1.1 billion, and operating profit margin shrank 39%. from to 14 billion dollars. The company blamed the consumer and education segments for the decline in demand for PCs, as well as increased inventories by manufacturers. Intel considers the increase in production costs to be one of the factors that affected the decrease in operating income in the second quarter. Meanwhile, the average selling price of processors rose 11% in the second quarter, driven by a shift in demand to more expensive models in the desktop and mobile segments.
The company expects to start shipping Raptor Lake processors in the current half and introduce Meteor Lake processors next year. The Raptor Lake family will arrive in the desktop segment this fall and will be introduced to mobile devices later in the semester, providing a double-digit percentage performance increase over Alder Lake and CPU socket-level compatibility. Meteor Lake processors will be released with Intel 4 technology in 2023, their samples are already working both in the company’s own laboratories and by its customers.
Intel has already started digital designs for Granite Rapids chips, which will be built using Intel 3 technology, but this is a server product, not a consumer product. In the current quarter, it is already planned to launch the engineering samples of the first phase of Granite Rapids on the test bench.
Things aren’t so bleak on the server side yet. In the second quarter, the company had to deal with a 16% decline in server revenue to $4.6 billion, but in the long term, Intel management expects revenue growth in the 15-16% annual range. Second-quarter operating profit in the server segment fell 90% to $0.2 billion, with operating profit margins narrowing from 38% to 5%. Among the negative factors, the company attributed the decline in the average selling price of processors for servers to the impact of changes in the demand structure, in addition to competitive pressure. The profitability of the activity is also reduced by the need to invest in new product development and new lithographic pattern development.
Intel had to admit that this year the company will not be able to reach the previously planned numbers in the number of shipped GPUs, but in terms of revenue they will exceed 1 billion dollars by the end of the year. Starting in Q2, Arc Mobile discrete graphics solutions are shipping to leading notebook manufacturers. The company will begin shipping Arc A5 and A7 discrete desktop graphics cards in the third quarter. Intel also expects to ship several million Blockscale mining accelerators this year, though that wasn’t originally planned. Graphically, Intel’s revenue grew 5% year-on-year to $186 million, but operating losses rose from $168 million to $507 million, making this type of business still unprofitable for the company.
Demand for Mobileye’s active driver assistance systems components enabled the company to increase core revenue by 41% to a record $460 million, while operating income increased by 43% to $190 million. Finally, the contract line of business isolated in the new report brought Intel no more than $122 million in revenue in the second quarter, down 54% from a year earlier. The company’s $155 million operating loss was due in part to higher costs to expand its contract business, as well as lower demand from automakers that have had to deal with shortages of other components.
But by the way, Intel can boast that it has deals not only with MediaTek, but also with six of the top ten overall chip developers, among which there are already customers of the 18A process technology. The company has already formed $6 billion in contract commitments, with more than 30 customers preparing to receive the first engineering samples of their products from Intel. The company expects to complete the acquisition of Tower Semiconductor early next year.
Intel CFO David Zinsner added that by the end of the year, the company will not only have to limit new hires, but also reduce capital expenditures. According to him, a recession scenario may occur in the world economy by the end of the year, and the impact of the epidemic should not be fully amortized. By the end of this year, Intel expects to earn between $65 billion and $68 billion, down from a previous forecast of $76 billion. In the second half, Intel’s revenues in the customer sector may increase, although overall, by the end of the year, market capacity will decrease by 10%. The company will end the period with negative free cash flows in the range of 1-2 billion dollars.
In the fourth quarter, Intel expects to increase the profit margin to at least 51%, but it will not exceed 49% by the end of the year. Finally, the company’s capital expenditures should be reduced from $27 billion to $23 billion, which will not prevent shareholders from paying dividends of $1.5 billion per quarter at the same time. In just three quarters, the company will pay out more than $4.5 billion in dividends, and with $4 billion in capital spending cuts, it’s kind of a waste, but not in the eyes of shareholders. In the third quarter, the company expects to earn 15-16 billion dollars, and the profit margin for the current quarter will be 46.5%.
According to Intel’s CFO, the second and third quarters of this year in terms of financial performance will be the “bottom” from which Intel can break out for further growth. The shares of the company responded to such announcements and the publication of statistics with a devaluation of 8.23%.