In the last few months, the importance of corporate earnings reports in the tech industry has increased significantly, as the industry prepares to weather what is expected to be the largest downturn in demand in the last several years. Intel’s brutal Q2’22 report, in which the company lost money on a GAAP basis for the first time in five years, appears to be a portent of things to come for the largest industry, with AMD and other companies issuing earnings warnings before their Q3 reports. As the first major tech company to release its complete Q3’22 earnings report, Intel will likely once again serve as a barometer of the tech industry’s performance over the past three months.
Intel reported $15.3B in revenue for the third quarter of 2022, a decrease of $3.9B compared to the same period last year. Compared to Intel’s disappointing Q2 report, the company has returned to profitability, posting a cool billion dollars in net income, although this is still significantly below its historical norms. In actuality, the company continues to operate at a (GAAP) loss, recording an operating income of -175M dollars. For the third quarter, at least, it appears that Intel’s tax situation is pushing them into the black, as the company recorded a $1.2 billion tax benefit.
|Intel Q3 2022 Financial Results (GAAP)|
|Client Computing Group Revenue||$8.1B||+5%||-17%|
|Datacenter & AI Group Revenue||$4.2B||-9%||-27%|
|Network & Edge Group Revenue||$2.3B||flat||+14%|
|Accelerated Computing Systems and Graphics Group Revenue||$185M||-1%||+8%|
|Intel Foundry Services Revenue||$171M||+40%||-2%|
Despite the second-quarter decline, Intel appears to be turning the corner, albeit slowly. Gross margins have increased to 42.6%, which, while still below Intel’s historical (or even recent) average, is at least sufficient to keep operating income close to positive numbers.
These numbers also include one-time charges, including a $664 million restructuring charge that Intel is incurring to reduce ongoing expenses (i.e. layoffs). Intel is once again lowering its revenue projections for the year, as the PC industry’s bust cycle is not yet over. We’ll discuss Intel’s future projections and actions in greater detail later on, but to summarize: while Intel has likely seen the worst of things on their end, the PC industry’s bust cycle is still ongoing.
CCG and DCAI, Intel’s two largest business groups, are both significantly lower year-over-year when compared to the previous year. Noting that this is still the first year of Intel’s reorganized business groups, Intel has had to provide year-over-year comparisons of how the new groups would have performed if they had been in place the previous year.
Beginning as usual with the CCG, Intel’s client group generated $8.1B in revenue, which is 17% less than the same quarter last year. CCG has been affected by OEMs ordering fewer chips due to their large inventories, as sales of consumer and educational systems slow. Operating margins are also declining due to a combination of lower revenues against which to book expenses and Intel’s continued product development investments.
Intel anticipates that the Total Addressable Market (TAM) for the PC market will decline by “mid- to high-teens” for 2022, with the decline continuing throughout the remainder of the year. The recent introduction of Intel’s 13th generation Core (Raptor Lake) components will stimulate some new demand, but not enough to completely offset the decline in the much larger PC market.
Intel’s Data Center and AI group (DCAI) experienced an even greater revenue decline. Intel’s DCAI revenue for the third quarter was $4.2 billion, a 27% decrease from the same period a year ago.
This decline in revenue has nearly wiped out the group’s operating profit, with Intel reporting an operating income of $0.0B and an operating margin of 0%. Intel attributes the decline to lower sales of server/AI components due to weakening customer demand, while Intel’s relative costs increase as more server processors are manufactured using the Intel 7 and 10ESF processes.
The long-delayed 4th Generation Xeon Scalable (Sapphire Rapids) processors from Intel are, of course, on the verge of shipping. In addition to economic factors, therefore, customers await Intel’s next-generation hardware. According to the company, they shipped their “high-volume” Sapphire Rapids SKUs in the third quarter, but as the chips have not yet received ARK entries, it is clear that they are not yet fully launched. Sapphire Rapids has reached PRQ (Product Release Qualification), the point at which Intel is satisfied that yields are sufficient and performance is adequate for silicon to be manufactured for retail products.
Network and Edge (NEX), Intel’s final billion-dollar business, is the only real bright spot in this quarter’s earnings report. NEX’s annual revenue increased by 14%, reaching $2.3 billion.
Nonetheless, operating income decreased significantly, falling 85% to $75 million for the quarter. Ultimately, Intel’s more specialized networking products, such as 5G and Ethernet, were in high demand, whereas the Xeon products sold within this segment were in lower demand.
The “emerging” sub-billion-dollar groups of Intel were a mixed bag. The AXG group will continue to incur losses for the next couple of years until Intel has fully penetrated the market and is shipping large volumes of client and server GPUs. Intel Foundry Services is in a similar position, as Intel continues to make the necessary investments to enter the contract fab market in a significant way. Mobileye was not only profitable but also grew from year to year. This week, Intel completed the initial public offering of Mobileye, which, despite no longer being a wholly-owned subsidiary, will have a positive impact on Intel’s income statement because Intel still owns the majority of the spin-off.
So where does Intel go from here? Intel must still prepare itself and its investors for the remainder of this bust cycle and what is (still) expected to be a general economic recession, even though the company believes it has already endured the worst of its quarters in terms of profitability.
Intel now anticipates that the 2022 fiscal year will generate $63-$64 billion in revenue, a decrease of $2-$4 billion from their previous (Q2) projection. In other words, the market will be weaker than what Intel anticipated at the end of the second quarter. If the new projections come to fruition, this will result in 14%-16% less revenue than in 2021.
Consequently, Intel’s gross margin will not recover fully this year. The gross margin for the entire year is now anticipated to reach 47.5%, with the fourth quarter expected to reach 45%. Intel still anticipates a profit, but with Q4 revenue expected to decline by up to 28% from the same period last year, they are not out of the woods yet.
Given that Intel’s revenues and profitability are not expected to recover immediately, the company has made it clear that layoffs are on the horizon. Intel took a $664M restructuring charge this quarter to implement the impending layoffs. Although specific layoffs have not yet been announced (some will undoubtedly be announced in the coming days, now that the earnings period has ended), we do know that Intel incurred this charge to implement the layoffs. Intel currently employs approximately 114,000 people.
Intel aims to save $3 billion in total costs by 2023, with this goal accelerating by 2025. As capital expenditures are one of Intel’s largest expenses, this is where they will make some of their most significant cuts. According to the company, they will continue to construct fab shells and then fill them with equipment based on market demand. This alone should enable a $2B reduction in capital expenditures for 2023.
Intel leaves the door open for any mergers, acquisitions, or divestitures that would help the company as it focuses on high-margin businesses. There is nothing specific to announce today, but as with any company undergoing a cost-cutting initiative, Intel will consider all of its options.
Even though Q3’22 has not been as difficult for Intel as Q2 was, the company’s message is that the challenges are far from over. As stated in the company’s earnings release by CEO Pat Gelsinger: “we are aggressively addressing costs and driving efficiencies across the business” as Intel attempts to realign itself to endure the remainder of this bust cycle.