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Reporter of China Business Network: Yang Hui Editor of China Business Network: Wei Guanhong

On the evening of August 2nd, Beijing time, the stock price of veteran chip giant Intel fell 26% to US$21.48 per share, and its market value evaporated by about US$32 billion, marking the largest single-day drop since at least 1982.

Before the market opened, Intel announced its second quarter results for 2024: revenue of $12.8 billion, down 1% year-on-year; net loss of $1.6 billion, and forecasts that third quarter revenue will be lower than expected. To cope with the current crisis, Intel plans to increase its cost-saving efforts, announced a 15% layoff, and suspended dividends to shareholders from the fourth fiscal quarter.

Intel currently has two main focuses. The first is what it has been trying to do three years ago, which is to "regain glory" by relying on high-end chip manufacturing. This year, it also separated its chip foundry business. The large losses of the foundry business have caused a lot of discussion. However, while the foundry business is "burning money", the competitive pressure is also not small, and it has to "challenge" companies such as TSMC and Samsung. At the same time, Intel is also actively deploying artificial intelligence, but due to the high cost and low profit of AI, it has not yet fully benefited from it.

Second quarter results were below expectations and dividends were discontinued in the fourth quarter

Financial report data shows that in the second quarter of 2024, Intel achieved operating income of US$12.8 billion, a year-on-year decrease of 1%; net profit attributable to it turned from US$1.5 billion in the same period last year to a loss of US$1.6 billion. According to Intel, the factors affecting the second quarter performance mainly include the decline in gross profit margin brought about by the acceleration of AI PC growth, excessive expenses related to non-core businesses, and idle production capacity.

In terms of business, in terms of products, Intel's total product revenue in the second quarter was $11.8 billion, up 4% year-on-year. The Client Computing Group (CCG) had revenue of $7.4 billion, up 9% year-on-year; the Data Center and Artificial Intelligence Group (DCAI) still faces challenges, with revenue of $3 billion in the second quarter, down 3% year-on-year; the Network and Edge Group (NEX) had revenue of $1.3 billion, down 1% year-on-year.

In terms of foundry, Intel's foundry business revenue in the second quarter was US$4.3 billion, up 4% year-on-year; Altera's revenue was US$361 million, down 57% year-on-year;AutopilotMobileye's revenue was $440 million, down 3% year-on-year. According to Intel, the company will suspend dividends starting in the fourth quarter of 2024.

As for the new growth pole of AI, from which many competitors have benefited this year, according to financial reports, Intel's AI PC shipments have exceeded 15 million units since December 2023, and will exceed 40 million units by the end of the year.

However, despite the fact that a lot of AI PCs have been shipped and the Gaudi series also focuses on cost-effectiveness, Intel CEO Pat Gelsinger still bluntly stated in a letter to employees that "costs are too high and profit margins are too low", and the company has not yet fully benefited from powerful trends such as AI. Considering the financial performance and prospects in the second half of 2024, Gelsinger believes that "it is more difficult than previously expected." Intel expects the company's revenue in the third quarter of 2024 to be between US$12.5 billion and US$13.5 billion.

As the foundry business continues to burn money, reducing costs and saving money has become Intel's first choice.

Externally, Intel will suspend dividend payments from the fourth quarter. Internally, on the one hand, it needs to reduce operating expenses, including streamlining operations, cutting expenses and headcount. Intel announced a 15% layoff and plans to cut non-GAAP R&D, marketing, general and administrative expenses to approximately $20 billion in 2024 and approximately $17.5 billion by 2025. On the other hand, it is to reduce capital expenditures. Intel expects total capital expenditures to fall to $25 billion to $27 billion in 2024, and net capital expenditures to be between $11 billion and $13 billion.

After the release of the performance data, Intel's stock price fell by more than 28% during the day and fell 26% to $21.48 per share by the close of trading. Its market value evaporated by about $32 billion overnight, marking the largest single-day drop since at least 1982. In addition, S&P put Intel's rating on the negative credit watch list.

Gaudi 3 is planned to be released in the third quarter, and mass production of wafers will begin in the first half of 2025

The costly transformation to focus on foundry is considered by the industry to be Intel's biggest challenge and opportunity at present.

Intel has always adhered to the "integrated device manufacturer" (IDM) model that integrates design and manufacturing, rather than the "fab" model commonly seen in the semiconductor industry, laying the foundation for the company's transformation.

As the market share of its "moat" X86 was increasingly eroded by competitors, Intel began to try to transform into a foundry three years ago. Earlier this year, Intel announced the official spin-off of its chip design and manufacturing businesses, with the foundry division responsible for chip manufacturing business accounting and statistics separately and responsible for its own profits and losses.

According to a document submitted by the company to the U.S. Securities and Exchange Commission (SEC) in April, the independent chip manufacturing division "Intel Foundry" will have revenue of $18.9 billion in 2023, a year-on-year decrease of 31%, and an operating loss of $7 billion. After the split, although the risks brought by the foundry losses can still be shared by the group, it is difficult for the performance of wafer foundry to improve in the short term, which also shows Intel's determination to transform.

Judging from the information revealed in the earnings report, Intel still has high hopes for foundry, saying that the company is taking decisive actions through new operating models to improve operational and capital efficiency while accelerating the IDM 2.0 transformation. In addition, with the launch of Intel 18A next year, Intel believes that the company will regain process leadership.

According to Intel's previous goals, by 2030, Intel's external foundry scale will be second only to TSMC, surpassing Global Foundries, UMC and Samsung to become the world's second largest foundry.

Judging from the currently disclosed process progress, according to Intel, the company is about to complete the "four-year five process nodes" plan as scheduled; Intel's 18A process node is progressing smoothly and will be ready for production by the end of 2024, and mass production of wafers will begin in the first half of 2025; this means that products based on the Intel 18A process node will be launched to the mass market in 2025. In addition, Intel also plans to launch the Intel® Gaudi3 AI accelerator in the third quarter, continuing to focus on "cost-effectiveness".

In the industry's view, Intel is in a "critical period". The competition in the data center, once the trump card business, is becoming increasingly fierce under the wave of artificial intelligence. Take AMD (Advanced Microelectronics), which has just released its financial report, as an example. In the second quarter of 2024, AMD's data center division had revenue of US$2.8 billion. Although it was not as high as Intel, it increased by 115% year-on-year. The market is also optimistic about its third-quarter performance, believing that AMD AI chip sales have shown signs of acceleration.

In comparison, it remains to be seen how much market share AI can help Intel regain. How to take advantage of the US investment in domestic manufacturing and the surging global demand for AI chips to truly "gain a foothold" in chip manufacturing and foundry is the key to Intel's reshaping of its core competitiveness.

Liang Zhenpeng, a senior industrial economist, also pointed out that driven by AI, the chip industry may usher in a reshuffle, but this does not mean that all manufacturers will be impacted to the same extent. For Intel, its accumulation and advantages in the field of chip foundry and its leading position in the field of CPU may become the key to its competitiveness in the AI ​​era.

However, for Intel, which is in a "critical period" of transformation, the best core competitiveness is technological innovation and continuous research and development, and it also needs to focus on maintaining its brand image and market reputation. Facing competition from chip foundries such as Samsung and TSMC, Intel needs to come up with more advanced process technologies and products.

Daily Economic News