Intel Shares Plunge on Layoffs, Dividend Cut
On August 1st, Intel Corporation unveiled its second-quarter financial results for the fiscal year 2024, revealing a challenging landscape for the tech giant. The company's revenue amounted to $12.8 billion, marking a slight decline of 1% year-over-year. Most concerning was the significant net loss reported at $1.6 billion, a stark contrast to the $1.5 billion profit achieved during the same quarter the previous year. Such discouraging results undoubtedly impacted investor confidence, leading to a 5.5% drop in Intel's stock price, which closed at $29.05 per share. In after-hours trading, the stock plummeted nearly 20%, signaling distress in market sentiment.
Alongside the financial results, Intel unveiled a comprehensive cost-cutting initiative aimed at stabilizing the company amidst its financial struggles. This plan includes a notable reduction of 15% in workforce, anticipated to be completed by the end of 2024. Intel's restructuring will focus on both operational and structural changes, estimating more than $10 billion in reductions in operating and capital expenditures by 2025. The strategic shift aims to establish a clearer, sustainable business model while ensuring ample financial resources to support long-term goals.
Advertisement
Intel plans to streamline its operational expenses significantly, projecting that its non-GAAP research and development, marketing, general, and administrative expenses will shrink to approximately $20 billion in 2024, followed by further reductions to around $17.5 billion in 2025. Such cuts demonstrate the company's urgent need to realign its resource allocation and enhance capital efficiency. With regards to capital expenditures, Intel is poised to adjust its investments in light of its recent “Four Nodes in Five Years” strategy, emphasizing efficiency that aligns with market demands. For 2024, total capital expenditures are expected to be between $25 billion and $27 billion, with net capital expenditures anticipated to fall between $11 billion and $13 billion.
Intel's CEO, Pat Gelsinger, expressed disappointment in the company's second-quarter performance, despite hitting critical product and process technology milestones. He characterized the upcoming second half of the year as more challenging than previously anticipated. The reassessment of operational modes is aimed at improving both operational and capital effectiveness while facilitating the ongoing transition to the IDM 2.0 model. Notably, Gelsinger highlighted that Intel is set to launch its Intel 18A process technology in the coming year.
Diving deeper into segment performance, Intel's Client Computing Group (CCG), Data Center and AI Group (DCAI), and Network and Edge Group (NEX) reported revenues of $7.4 billion, $3 billion, and $1.3 billion, respectively. These figures reflect a year-over-year increase of 9% in CCG revenue but a decline of 3% in DCAI and 1% in NEX. Notably, since December 2023, Intel has shipped over 15 million AI-enabled PCs, and the next-generation AI CPU, Lunar Lake, is slated for mass production and shipping starting in the third quarter of this fiscal year. However, the financial impact of rapidly expanding AI PC product offerings has been a double-edged sword. While there is excitement about growth, rising costs associated with these technologies and unutilized capacity have negatively influenced margins.
During the earnings call following the report, Intel’s management team discussed how AI PCs have affected second-quarter performances. They acknowledged that profitability fell short of expectations, partially due to a strategic decision to accelerate the production of Ultra AI PC CPUs. The team articulated their belief in the long-term potential of investing in the AI PC category, which is projected to rise from a market share of less than 10% currently to over 50% by 2026. Their optimism hinges on the advantages these investments would yield in the years to come.
From a market perspective, recent data from IDC indicated modest growth in global PC shipments during the second quarter of this year, rising 3% year-over-year to 64.9 million units, yet still trailing shipments from the same quarter in 2022. Insights from sources within the PC supply chain suggest that sluggish demand for consumer electronics continues to prevail. The ongoing market buzz largely revolves around advancements in data centers, particularly driven by large models that require substantial resources and capabilities. Until these AI applications solidify their positions, the anticipated positive impacts on mobile device markets may take longer to manifest, compounded by challenges such as increased power consumption associated with AI computations.
Intel has pursued a diverse range of chip technologies within the AI sector. Earlier this year in April, the company launched its next-generation AI chip, Gaudi 3, targeted to compete directly against NVIDIA's H100 and H200. In June, Intel showcased a new generation of CPUs, Xeon 6, with the Xeon 6 P series set for release in the next quarter, tailored for high-performance computing and AI workloads. Furthermore, for edge AI, Intel integrated a Neural Processing Unit (NPU) in its next-generation Core Ultra processors to bolster PC-level AI functionality.
As 2023 progresses, Intel’s stock performance has exhibited a downward trend, showcasing volatility. At the beginning of the year, shares traded around $47 per share, but most recently, it closed at $29.05 per share. With a market capitalization of around $123.7 billion on August 1, Intel finds itself overshadowed by its competitors. NVIDIA's market cap stands at an impressive $2.69 trillion, while AMD is valued at $214.5 billion, both significantly higher than Intel. This financial landscape throws into stark relief the challenges facing Intel as it strives to adapt to a rapidly evolving tech environment while competing against formidable adversaries.