By Ryan Shrout
Blue but no longer blue-chip, Intel hasn’t been able to match Nvidia, AMD, Qualcomm and Arm Holdings
Intel’s plan to grow is first to shrink – with layoffs, reorganization and the suspension of its shareholder dividend.
In a week where Big Tech earnings have been under the spotlight, Intel (INTC) may have become the biggest story – but not in the way it wanted. The company continues to struggle mightily against quarter after quarter of growth for competitors such as Nvidia (NVDA), AMD (AMD), Qualcomm (QCOM) and Arm Holdings (ARM). Intel’s plan to grow is first to shrink – with layoffs, reorganization and the suspension of its shareholder dividend.
Yet the news from Intel’s second-quarter earnings report on Thursday wasn’t all bad. CEO Pat Gelsinger continued to reiterate that the company’s ambitious plan for “5 nodes in 4 years” to enable its foundry business (for both internal and external customers) to catch up to Taiwan Semiconductor Manufacturing (TSM) is still on track and executing as planned. That means the critical 18A process node will indeed power some of Intel’s most important products over the next two years. The ability for Intel to be a key competitor in the foundry space remains the primary focus of the company’s leadership.
Also, Intel has shipped more than 15 million of its first “AI PC” chips, codenamed Meteor Lake, and is confident it will have 40 million units shipped by the end of 2024. That’s a huge milestone and dwarfs what AMD or Qualcomm could hope to do in the same time frame.
But that’s where the good news ends. Unfortunately, Gelsinger indicated that the yields, or how effectively the production of the chips can be, for Meteor Lake were poor. Intel had to spend more on manufacturing per chip than expected, lowering margins. Lunar Lake is set to launch next month, improving performance and power efficiency for Intel’s entry into Microsoft’s new Copilot+ PC category.
Moreover, revenue for the second quarter was $12.8 billion, down 1% year-over-year – but margins were 38.7%, off by nearly five points from the guidance Intel gave in April. The primary product groups didn’t show any improvement, with cash cow CCG (client group) revenue and operating income dropping for two straight quarters, as did the data center group and NEX (network/edge) group. The foundry business lost $2.8 billion.
Intel’s outlook for the third quarter is even worse, with a projected $12.5-$13.5 billion in revenue – $1.2 billion lower than in the same period last year. Margins also are weak – projected at 38% or almost eight points lower year-over-year.
As a result, Intel announced it would lay off 15,000+ employees and cut marketing, general and administrative expenses to downsize and become more efficient. Business units and products that are underperforming will be eliminated.
Hearing this, stock investors went running for the hills. Intel shares were down 19% after-hours on Thursday.
The great reset
If Intel’s leadership can’t come up with a cohesive sales and marketing strategy now, they may not get many more chances.
It’s more than fair to ask at this point what Intel can do to recover? First, it needs two products to succeed in the next 12 months: Lunar/Panther Lake and Gaudi 3. The first set are the key leadership products for the client business that will accelerate AI performance and dramatically increase graphics performance for consumer and commercial laptops. Intel needs these to not simply sustain its customer base, but to excite and entice them to buy new and buy at higher prices, to improve margins and keep competition from AMD and Qualcomm at bay.
Gaudi 3, meanwhile, is the third generation of Intel’s Habana AI accelerator family and looks like the last hope for Intel to make any inroads for the data center AI ecosystem revolution taking place around them.
Nvidia has cemented its position at the top, while AMD and others are fighting for second place as the market transitions from training-focused to inference-focused. But Intel’s Gaudi product line has the technical chops and potential to make waves. It has a price advantage and several architectural features that help it stand out from standard GPU accelerators. But if Intel’s leadership can’t come up with a cohesive sales and marketing strategy for Gaudi, I don’t know how many more chances they will get.
Read: It’s time for Nvidia to replace Intel in the Dow
Arm Holdings, Qualcomm faring better
After AMD’s upbeat earnings earlier this week, Qualcomm and Arm Holdings came out with their results and guidance.
Qualcomm had a stellar quarter with an 11% increase in revenue ($9.4 billion) year-over-year and a 26% increase in net income. Its QCT products group revenue was up 12%, licensing was up modestly at 3%. From a business unit perspective, $2.2 billion of revenue came from automotive and IOT thanks to 10 new design wins with automotive OEMs (the pipeline is getting huge here. Qualcomm beat market expectations by $150 million on auto alone. The handsets group reported $5.9 billion in revenue and should see continued growth when a new platform with high performance CPU cores launches in October.
Qualcomm’s guidance for the third quarter is a range between $9.5 billion and $10.3 billion in revenue, the midpoint of which implies a 14% increase year-over-year. If this holds, Qualcomm revenue could come within 20%-25% of Intel’s – previously unthinkable.
Arm got hit a bit in the immediate after-market trading for its results, despite beating its revenue target with $939 million in quarterly revenue and posting yet another record quarter, up 39% year-over-year. Licensing revenue was up 72% year-over-year to $472 million, surpassing royalty revenue for the first time since the company’s IPO.
Arm’s business model is unique in the tech market, and the relationship between licensing and royalties typically means growth in licensing now equates to extended royalty growth later (over the next two- to eight quarters). This licensing increase is an indicator of AI demand increases for inference on the edge/data center.
Because Arm is diversified across many different markets, like compute/PC, mobile handsets, cloud, automotive, data center, and IoT, success by its partners (from Apple to Qualcomm to Microsoft to Nvidia and more) insulates them from a lot of the volatility of competition. They are still small by other tech company measures today, but the long-term outlook for Arm looks strong and sustainable.
Ryan Shrout is the president of Signal65 and founder at Shrout Research. Follow him on X @ryanshrout. Shrout has provided consulting services for AMD, Qualcomm, Intel, Arm Holdings, Micron Technology, Nvidia and others. Shrout holds shares of Intel.
More: Why Intel is suspending its dividend – as stock heads for worst drop since 2000
Plus: Earnings results bruised Microsoft while AMD cruised, but AI will boost them both
-Ryan Shrout
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08-03-24 1027ET
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