The Six Five team dives into Intel’s earnings for this episode of Earnings Palooza!
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Transcript:
Patrick Moorhead: Intel had a big surprise and a positive surprise, in that they met top line, but they beat by 79% EPS. Ghoulishly enough, I think the big pop, it was up 5% after hours. I’m not looking at it right now. I’m paying attention to the camera, but they love layoffs and cost reductions. That was one of the big messages here, “Hey. We are going to reduce costs- let me get the number here- $3 billion in 2023 and cost reduction of eight to $10 billion by end of year ’25.”
I’ll leave the details to you, if you want to hit those, but I do have those. I think it’s more interesting to go up by business unit by business unit. PC group, off 17%. No surprise. The PC market stinks. Unless, of course, you’re Apple, who is up 20%. And if you’re Surface, who’s up 8%. Really hit by consumer and education demand. There was more OEM inventory bleed-off, and it looks like a mix-shift from Core i9 to Core i7. Likely, at the hands of AMD. Now, with the new 13th gen coming out versus AMD’s new offering, Intel is better off competitively than it was in the prior quarter.
Probably the biggest surprise here to me was just the incredible operating income decline of data center and AI business. Off just an eye-watering 99% out there. Revenue is down 27%, which didn’t surprise me, because they just started shipping in volume Sapphire Rapids recently. Probably, in the last month of the quarter. But man, AMD really took it to Intel this quarter. Because I’m not expecting the data center market to be off by 27%. You can do the math.
Three very positive points. Edge Networking, up 14%. Unfortunately, operating income off 85% due to networking. Big increases in 5G, in the Edge. Graphics, up 8%, but a huge $378 million loss due to inventory write down. My guess is that has everything to do with Arc in there. Because again, as I called, I think it was four years ago .I said Intel would be aspiring to have the fastest graphic card desktop, but it would likely settle in the mid-range. And that’s exactly what happened. You had a higher-valuation inventory that they had to take a write-down. But again, not all bad.
These are brand new businesses and I’d give Intel probably three at-bats in consumer graphics to truly see what they can do. Mobile revenue, up 38%. Operating income, up 12%. Driven by IQ, which is their next generation L2 plus solution. I’ll mention they had an IPO. Started at $17 billion. Got to $22 billion. I don’t even think the stock is reacting to it, even though Intel owns the majority of those shares. Daniel, I’m going to leave a little bit of oxygen for you. Whether you want to go into transformation actions or really all of the positive stuff that the company cranked out.
Daniel Newman: Yeah, Pat. Well, first of all, I think you did a really nice job breaking it down. I think Intel is at this massive inflection point right now. They did hammer out some good bottom line results. If I have to say one thing maybe. I expected client computing to be soft. I was hopeful of a better result for DCAI this quarter. I think Sapphire Rapids is scaling and I think that is going to be a tailwind for the company over the next few quarters.
You did hit on the three. The network, graphics, and Mobileye. Foundry is a longer tail for the company, but I do believe with everything going on in China right now and all the attention that has, Intel is definitely the best-positioned company in the US to benefit from what is going to likely be a continued series of microaggressions between us and China. The fact is that’s not going to slow our need for semiconductors. The $10 billion in cost cutting is going to create some indigestion for everybody.
It’s going to be indigestion for the employees, for the management, for shareholders, and for us to try to digest, “What does it mean?” Intel has been in this transformation phase for a long time. The fact is that if you’re cutting costs, you’ve got to do it really efficiently. Especially, when you’re planning to launch five new processes in four years, and you’re being held to an incredibly high standard for execution, in which the market wants to see you hit every date. Absolutely, Pat.
I mentioned booms and busts. We are in a semiconductor cycle of booming and busting. This is a little bit of, “Hey. We’ve got that glut.” We had that huge amount of demand. We didn’t have enough supply. Now, the supply is beefing up a little bit and we’re going to see a little bit of a downturn for semis as a whole. Please do not think that this is unique to Intel. This is all semiconductor companies. This doesn’t mean tech is ruined forever. It just basically means we ebb, we flow. Or now, we’re doing a little bit more ebbing than we are doing flowing.
I did want to talk just a bit about the Mobileye IPO. I thought it was a remarkable vote of confidence by Intel that they only made 6% of the shares available in the public market. Based on their current situation, I think they probably could have made some people happy by raising a lot more capital, by making more shares available. But I think Intel knows what they have in Mobileye. They know that it’s going to be a really big business for the company.
I think they were able to do some crafty financial engineering here to extract value, raise capital, allow people to invest in Mobileye that wanted a play in this space. They want to invest in ADAS, the future of autonomous vehicles, but maybe right now weren’t going to put their money into the broader Intel in order to make that investment. Now, you have the best of both worlds. I think it’ll swell in valuation when we hit the next growth cycle.
I’m an eternal optimist, Pat. We’re going on a year now of really negative market reaction to tech. I think the market is forward-looking. Nobody calls a bottom. By the way, this isn’t financial advice. But I think our friend Chamath said it on the All-In Podcast. My friend, I met him once. On the All-In podcast though, he did say that if you look in the history of rate-rising cycles, the bottom of the market tends to happen in the first third.
Most people think the highest terminal rate is going to come sometime in the middle of the late part of next year. If that’s the truth, we are definitely in that first third. Maybe even heading into the second third. Are we at a bottom? Is Intel at a bottom? Is this the turning point? I think Pat’s doing the right things. Doing a better job than Zucker. Pat, before I move on to Honeywell. Anything else you want to add here?
Patrick Moorhead: I just want to make it clear that the company Intel is taking actions. Pat Gelsinger is a man of action and he’s not going to sit around and let things happen to him. These transformation actions that they talk about. First off, they’re going to do layoffs. No question. They said they were going to reduce cost of goods. We don’t know how yet. There were no details. They’re going to continue these skips to have asset light.
They said that they’re going to do a 20. A $2 billion CapEx reduction this year. That’s in two months. Interesting stuff that we don’t know yet. But I saw they’re reallocating resources by return on investment. That means moving dollars from one BU to the other. I want to know. What does that mean? They also said they’re looking at M&A and divestitures. I’m thinking, “What more divestitures could they possibly make at this point?” But I think their customers, rightly so, do want to know.
By the way, in this quarter, they got a shitload done. First of all, reaffirming. On-track. Five nodes in four years. I looked Pat Gelsinger in the eye, challenged him. You and I both peeled that onion back, and he’s sticking to his guns. Shipped in high volume Sapphire Rapids. He launched Raptor Lake. By the way, everything I’m hearing about Meteor Lake is very positive across the OEMs.
They launched Arc Desktop Graphics. That’s a big fricking deal. There were only two people in that market for 15 years, and now Intel is in that market. They introduced a Flex Data Center GPU for transcoding and inference. They signed up. They did a $30 billion skip deal to help finance the fabs out of Columbus. They signed up NVIDIA to IFS. No details yet, but boy, did that one go over what it said.
Basically, NVIDIA is going to fab some of its processors at IFS. That’s mind-blowing. This is for a military contract. They set up an entirely new business office for IDM 2.0, which by the way, the leader of that is one of the biggest hard-asses that I know, who I’ve known for 15 years. A guy named Stuart Pann is the Chief Business Transformation Officer.
Now, a lot of times when I hear those words, it sounds so corporate. But Stu Pann is going to go in, he’s going to kick ass and take names, and make shit happen. With that, I think we’ve spent 15 minutes on Intel, but there’s a lot to talk about there. Sorry for my voice.
Daniel Newman: It’s all right, man. Your passion rings true, buddy.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
