Intel, the world’s largest chipmaker, reported its third-quarter earnings on Thursday, October 26, 2023, and surprised the market with better-than-expected results. The company also issued a strong revenue guidance for the fourth quarter, indicating that it is returning to growth after seven consecutive quarters of declining sales.
Q3 Highlights
Intel posted GAAP net income of $297 million, or 7 cents per share, versus net income of $1.02 billion, or 25 cents per share in the same quarter last year1.
Intel reported adjusted earnings per share of 41 cents, beating the LSEG (formerly Refinitiv) consensus estimate of 22 cents1.
Intel’s revenue was $14.16 billion, down 8% year-over-year, but surpassing the LSEG expectation of $13.53 billion1.
Intel’s gross margin for the quarter was 45.8%, which is flat year-over-year1.
Intel’s operating income was $1.9 billion, down 36% year-over-year2.
Business Segment Performance
Intel’s Client Computing group, which includes laptop and PC processor shipments, saw its revenue decrease by 3% to $7.9 billion1. The company attributed the decline to lower notebook processor volumes and average selling prices, partially offset by higher desktop processor volumes and average selling prices2.
Intel’s Data Center and AI division, which offers server chips, experienced a 10% drop in revenue to $3.8 billion1. The company cited competitive pressure and a smaller overall market for server processors as the main reasons for the decline1.
Intel’s Mobileye subsidiary, which provides self-driving car parts, was a bright spot in the quarter, growing its revenue by 18% to $530 million1. The company said that Mobileye benefited from strong demand for its advanced driver-assistance systems (ADAS) and its autonomous vehicle (AV) solutions2.
Intel’s network and edge division, which sells networking parts, reported a 32% plunge in revenue to $1.5 billion1. The company blamed lower demand for its wireless products and lower enterprise and government spending on its wired products for the poor performance2.
Intel’s foundry services unit, which manufactures chips for other companies, remained a small part of Intel’s business with $311 million in revenue, but it grew nearly 300% on an annual basis1. The company said that it is seeing strong interest from customers for its foundry offerings and that it is on track to catch up with Taiwan Semiconductor Manufacturing Company’s (TSMC) chipmaking technology by 20251.
Q4 Outlook
Intel expects to report adjusted earnings per share of 23 cents on revenue between $14.6 billion and $15.6 billion for the fourth quarter1. This compares favorably with the LSEG projections of 32 cents per share on $14.31 billion in sales1.
Intel expects its gross margin to be 46%, up one percentage point from the third quarter2.
Intel expects its operating income to be $1.7 billion, down 11% from the third quarter2.
Analysts’ Reactions
Intel’s stock rose about 6% in after-hours trading following the earnings release1. Analysts were generally positive about Intel’s results and guidance, but some expressed concerns about the company’s long-term competitive position and profitability.
Patrick Moorhead, founder and principal analyst at Moor Insights & Strategy, said that Intel “delivered a solid beat” and that he was “impressed” by its foundry services growth and Mobileye performance3. He also said that he expects Intel to gain market share in the PC market in the fourth quarter due to supply constraints affecting its rivals3.
Stacy Rasgon, senior analyst at Bernstein Research, said that Intel’s earnings beat was “low quality” and that its guidance was “not great” given the favorable seasonality in the fourth quarter4. He also said that Intel’s gross margin outlook was “weak” and that its operating income guidance implied a “massive” decline in profitability in 20244.
Harlan Sur, senior analyst at J.P. Morgan, said that Intel’s results were “solid” and that its guidance was “better than feared” given the challenging environment for server chips. He also said that Intel’s foundry services unit was “gaining traction” and that its Mobileye unit was “well positioned” for the future of mobility.
My Thoughts
Intel announced its Foundry Ambitions in March 2021, as part of its IDM 2.0 strategy. The company aims to become the second largest foundry in the world by 2030, and to offer competitive process technologies and foundry services to its internal and external customers. Intel plans to invest billions of dollars in expanding its manufacturing capacity and capabilities in various regions, including Poland, Israel, and Germany.The CHIPS Act is a U.S. legislation that provides funding and incentives for the domestic semiconductor industry. Intel, as the World’s largest Chipmaker and one of the few companies that designs and manufactures its own chips, has benefited from the CHIPS Act in several ways:
- Intel has received billions of dollars in subsidies and tax credits to build new factories and expand its existing ones in the U.S. For example, Intel is building a new chipmaking plant in Ohio and expanding its operations in Arizona and New Mexico.
- Intel has gained a competitive edge over its rivals, especially those that rely on foreign Foundries like TSMC and Samsung, which face supply chain disruptions and geopolitical risks. Intel has also leveraged its foundry services to attract new customers, such as Amazon, Qualcomm, and Microsoft.
- Intel has strengthened its innovation capabilities and leadership position in the Semiconductor Industry, which is critical for the U.S. economic and national security. Intel has invested in cutting-edge technologies, such as quantum computing, neuromorphic computing, and advanced packaging.
However, the CHIPS Act also comes with some challenges and trade-offs for Intel:
- Intel has to share some of its profits with the U.S. government if its projects exceed its projections by an agreed-upon threshold. This could reduce Intel’s profitability and financial flexibility in the long term.
- Intel has to face increased competition from other chipmakers that also receive support from the CHIPS Act, such as AMD, Nvidia, and Micron. Some of these competitors have expressed concerns that the CHIPS Act favors manufacturers like Intel over designers.
- Intel has to balance its global strategy and operations with its U.S. commitments and obligations. Intel has to consider the interests and needs of its customers, suppliers, partners, and regulators in different regions, such as Europe and Asia.
