Intel CEO Pat Gelsinger, with US President Joe Biden (not pictured), announced the tech company’s plans to build a $20 billion factory in Ohio, from the South Court Auditorium on the White House campus in Washington, January 21, 2022.
Jonathan Ernst Reuters
It’s Intel December’s earnings showed a significant decline in sales, profit, gross margin, and the company’s outlook, for the quarter and full year.
Investors were outraged, sending shares more than 9% lower in extended trade, despite the fact that Intel did not cut its dividend.
The earnings report, the eighth under the leadership of CEO Pat Gelsinger, showed the legendary technology company struggling with many factors outside of its control, including a sharp decline in the PC market. It also highlights some of Intel’s current problems with weak demand for its current products and inefficient internal performance, and emphasizes how the company’s financial health is in jeopardy.
“Obviously, the financials are not what we expected,” Gelsinger told analysts.
In short: Intel had a difficult 2022, and 2023 will be difficult as well.
Here are some of the highlights from Intel’s earnings report and analyst call:
Weak and uncertain guidance
Intel did not provide one-year guidance for 2023, due to economic uncertainty.
But the data points for the current quarter indicate tough times. Intel guided for sales of $11 billion in the March quarter, which would be a 40% year-over-year decline. Gross margin will be 34.1%, a big decrease from 55.2% in the same quarter in 2021, Gelsinger’s first leadership.
But the biggest issue for investors is that Intel is guided to 15 cents non-GAAP loss per share, a big decline for a company that last year reported $1.13 in profit per share. It would be the first loss per share since last summer, which was the company’s first loss in decades.
Inventory glut
Management gave several reasons for the difficult upcoming quarters, but one theme that came through was that customers only had too many chips and had to work through the inventory, so they wouldn’t buy a lot of new chips.
The PC and server market is slowing after a two-year boom due to remote work and school during the pandemic. Now, PC sales have slowed down and computer manufacturers have a lot of chips. Gelsinger predicts PC sales for the year to be around 270 million to 295 million – a far cry from the “million units per day” predicted in 2021.
Currently, Intel customers have to “digest” existing chips, or “justify” their inventory, and the company doesn’t know when this dynamic will reverse.
“While we know these dynamics will reverse, predicting when is difficult,” Gelsinger told analysts.
Dropoff in gross margins
On top of all this is that Intel’s gross margins continue to decline, hurting the company’s profits. One issue is “factory load,” or how efficiently factories run each hour. Intel said its gross margin would be hit by 400 basis points, or 4 percentage points, due to factories that remain open due to lower demand.
Ultimately, Intel is forecasting a gross margin of 34.1% in the current quarter — a far cry from the 51% to 53% target the company set at last year’s investor day. The company said it is working on it, and margins could return to Intel’s target “in the medium term” if demand recovers.
“We have some initiatives that we are doing to increase our gross profit and we are on track. When you look at the reduction of $3 billion [in costs] what we’re talking about for 2023, 1 billion is the cost of sales and we’re going to get that billion dollars,” Gelsinger said.
The bad news: Dividends and self-driving cars
Long-term investors are always watching carefully how companies balance the short-term need to save shareholders with the large capital expenditures required to remain competitive in the semiconductor manufacturing business.
If Intel cuts costs and still needs to invest in chip factories to turn it around, analysts say it may want to reconsider its dividend. Intel is spending $6 billion on dividends in 2022, but did not eliminate the dividend on Thursday.
Meanwhile, the company said it wants to cut costs by $3 billion by 2023 and analysts believe it wants to spend about $20 billion in capital spending to build factories.
Gelsinger was asked about this dynamic on Thursday.
“I’m just saying that the board, the management, we take a very disciplined approach to our capital allocation strategy and we will remain committed to being prudent in how we allocate capital to our owners and we are committed to maintaining a competitive dividend,” Gelsinger replied.
There was at least one bright spot for Intel on Thursday.
Mobileye, self-driving subsidiary that went public during the December quarter, reported earlier today, showing adjusted earnings per share of 27 cents and revenue growth of 59%, to $656 million. It also predicts a strong 2023 revenue of between $2.19 billion and $2.28 billion. Shares rose nearly 6% during regular trading hours Thursday.