Intel’s Disappointing Outlook for Q1 2024

Intel’s Disappointing Outlook for Q1 2024

Intel, the largest semiconductor maker by revenue, reported results for the fourth quarter of 2023 that beat Wall Street estimates, but its outlook for the first quarter of 2024 fell short of analyst forecasts. The chipmaker announced earnings per share of 54 cents, adjusted, compared to the expected 45 cents. Revenue came in at $15.4 billion, exceeding the estimated $15.15 billion. However, for the first quarter of fiscal 2024, Intel projected earnings per share of only 13 cents on sales ranging from $12.2 billion to $13.2 billion. This outlook was significantly lower than the LSEG expectations of 33 cents per share on $14.15 billion of revenue.

Weakness in Subsidiaries and Sold Businesses

Intel CEO Pat Gelsinger explained that while the core businesses, namely PC and server chips, were expected to perform in line with the company’s seasonal range, overall sales would be impacted by weakness in subsidiaries like Mobileye and its programmable chip unit, as well as revenue decreases from businesses that Intel has spun off or sold. Despite this, Gelsinger expressed confidence in the core business, stating that there were no areas for market share loss and that the products were strengthening.

Intel saw a turnaround in its financial performance, posting net income of $2.7 billion, or 63 cents per share, compared to a net loss of $0.7 billion, or 16 cents per share, the previous year. This improvement is notable as Intel has experienced seven consecutive quarters of declining revenue. The company’s gross margin stood at 40%, a decline of 2.6 percentage points from the previous year. Despite these positive results, Intel shares dropped in extended trading after the announcement.

Nvidia’s Dominance in the Data Center Market

One of the key areas impacting Intel’s performance is the rise of Nvidia in the data center market. Previously, Intel’s central processors were the most important component in servers, but now AI servers can have as many as eight Nvidia or AMD graphics processing units (GPUs) along with one or two Intel CPUs. The increasing focus on artificial intelligence has led cloud providers and large tech companies to prioritize accelerators like Nvidia’s GPUs. This market shift has caused a decline in Intel’s data center and AI division, which saw sales drop by 10% to $4 billion.

Under the leadership of CEO Pat Gelsinger, Intel has been implementing a five-year plan focused on catching up to Taiwan Semiconductor Manufacturing Company (TSMC) in manufacturing services while improving its own branded chips. Intel’s Foundry Services, which manufactures chips for other companies, showed promise with $291 million in revenue, representing a 63% annual increase. Additionally, Intel made efforts to cut costs through workforce reductions and the spinning off or selling of various business lines. The Company reported $3 billion in cost reductions in 2023.

Intel’s largest division, the Client Computing group, experienced growth with $8.8 billion in fourth-quarter sales, a 33% increase. This division includes laptop and PC processor chips, and Gelsinger stated that the demand for these chips had “normalized,” with strong sales in the gaming and commercial sectors. Furthermore, Intel expects the total PC market to expand in the coming year, indicating potential growth opportunities in this segment.

While Intel’s PC division showed promising results, its Data Center and AI division faced challenges. Sales declined by 10% to $4 billion as the data center market shifted towards the use of accelerators like Nvidia’s GPUs. Intel CFO David Zinsner predicted a double-digit sequential decline for the Data Center business in the first quarter of 2024 compared to the previous quarter. The Network and Edge department, which sells parts for carriers and networking, also reported a decline of 24% in sales.

Intel’s latest financial results showcased improved performance in terms of earnings and revenue, breaking a streak of declining revenue. However, the company’s outlook for the first quarter of 2024 fell short of expectations, primarily due to weakness in subsidiaries and businesses that Intel has sold or spun off. The rise of Nvidia in the data center market has also posed challenges for Intel, as AI servers increasingly rely on accelerators like Nvidia’s GPUs. Despite these obstacles, Intel is focused on its transformation plan and aims to catch up to TSMC in manufacturing services while enhancing its own branded chips. The growth potential in the PC market provides a glimmer of hope for Intel’s recovery, but the company must address the decline in its data center business to regain its competitive edge.

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