Intel serves up a $2.8B loss but hails quarter as 'turning point'

Intel vRAN Boost, the brand name for the accelerators Intel bakes into its latest chipsets, provides a massive performance lift for the operators using it in their mobile networks, said Pat Gelsinger, Intel's boss, drawing rare attention to a relatively small part of the giant chipmaker's business on his earnings call with analysts this week. Sadly, there was no sign of an accelerator for Intel's business, which served up its worst quarterly loss ever.

After reporting an $8.1 billion net profit this time last year, Intel slumped to a loss of about $2.8 billion for the first three months of the year. Headline sales fell 36%, to roughly $11.7 billion, and margins crashed everywhere. The closely watched figure for gross margin came in at just 34.2%, a huge drop from the 50.4% Intel reported a year ago for the first quarter of 2022. "We delivered solid first-quarter results, representing steady progress with our transformation," wrote Gelsinger in prepared remarks, presumably without trying to be ironic.

Figure 1: Intel CEO Pat Gelsinger introducing a new generation of processors.
(Source: Intel)

This was a better performance than analysts had expected, though, explaining why Intel's share price was up 5% in after-hours trading on the Nasdaq yesterday. At $29.86, it remains well below the low $60s range it achieved in early 2020, when COVID-19 first sent countries into lockdown. But Intel watchers are buying into the idea the company has reached its nadir. Things can only get better, as they say.

Sales suffered partly because of inventory build-up during the lean years of the pandemic, a factor cited by telecom equipment vendors such as Ericsson and Nokia in recent weeks. But in the PC market, where Intel generates about half its revenues, there are now signs of recovery. A significant amount of stock was depleted in the recent quarter and the market is "tracking to be at a healthy level" by the end of the second quarter, Gelsinger told analysts.

Absolutely fabless

Less positive was the situation in the data center and AI group, Intel's second-biggest division, accounting for nearly a third of sales. Inventory corrections are still going on and are forecast to drag down results for the current second quarter. The bigger worry is the ongoing loss of market share to AMD, a rival using the same x86 architecture in its chips. Data supplied by Counterpoint Research shows Intel's market share in data center central processing units (CPUs) dropped from 80.7% in 2021 to 70.8% last year, while AMD's rose from 11.7% to 19.8% over the same period.

Yet Gelsinger insists the first quarter was a "turning point" in the data center market after recent investments designed to improve Intel's technology. Among other things, it is attempting to race through five process nodes – which dictate how many transistors can be crammed onto a silicon chip – in just four years. This is partly why margins have been squeezed.

Costs are also high because Intel is spending heavily to establish itself as a foundry, a contractor that makes chips for other companies. This business has largely moved to Asia in recent years as US firms have gone "fabless," and is currently dominated by Taiwan's TSMC and Samsung of South Korea. But Intel's plan has secured backing and financial support from government authorities worried about western reliance on Asian fabs while China continues to threaten its neighbors.

While this activity ramps up, though, revenues generated by the new-look Intel Foundry Services (IFS) are negligible. It fetched as little as $118 million in the first quarter, and this was 24% less than it made in the same period last year. "We understand that our foundry ambitions will not be realized overnight – building a vibrant foundry ecosystem will take time," said Gelsinger on yesterday's call. "But we also understand our foundry success is vitally important to establishing a geographically diverse and secure supply of semiconductors."

Arm wrestling

On the competitive front, AMD is arguably not Intel's biggest threat, even though it is the company that has recorded the biggest market share gains against Intel. Companies basing their chips on the blueprints of Arm, a UK-based company owned by Japan's SoftBank, have a small but growing presence in the CPU market. Vivek Arya of the Bank of America is one analyst who wonders what this could mean for Intel and its x86 technology in future.

It's an awkward question for Gelsinger, who welcomed Arm as an IFS partner in the first quarter. "[If] we are doing a great job with our roadmap the role of Arm in the data center will be limited," he said. "Migrating software stacks in the data center is a lot of work, right? And if I give customers an easy path with x86 and E-core solutions with superior TCO [total cost of ownership] alternatives, that will do very well."

Figure 2: Intel's share price ($) (Source: Google Finance)

Concern in this area extends into the much smaller networks and edge group, the bit responsible for Intel's vRAN Boost. That product has been well received by telecom companies including Ericsson, Verizon and Telefónica, according to Gelsinger, but others including Nokia seem to prefer Arm-based alternatives.

The worst thing that could happen from Intel's perspective is the arrival of more competitive Arm-based alternatives in the computer market. It has already lost business with Apple, which is now designing its own M1 and M2 processors for the latest MacBooks. Richard Windsor, an analyst with Radio Free Mobile, reckons Qualcomm is close to shipping an M-series rival that could be available for the much bigger Windows PC market as well.

"If this new family of chips lives up to expectations, it will represent a dire threat to all Intel shipments into the laptop market," he wrote in his blog. "Qualcomm has been slower than expected to ship this product and it remains to be seen how good it is, but this is a major potential negative for Intel." If it turns into an actual negative, the recent improvement in the share price will be quickly forgotten.

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— Iain Morris, International Editor, Light Reading