The Six Five team discusses Intel Q2CY24 earnings.
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Transcript:
Patrick Moorhead: Intel, Intel, wow, my phone was lighting up. I’m getting DM’d. I think I got 27 LinkedIn invitations from people at Intel. I mean, I got 42 new followers. I mean it was crazy nets, but here’s the net and net and we’re going to throw the red meat into the room and we can discuss it, but good quarter, lousy forecast, giant cost production.
Stacy Rasgon: It wasn’t a great quarter.
Patrick Moorhead: Well, they met revenue. How about that? Yeah, net-net boils down to confidence at this point. There’s a lot we don’t know and we’ll try to get info on details about Oregon to Ireland transition, Meteor Lake. What changed to drive the 15% layoff numbers, literally changed between last quarter and this quarter. What could be the downstream impact from the layoffs.
Daniel Newman: I’ll let Stacy go first.
Patrick Moorhead: Yeah, yeah, okay. I was just going to get my blurb out, and then…
Daniel Newman: No, no, no, no, no, what I was going to say though, Pat, you can go first, then Stacy, I’ll go last. I just wanted to laugh because I said something on Twitter and I said something along the lines of, had a less than ideal quarter was how I tried to be nice about it. And I got someone that said, is that the understatement of a lifetime that you said that? Because it’s like I’m already sad. I think Stacy, you said in the green room, I’m sad. It’s like, I’m sad. How do I say this without saying this?
Patrick Moorhead: Yeah, but I’m sorry, Dan. This was supposed to be your lead in too. I just got so excited ahead of myself. I’m sorry.
Daniel Newman: No, no, it’s okay. Go ahead, Pat. Finish your run ’cause you were on a nice run, but it was less than ideal for me.
Patrick Moorhead: I mean, in the end, what can we take to the bank now that the company says. And listen, I’m talking to their customers, they’re customer customers now. So Stacy, the floor is yours.
Stacy Rasgon: You bet. It was a less than ideal quarter for sure. So the quarter itself, you’re right. It missed the consensus, but they had actually lowered their number early in the quarter because they lost their export license to Huawei and the street numbers on revenue didn’t quite fully incorporate that. So you could argue the revenue was, they did about 12.8 billion, was kind of in line with that target. The gross margins were very, very bad. They printed 38%, so were back with a three handle on them. And you got to remember that, that happened a little while ago but really the last time that the gross runs out of three of them, I was in elementary school. It was 1986 was the last time. So it’s been a long time. They were 500 basis points below on that. They printed 2 cents. I think the street was at 8 or 10 cents expectations.
So the quarter wasn’t good. And you’re not the best quarter for, Q3, the guidance was horrendous. So they guided about, oh, I don’t know, a billion and a half dollars below the street on revenue. Gross margins, again, they guided like 38, it was like 750 basis points below the street. They guided to a 3 cent loss. It’s nasty. And they even sort of gave some color into Q4. Q4 is, I don’t know, another massive miss versus where people, so those things are really, really bad. There’s a few reasons for it. I mean one is I just think the original guidance, they had said last quarter that they’d get above seasonal growth through the back half. They have this little hockey stick for whatever reason embedded in the numbers, so that’s clearly not happening. There’s some PC/CPU inventory channel flush. This is something I’ve been concerned of.
We tracked this pretty religiously and we saw through the Covid swing, we had a big overshipment and then an undershipment. And I know in Q4 and in Q1, as far as I can tell, the PC/CPUs were back to overshipping by a pretty wide margin. So I’ve been a little worried about channel and that’s flushing out in the back half and so that, there’s some degradation on revenue there. Look, I think they’re still losing share. You can look at what’s implied for their data center growth versus say what their competitors are putting up and they’re clearly losing shares. So on the revenue side it’s not good. And then the margins are really horrible and that’s really where I think a lot of the deep concerns are going on. They’re attributing this to a mix. They’re basically, they’re ramping a new product for AIPCs. It’s called Meteor Lake.
And the early parts are made in Oregon. And then they would typically transition those over to their other fabs, in this case Ireland. And they made a decision, their claim is they made a decision to make that shift early. And they said what that does is it saves them a billion dollars in CapEx. So they think it’s good, and maybe it’s the right decision, but the issue is, early in the run, the costs are really bad. And so it’s massively impacting the margins into Q2 and Q3. And then I also think even as those costs come down, just the cost of that part is lower. I’m sorry, the margin of that part is lower, the cost is higher. A lot of it is outsourced to TSMC. A lot of the tiles, that becomes a bigger piece of the mix, I think, that impact. And then they gave kind of color for next year.
Margins are still going to be really impaired. I bet street numbers came down by five or 600 basis points for gross margins next year. And that’s the Lunar Lake ramp, which again, they’re very bullish. But Lunar Lake is entirely made at TSMC and so again are really bad. So it was not good. And so in response, they’re taking action. So there were some new stories in the days before that they were prepping a pretty big riff. And they are, so they’re laying off 15% of their employees. If I just take the Intel-specific employees, that’d be about over 17,000 employees. So they’re cutting OpEx. They’re cutting CapEx this year and, although it’s hard to say because I think the street CapEx numbers for Intel were already lower, but versus their plan, they’re cutting fairly significant amounts of CapEx. They also suspended their dividend. They had cut their dividend by two thirds a year, year and a half ago, and they’ve fully suspended it now.
So they’re in scramble mode right now, in survival mode to try to right the ship. And then there’s two other things that are going on, and these were already happening, but I think they’re accelerating. They are getting subsidies from the government. There’s the investment tax credit and then eventually the CHIPS Act stuff. And then they’re also getting what they’re calling partner contributions. What they’ve been doing is they’ve been selling parts of some of their factories effectively to private equity. They sold half of the Arizona fab that they’re currently building, the Brookfield, that one’s not operational yet. And then this quarter they sold half of their Ireland fab, this fab 34 to Apollo for $11 billion. They got that cash in Q2. Now they have to give up returns. They said that’s going to cost them, it’s like $700 million next year that they’re going to have to give up to Apollo.
Apollo doesn’t work for free. But they have cash coming in. So that’s what’s going, but I mean in general it was a horrendous, horrendous quarter. And then the issues that you kind of look at, it’s down, I don’t know, 27%, I’m probably off by 20 minutes on this feed, but it’s down a lot. I think the issue people wrestling is like, how do you even value it? There’s no real earnings, there’s no free cash flow, and there may or may not be any terminal value. That’s the question that people are having now. So it’s going to struggle to fly on the floor right now. I think all the funds that held it, like in the dividend funds, it had a small dividend. I mean they’re probably going to have to sell. It’s a mess. It’s a real mess.
Patrick Moorhead: Dan, what do you got buddy?
Daniel Newman: Yeah, so look, I know this is, Stacy, this is a mix like you said of being sad and sort of a victory lap because you’ve probably been, I’m sort of being sardonic about it because you’ve been sort of one of the more notable bears that just has not come around. And some of us, I mean look, I admit when I get things right, in fact I’m the first to always say it. And I also have to sometimes be the one to acknowledge when I get things wrong. And there’s some things I’ve gotten wrong here. I mean, I think on some of the parts, I think we kind of said about executing the say/do ratio thing that Pat likes to talk about. He’s done a lot of things, but it just hasn’t worked yet. It just hasn’t worked in the numbers. I mean the process, the getting things to market, the tape-ins, all the things that he sort of said would happen, have happened. It isn’t panning out, I mean, they’re raising money, they’re leveraging assets, they’re shedding business units. This is like a GE story. This looks like a little bit like what GE started doing and it’s like when do you get to the minimum viable product? Where the market’s going to be like, this is where you’ve…
Stacy Rasgon: I mean, that’s it. That’s exactly, I mean they’re spinning hope, right? It’s like, oh, we’ve got Lunar Lake. It’s a great part, supposedly, they say, but the cost structure is not good. But then when we get to Panther Lake, which kind of launches second half of ’25, so it’s kind of 2026 for volume, that’s where it’s actually on 18A, which is that’s finally the process that they’re saying is really good and we’re going to bring all those tiles back from TSMC. And so we’ll be making them internally on our better, at that point, hopefully we’ll have a better cost structure and so the margins will get better. So that’s the hope. But I mean even if you believe it, I mean it’s 2024 right now. That’s a long time to wait. We may have talked about this last time, I can’t remember, but they had that Foundry Day a little back and they were talking, we’re sort of splitting the economics of the different parts of the business and we’re trying to incentivize better behavior and better choices and transparency, those are all very good things they need to do that, but I think I said last time, my biggest takeaway from that day was come back in 2030.
Daniel Newman: Yeah, I was going to say, I got three quick bullets and then we got to move ’cause we probably could spend the whole show on… Go ahead, Stacy, go ahead.
Stacy Rasgon: I just want to say, there was one silver lining from last night. And maybe it’s in your bullets, but I do want to say, I was talking to Pat in the green room like, I’m having, initially I was having sort of reminisces of AMD back in 2014 where I mean that the investment controversy at that time for AMD was are they going to go bankrupt or not? And I think if this was a different scenario, if we didn’t have the CHIPS Act and all these partner contributions, we’d be having, going concerned conversations here. I think Intel will live. I don’t know what kind of a life it will be, but I think they’ll live for, and the reason is if you sort of add up everything they’re doing. You add up the cost cuts. You add up the CapEx cuts. The other cost savings. You add in the cash that they’re saving from not paying the dividend. And you add in all the subsidies and these partner contributions. It’s like $40 billion of cash, incremental cash on their balance sheet over the next two years. It’s probably 45 or 50 billion over the next three years that they would not have had. So that will I think save them from, they will live. So that’s the one silver line, but the problem is, I don’t know what kind of a life it’s going to be.
Patrick Moorhead: Yeah. Dan what are your three bullets, buddy?
Daniel Newman: Yeah, so I’ll make them real quick ’cause we’ve got some more positive earnings to talk about now that we can all wipe our tears and keep going. But bullet one is the Gaudi thing has to be done. They have to get it right. They have to land. And that one, what I’m saying though, look, you cannot be relevant if you cannot get an AI processor for the data center.
Stacy Rasgon: It’s $500 million this year. Who cares?
Daniel Newman: No, well that’s my point. So I’m not talking about now. I’m talking about at some point that thing has to get competitive.
Stacy Rasgon: Well no, it’s not Gaudi. So they’re talking Falcon Shores.
Patrick Moorhead: Falcon.
Stacy Rasgon: Which is the next one.
Daniel Newman: That’s too far out.
Stacy Rasgon: Well…
Daniel Newman: Literally. I know, I know, I know, I’m just finishing my thoughts though. They got to execute with what they have, because you cannot survive this. You’re right, I’ve actually said, I think I said to somebody, there’s just no thesis right now to go in now. The only thesis is basically extraordinary value with a 10-year horizon. That’s the only thesis I can really think of. The second thing though is they do have the wins and designs on AIPC, whether or not it’s super profitable, they need to saturate the market and show they can protect their market share. That’s the second item. And the third is, the world does need a strong Intel. The TSMC dependency is scary. When you actually break down how much we depend on Taiwan for everything.
Stacy Rasgon: I mean, I’ll say something and maybe it’s controversial, I don’t know, but this whole CHIPS Act thing like picking Intel as the national champion, I understand politically why that happened. But I mean to be fair, if we really wanted to get a ton of leading edge capacity built here in the US, we probably should have given all the money to TSMC and encourage them…
Daniel Newman: Totally should have. Totally should have.
Stacy Rasgon: Build as many fabs as they could have made it as easy as possible.
Daniel Newman: But the thing is they had to pick a US company. That was the only way.
Stacy Rasgon: I understand.
Daniel Newman: And second of all, and I’ll actually say something controversial back to you, Stacy, is they did not, they picked them in words, but with the money they gave out, they weren’t as nearly as clear that they were picking Intel. They gave almost as much money to Samsung, Micron and to TSMC as they did to Intel. So they kind of said blah, blah, blah, Intel, but the money they kind of said, we’re not as confident as we may be, we’re articulating we are.
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.
